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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, 2000 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 incorporation or organization) (I.R.S. Employer Identification No.)
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
------------------- -------------------
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, 2001..................... none
Number of shares of Common Stock, without par value, outstanding at March 15,
2001..................1,000
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TEXAS EASTERN TRANSMISSION CORPORATION
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Item Page
- ---- ----
PART I.
1. Business......................................................................................................1
General...................................................................................................1
Natural Gas Transmission..................................................................................1
Competition...............................................................................................1
Regulation................................................................................................2
Environmental Matters.....................................................................................2
Other Matters.............................................................................................3
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.........................25
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................25
Signatures...................................................................................................26
Exhibit Index................................................................................................27
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."
i
PART I.
Item 1. Business.
GENERAL
Texas Eastern Transmission Corporation (TETCO) 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).
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 2000, 1999 and 1998 were 1,312
trillion British thermal units (TBtu), 1,254 TBtu and 1,148 TBtu, respectively.
A majority of the Company's contracted volumes are under long-term firm service
agreements with local distribution company (LDC) customers in the pipeline's
market area. Firm transportation services are also provided to gas marketers,
producers, other pipelines, electric power generators and a variety of end-
users. In addition, firm and interruptible transportation services are provided
to various customers on a short-term or seasonal basis. The Company's major
customers are located in Pennsylvania, New Jersey and New York. 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 with transportation. 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's certificated working capacity
in these three fields is 75 billion cubic feet (Bcf). The Company also leases
storage capacity.
During 2000, 1999 and 1998, total billings for transportation and storage
services provided by the Company to Public Service Electric and Gas Company
(PSE&G) accounted for approximately 11%, 12% and 14%, 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 2000, 1999 and 1998.
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.
The Company competes directly with other interstate pipelines serving the
Mid-Atlantic and northeastern states.
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 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.
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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.
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," and Note 3 to the Consolidated Financial
Statements, "Regulatory Matters." for further discussion. The FERC also has
implemented regulations governing access to regulated natural gas
transmission customer data by non-regulated affiliated entities and services
provided between regulated and non-regulated affiliated entities. These
regulations affect the Company's activities with certain Duke Energy entities.
The Company is subject to the jurisdiction of the Environmental Protection
Agency and state environmental agencies. The Company is also 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:
. The Clean Air Act and the 1990 Amendments to the Act, as well as state laws
and regulations impacting air emissions that impose responsibilities on
owners, operators or both of air emissions sources including obtaining
permits and annual compliance and reporting obligations;
. The Comprehensive Environmental Response, Compensation and Liability Act,
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 11 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, cash flows or financial position of the Company.
2
OTHER MATTERS
Foreign operations and export sales are currently not material to the Company's
business as a whole.
At December 31, 2000, 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 9,000 miles of pipeline and has 70 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 include 469 miles of
its pipeline system.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission."
Item 3. Legal Proceedings.
See Note 11 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
indirectly owned by Duke Energy. During 2000, the Company declared and paid an
approximately $726 million dividend. 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 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 northeastern
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 2000 and 1999 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.
3
Business Strategy. The Company's business strategy is to continue developing
expanded services and incremental projects that meet changing customer needs and
market growth.
RESULTS OF OPERATIONS
The Company reported consolidated net income of $201 million in 2000 compared to
consolidated net income of $198 million in 1999. Operating income was $414
million in 2000 and $410 million in 1999. Earnings before interest and taxes
(EBIT) were $417 million in 2000 compared to $421 in 1999. Operating income and
EBIT are not materially different, and are affected by the same fluctuations for
the Company.
EBIT is calculated as net income (loss) before extraordinary items, excluding
interest expenses and income tax expenses. The Company has included
information concerning EBIT because EBIT is a measure that is used by the
Company's chief decision maker to assess performance and it is the primary
measure for incentive compensation for executives. EBIT should not be
considered as an alternative to, or more meaningful than, net income or cash
flow as determined in accordance with generally accepted accounting principles
as an indicator of the Company's operating performance or liquidity. EBIT is
not necessarily comparable to a similarly titled measure of another company.
