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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
5400 Westheimer Court P.O. Box 1642 Houston, Texas 77251-1642
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-627-5400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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8 1/4% Notes Due 2004 The New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
--------------
None
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I)(1)(A)
AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT. ITEMS 4, 6, 10, 11, 12 AND 13 HAVE BEEN OMITTED IN ACCORDANCE
WITH INSTRUCTION (I)(2)(C) AND ITEM 7 HAS BEEN REDUCED IN ACCORDANCE WITH
INSTRUCTION (I)(2)(A).
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, as amended.
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at March 15, 2000............................................none
Number of shares of Common Stock, without par value, outstanding at March 15,
2000.......................................................................1,000
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TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
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ITEM PAGE
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PART I.
1. Business......................................................................................................1
General...................................................................................................1
Natural Gas Transmission..................................................................................1
Competition...............................................................................................1
Regulation................................................................................................2
Environmental Matters.....................................................................................2
Other Matters.............................................................................................2
2. Properties....................................................................................................3
3. Legal Proceedings.............................................................................................3
PART II.
5. Market for the Registrant's Common Equity and Related Stockholder Matters.....................................3
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.........................3
7A. Quantitative and Qualitative Disclosures About Market Risk....................................................7
8. Financial Statements and Supplementary Data...................................................................8
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................23
PART IV.
14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K..............................................23
Signatures...................................................................................................24
Exhibit Index................................................................................................25
</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. For a discussion of some factors that could cause actual
achievements and events to differ materially from those expressed or implied in
such forward-looking statements, see "Management's Discussion and Analysis of
Results of Operations and Financial Condition, Current Issues - Forward-Looking
Statements."
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PART I.
ITEM 1. BUSINESS.
GENERAL
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary of
PanEnergy Corp (PanEnergy), 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).
Executive offices of the Company are located at 5400 Westheimer Court, Houston,
Texas 77056-5310, and the telephone number is (713) 627-5400.
NATURAL GAS TRANSMISSION
The Company's throughput volumes for the years 1997 to 1999 were 1,300 trillion
British thermal units (TBtu), 1,148 TBtu and 1,254 TBtu, respectively. A
majority of the Company's delivered volumes represents gas transported under
long-term firm service agreements with local distribution company (LDC)
customers in the pipeline's market area. Firm transportation services are also
provided under contract to gas marketers, producers, other pipelines, electric
power generators and a variety of end-users. In addition, the pipeline offers
interruptible transportation to customers on a short-term or seasonal basis. The
Company's major customers are located in Pennsylvania, New Jersey and New York,
and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York City
metropolitan areas. Demand for gas transmission on the Company's interstate
pipeline system is seasonal, with the highest throughput occurring during the
colder periods in the first and fourth quarters.
The Company also provides firm and interruptible open-access storage services.
Storage is offered as a stand-alone unbundled service or as part of a no-notice
bundled service. The Company's storage services utilize two joint venture
storage facilities in Pennsylvania and one wholly owned and operated storage
field in Maryland. The Company also leases storage capacity. The Company's
certificated working capacity in these three fields is 75 billion cubic feet
(Bcf), and the combined working gas in storage was 59 Bcf on December 31, 1999.
During 1999, 1998 and 1997, total billings for transportation and storage
services provided by the Company to Public Service Electric and Gas Company
(PSE&G) accounted for approximately 12%, 14% and 13%, respectively, of the
Company's consolidated revenues. PSE&G was the only customer of the Company
accounting for 10% or more of consolidated revenues in 1999, 1998 and 1997.
COMPETITION
The Company competes with other interstate and intrastate pipeline companies in
the transportation and storage of natural gas. The principal elements of
competition among pipelines are rates, terms of service and flexibility and
reliability of service.
In the Mid-Atlantic and New England markets, the Company competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company,
Iroquois Gas Transmission System, CNG Transmission Corporation and Columbia Gas
Transmission Corporation.
Natural gas competes with other forms of energy available to the Company's
customers and end-users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation
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and governmental regulations, the capability to convert to alternative fuels,
and other factors, including weather, affect the demand for natural gas in the
areas served by the Company.
REGULATION
The FERC has authority to regulate rates and charges for natural gas transported
in or stored for interstate commerce or sold by a natural gas company in
interstate commerce for resale. For further discussion of rate matters, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Liquidity and Capital Resources" and Note 3 to the Consolidated
Financial Statements, "Regulatory Matters." The FERC also has authority over the
construction and operation of pipeline and related facilities utilized in the
transportation and sale of natural gas in interstate commerce, including the
extension, enlargement or abandonment of such facilities. The Company holds
certificates of public convenience and necessity issued by the FERC, authorizing
it to construct and operate the pipeline, facilities and properties now in
operation for which such certificates are required, and to transport and store
natural gas in interstate commerce.
As required by FERC Order 636, the Company's pipeline operates as an open-access
transporter of natural gas, providing unbundled firm and interruptible
transportation and storage services on an equal basis for all gas supplies,
whether purchased from the pipeline or from another gas supplier. FERC allows
pipelines to recover eligible costs, known as "transition costs," resulting from
the implementation of Order 636. For further discussion of Order 636, see Note 3
to the Consolidated Financial Statements, "Regulatory Matters."
On February 9, 2000, the FERC issued Order 637 which sets forth revisions to its
regulations governing short-term natural gas transportation services and
policies governing the regulation of interstate natural gas pipelines. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition, Current Issues - Competition," for further discussion.
The Company is subject to the Natural Gas Pipeline Safety Act of 1968, which
regulates gas pipeline safety requirements and to the Hazardous Liquid Pipeline
Safety Act of 1979, which regulates oil and petroleum pipelines.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local regulations with regard to
air and water quality, hazardous and solid waste disposal and other
environmental matters. Certain environmental regulations affecting the Company
include, but are not limited to:
o The Clean Air Act Amendments of 1990;
o The Comprehensive Environmental Response, Compensation and Liability
Act (CERCLA), which can require any individual or entity which may have
owned or operated a disposal site, as well as transporters or
generators of hazardous wastes which were sent to such site, to share
in remediation costs for the site.
