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UNITED STATES
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER 1-4456
TEXAS EASTERN TRANSMISSION CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 72-0378240
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
5400 WESTHEIMER COURT
P.O. BOX 1642
HOUSTON, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
713-627-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
The Registrant meets the conditions set forth in General Instructions (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format. Part I, Item 2 has been reduced and Part II, Item 4 has been
omitted in accordance with such Instruction H.
All of the Registrant's common shares are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock, $1 par value, outstanding at
October 31, 1999...............................1,000
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<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 1999 and 1998.......1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998.............2
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998..............................3
Notes to Consolidated Financial Statements..............................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition...................6
PART II. OTHER INFORMATION
1. Legal Proceedings.......................................................................................9
6. Exhibits and Reports on Form 8-K........................................................................9
Signatures.............................................................................................10
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
From time to time, the Company's reports and other public announcements may
include assumptions, projections, expectations, intentions or beliefs about
future events. These statements are intended as "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. The Company cautions
that assumptions, projections, expectations, intentions or beliefs about future
events may and often do vary from actual results and the differences between
assumptions, projections, expectations, intentions or beliefs and actual results
can be material. Accordingly, there can be no assurance that actual results will
not differ materially from those expressed or implied by the forward-looking
statements. Factors that could cause actual achievements and events to differ
materially from those expressed or implied in such forward-looking statements
include state and federal legislative and regulatory initiatives that affect
cost and investment recovery, have an impact on rate structures and affect the
speed and degree to which competition enters the natural gas industry; the
weather and other natural phenomena; the timing and extent of changes in
commodity prices and interest rates; changes in environmental and other laws and
regulations to which the Company is subject or other external factors over which
the Company has no control; the results of financing efforts; growth in
opportunities for the Company; achievement of year 2000 readiness; and the
effect of accounting policies issued periodically by accounting standard-setting
bodies.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenues
<S> <C> <C> <C> <C>
Transportation and storage of natural gas $ 203 $ 203 $ 630 $ 638
Other 17 13 41 39
--- --- --- ---
Total operating revenues 220 216 671 677
--- --- --- ---
Operating Expenses
Operation and maintenance 96 53 254 244
Depreciation and amortization 21 38 64 113
Property and other taxes 11 10 34 18
--- --- --- ---
Total operating expenses 128 101 352 375
--- --- --- ---
Operating Income 92 115 319 302
--- --- --- ---
Other Income and Expenses 3 5 8 9
---- ---- --- ---
Earnings Before Interest and Taxes 95 120 327 311
Interest Expense 26 27 79 83
----- ----- ----- ----
Earnings Before Income Taxes 69 93 248 228
Income Taxes 27 35 95 85
------ ----- ----- -----
Net Income $ 42 $ 58 $ 153 $ 143
===== ===== ====== =====
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
<TABLE>
<CAPTION>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 153 $ 143
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 67 116
Deferred income taxes 3 11
Transition cost recoveries (payments) 65 (55)
Net change in current assets and liabilities 4 (62)
Other, net (21) 13
----- -----
Net cash provided by operating activities 271 166
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (96) (85)
Net increase in advances receivable - parent (175) (84)
Retirements and other - 3
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Net cash used in investing activities (271) (166)
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Net change in cash and cash equivalents - -
----- -----
Cash and cash equivalents at beginning of period - -
----- -----
Cash and cash equivalents at end of period $ - $ -
===== =====
Supplemental Disclosures
Cash paid for interest, net of amount capitalized $ 75 $ 78
Cash paid for income taxes $ 100 $ 76
</TABLE>
See Notes to Consolidated Financial Statements.
2
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<TABLE>
<CAPTION>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
1999 1998
(Unaudited)
----------- -----------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Receivables $ 77 $ 92
Inventory 20 12
Current portion of natural gas transition costs 100 100
Current portion of environmental clean-up costs 13 11
Other 25 22
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Total current assets 235 237
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INVESTMENTS AND OTHER ASSETS
Advances receivable - parent 1,287 1,112
Goodwill, net 147 151
----- -----
Total investments and other assets 1,434 1,263
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PROPERTY, PLANT AND EQUIPMENT
Cost 3,583 3,493
Less accumulated depreciation and amortization 1,018 990
----- -----
Net property, plant and equipment 2,565 2,503
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REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 37 41
Natural gas transition costs 16 81
Environmental clean-up costs 20 68
Other 67 72
----- -----
Total regulatory assets and deferred debits 140 262
----- -----
Total Assets $ 4,374 $ 4,265
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
September 30, December 31,
1999 1998
(Unaudited)
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
<S> <C> <C>
Accounts payable $ 20 $ 11
Taxes accrued 128 131
Deferred income taxes 35 29
Interest accrued 15 14
Current maturities of long-term debt 49 49
Other 67 74
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Total current liabilities 314 308
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Long-term Debt
Notes payable - parent 605 605
Other 551 551
----- -----
Total long-term debt 1,156 1,156
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Deferred Credits and Other Liabilities
Deferred income taxes 588 584
Environmental clean-up liabilities 50 118
Other 109 113
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Total deferred credits and other liabilities 747 815
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Common Stockholder's Equity
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding - -
Paid-in capital 1,482 1,464
Retained earnings 675 522
----- -----
Total common stockholder's equity 2,157 1,986
----- -----
Total Liabilities and Stockholder's Equity $ 4,374 $ 4,265
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. NATURE OF OPERATIONS
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary of
PanEnergy Corp, which is an indirect, wholly owned subsidiary of Duke Energy
Corporation. TETCO and its subsidiaries (the Company) are primarily engaged in
the interstate transportation and storage of natural gas. The interstate natural
gas transmission and storage operations of the Company are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. These consolidated financial statements reflect
all normal recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position and results of operations for
the respective periods.