==============================================================================
Reconciliation of Net Income to EBIT (in millions)
- ------------------------------------------------------------------------------
Years Ended December 31,
-----------------------------
2000 1999 1998
-----------------------------
Net Income $201 $198 $181
Plus: Interest 100 106 110
Taxes 116 117 107
-----------------------------
EBIT $417 $421 $398
==============================================================================
EBIT for the Company decreased 1% in 2000 compared to the prior year. This
decrease was the result of a $28 million benefit in 1999 related to the
completion of certain environmental cleanup programs below estimate. Increased
operating revenues due to other service activities partially offset this
decrease. The decrease in transportation revenues in 2000 from 1999
was the result of reduced rates that reflect lower recovery requirements for
operating costs, primarily system fuel and Order 636 transition costs.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for 2000 and 1999 were $102 million and $131
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 2001 capital and investment
expenditures, including allowance for funds used during construction, are
approximately $140 million, with market expansion approximating 20% 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 2001 are expected to be funded by cash from operations and/or
collection of intercompany advances receivable.
During 2000, the Company repaid at maturity $200 million of 10.375% notes and
issued $300 million of 7.30% notes. Also during 2000, the Company's direct
parent repaid approximately $1.3 billion of advances from the Company. The
Company then repaid its $605 million note to its direct parent and paid an
approximately $726 million dividend.
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, the Company's transportation rates were 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
4
flows from operations that will result from this rate decrease
will not have a material effect on the Company's ability to fund operating and
investing activities. For more information concerning the settlement, see Note 3
to the Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Policies
The Company is exposed to market risks associated with interest rates and
commodity prices. Comprehensive risk management policies have been established
by management to monitor and manage these market risks. Duke Energy's Policy
Committee is responsible for the overall approval of market risk management
policies and the delegation of approval and authorization levels. The Policy
Committee is comprised of senior executives of Duke Energy who receive periodic
updates from Duke Energy's Chief Risk Officer (CRO) on market risk positions,
corporate exposures, credit exposures and overall results of Duke Energy's risk
management activities. The CRO has responsibility for the overall management of
interest rate risk, foreign currency risk, credit risk and energy risk,
including monitoring of exposure limits.
Interest Rate Risk
The Company may, at times, be exposed to risk resulting from changes in interest
rates as a result of its issuance of variable-rate debt. The Company manages its
interest rate exposure by limiting its variable-rate exposure to certain
percentages of total capitalization, as set by policy, and by monitoring the
effects of market changes in interest rates. The Company had no variable-rate
debt at December 31, 2000; therefore, the Company's net income would not be
affected by changes in interest rates. 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 have decreased (increased) 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. During 2000, this
variable-rate debt was repaid.
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. Based on a sensitivity
analysis as of December 31, 2000, it was estimated that if market prices of the
underlying commodities decreased 10% in 2001, it would not have a material
effect on the Company's net income, after considering the effect on the
Company's commodity hedge positions. See Notes 2 and 9 to the Consolidated
Financial Statements for additional information.
Credit Risk
The Company's principal markets for natural gas transportation and storage
services are industrial end-users and utilities located throughout the Mid-
Atlantic and northeastern states. The Company has concentrations of
receivables from natural gas and electric utilities and their affiliates, as
well as industrial customers and gas marketers throughout these regions. These
concentrations of customers may affect the Company's overall credit risk in that
certain customers may be similarly affected by changes in economic, regulatory
or other factors. On all transactions where the Company is exposed to credit
risk, the Company analyzes the counterparties' financial condition prior to
entering into an agreement, establishes credit limits and monitors the
appropriateness of these limits on an ongoing basis.
CURRENT ISSUES
Competition. Wholesale Competition. 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
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regulation of interstate natural gas pipelines. "Short-term" has been defined as
all transactions of less than one year. Among the significant actions taken were
the lifting of the price cap for short-term capacity release by pipeline
customers for an experimental 2 1/2-year period ending September 1, 2002, and
requiring that interstate pipelines file pro forma tariff sheets to (i) provide
for nomination equality between capacity release and primary pipeline capacity;
(ii) implement imbalance management services (for which interstate pipelines may
charge fees) while at the same time reducing the use of operational flow orders
and penalties; and (iii) provide segmentation rights if operationally feasible.