For further discussion of environmental matters involving the Company, including
possible liability and capital costs, see "Management's Discussion and Analysis
of Results of Operations and Financial Condition, Current Issues - Environmental
Matters" and Note 10 to the Consolidated Financial Statements, "Commitments and
Contingencies - Environmental." Compliance with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise protecting the environment, is not
expected to have a material adverse effect on the consolidated results of
operations or financial position of the Company.
OTHER MATTERS
Foreign operations and export sales are currently not material to the Company's
business as a whole.
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At December 31, 1999, the Company had approximately 1,100 employees.
ITEM 2. PROPERTIES.
The Company's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. The Company's
system consists of 9,220 miles of pipeline and has 73 compressor stations.
The Company also owns and operates two offshore Louisiana gas supply systems,
which extend over 100 miles into the Gulf of Mexico and consist of 490 miles of
pipeline.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
ITEM 3. LEGAL PROCEEDINGS.
See Note 10 to the Consolidated Financial Statements, "Commitments and
Contingencies - Litigation" and "Management's Discussion and Analysis of Results
of Operations and Financial Condition, Current Issues - Environmental Matters"
for a discussion of legal proceedings.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Company's outstanding common stock, $1.00 par value per share, is
owned by PanEnergy. No common stock cash dividends were declared in 1999 or
1998.
ITEM 7. 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 (PanEnergy), 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).
The following information is provided to facilitate increased understanding of
the 1999 and 1998 consolidated financial statements and accompanying notes of
the Company, and should be read in conjunction therewith. Because all of the
outstanding common stock of the Company is owned indirectly by Duke Energy, the
following discussion has been prepared in accordance with the reduced disclosure
format permitted by Form 10-K for certain issuers that are wholly owned
subsidiaries of reporting companies under the Securities Exchange Act of 1934
set forth in General Instruction I (1)(a) and (b) for Form 10-K.
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BUSINESS STRATEGY. The Company's natural gas transmission operations provide
solid earnings growth and strengthen its competitive position by adhering to a
comprehensive strategy of selected acquisitions and developing incremental
projects that expand services to meet specific customer needs.
RESULTS OF OPERATIONS
The Company reported consolidated net income of $198 million in 1999 compared to
consolidated net income of $181 million in 1998. Operating income was $409
million in 1999 and $386 million in 1998. Earnings before interest and taxes
(EBIT) were $421 million in 1999 compared to $398 in 1998. Operating income and
EBIT are not materially different, and are affected by the same fluctuations for
the Company.
EBIT for the Company increased 6% in 1999 compared to the prior year. This
increase was the result of slightly higher operating revenues due to market
expansion projects and higher throughput from colder weather and from lower
operating expenses. Operating expenses decreased partially due to a $28 million
benefit from the Environmental Protection Agency's (EPA) certification of
completion of PCB (polychlorinated biphenyl) assessment and soil clean-up
programs. Depreciation expense decreased $49 million primarily to reflect the
extension of the estimated useful lives of certain facilities. In addition, as a
result of the customer rate initiative effective October 1, 1998, operation and
maintenance expenses increased as a result of accelerated recovery of transition
costs. For additional information, see Notes 2 and 3 to the Consolidated
Financial Statements, "Summary of Significant Accounting Policies" and
"Regulatory Matters," respectively. The absence of a $39 million benefit from
the resolution of gas supply realignment cost issues and a $13 million refund
from a state property tax ruling which both occurred in 1998 partially offset
the increase in EBIT.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for 1999 and 1998 were $131 million and $128
million, respectively. These expenditures consist primarily of business
expansion projects and renewals and betterments which extend the useful life of
property, plant and equipment. Projected 2000 capital and investment
expenditures, including allowance for funds used during construction, are
approximately $100 million, with market-expansion approximating 30% 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.
Assets and liabilities recorded in the Consolidated Balance Sheets related to
natural gas transition cost recoveries and the related cash flow impacts are
affected by state and federal regulatory orders and specific agreements. For
more information on the natural gas transition cost recoveries, see Note 3 to
the Consolidated Financial Statements, "Regulatory Matters."
On August 29, 1998, the FERC approved a settlement from the Company which
accelerates recovery of natural gas transition costs. The order was effective
October 1, 1998 and includes a rate moratorium until 2004. Net cash flows from
operations are not expected to change for the first two years after
implementation; however, after the natural gas transition costs are fully
recovered, cash flows from operations are expected to decrease during 2001
through 2003 by an estimated total of $270 million. For more information
concerning the settlement, see Note 3 to the Consolidated Financial Statements,
"Regulatory Matters."
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISK POLICES
The Company is exposed to market risks associated with interest rates and
commodity prices. Comprehensive risk management policies have been established
by the Corporate Risk Management Committee (CRMC) for Duke Energy to monitor and
control these market risks. The CRMC is chaired by the Chief Financial Officer
of
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Duke Energy and is comprised of senior executives. The CRMC has responsibility
for oversight of interest rate risk, foreign currency risk, credit risk and
energy risk management, including approval of energy financial exposure limits.
INTEREST RATE RISK
The Company is exposed to risk resulting from changes in interest rates as a
result of its issuance of variable-rate debt and fixed-rate debt. The Company
manages its interest rate exposure by limiting its variable-rate and fixed-
rate exposure to certain percentages of total capitalization, as set by policy,
and by monitoring the effects of market changes in interest rates. All of the
Company's variable-rate debt is payable to PanEnergy. See Notes 8 and 9 to the
Consolidated Financial Statements, "Financial Instruments" and "Long-term Debt,"
respectively, for additional information.