NOTE 2. RELATED PARTY TRANSACTIONS
Certain balances due to or from related parties included in the Consolidated
Balance Sheets at September 30, 1999 and December 31, 1998 are as follows:
- --------------------------------------------------------------------------------
In millions
- --------------------------------------------------------------------------------
September 30, December 31,
1999 1998
----------------- ----------------
Receivables $ 7 $10
Accounts payable 12 2
Taxes accrued 82 91
- --------------------------------------------- ----------------- ----------------
For the three months ended September 30, 1999 and 1998, interest expense
included $12 million and $13 million, respectively, of interest associated with
notes payable to parent. Interest expense for the nine months ended September
30, 1999 and 1998 included $35 million and $39 million, respectively, of
interest associated with notes payable to parent.
NOTE 3. GAS IMBALANCES
The consolidated balance sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At September 30, 1999 and
December 31, 1998, other current assets included $21 million and $16 million,
respectively, and other current liabilities included $18 million and $15
million, respectively, related to gas imbalances.
NOTE 4. COMMITMENTS AND CONTINGENCIES
LITIGATION. The Company is involved in legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business, some of which
involve substantial amounts. Where appropriate, the Company has made accruals in
accordance with Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," to provide for such matters. Management believes that the
final disposition of these proceedings will not have a material adverse effect
on consolidated results of operations or financial position.
ENVIRONMENTAL. In June 1999, the Environmental Protection Agency certified that
the Company had completed clean up of PCB (polychlorinated biphenyl)
contaminated sites under conditions stipulated by a U.S. Consent Decree in 1989.
Due to the completion of the project under budget, the estimated liability and
amounts to be recovered from customers were reduced resulting in a $28 million
reduction in expense in June 1999. The Company
5
<PAGE>
is required to continue groundwater monitoring on a number of sites for at least
the next two years. The estimated cost of such monitoring is not material.
OTHER COMMITMENTS AND CONTINGENCIES. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company, with respect to certain producer contract
settlements, may be contractually required to reimburse or, in some instances,
to indemnify producers against such royalty claims. The potential liability of
the producers to the government and of the pipelines to the producers involves
complex issues of law and fact which are likely to take substantial time to
resolve. If required to reimburse or indemnify the producers, the Company will
file with the FERC to recover a portion of these costs from pipeline customers.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers. If the customers are successful, the Company may
not receive the full value of anticipated benefits under the contracts.
Management believes that these commitments and contingencies will not have a
material adverse effect on consolidated results of operations or financial
position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary of
PanEnergy Corp, which is an indirect wholly owned subsidiary of Duke Energy
Corporation. TETCO and its subsidiaries (the Company) are primarily engaged in
the interstate transportation and storage of natural gas. The interstate natural
gas transmission and storage operations of the Company are subject to the rules
and regulations of the Federal Energy Regulatory Commission.
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1999 was $153 million, an
increase of $10 million compared to the same period in 1998. The increase was
primarily the result of lower operating expenses due to a $28 million benefit
from EPA certification of completion of PCB (polychlorinated biphenyl)
assessment and soil clean-up programs. In addition, as a result of the
implementation of the customer rate initiative effective October 1, 1998,
depreciation expense was reduced and certain operation and maintenance expenses
increased. Partially offsetting these reductions were a $39 million benefit in
1998 from resolution of gas supply realignment cost issues and a $13 million
refund from a state property tax ruling.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for the first nine months of 1999 and 1998
totaled $96 million and $85 million, respectively. Projected 1999 capital and
investment expenditures, including allowance for funds used during construction,
are approximately $175 million, with market-expansion expenditures approximating
45% of the capital budget. These projections are subject to periodic review and
revision. Actual expenditures incurred may vary from estimates due to various
factors, including business expansion opportunities and environmental matters.
Expenditures for 1999 are expected to be funded by cash from operations and/or
collection of intercompany advances receivable.