Order 637 also narrowed the right of first refusal to remove economic biases
perceived in the current rule. Order 637 imposed significant new reporting
requirements for interstate pipelines that were implemented by the Company
during the third quarter of 2000. Additionally, Order 637 permitted pipelines to
propose peak/off-peak rates and term-differentiated rates, and encouraged
pipelines to propose experimental capacity auctions. By Order 637-A, issued in
February 2000, the FERC generally denied requests for rehearing and several
parties, including the Company, have filed appeals in the District of Columbia
Court of Appeals seeking court review of various aspects of the Order. During
the third quarter of 2000, the Company made the required pro forma tariff sheet
filings. These filings are currently subject to review and approval by the FERC.
Management does not believe the effects of these matters will have a material
effect on the Company's future consolidated results of operations, cash flows or
financial position.
Retail Competition. Changes in regulation to allow retail competition could
affect the Company's natural gas transportation contracts with local natural gas
distribution companies. 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, cash flows 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 Cleanup Programs. In June 1999,
the Environmental Protection Agency (EPA) certified that the Company had
completed cleanup of PCB-contaminated sites under conditions stipulated by a
U.S. Consent Decree in 1989. The Company was required to continue groundwater
monitoring on a number of sites for two years. This required monitoring was
completed as of the end of 2000, pending EPA concurrence. The Company will be
evaluating and discussing with the EPA, appropriate state authorities or both
the need for additional remediation or monitoring.
Based on the Company's experience to date and costs incurred for cleanup
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, cash flows or financial position.
Air Quality Control. In October 1998, the EPA issued a final rule on regional
ozone control that required 22 eastern states and the District of Columbia to
revise their State Implementation Plans to significantly reduce emissions
of nitrogen oxide by May 1, 2003. The EPA's rule was challenged in court by
various states, industry and other interests, including the Company's parent
Duke Energy. In March 2000, the court upheld most aspects of the EPA's rule. The
same court subsequently issued a decision that extended the compliance deadline
for implementation of emission reductions to May 31, 2004. In January 2000, the
EPA finalized another ozone-related rule under Section 126 of the Clean Air Act
that has virtually identical emission control requirements as its October 1998
action, but with a May 1, 2003 compliance date. The EPA's 2000 rule has been
challenged in court. The court is expected to issue its decision during the
spring of 2001. Depending on the resolution of these matters, costs to the
Company may range up to $10 million for additional capital improvements.
Global Climate Change. In 1997, the United Nations held negotiations in Kyoto,
Japan to determine how to minimize global warming. The resulting Kyoto Protocol
prescribed, among other greenhouse gas emission reduction tactics, methane
emission reductions from natural gas operations. Several subsequent meetings
have been held attempting to resolve operational details to clear the way for
multinational
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ratification and implementation without resolution. If the Kyoto
Protocol were to be adopted in its current form, it could have far-reaching
implications for the Company and the entire energy industry. However, the
outcome and timing of these implications are highly uncertain, and the Company
cannot estimate the effects on future consolidated results of operations, cash
flows or financial position. The Company remains engaged with those developing
public policy initiatives and continuously assesses the commercial implications
for its markets.
Litigation and Contingencies. For information concerning litigation and other
commitments and contingencies, see Note 11 to the Consolidated Financial
Statements.
New Accounting Standard. In June 1998, Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued. The Company was 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 has determined the effect of implementing SFAS No. 133. The net-of-
tax cumulative-effect adjustment reducing OCI and Common Stockholder's Equity is
estimated to be $1.5 million on January 1, 2001. There was no impact on the
Company's results of operations from the implementation of SFAS No. 133.
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."