Based on a sensitivity analysis as of December 31, 1999, it was estimated that
if market interest rates average 1% higher (lower) in 2000 than in 1999, the
Company's earnings before income taxes would decrease (increase) by
approximately $6 million. This amount was determined by considering the impact
of the hypothetical interest rates on the Company's variable-rate debt balances
as of December 31, 1999. In the event of a significant change in interest rates,
management would likely take actions to manage its exposure to the change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, the sensitivity analysis assumes no changes in the
Company's financial structure.
COMMODITY PRICE RISK
The Company is exposed to the impact of market fluctuations in the price of
natural gas and other energy-related products. The Company employs established
policies and procedures to manage its risks associated with these market
fluctuations using various commodity derivatives, including forward contracts,
futures, over-the-counter swap agreements and options. Market risks associated
with commodity derivatives were not material at December 31, 1999. See Notes 2
and 8 to the Consolidated Financial Statements, "Summary of Significant
Accounting Policies" and "Financial Instruments and Risk Management,"
respectively, for additional information.
CURRENT ISSUES
COMPETITION. WHOLESALE. Currently, the interstate natural gas transmission
industry is regulated on a basis designed to recover the costs of providing
services to customers. See Note 2 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies" for further discussion of
cost-based regulation. On February 9, 2000, the FERC issued Order 637 which sets
forth revisions to its regulations governing short-term natural gas
transportation services and policies governing the regulation of interstate
natural gas pipelines. "Short term" has been defined as all transactions of less
than one year. Among the significant actions taken are the lifting of the price
cap for short- term capacity release by pipeline customers for an experimental
2-year period ending September 1, 2002 and requiring that interstate pipelines
file pro forma tariff sheets by May 1, 2000 to (i) provide for nomination
equality between capacity release and primary pipeline capacity; (ii) implement
imbalance management services (for which interstate pipelines may charge) while
at the same time reducing the use of operational flow orders and penalties and
(iii) increase segmentation rights. Order 637 also narrows the right of first
refusal to remove economic biases perceived in the current rule. Order 637
imposes significant new reporting requirements for interstate pipelines which
must be implemented by September 1, 2000. The stated FERC goal of these
reporting requirements is to increase transparency of transactions on a
real-time basis and to provide additional information on pipeline organizational
structure. Additionally, Order 637 permits pipelines to implement, subject to
certain conditions, peak/off-peak rates, term-differentiated rates, and capacity
auctions. Order 637 is subject to requests for rehearing and possible court
appeal.
In addition, the FERC clarified its policies regarding the construction
of new pipeline facilities that were addressed in a policy statement issued
September 15, 1999. Under this policy statement, the FERC will first address
whether a project is economically viable without subsidization from existing
pipeline customers. Generally, this changes the presumption in favor of
rolled-in pricing to a presumption in favor of incremental
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pricing, although the FERC announced certain instances in which rolled-in
pricing would be appropriate, such as an expansion designed to increase
reliability and flexibility of service for existing customers. Assuming the
first hurdle is met, the FERC will then investigate whether the pipeline has
acted to mitigate adverse impacts on: (1) its existing customers, (2) other
pipelines and their captive customers and (3) landowners and communities. The
FERC will then apply a "sliding scale" test balancing the need for the project
against the remaining adverse impacts on the interests set out above. This
analysis is in addition to the environmental analysis required under the
National Environmental Policy Act. This policy statement is also subject to
rehearing and judicial review.
Because the ultimate resolution of the foregoing proceedings is unknown,
management cannot estimate the effects of these matters on future consolidated
results of operations or financial position.
RETAIL COMPETITION. Changes in regulation to allow retail competition could
affect the Company's natural gas transportation contracts with local gas
distribution companies. Order 637 may also have an effect on retail competition
and the rules under which retail competition will be achieved. See discussion
above. Natural gas retail deregulation is in the very early stages of
development and management cannot estimate the effects of this matter on future
consolidated results of operations or financial position.
ENVIRONMENTAL MATTERS. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters.
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS. In June 1999,
the EPA certified that the Company had completed clean up of PCB 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. The Company 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.
At December 31, 1999 and 1998, remaining estimated clean-up costs on the
Company's system were accrued and included in the Consolidated Balance Sheets as
Other Current Liabilities and Environmental Clean-up Liabilities. These cost
estimates represent gross clean-up costs expected to be incurred, have not been
discounted or reduced by customer recoveries and generally do not include fines,
penalties or third-party claims. Costs expected to be recovered from customers
have been deferred and are included in the Consolidated Balance Sheets as
Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.
AIR QUALITY CONTROL. In October 1998, the EPA issued a final ruling on regional
ozone control which requires revised State Implementation Plans for 22 eastern
states and the District of Columbia. This EPA ruling is being challenged in
court by various states, industry and other interests, including the Company. In
March 2000, the court ruled in favor of the EPA on most issues in the
litigation. A rehearing on this ruling or an appeal is likely. The EPA has
undertaken other ozone-related actions having virtually identical goals. These
actions have likewise been challenged by the same or similar parties. The
ultimate 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.
In December 1997, the United Nations held negotiations in Kyoto, Japan to
determine how to minimize global warming caused by, among other things, carbon
dioxide emissions from fossil-fired generating facilities and methane from
natural gas operations. Further negotiations in November 1998 resulted in a work
plan to complete the operational details of the Kyoto agreement by late 2000. If
this initiative is adopted in its current form, it could have far reaching
implications to the Company and the entire energy
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industry. Because this matter is in the early stages of discussion, management
cannot estimate the effects on future consolidated results of operations or
financial position.
LITIGATION AND CONTINGENCIES. For information concerning litigation and other
commitments and contingencies, see Note 10 to the Consolidated Financial
Statements, "Commitments and Contingencies - Litigation."
