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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 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 April 30,
1999............1,000
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<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
ITEM PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements.................................................................1
Consolidated Statements of Income for the Three Months Ended March 31, 1999 and
1998 ............................................................................1
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
1999 and 1998 ...................................................................2
Consolidated Balance Sheets as of March 31, 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....................................................................8
6. Exhibits and Reports on Form 8-K.....................................................8
Signatures...........................................................................9
</TABLE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company may make statements regarding its 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.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1999 1998
-------- -------
<S> <C> <C>
OPERATING REVENUES
Transportation and storage of natural gas $ 223 $ 226
Other 11 13
----- -----
Total operating revenues 234 239
----- -----
OPERATING EXPENSES
Operation and maintenance 94 96
Depreciation and amortization 21 37
Property and other taxes 12 (2)
----- -----
Total operating expenses 127 131
----- -----
OPERATING INCOME 107 108
----- -----
OTHER INCOME AND EXPENSES 3 3
----- -----
EARNINGS BEFORE INTEREST AND TAXES 110 111
INTEREST EXPENSE 26 29
----- -----
EARNINGS BEFORE INCOME TAXES 84 82
INCOME TAXES 32 30
----- -----
NET INCOME $ 52 $ 52
===== =====
</TABLE>
See Notes to Consolidated Financial Statements.
1
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 52 $ 52
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 22 39
Deferred income taxes (3) (4)
Transition cost recoveries 23 --
Net change in current assets and liabilities (44) (71)
Other, net (5) --
---- ----
Net cash provided by operating activities 45 16
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (17) (20)
Net (increase) decrease in advances receivable - parent (28) 5
Retirements and other -- (1)
---- ----
Net cash used in investing activities (45) (16)
---- ----
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 $ 24 $ 26
Cash paid for income taxes $ 92 $ 72
</TABLE>
See Notes to Consolidated Financial Statements.
2
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables $ 86 $ 92
Inventory 13 12
Current portion of natural gas transition costs 100 100
Current portion of environmental clean-up costs 12 11
Other 25 22
------ ------
Total current assets 236 237
------ ------
INVESTMENTS AND OTHER ASSETS
Advances receivable - parent 1,140 1,112
Goodwill, net 150 151
------ ------
Total investments and other assets 1,290 1,263
------ ------
PROPERTY, PLANT AND EQUIPMENT
Cost 3,511 3,493
Less accumulated depreciation and amortization 986 990
------ ------
Net property, plant and equipment 2,525 2,503
------ ------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 39 41
Natural gas transition costs 58 81
Environmental clean-up costs 64 68
Other 79 72
------ ------
Total regulatory assets and deferred debits 240 262
------ ------
TOTAL ASSETS $4,291 $4,265
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
3
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 34 $ 11
Taxes accrued 74 131
Deferred income taxes 34 29
Interest accrued 15 14
Current maturities of long-term debt 49 49
Other 61 74
------ ------
Total current liabilities 267 308
------ ------
LONG-TERM DEBT
Notes payable - parent 605 605
Other 551 551
------ ------
Total long-term debt 1,156 1,156
------ ------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 583 584
Environmental clean-up liabilities 117 118
Other 112 113
------ ------
Total deferred credits and other liabilities 812 815
------ ------
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 574 522
------ ------
Total common stockholder's equity 2,056 1,986
------ ------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,291 $4,265
====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
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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
- ----------------------------------------------------------------
BALANCE SHEET TRANSACTIONS (in millions)
- ----------------------------------------------------------------
March 31, December
31,
1999 1998
------------- ------------
Receivables $ 5 $ 10
Accounts payable 27 2
Taxes accrued 31 91
- ------------------------------------- ------------- ------------
For the three months ended March 31, 1999 and 1998, interest expense included
$12 million and $13 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 both March 31, 1999 and
December 31, 1998, other current assets includes $16 million and other current
liabilities includes $15 million 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," in order 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.
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 FERC to recover a portion of these costs from pipeline customers.
5
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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 (FERC).
RESULTS OF OPERATIONS
Net income for each of the three months ended March 31, 1999 and 1998 was $52
million. Operating revenues remained relatively flat. As a result of the
implementation of a customer rate initiative effective October 1, 1998,
depreciation expense was reduced and certain operation and maintenance expenses
increased. Additionally, property and other taxes increased as a result of a
refund from a state tax ruling in the first quarter of 1998. Other impacts to
net income include a decrease in interest expense due to lower interest rates in
1999.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for the first three months of 1999 and 1998
totaled $17 million and $20 million, respectively. Projected 1999 capital and
investment expenditures, including allowance for funds used during construction,
are approximately $180 million, with market-expansion expenditures approximating
40% 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.
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,
6
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testing and contingency planning. The Company is employing 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 has substantially completed the
first two phases throughout its business operations, and is in various stages of
the third and final phase. The Company's goal is to have its critical systems,
equipment and devices year 2000 ready by mid -1999.
In addition, 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 third parties and any 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, of which approximately $1 million
has been incurred as of March 31, 1999. These costs exclude replacement systems
that, in addition to being year 2000 ready, provide significantly enhanced
capabilities that 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. In the event that such a
scenario occurs, it is not expected to have a material adverse impact on the
Company's consolidated results of operations or financial position.
CONTINGENCY PLANS
Year 2000 contingency planning is currently underway to address 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 intends to complete its own year 2000
contingency plans by mid-1999. These 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.
Based on assessments completed to date and compliance plans in process,
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.
7
<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 first quarter of
1999.
8
<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
May 13, 1999 /s/ Dorothy M. Ables
---------------------------------------------
Dorothy M. Ables
Vice President, Chief Financial Officer and
Treasurer
9
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<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 March 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 86000
<ALLOWANCES> 0
<INVENTORY> 13000
<CURRENT-ASSETS> 236000
<PP&E> 3511000
<DEPRECIATION> 986000
<TOTAL-ASSETS> 4291000
<CURRENT-LIABILITIES> 267000
<BONDS> 1156000
0
0
<COMMON> 0
<OTHER-SE> 2056000
<TOTAL-LIABILITY-AND-EQUITY> 4291000
<SALES> 0
<TOTAL-REVENUES> 234000
<CGS> 0
<TOTAL-COSTS> 94000
<OTHER-EXPENSES> 33000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26000
<INCOME-PRETAX> 84000
<INCOME-TAX> 32000
<INCOME-CONTINUING> 52000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52000
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>
Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