7
Item 8. Financial Statements and Supplementary Data
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
Years Ended December 31,
---------------------------------
2000 1999 1998
---------- ---------- ---------
Operating Revenues
Transportation of natural gas $ 723 $ 775 $ 771
Storage of natural gas and other
services 180 127 118
--------- --------- --------
Total operating revenues 903 902 889
--------- --------- --------
Operating Expenses
Operation and maintenance 350 361 339
Depreciation and amortization 92 86 135
Property and other taxes 47 45 29
--------- --------- --------
Total operating expenses 489 492 503
--------- --------- --------
Operating Income 414 410 386
Other Income and Expenses 3 11 12
Interest Expense 100 106 110
--------- --------- --------
Earnings Before Income Taxes 317 315 288
Income Taxes 116 117 107
--------- --------- --------
Net Income $ 201 $ 198 $ 181
========= ========= ========
See Notes to Consolidated Financial Statements.
8
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Years Ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 201 $ 198 $ 181
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 96 90 140
Deferred income taxes (12) 4 12
Transition cost recoveries (payments) 82 96 (30)
(Increase) decrease in
Receivables (2) 9 (11)
Inventory 1 (15) 2
Other current assets (12) (3) (2)
Increase (decrease) in
Accounts payable 3 (1) (28)
Taxes accrued 11 26 28
Other current liabilities 17 (15) (27)
Other assets 10 11 --
Other liabilities (4) (21) --
------------ ------------ ------------
Net cash provided by operating activities 391 379 265
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (102) (131) (128)
Net (increase) decrease in advances receivable - parent 935 (200) (138)
Retirements 7 1 1
------------ ------------ ------------
Net cash provided by (used in) investing activities 840 (330) (265)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 300 -- --
Payments for the redemption of long-term debt (200) (49) --
Repayment of notes payable to parent (605) -- --
Dividends paid (726) -- --
------------ ------------ ------------
Net cash used in financing activities (1,231) (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 $ 138 $ 102 $ 105
Cash paid for income taxes $ 123 $ 103 $ 77
Non-cash investing and financing transactions:
In 1999, the Company received a transfer from its direct parent 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.
See Notes to Consolidated Financial Statements.
9
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
December 31,
----------------------------
2000 1999
------------- -----------
ASSETS
Current Assets
Accounts receivable $ 85 $ 83
Inventory 26 27
Current portion of natural gas transition costs -- 81
Other 127 29
---------- -----------
Total current assets 238 220
---------- -----------
Investments and Other Assets
Advances receivable - parent 332 1,267
Goodwill, net 141 146
---------- -----------
Total investments and other assets 473 1,413
---------- -----------
Property, Plant and Equipment
Cost 3,767 3,677
Less accumulated depreciation and amortization 1,135 1,054
---------- -----------
Net property, plant and equipment 2,632 2,623
---------- -----------
Regulatory Assets and Deferred Debits 182 138
---------- -----------
Total Assets $ 3,525 $ 4,394
========== ===========
See Notes to Consolidated Financial Statements.
10
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share amounts)
December 31,
----------------------
2000 1999
--------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 13 $ 10
Taxes accrued 168 157
Current maturities of long-term debt 116 200
Other 231 98
------ ---------
Total current liabilities 528 465
------ ---------
Long-term Debt
Notes payable - parent -- 605
Other 535 351
------ ---------
Total long-term debt 535 956
------ ---------
Deferred Credits and Other Liabilities
Deferred income taxes 626 601
Other 156 170
------ ---------
Total deferred credits and other liabilities 782 771
------ ---------
Common Stockholder's Equity
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding -- --
Paid-in capital 1,485 1,482
Retained earnings 195 720
------ ---------
Total common stockholder's equity 1,680 2,202
------ ---------
Total Liabilities and Stockholder's Equity $3,525 $ 4,394
====== =========
See Notes to Consolidated Financial Statements.