YEAR 2000 READINESS PROGRAM. The Company did not experience any disruption to
its operations resulting from the transition to the year 2000 nor during the
leap year transition. The Company completed its year 2000 readiness program in
June 1999. Systems will continue to be monitored throughout the year. The total
cost of the program, including internal labor as well as incremental costs such
as consulting and contract costs, was approximately $1 million. These costs
exclude replacement systems that, in addition to being Year 2000 ready, provided
significantly enhanced capabilities which benefit operations in future periods.
NEW ACCOUNTING STANDARD. In September 1998, Statement of Financial Accounting
Standards (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 it defines the
accounting for changes in the fair value of the derivatives depending on the
intended use of the derivative. The Company is currently reviewing the expected
impact of SFAS No. 133 on consolidated results of operations and financial
position.
FORWARD-LOOKING STATEMENTS. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition, Quantitative and Qualitative Disclosures About Market Risk."
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
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1999 1998 1997
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<S> <C> <C> <C>
OPERATING REVENUES
Transportation of natural gas $ 775 $ 771 $ 807
Storage of natural gas 65 64 67
Other 62 54 50
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Total operating revenues 902 889 924
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OPERATING EXPENSES
Operation and maintenance 361 339 402
Depreciation and amortization 86 135 147
Property and other taxes 45 29 37
--------- ---------- ---------
Total operating expenses 492 503 586
--------- ---------- ---------
OPERATING INCOME 410 386 338
OTHER INCOME AND EXPENSES 11 12 11
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EARNINGS BEFORE INTEREST AND TAXES 421 398 349
INTEREST EXPENSE 106 110 116
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EARNINGS BEFORE INCOME TAXES 315 288 233
INCOME TAXES 117 107 87
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NET INCOME $ 198 $ 181 $ 146
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</TABLE>
See Notes to Consolidated Financial Statements.
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TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 198 $ 181 $ 146
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 90 140 152
Deferred income taxes 4 12 14
Transition cost recoveries (payments) 96 (30) (39)
(Increase) decrease in
Receivables 9 (11) (3)
Inventory (15) 2 2
Other current assets (3) (2) 3
Increase (decrease) in
Accounts payable (1) (28) (9)
Taxes accrued 26 28 19
Other current liabilities (15) (27) (53)
Other, net (10) - (45)
---------- -------- ---------
Net cash provided by operating activities 379 265 187
---------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (131) (128) (119)
Net increase in advances receivable - parent (200) (138) (64)
Retirements and other 1 1 (4)
---------- -------- ---------
Net cash used in investing activities (330) (265) (187)
---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for the redemption of long-term debt (49) - -
---------- -------- ---------
Net cash used in financing activities (49) - -
---------- -------- ---------
Net change in cash and cash equivalents - - -
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - - -
---------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ - $ -
========== ======== =========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest, net of amount capitalized $ 102 $ 105 $ 105
Cash paid for income taxes $ 103 $ 77 $ 58
Non-cash investing and financing transactions:
In 1999, the Company received a transfer of approximately $70 million
of Property, Plant & Equipment and a related $7 million deferred tax
liability, of which $45 million was treated as a reduction to advances
receivable - parent and $18 million was treated as a capital
contribution from parent.
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Accounts Receivables $ 83 $ 92
Inventory 27 12
Current portion of natural gas transition costs 81 100
Other 29 33
---------- ----------
Total current assets 220 237
---------- ----------
INVESTMENTS AND OTHER ASSETS
Advances receivable - parent 1,267 1,112
Goodwill, net 146 151
---------- ----------
Total investments and other assets 1,413 1,263
---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Cost 3,677 3,493
Less accumulated depreciation and amortization 1,054 990
---------- ----------
Net property, plant and equipment 2,623 2,503
---------- ----------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 36 41
Natural gas transition costs 4 81
Environmental clean-up costs 27 68
Other 71 72
---------- ----------
Total regulatory assets and deferred debits 138 262
---------- ----------
TOTAL ASSETS $4,394 $4,265
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 10 $ 11
Taxes accrued 157 131
Deferred income taxes 25 29
Interest accrued 13 14
Current maturities of long-term debt 200 49
Other 60 74
--------- ---------
Total current liabilities 465 308
--------- ---------
LONG-TERM DEBT
Notes payable - parent 605 605
Other 351 551
--------- ---------
Total long-term debt 956 1,156
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 601 584
Environmental clean-up liabilities 49 118
Other 121 113
--------- ---------
Total deferred credits and other liabilities 771 815
--------- ---------
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 720 522
--------- ---------
Total common stockholder's equity 2,202 1,986
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,394 $ 4,265
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ - $ - $ -
-------- --------- --------
BALANCE AT END OF YEAR - - -
-------- --------- --------
PAID-IN CAPITAL
Balance at beginning of year 1,464 1,464 1,464
Capital contribution from parent 18 - -
-------- --------- --------
BALANCE AT END OF YEAR 1,482 1,464 1,464
-------- --------- --------
RETAINED EARNINGS
Balance at beginning of year 522 344 198
Net income 198 181 146
Common stock dividends - (3) -
-------- --------- --------
BALANCE AT END OF YEAR 720 522 344
-------- --------- --------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 2,202 $ 1,986 $ 1,808
======== ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1. NATURE OF OPERATIONS
Texas Eastern Transmission Corporation (TETCO) is a wholly owned subsidiary of
PanEnergy Corp (PanEnergy), 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.
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).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of all
of the Company's majority-owned subsidiaries after the elimination of
significant intercompany transactions and balances.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current and
expected future events, actual results could differ from those estimates.
INVENTORY. Inventory consists of materials and supplies and natural gas held for
storage and is recorded at the lower of cost or market, primarily using the
average cost method.