6
<PAGE>
CURRENT ISSUES
YEAR 2000 READINESS PROGRAM
STATE OF READINESS
The Company initiated its Year 2000 Readiness Program in 1996 and began a formal
review of computer-based systems and devices that are used in its business
operations. These systems and devices include customer information, financial,
materials management and personnel systems, as well as components of natural gas
production, gathering, processing and transmission.
The Company's goal is to provide natural gas transmission and storage services
reliably and safely to its customers - now, on January 1, 2000 and beyond. By
"Year 2000 ready," the Company means that it has executed the Year 2000 approach
described below and management believes the business will not suffer a material
adverse impact to consolidated financial results caused by Year 2000 events.
However, the Year 2000 issue is complex and Year 2000 readiness of customers,
suppliers, and others beyond the Company's control can affect our business
operations.
The Company is using a three-phase approach to address Year 2000 issues: 1)
inventory and preliminary assessment of computer systems, equipment and devices;
2) detailed assessment and remediation planning; and 3) conversion, testing and
contingency planning. The Company employed a combination of systems repair,
planned systems replacement activities, systems retirement and workarounds to
achieve Year 2000 readiness for its business and process control systems,
equipment and devices. The Company achieved Year 2000 readiness of its critical
systems, equipment and devices as of June 30, 1999.
The Company is monitoring the Year 2000 readiness of key third parties. Third
parties include vendors, customers, U.S. governmental agencies and other
business associates. While the Year 2000 readiness of third parties cannot be
controlled, the Company is attempting to assess the readiness of key third
parties and potential implications to its operations. Alternate suppliers of
critical products, goods and services are being identified, where necessary.
COSTS
Management believes it is devoting the resources necessary to achieve Year 2000
readiness in a timely manner. Current estimates for total costs of the program,
including internal labor as well as incremental costs such as consulting and
contract costs, are approximately $2 million, most of which has been spent as of
September 30, 1999. These costs exclude replacement systems that, in addition to
being Year 2000 ready, provide significantly enhanced capabilities which will
benefit operations in future periods.
RISKS
Management believes it has an effective program in place to manage the risks
associated with the Year 2000 issue in a timely manner. Nevertheless, since it
is not possible to anticipate all future outcomes, especially when third parties
are involved, there could be circumstances in which the Company would
temporarily be unable to deliver energy or energy services to its customers.
Management believes that the most reasonably likely worst case scenario would be
small, localized interruptions of service, which likely would be rapidly
restored. In addition, there could be a temporary reduction in the service needs
of customers due to their own Year 2000 problems. If such a scenario occurs,
management does not expect it to have a material adverse impact on the Company's
consolidated results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning addresses continuity of business operations for
all periods during which Year 2000 impacts may occur. The Company is
participating in multiple industry efforts to facilitate effective Year 2000
contingency plans, and has completed its own Year 2000 contingency plans.
Contingency plans address various Year 2000 risk scenarios that cross
departmental, business unit and industry lines as well as specific risks from
various internal and external sources, including supplier readiness.
7
<PAGE>
Based on Year 2000 readiness efforts and contingency plans in place, management
believes that Year 2000 issues, including the cost of making critical systems,
equipment and devices ready, will not have a material adverse effect on the
Company's business operation or consolidated results of operations or financial
position. Nevertheless, achieving Year 2000 readiness is subject to risks and
uncertainties, including those described above. While management believes the
possibility is remote, if the Company's internal systems, or the internal
systems of external parties, fail to achieve Year 2000 readiness in a timely
manner, the Company's business, consolidated results of operations or financial
condition could be adversely affected.
8
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning material litigation and other contingencies, see Note
4 to the Consolidated Financial Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of 1999.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEXAS EASTERN TRANSMISSION CORPORATION
November 11, 1999 /s/ Dorothy M. Ables
-----------------------------------------------------
Dorothy M. Ables
Vice President, Chief Financial Officer and Treasurer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Texas
Eastern Transmission Corporation Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000097432
<NAME> TEXAS EASTERN TRANSMISSION CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 77,000
<ALLOWANCES> 0
<INVENTORY> 20,000
<CURRENT-ASSETS> 235,000
<PP&E> 3,583,000
<DEPRECIATION> 1,018,000
<TOTAL-ASSETS> 4,374,000
<CURRENT-LIABILITIES> 314,000
<BONDS> 1,156,000
0
0
<COMMON> 0
<OTHER-SE> 2,157,000
<TOTAL-LIABILITY-AND-EQUITY> 4,374,000
<SALES> 0
<TOTAL-REVENUES> 671,000
<CGS> 0
<TOTAL-COSTS> 254,000
<OTHER-EXPENSES> 98,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,000
<INCOME-PRETAX> 248,000
<INCOME-TAX> 95,000
<INCOME-CONTINUING> 153,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,000
<EPS-BASIC> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