11
TEXAS EASTERN TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(In millions)
Common Paid-in Retained
Stock Capital Earnings Total
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 $ - $ 1,464 $ 344 $ 1,808
- --------------------------------------------------------------------------------------------------------------------
Net income 181 181
Dividends paid (3) (3)
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 $ - $ 1,464 $ 522 $ 1,986
- --------------------------------------------------------------------------------------------------------------------
Net income 198 198
Capital contribution from parent 18 18
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 $ - $ 1,482 $ 720 $ 2,202
- --------------------------------------------------------------------------------------------------------------------
Net income 201 201
Dividends paid (726) (726)
Other 3 3
- --------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 $ - $ 1,485 $ 195 $ 1,680
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
12
Notes to Consolidated Financial Statements
For The Years Ended December 31, 2000, 1999 and 1998
Note 1. Nature of Operations
Texas Eastern Transmission Corporation (TETCO) 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 best available knowledge of
current and expected future events, actual results could differ from those
estimates.
Inventory. Inventory consists primarily 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. See Note 5 to
the Consolidated Financial Statements for additional information.
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, 2000 and 1999 was $104 million and $99 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. The
composite weighted-average depreciation rates were 2.3%, 2.3% and 3.8% for 2000,
1999 and 1998, respectively. In 1998, the Company reviewed the condition of its
natural gas pipeline facilities and maintenance practices and concluded that an
extension of the useful lives of certain facilities, primarily interstate
natural gas pipelines, was appropriate. The reduction in the 1999 weighted
average depreciation rates was the result of extending the lives of these
assets.
When certain of the Company's property, plant and equipment, that are regulated
by the FERC, 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
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 currently 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 cleanups are
probable and the costs can be reasonably estimated.
Cost-Based Regulation. Certain of the Company's FERC 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. The applicability of
SFAS No. 71 is routinely evaluated, and factors such as regulatory changes and
the impact of competition are considered. Discontinuing cost-based regulation or
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
discontinuing cost-based regulation or increasing competition on future
consolidated results of operations, cash flows or financial position.
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. Reserves are established where
required for such cases; however, there were no outstanding rate cases and no
reserves were recorded as of December 31, 2000 or 1999.
Total billings for transportation and storage services provided by the Company
to Public Service Electric and Gas Company accounted for approximately 11% of
consolidated revenues for 2000, 12% for 1999, and 14% for 1998. No other
customer accounted for 10% or more of consolidated revenues in 2000, 1999 or
1998.
During 2000, the Company adopted provisions of Staff Accounting Bulletin (SAB)
101 issued by the Securities and Exchange Commission. The impact of adopting SAB
101 was not material to the Company.
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
14
non-cash item and is recognized as a cost of Property, Plant and Equipment, with
offsetting credits to Other 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.
New Accounting Standard. In June 1998, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" was issued. The Company was 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 has determined the effect of implementing SFAS No. 133. The net-of-
tax cumulative-effect adjustment reducing OCI and Common Stockholder's Equity is
estimated to be $1.5 million on January 1, 2001. There was no impact on the
Company's results of operations from the implementation of SFAS No. 133.
Reclassifications. Certain prior period amounts have been reclassified in the
Consolidated Financial Statements to conform to the current presentation.
Note 3. 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. "Short-
term" has been defined as all transactions of less than one year. Among the
significant actions taken were the lifting of the price cap for short-term
capacity release by pipeline customers for an experimental 2 1/2-year period
ending September 1, 2002, and requiring that interstate pipelines file pro forma
tariff sheets to (i) provide for nomination equality between capacity release
and primary pipeline capacity; (ii) implement imbalance management services (for
which interstate pipelines may charge fees) while at the same time reducing the
use of operational flow orders and penalties; and (iii) provide segmentation
rights if operationally feasible. Order 637 also narrowed the right of first
refusal to remove economic biases perceived in the current rule. Order 637
imposed significant new reporting requirements for interstate pipelines that
were implemented by the Company during the third quarter of 2000. Additionally,
Order 637 permitted pipelines to propose peak/off-peak rates and term-
differentiated rates, and encouraged pipelines to propose experimental capacity
auctions. By Order 637-A, issued in February 2000, the FERC generally denied
requests for rehearing and several parties, including the Company, have filed
appeals in the District of Columbia Court of Appeals seeking court review of
various aspects of the Order. During the third quarter of 2000, the Company
made the required pro forma tariff sheet filings. These filings are currently
subject to review and approval by the FERC.