GAS IMBALANCES. Gas imbalances occur as a result of differences in volumes of
gas received and delivered. Gas imbalance receivables are valued at lower of
cost or market while gas imbalance payables are valued at market.
GOODWILL. Goodwill represents the excess of acquisition costs over the fair
value of the net assets of an acquired business. The amount of goodwill related
to the purchase of Texas Eastern Corporation and its subsidiaries in 1989 is
amortized on a straight-line basis over 40 years. Accumulated amortization of
goodwill at December 31, 1999 and 1998 was $99 million and $94 million,
respectively.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at cost.
The Company capitalizes all construction-related direct labor and material
costs, as well as indirect construction costs. Indirect costs include general
engineering, taxes and the cost of money. The cost of renewals and betterments
that extend the useful life of property, plant and equipment is also
capitalized. The cost of repairs and replacements is charged to expense as
incurred. Depreciation is generally computed using the straight-line method
based on the estimated useful lives of the assets. The composite
weighted-average depreciation rates were 2.3%, 3.8% and 4.3% for 1999, 1998 and
1997, respectively.
When property, plant and equipment maintained by the Company's regulated
operations are retired, the original cost plus the cost of retirement, less
salvage, is charged to accumulated depreciation and amortization. When entire
regulated operating units are sold or non-regulated properties are retired or
sold, the property and related accumulated depreciation and amortization
accounts are reduced, and any gain or loss is recorded in income, unless
otherwise required by the FERC.
IMPAIRMENT OF LONG-LIVED ASSETS. The recoverability of long-lived assets and
intangible assets are reviewed whenever events or changes in circumstances
indicate that the carrying amount of the asset may
13
<PAGE>
not be recoverable. Such evaluation is based on various analyses, including
undiscounted cash flow projections.
ACCOUNTING FOR RISK MANAGEMENT ACTIVITIES. The Company manages its exposure to
risk from existing contractual commitments through commodity derivatives,
including forward contracts, futures, over-the-counter swap agreements and
options.
These commodity derivatives are utilized for non-trading purposes to hedge the
impact of market fluctuations in the price of natural gas and other
energy-related products. To qualify as a hedge, the price movements in the
commodity derivatives must be highly correlated with the underlying hedged
commodity. Under the deferral method of accounting, gains and losses related to
commodity derivatives which qualify as hedges are recognized in income when the
underlying hedged physical transaction closes and are included in the
Consolidated Statements of Income as Other Revenues. If the commodity derivative
is no longer sufficiently correlated to the underlying commodity, or if the
underlying commodity transaction closes earlier than anticipated, the deferred
gains or losses are recognized in income.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE. Premiums, discounts and expenses
incurred in connection with the issuance of presently outstanding long-term debt
are amortized over the terms of the respective issues. Any call premiums or
unamortized expenses associated with refinancing higher-cost debt obligations
used to finance regulated assets and operations are amortized consistent with
regulatory treatment of those items.
ENVIRONMENTAL EXPENDITURES. Environmental expenditures that relate to an
existing condition caused by past operations and do not contribute to current or
future revenue generation are expensed. Environmental expenditures relating to
current or future revenues are expensed or capitalized as appropriate.
Liabilities are recorded when environmental assessments and/or clean-ups are
probable and the costs can be reasonably estimated. Certain of these
environmental assessments and clean-up costs are expected to be recovered from
the Company's customers and have, therefore, been deferred and are included in
the Consolidated Balance Sheets as Environmental Clean-up Costs.
COST-BASED REGULATION. The Company's regulated operations are subject to the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly,
certain assets and liabilities that result from the regulated ratemaking process
are recorded that would not be recorded under generally accepted accounting
principles for non-regulated entities. These regulatory assets and liabilities
are classified in the Consolidated Balance Sheets as Regulatory Assets and
Deferred Debits, and Deferred Credits and Other Liabilities, respectively. The
applicability of SFAS No. 71 is routinely evaluated, and factors such as
regulatory changes and the impact of competition are considered. Increasing
competition might require companies to reduce their asset balances to reflect a
market basis less than cost and to write off their associated regulatory assets.
Management cannot predict the potential impact, if any, of increasing
competition on future financial position or consolidated results of operations.
However, the Company continues to position itself to effectively meet these
challenges by maintaining competitive prices.
REVENUES. Revenues on transportation and storage of natural gas are recognized
as service is provided. When rate cases are pending final approval, a portion of
the revenues is subject to possible refund and reserves are established when
appropriate.
Total billings for transportation and storage services provided by the Company
to Public Service Electric and Gas Company accounted for approximately 12% of
consolidated revenues for 1999, 14% for 1998, and 13% for 1997. No other
customer accounted for 10% or more of consolidated revenues in 1999, 1998 or
1997.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other
14
<PAGE>
Income and Expenses and to Interest Expense. After construction is completed,
the Company is permitted to recover these costs, including a fair return,
through their inclusion in rate base and in the provision for depreciation.
Rates used for capitalization of AFUDC by the Company's regulated operations are
calculated in compliance with FERC rules.
INCOME TAXES. Duke Energy and its subsidiaries file a consolidated federal
income tax return. Federal income taxes have been provided by the Company on the
basis of its separate company income and deductions in accordance with
established practices of the consolidated group. Deferred income taxes have been
provided for temporary differences. Temporary differences occur when events and
transactions recognized for financial reporting result in taxable or
tax-deductible amounts in different periods. Investment tax credits have been
deferred and are being amortized over the estimated useful lives of the related
properties.
NEW ACCOUNTING STANDARD. In September 1998, 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 it defines the accounting for changes in the fair value of the
derivatives depending on the intended use of the derivative. The Company is
currently reviewing the expected impact of SFAS No. 133 on consolidated results
of operations and financial position.
