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 September 30, 2000 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, 2000.......................................................1,000
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TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
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Item Page
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PART I. FINANCIAL INFORMATION
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1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2000 and 1999.......1
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2000 and 1999.............2
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999..............................3
Notes to Consolidated Financial Statements..............................................................5
2. Management's Discussion and Analysis of Results of Operations and Financial Condition...................7
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PART II. OTHER INFORMATION
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1. Legal Proceedings.......................................................................................8
6. Exhibits and Reports on Form 8-K........................................................................8
Signatures..............................................................................................9
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
From time to time, the Company's reports, filings 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. Some of the 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,
including the Company's ability to obtain financing on favorable terms, which
can be affected by the Company's credit rating and general economic conditions;
growth in opportunities for the Company; 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)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- -----------------
2000 1999 2000 1999
---- ---- ---- ----
Operating Revenues
Transportation of natural gas $176 $187 $547 $582
Storage of natural gas 18 16 55 48
Other 24 17 81 41
---- ---- ---- ----
Total operating revenues 218 220 683 671
---- ---- ---- ----
Operating Expenses
Operation and maintenance 88 96 268 254
Depreciation and amortization 22 21 67 64
Property and other taxes 12 11 36 34
---- ---- ---- ----
Total operating expenses 122 128 371 352
---- ---- ---- ----
Operating Income 96 92 312 319
Other Income and Expenses - 3 3 8
---- ---- ---- ----
Earnings Before Interest and Taxes 96 95 315 327
Interest Expense 28 26 82 79
---- ---- ---- ----
Earnings Before Income Taxes 68 69 233 248
Income Taxes 25 27 87 95
---- ---- ---- ----
Net Income $ 43 $ 42 $146 $153
==== ==== ==== ====
See Notes to Consolidated Financial Statements.
1
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended
September 30,
-----------------
2000 1999
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 146 $ 153
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 70 67
Deferred income taxes (11) 3
Transition cost recoveries 65 65
Net change in current assets and liabilities 13 4
Other, net (11) (21)
----- -----
Net cash provided by operating activities 272 271
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (78) (96)
Net increase in advances receivable - parent (203) (175)
Retirements and other 9 -
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Net cash used in investing activities (272) (271)
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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 $ 85 $ 75
Cash paid for income taxes $ 122 $ 100
See Notes to Consolidated Financial Statements.
2
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
ASSETS
Current Assets
Accounts receivable $ 85 $ 83
Inventory 25 27
Current portion of regulatory assets 16 81
Other 62 29
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Total current assets 188 220
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Investments and Other Assets
Advances receivable - parent 1,470 1,267
Goodwill, net 142 146
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Total investments and other assets 1,612 1,413
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Property, Plant and Equipment
Cost 3,742 3,677
Less accumulated depreciation and amortization 1,114 1,054
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Net property, plant and equipment 2,628 2,623
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Regulatory Assets and Deferred Debits 147 138
------ ------
Total Assets $4,575 $4,394
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See Notes to Consolidated Financial Statements.
3
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
September 30, December 31,
2000 1999
(Unaudited)
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 7 $ 10
Taxes accrued 140 157
Current maturities of long-term debt 310 200
Other 140 98
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Total current liabilities 597 465
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Long-term Debt
Notes payable - parent 605 605
Other 241 351
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Total long-term debt 846 956
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Deferred Credits and Other Liabilities
Deferred income taxes 614 601
Other 170 170
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Total deferred credits and other liabilities 784 771
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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 1,482
Retained earnings 866 720
------ ------
Total common stockholder's equity 2,348 2,202
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Total Liabilities and Stockholder's Equity $4,575 $4,394
====== ======
See Notes to Consolidated Financial Statements.
4
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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 for customers primarily
in the Mid-Atlantic and New England states. 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, 2000 and December 31, 1999 are as follows:
-------------------------------------------------------------------------------
In millions
-------------------------------------------------------------------------------
September 30, December 31,
2000 1999
----------------- --------------
Accounts receivable $ 3 $ 7
Taxes accrued 94 113
--------------------------------------------- ----------------- ---------------
For the quarters ended September 30, 2000 and 1999, interest expense included
$15 million and $12 million, respectively, of interest associated with notes
payable to parent. Interest for the nine months ended September 30, 2000 and
1999 included $41 million and $35 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, 2000 and
December 31, 1999, other current assets included $53 million and $22 million,
respectively, and other current liabilities included $69 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 performance, contracts and other matters arising in the ordinary
course of business, some of which involve substantial amounts. 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.