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
15
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
accelerated recovery from customers of transition costs. Effective December 1,
2000, the Company's transportation rates were 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 effect on the Company's ability to fund operating and investing
activities.
Management does not believe the effects of these matters will have a material
effect on the Company's future consolidated results of operations, cash flows or
financial position.
Note 4. Related Party Transactions
- ----------------------------------------------------------------------------------------
Income Statement Transactions (in millions)
- ----------------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------
2000 1999 1998
------------------------------------------
Transportation of natural gas $ 32 $ 42 $ 34
Storage of natural gas and other services 93 21 37
Operation and maintenance/a/ 87 80 124
Interest expense 46 48 51
- ----------------------------------------------------------------------------------------
/a/ Includes allocated retirement plan costs
- ----------------------------------------------------------------------
Balance Sheet Transactions (in millions)
- ----------------------------------------------------------------------
December 31,
----------------------------
2000 1999
----------------------------
Receivables $ 6 $ 7
Taxes accrued 128 113
- ----------------------------------------------------------------------
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. On
October 31, 2000, the Company's direct parent repaid the cumulative advance
receivable balance as of that date of approximately $1,330 million. The Company
then repaid its outstanding note payable to the direct parent of $605 million
and declared and paid a dividend of approximately $726 million.
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, 2000 and
1999, Other Current Assets include $101 million and $22 million, respectively,
and Other Current Liabilities include $178 million and $15 million, related to
gas imbalances. Natural gas volumes owed to (from) the Company are valued at
current natural gas market prices. The increased balances comparing 2000 and
1999 are primarily the result of significantly increased market prices for
natural gas.
16
Note 6. Regulatory Assets and Liabilities
=========================================================================================
Regulatory Assets (in millions)
- -----------------------------------------------------------------------------------------
December 31,
--------------------------------------
2000 1999
--------------------------------------
Environmental clean-up costs $ 27 $ 31
Deferred tax assets 16 12
Natural gas transition costs - 85
Loss on reacquired debt 31 35
=========================================================================================
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 Company also had approximately $2 million of
regulatory liabilities as of December 31, 2000 and 1999 related to deferred
gains on property sales.
Note 7. Income Taxes
- ----------------------------------------------------------------------------------------------
Income Tax Expense (in millions)
- ----------------------------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------
2000 1999 1998
-------------------------------------------
Current income taxes
Federal $ 120 $ 103 $ 85
State 8 10 10
-------------------------------------------
Total current income taxes 128 113 95
-------------------------------------------
Deferred income taxes, net
Federal (11) 4 12
State (1) - -
-------------------------------------------
Total deferred income taxes, net (12) 4 12
-------------------------------------------
Total income tax expense $ 116 $ 117 $ 107
- ----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Income Tax Expense Reconciliation to Statutory Rate (in millions)
- -----------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------
2000 1999 1998
--------------------------------------------
Income tax, computed at the statutory rate $ 111 $ 110 $ 101
Adjustments resulting from:
State income tax, net of federal income tax
effect 5 7 6
--------------------------------------------
Total income tax expense $ 116 $ 117 $ 107
- -----------------------------------------------------------------------------------------------
Effective tax rate 36.6% 37.1% 37.2%
- -----------------------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
Net Deferred Income Tax Liability Components (in millions)
- --------------------------------------------------------------------------------
December 31,
-----------------------------
2000 1999
-----------------------------
Deferred credits and other liabilities $ 67 $ 34
Natural gas transition liabilities - 1
Environmental cleanup liabilities 18 19
Other - 5
-----------------------------
Total deferred income tax assets 85 59
-----------------------------
Property, plant and equipment (633) (550)
Regulatory assets and deferred debits (32) (38)
Natural gas transition costs - (30)
Environmental cleanup costs (10) (11)
-----------------------------
Total deferred income tax liabilities (675) (629)
-----------------------------
State deferred income tax, net of federal tax
effect (24) (56)
-----------------------------
Net deferred income tax liability (614) (626)
Portion classified as current asset (liability) 12 (25)
-----------------------------
Noncurrent liability $(626) $(601)
- --------------------------------------------------------------------------------
Note 8. Property, Plant and Equipment
===============================================================================
Net Property, Plant and Equipment (in millions)
- -------------------------------------------------------------------------------
December 31,
----------------------------
2000 1999
----------------------------
Transmission $ 2,438 $ 2,311
Other 1,329 1,366
----------------------------
Total property, plant, and equipment 3,767 3,677
Less accumulated depreciation and amortization 1,135 1,054
----------------------------
Net property, plant and equipment $ 2,632 $ 2,623
===============================================================================
Note 9. Financial Instruments and Risk Management
The Company's financial instruments include $651 million and $551 million of
long-term debt with an approximate fair value of $711 million and $570 million
as of December 31, 2000 and 1999, respectively. The estimated fair value
amounts of long-term debt were obtained from independent parties.