RECLASSIFICATIONS. Certain amounts have been reclassified in the Consolidated
Financial Statements to conform to the current presentation.
NOTE 3. REGULATORY MATTERS
The Company primarily provides natural gas transportation and storage services
pursuant to FERC Order 636. Order 636 allows pipelines to recover eligible costs
resulting from implementation of the order (transition costs). In 1994, the FERC
approved the Company's settlement resolving regulatory issues related primarily
to Order 636 transition costs and a number of other issues related to services
prior to Order 636. Under the 1994 settlement, the Company's liability for
transition costs was estimated based on the amount of producers' natural gas
reserves and other factors. In 1998, the Company favorably resolved all
remaining gas purchase contracts, recognizing $39 million of income ($24 million
after tax).
In addition, the FERC approved a settlement filed by the Company in 1998, which
accelerates recovery of natural gas transition costs. The 1998 settlement is not
expected to have a material adverse effect on consolidated results of operations
or financial position.
15
<PAGE>
NOTE 4. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
INCOME STATEMENT TRANSACTIONS (in millions)
- -----------------------------------------------------------------------
Years Ended December 31,
-------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Transportation and storage of natural gas $42 $34 $23
Other operating revenues 21 37 39
Operation and maintenance(a) 80 124 107
Interest expense 48 51 51
- --------------------------------------------- -------- -------- -------
</TABLE>
(a) Includes allocated retirement plan costs
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
BALANCE SHEET TRANSACTIONS (in millions)
- -----------------------------------------------------------------------
December 31,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
Receivables $ 7 $ 10
Accounts payable - 2
Taxes accrued 113 91
- -----------------------------------------------------------------------
</TABLE>
Advances receivable-parent do not bear interest. Advances are carried as open
accounts and are not segregated between current and non-current amounts.
Increases and decreases in advances result from the movement of funds to provide
for operations, capital expenditures and debt payments of the Company.
NOTE 5. GAS IMBALANCES
The consolidated balance sheets include in-kind balances as a result of
differences in gas volumes received and delivered. At December 31, 1999 and
1998, other current assets include $22 million and $16 million, respectively,
and other current liabilities include $15 million for both years, related to gas
imbalances.
NOTE 6. INCOME TAXES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE (in millions)
- --------------------------------------------------------------------------------
Years Ended December 31,
----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current income taxes
Federal $103 $ 85 $67
State 10 10 6
------- ------- -------
Total current income taxes 113 95 73
------- ------- -------
Deferred income taxes, net
Federal 4 12 12
State - - 2
------- ------- -------
Total deferred income taxes, net 4 12 14
------- ------- -------
Total income tax expense $117 $107 $87
- ------------------------------------------------------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE RECONCILIATION TO STATUTORY RATE (in millions)
- --------------------------------------------------------------------------------
Years Ended December 31,
--------------------
1999 1998 1997
----- ----- ------
<S> <C> <C> <C>
Income tax, computed at the statutory rate $110 $101 $82
Adjustments resulting from:
State income tax, net of federal income tax effect 7 6 5
----- ----- ------
Total income tax expense $117 $107 $87
- ------------------------------------------------------- ----- ----- ------
Effective tax rate 37.1% 37.2% 37.3%
- ------------------------------------------------------- ----- ----- ------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
NET DEFERRED INCOME TAX LIABILITY COMPONENTS (in millions)
- --------------------------------------------------------------------------------
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Deferred credits and other liabilities $ 34 $ 38
Natural gas transition liabilities 1 1
Environmental clean-up liabilities 19 43
Other 5 6
-------- --------
Total deferred income tax asset 59 88
-------- --------
Property, plant and equipment (550) (517)
Regulatory assets and deferred debits (38) (38)
Natural gas transition costs (30) (63)
Environmental clean-up costs (11) (28)
-------- --------
Total deferred income tax liabilities (629) (646)
-------- --------
State deferred income tax, net of federal tax effect (56) (55)
-------- --------
Net deferred income tax liability (626) (613)
Portion classified as current liability (25) (29)
-------- --------
Noncurrent liability $ (601) $(584)
- ------------------------------------------------------ -------- --------
</TABLE>
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT (in millions)
- ------------------------------------------------------------------------
December 31,
-----------------
1999 1998
-------- --------
<S> <C> <C>
Transmission $3,356 $3,267
Other 321 226
-------- --------
Total property, plant, and equipment 3,677 3,493
Less accumulated depreciation and amortization 1,054 990
-------- --------
Net property, plant and equipment $2,623 $2,503
- ------------------------------------------------------ -------- --------
</TABLE>
NOTE 8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company's financial instruments include $551 million and $600 million of
long-term debt with an approximate fair value of $570 million and $655 million
as of December 31, 1999 and 1998, respectively. The majority of the estimated
fair value amounts of long-term debt were obtained from independent parties.
Judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates determined as of December 31, 1999 and
1998 are not necessarily indicative of the amounts the Company could have
realized in current market exchanges.
The fair values of Notes Payable - Parent are not materially different from
their carrying amounts because the stated rates approximate market rates. The
fair values of Advances Receivable - Parent are not readily determinable since
such amounts are carried as open accounts. See Note 4, "Related Party
Transactions."
At December 31, 1999, the Company held or issued several commodity derivatives,
primarily in the form of swaps, that reduce exposure to market price
fluctuations for natural gas and other energy-related products. At December 31,
1999, these commodity derivatives extended for periods up to three years. The
gains, losses and costs related to non-trading commodity derivatives that
qualify as a hedge are not recognized until the underlying physical transaction
closes. At December 31, 1999, the non-trading commodity derivatives held were
not material. There were no outstanding non-trading commodity derivatives at
December 31, 1998.