Note 5. New Accounting Standards
In June 1998, Statement of Financial Accounting Standard (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. The
Company is required to adopt this standard by January 1, 2001. SFAS No. 133
requires that all derivatives be recognized as either assets or liabilities and
measured at fair value, and changes in the fair value of derivatives are
reported in current earnings, unless the derivative is designated and effective
as a hedge. If the intended use of the derivative is to hedge the exposure to
changes in the fair value of an asset, a liability or a firm commitment, then
changes in the fair value of the derivative instrument will generally be offset
in the income statement by changes in the hedged item's fair value. However, if
the intended use of the derivative is to hedge the exposure to variability in
expected future cash flows then changes in the fair value of the derivative
instrument will generally be reported in Other Comprehensive Income (OCI). The
gains and losses on the derivative instrument that are reported in OCI will be
reclassified to earnings in the periods in which earnings are impacted by the
hedged item.
The Company manages its exposure to risk from existing contractual commitments
through over-the-counter swap agreements, which require the Company to receive
or make payments based on the difference between a specified price and the
actual price of the underlying commodity. As of September 30, 2000, the Company
utilized over-the-counter commodity agreements to hedge market price
fluctuations for natural gas and other energy-related products.
The Company has conducted a review of its contracts to identify derivative
instruments and document hedging activities. In conducting this review, it was
determined that the Company's derivative instruments were cash flow hedges and
such hedges were generally highly effective in offsetting or reducing the risks
of the underlying hedged items. Based on the overall results of this review,
management believes that the adoption of SFAS\ No. 133 will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101) which provides the SEC staff's views on
revenue recognition policies. The Company has adopted early the provisions of
SAB 101 as of April 1, 2000. The impact of adopting SAB 101 was not material to
the Company's consolidated results of operations or financial position.
6
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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 (Duke Energy). TETCO and its subsidiaries (the Company) are
primarily engaged in the interstate transportation and storage of natural gas
for customers primarily in the Mid-Atlantic and New England states. 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 the nine months ended September 30, 2000 decreased $7 million,
compared to the same period in 1999. The decrease was mainly attributable to
1999 results reflecting a $28 million operating expense benefit related to the
completion of certain PCB (polychlorinated biphenyl) soil clean-up programs
below estimates. Increased operating revenues due to other service activities
partially offset this decrease.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for the first nine months of 2000 and 1999
totaled $78 million and $96 million, respectively. Projected 2000 capital and
investment expenditures, including allowance for funds used during construction,
are approximately $110 million, with market-expansion expenditures approximating
25% 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 2000 are expected to be funded by cash from operations and/or
collection of intercompany advances receivable.
The Company has $310 million of long-term debt due in 2000. The Company plans to
initially refinance this obligation with Duke Capital Corporation, a subsidiary
of Duke Energy. The Company filed a shelf registration during October 2000 with
the Securities and Exchange Commission under which it will be able to issue up
to $500 million aggregate principal amount of debt securities in the form of
unsecured senior note obligations. Management intends to replace the
intercompany note with Duke Capital Corporation with proceeds from these debt
securities subject to favorable market conditions.
In 1998, the FERC approved the Company's settlement with customers which
included an accelerated recovery from customers of natural gas transition costs.
Effective December 1, 2000, subject to FERC approval, the Company's
transportation rates will be reduced to reflect the successful recovery of these
costs. This rate change is expected to increase the competitiveness of the
Company's transportation services. The reduction in cash flows from operations
that will result from this rate decrease will not have a material affect on the
Company's ability to fund operating and investing activities.
Current Issues
Environmental Matters. Air Quality Control. In October 1998, the Environmental
Protection Agency (EPA) issued a final ruling on regional ozone control that
requires revised State Implementation Plans (SIPs) for 22 eastern states and the
District of Columbia. This EPA ruling was challenged in court by various states,
industry and other interests, including the Company. In March 2000, the court
upheld most aspects of the EPA's rule. Most of the states subject to the rule
submitted their SIP revisions in October 2000. The District of Columbia Circuit
Court has extended the deadline for implementation of emission controls required
by the SIP revisions to May 1, 2004. The EPA has undertaken other ozone-related
actions having virtually identical goals to its October 1998 action. These
actions have likewise been challenged in court by the same or similar parties.
The final resolution of the October 1998 action is expected to resolve these
other ozone-related actions as well. Depending on the resolution of these
matters, costs to the Company may range up to $10 million for additional capital
improvements.
7
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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 2000.
8
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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 13, 2000 /s/ Dorothy M. Ables
-----------------------------------------------------
Dorothy M. Ables
Senior Vice President, Finance and Administration and
Chief Financial Officer
9