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 to the Consolidated
Financial Statements.
At December 31, 2000, 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,
2000, 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, 2000 and December 31, 1999, the non-trading commodity
derivatives held were not material.
18
Note 10. Long-term Debt
=====================================================================================================================
Long-term Debt (in millions)
- ---------------------------------------------------------------------------------------------------------------------
December 31,
----------------------------------
Year Due 2000 1999
---------------------------------------------------
Notes Payable
7.30% - 10.375% 2001 - 2010 $ 600 $ 500
Medium term, Series A, 7.640% - 9.070% 2001 - 2012 51 51
Notes Payable - Parent - 605
----------------------------------
Total long-term debt 651 1,156
Current maturities of long-term debt (116) (200)
----------------------------------
Total long-term portion $ 535 $ 956
=====================================================================================================================
===========================================================================
Annual Maturities (in millions)
- ---------------------------------------------------------------------------
2001 $ 116
2002 100
2003 -
2004 115
2005 -
Thereafter 320
-------------------
Total long-term debt $ 651
===========================================================================
Note 11. 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.
PCB (Polychlorinated Biphenyl) Assessment and Cleanup Programs. In June 1999,
the Environmental Protection Agency (EPA) certified that the Company had
completed cleanup of PCB-contaminated sites under conditions stipulated by a
U.S. Consent Decree in 1989. The Company was required to continue groundwater
monitoring on a number of sites for two years. This required monitoring was
completed as of the end of 2000, pending EPA concurrence. The Company will be
evaluating and discussing with the EPA, appropriate state authorities or both
the need for additional remediation or monitoring.
Based on the Company's experience to date and costs incurred for cleanup
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, cash flows or financial position.
Air Quality Control. In October 1998, the EPA issued a final rule on regional
ozone control that required 22 eastern states and the District of Columbia to
revise their State Implementation Plans to significantly reduce emissions
of nitrogen oxide by May 1, 2003. The EPA's rule was challenged in court by
various states, industry and other interests, including the Company's parent
Duke Energy. In March 2000, the court upheld most aspects of the EPA's rule. The
same court subsequently issued a decision that extended the compliance deadline
for implementation of emission reductions to May 31, 2004. In January 2000, the
EPA finalized another ozone-related rule under Section 126 of the Clean Air Act
that has virtually identical emission control requirements as its October 1998
action, but with a May 1, 2003 compliance date. The EPA's 2000 rule has been
challenged in court. The court is expected to issue its decision during the
spring of 2001. Depending on the resolution of these matters, costs to the
Company may range up to $10 million for additional capital improvements.
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
19
arising in the ordinary course of business. 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, cash flows 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.
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, cash flows or
financial position.
Leases. The Company utilizes assets under operating leases in several areas of
operations. Consolidated rental expense amounted to $7 million, $6 million and
$7 million in 2000, 1999 and 1998, respectively.