17
<PAGE>
NOTE 9. LONG-TERM DEBT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LONG-TERM DEBT (in millions)
- --------------------------------------------------------------------------------
December 31,
-------------------
Year Due 1999 1998
----------- ---------- --------
<S> <C> <C> <C>
Notes Payable-Parent
8.25% at December 31, 1999 and 1998 2001 - 2006 $ 605 $ 605
Notes Payable-Other
8% - 10 3/8% 2000 - 2004 500 500
Medium term, Series A, 7.64% - 9.07% 2001 - 2012 51 100
--------- ---------
Total long-term debt 1,156 1,205
Current maturities of long-term debt (200) (49)
--------- ---------
Total long-term portion $ 956 $ 1,156
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ANNUAL MATURITIES (in millions)
- --------------------------------------------------------------------------------
<S> <C>
2000 $200
2001 471
2002 100
2003 -
2004 115
- --------------------------------------------------------------------------------
</TABLE>
NOTE 10. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL. The Company is subject to federal, state and local regulations
regarding air and water quality, hazardous and solid waste disposal and other
environmental matters.
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. The
Company 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.
At December 31, 1999 and 1998, remaining estimated clean-up costs on the
Company's system have been accrued and are included in the Consolidated Balance
Sheets as Other Current Liabilities and Environmental Clean-up Liabilities.
These cost estimates represent gross clean-up costs expected to be incurred,
have not been discounted or reduced by customer recoveries and generally do not
include fines, penalties or third-party claims. Costs expected to be recovered
from customers have been deferred and are included in the Consolidated Balance
Sheets as of December 31, 1999 and 1998, as Environmental Clean-up Costs.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on consolidated
results of operations or financial position.
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. Where
appropriate, the Company has made accruals in accordance with SFAS 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.
18
<PAGE>
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.
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.
LEASES. The Company utilizes assets under operating leases in several areas of
operations. Consolidated rental expense amounted to $6 million, $7 million and
$9 million in 1999, 1998 and 1997, respectively. Future minimum rental payments
under the Company's various operating leases for the years 2000 through 2004 are
$8 million, $6 million, $3 million, $1 million and $1 million, respectively.
NOTE 11. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN. The Company participates in Duke Energy's non-contributory
defined benefit retirement plan covering most employees with minimum service
requirements using a cash balance formula. Under a cash balance formula, a plan
participant accumulates a retirement benefit based upon a percentage, which may
vary with age and years of service, of current eligible earnings and current
interest credits.
Prior to January 1, 1999, the Company participated in PanEnergy's
non-contributory defined benefit retirement plan covering most employees with a
minimum of one year vesting service. Through December 31, 1998, the plan
provided retirement benefits for eligible employees of the Company that were
generally based on an employee's years of benefit accrual service and highest
average eligible earnings. Effective January 1, 1999, the benefit formula under
the PanEnergy plan, for all eligible employees, was changed to a cash balance
formula. The PanEnergy plan was merged into the Duke Energy plan in 1999.
Duke Energy's policy is to fund amounts, as necessary, on an actuarial basis to
provide assets sufficient to meet benefits to be paid to plan participants. With
respect to the entire plan, the fair value of the plan assets of $3,121 million
and $2,922 million at December 31, 1999 and 1998, respectively, exceeded the
projected benefit obligations of $2,446 million and $2,540 million, as of
December 31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ASSUMPTIONS USED IN DUKE ENERGY'S PENSION AND OTHER POSTRETIREMENT BENEFITS
ACCOUNTING (a)
- --------------------------------------------------------------------------------
(Percent) 1999 1998 1997
- --------------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Discount rate 7.50 6.75 7.25
Salary increase 4.50 4.67 4.15
Expected long-term rate of return on plan assets 9.25 9.25 9.25
- --------------------------------------------------- ------ ------ ------
</TABLE>
(a) Reflects weighted averages across all plans.
The Company's net periodic pension benefit, as allocated by Duke Energy, was $6
million, $4 million and $3 million for the years ended December 31, 1999, 1998
and 1997, respectively.
19
<PAGE>
Duke Energy also sponsors, and the Company participates in, an employee savings
plan that covers substantially all employees. The Company expensed plan
contributions of $4 million each year in 1999, 1998 and 1997.
OTHER POSTRETIREMENT BENEFITS. The Company, in conjunction with Duke Energy,
provides certain health care and life insurance benefits for retired employees
on a contributory and non-contributory basis. Employees become eligible for
these benefits if they have met certain age and service requirements at
retirement, as defined in the plans. Under plan amendments effective late 1998
and early 1999, health care benefits for future retirees were changed to limit
employer contributions and medical coverage.
The Company accrues such benefit costs over the active service period of
employees to the date of full eligibility for the benefits. The net unrecognized
transition obligation, resulting from the implementation of accrual accounting,
is being amortized over approximately 20 years. With respect to the entire plan,
the fair value of the plan assets was $327 million and $305 million at December
31, 1999 and 1998, respectively, and the accumulated postretirement benefit
obligation was $562 million and $625 million at December 31, 1999 and 1998,
respectively.
It is the Company's and Duke Energy's general policy to fund accrued
postretirement health care costs. Duke Energy's retiree life insurance plan is
fully funded based on actuarially determined requirements.
The Company's net periodic postretirement benefit cost, as allocated by Duke
Energy, was $6 million, $7 million and $6 million in 1999, 1998 and 1997,
respectively.