Future minimum rental payments under the Company's various operating leases for
the years 2001 through 2005 are $6 million, $4 million, $2 million, $2 million
and $1 million, respectively.
Note 12. 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 Corp's
(PanEnergy) 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 $3,038 million
and $3,121 million at December 31, 2000 and 1999, respectively, exceeded the
projected benefit obligations of $2,586 million and $2,446 million, as of
December 31, 2000 and 1999, respectively.
20
==================================================================================================
Assumptions Used in Duke Energy's Pension and Other Postretirement Benefits Accounting/ a/
- --------------------------------------------------------------------------------------------------
(Percent) 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Discount rate 7.50 7.50 6.75
Salary increase 4.53 4.50 4.67
Expected long-term rate of return on plan assets 9.25 9.25 9.25
==================================================================================================
/a //Reflects weighted averages across all plans./
The Company's net periodic pension benefit, as allocated by Duke Energy, was $7
million, $6 million and $4 million for the years ended December 31, 2000, 1999
and 1998, respectively.
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 2000, 1999 and 1998.
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 $325 million and $327 million at December
31, 2000 and 1999, respectively, and the accumulated postretirement benefit
obligation was $614 million and $562 million at December 31, 2000 and 1999,
respectively.
The Company's net periodic postretirement benefit cost, as allocated by Duke
Energy, was $6 million, $6 million and $7 million in 2000, 1999 and 1998,
respectively.
For measurement purposes, a 6% average annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000 and beyond. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans.
==========================================================================================================
Sensitivity to Changes in Assumed Health Care Cost Trend Rates (in millions)
- ----------------------------------------------------------------------------------------------------------
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- ----------------------------------------------------------------------------------------------------------
Effect on total service and interest costs $ - $ -
Effect on postretirement benefit obligation 3 (3)
- ----------------------------------------------------------------------------------------------------------
21
Note 13. Quarterly Financial Data (Unaudited)
==========================================================================================================
First Second Third Fourth
(In millions) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------
2000
Operating revenues $ 238 $ 227 $ 218 $ 220 $ 903
Operating income 107 109 96 102 414
Net income 51 52 43 55 201
1999
Operating revenues $ 234 $ 217 $ 220 $ 231 $ 902
Operating income 107 120/a/ 92 91 410
Net income 52 59/a/ 42 45 198
==========================================================================================================
/a/ Includes the effect of completing certain environmental cleanup programs
below cost estimates.
22
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, 2000
and 1999, and the related consolidated statements of income, cash flows and
common stockholder's equity for each of the three years in the period ended
December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
January 18, 2001
23
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, Treasurer, Controller and Assistant Secretary
24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, 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,
2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Common Stockholder's Equity for the
Years Ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Financial Data (unaudited) (included in Note 13 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
A Current Report on Form 8-K filed on November 21, 2000 contained
disclosures under Item 5, Other Events.
(c) Exhibits - See Exhibit Index immediately following the signature page.
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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 30, 2001 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
Senior Vice President, Finance and Administration and
Chief Financial Officer
(iii) Principal accounting officer:
By: /s/ Alan N. Harris
----------------------------
Alan N. Harris
Vice President, Treasurer, 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 30, 2001
26
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.
- ----------------------------------------------------------------------------------------------------------------
Exhibit Number Description Originally Filed as Exhibit Exhibit
Number
3.01 Restated Certificate of Incorporation of 3.1 to Form 10-Q of TETCO for 1-4456
Texas Eastern Transmission quarter ended September 30,
Corporation dated October 25, 1993 1993
3.02 By-Laws of Texas Eastern 3.2 to Form 10-Q of TETCO for 1-4456
Transmission Corporation as adopted quarter ended September 30,
on August 17, 1993 1993
*4 Indenture, dated as of December 1,
2000, between Texas Eastern
Transmission Corporation and Chase
Manhattan Bank, as trustee.
*12 Computation of Ratio of Earnings to
Fixed Charges
*23 Independent Auditors' Consent
- ----------------------------------------------------------------------------------------------------------------
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