For measurement purposes, a 5% weighted average rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 4.75% for 2005 and remain at that level
thereafter. Assumed health care cost trend rates have a significant effect on
the amounts reported for the health care plans.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SENSITIVITY TO CHANGES IN ASSUMED HEALTH CARE COST TREND RATES (in millions)
- --------------------------------------------------------------------------------
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- --------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest
cost components $ - $ -
Effect on postretirement benefit obligation 3 (3)
- --------------------------------------------------------------------------------
</TABLE>
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
First Second Third Fourth
(In millions) Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Operating revenues $234 $217 $220 $231 $902
Operating income 107 120(a) 92 90 409
EBIT 110 122(a) 95 94 421
Net income 52 59(a) 42 45 198
1998
Operating revenues $239 $222 $216 $212 $889
Operating income 108(b) 79 115(c) 84 386
EBIT 111(b) 81 120(c) 86 398
Net income 52(b) 33 58(c) 38 181
- --------------------------------------------------------------------------------
</TABLE>
(a) Includes the effect of completing PCB assessment and soil clean-up programs
below cost estimates.
(b) Includes the effect of favorable state property tax rulings.
(c) Includes the effect of a favorable resolution of regulatory issues related
to gas supply realignment costs.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
Texas Eastern Transmission Corporation
We have audited the accompanying consolidated balance sheets of Texas Eastern
Transmission Corporation and subsidiaries (the Company) as of December 31, 1999
and 1998, and the related consolidated statements of income, common
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
February 11, 2000
21
<PAGE>
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Texas Eastern Transmission Corporation and
subsidiaries (the Company) are prepared by management, who are responsible for
their integrity and objectivity. The statements are prepared in conformity with
generally accepted accounting principles in all material respects and
necessarily include judgments and estimates of the expected effects of events
and transactions that are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, accounting controls provide reasonable assurance that
errors or irregularities which could be material to the financial statements are
prevented or are detected by employees within a timely period as they perform
their assigned functions. The Company's accounting controls are continually
reviewed for effectiveness. In addition, written policies, standards and
procedures, and a strong internal audit program augment the Company's accounting
controls.
/s/ Alan N. Harris
Alan N. Harris
Vice President, Controller and Assistant Secretary
22
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) Consolidated Financial Statements and Supplemental Financial Data included
in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Common Stockholder's Equity for the
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Quarterly Financial Data (unaudited) (included in Note 12 to the
Consolidated Financial Statements)
All schedules are omitted because of the absence of the conditions
under which they are required or because the required information is
included in the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
(c) Exhibits - See Exhibit Index immediately following the signature page.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: March 23, 2000 TEXAS EASTERN TRANSMISSION CORPORATION
(Registrant)
By /s/ Robert B. Evans
-------------------------
Robert B. Evans
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
(i) Principal executive officer:
By: /s/ Robert B. Evans
-------------------
Robert B. Evans
Chairman of the Board and President
(ii) Principal financial officer:
By: /s/ Dorothy M. Ables
--------------------
Dorothy M. Ables
Vice President, Chief Financial Officer and Treasurer
(iii) Principal accounting officer:
By: /s/ Alan N. Harris
--------------------
Alan N. Harris
Vice President, Controller and Assistant Secretary
(iv) A majority of the Directors:
By: /s/ Dorothy M. Ables
----------------------
Dorothy M. Ables
By: /s/ Robert B. Evans
----------------------
Robert B. Evans
By: /s/ Theopolis Holeman
----------------------
Theopolis Holeman
Date: March 23, 2000
24
<PAGE>
EXHIBIT INDEX
Exhibits filed herewith are designated by an asterisk (*). All exhibits not so
designated are incorporated by reference to a prior filing, as indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Exhibit Description Originally Filed as Exhibit Exhibit
Number Number
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
3.01 Restated Certificate 3.1 to Form 10-Q of TETCO for 1-4456
of Incorporation of quarter ended September 30, 1993
Texas Eastern
Transmission
Corporation dated
October 25, 1993
3.02 By-Laws of Texas 3.2 to Form 10-Q of TETCO for 1-4456
Eastern Transmission quarter ended September 30, 1993
Corporation as
adopted on August 17,
1993
*12 Computation of Ratio
of Earnings to Fixed
Charges
*23 Independent Auditors'
Consent
*27 Financial Data
Schedule for
December 31, 1999
- --------------------------------------------------------------------------------
</TABLE>
25
TEXAS EASTERN TRANSMISSION CORPORATION
Exhibit 12 COMPUTATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings Before Income Taxes $ 315 $ 288 $ 233 $ 209 $ 207
Fixed Charges 109 112 115 119 93
------- ------- ------- ------- -------
Total $ 424 $ 400 $ 348 $ 328 $ 300
======= ======= ======= ======= =======
Fixed Charges
Interest on debt $ 107 $ 111 $ 112 $ 116 $ 90
Interest component of rentals 2 1 3 3 3
------- ------- ------- ------- -------
Fixed Charges $ 109 $ 112 $ 115 $ 119 $ 93
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 3.9 3.6 3.0 2.8 3.2
</TABLE>
Exhibit No. 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-67690 of Texas Eastern Transmission Corporation on Form S-3 of our report
dated February 11, 2000, appearing in this Annual Report on Form 10-K of Texas
Eastern Transmission Corporation for the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Texas Eastern Transmission Corporation Quarterly Report on Form 10-K for
the year ended December 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 83000
<ALLOWANCES> 0
<INVENTORY> 27000
<CURRENT-ASSETS> 220000
<PP&E> 3677000
<DEPRECIATION> 1054000
<TOTAL-ASSETS> 4394000
<CURRENT-LIABILITIES> 465000
<BONDS> 956000
0
0
<COMMON> 0
<OTHER-SE> 2202000
<TOTAL-LIABILITY-AND-EQUITY> 4394000
<SALES> 0
<TOTAL-REVENUES> 902000
<CGS> 0
<TOTAL-COSTS> 361000
<OTHER-EXPENSES> 131000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106000
<INCOME-PRETAX> 315000
<INCOME-TAX> 117000
<INCOME-CONTINUING> 198000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 198000
<EPS-BASIC> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>Not meaningful since Texas Eastern Transmission Corporation is a
wholly-owned subsidiary.
</FN>
</TABLE>
