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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 Commission File Number 1-4456
TEXAS EASTERN TRANSMISSION, LP
(Exact name of Registrant as Specified in its Charter)
Delaware 76-0677232
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
5400 Westheimer Court
P.O. Box 1642
Houston, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
713-627-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No __
The Registrant meets the conditions set forth in General Instructions (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format. Part I, Item 2 has been reduced and Part I, Item 3 and Part
II, Items 2, 3, and 4 have been omitted in accordance with such Instruction H.
All of the Registrant's limited partnership interests and all of the limited
liability company interests of its general partner 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.
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TEXAS EASTERN TRANSMISSION, LP
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
INDEX
Item Page
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements ........................................................................... 1
Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2002 and 2001 ..................................................................... 1
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 ..................................................................... 2
Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 ................ 3
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended
June 30, 2002 and 2001 ..................................................................... 5
Notes to Consolidated Financial Statements ..................................................... 6
2. Management's Discussion and Analysis of Results of Operations and Financial Condition .......... 11
PART II. OTHER INFORMATION
1. Legal Proceedings .............................................................................. 14
6. Exhibits and Reports on Form 8-K ............................................................... 14
Signature ...................................................................................... 15
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Texas Eastern Transmission, LP's reports, filings and other public announcements
may contain or incorporate by reference statements that do not directly or
exclusively relate to historical facts. Such statements are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. You can typically identify forward-looking statements by the use of
forward-looking words, such as "may," "will," "could," "project," "believe,"
"anticipate," "expect," "estimate," "continue," "potential," "plan," "forecast"
and other similar words. Those statements represent our intentions, plans,
expectations, assumptions and beliefs about future events and are subject to
risks, uncertainties and other factors. Many of those factors are outside our
control and could cause actual results to differ materially from the results
expressed or implied by those forward-looking statements. Those factors include:
. state and federal legislative and regulatory initiatives that affect
cost and investment recovery, have an impact on rate structures, and
affect the speed at and degree to which competition enters the natural
gas industries;
. the outcomes of litigation and regulatory proceedings or inquiries;
. industrial, commercial and residential growth in our service
territories;
. 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 we and
our subsidiaries are subject or other external factors over which we
have no control;
. the results of financing efforts, including our ability to obtain
financing on favorable terms, which can be affected by various factors,
including our credit ratings and general economic conditions;
. the level of creditworthiness of counterparties to our transactions;
. growth in opportunities, including the timing and success of efforts to
develop pipeline infrastructure projects;
. the performance of pipeline and gas processing facilities;
i
. the extent of success in connecting natural gas supplies to gathering
and processing systems and in connecting and expanding gas markets; and
. the effect of accounting policies issued periodically by accounting
standard-setting bodies.
In light of these risks, uncertainties and assumptions, the events described in
the forward-looking statements might not occur or might occur to a different
extent or at a different time than we have described.
ii
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
TEXAS EASTERN TRANSMISSION, L.P
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2002 2001 2002 2001
--------- ----------- ---------- ----------
Operating Revenues
Transportation of natural gas $ 154 $ 147 $ 313 $ 302
Storage of natural gas and other services 42 45 83 98
-------- ---------- ---------- ----------
Total operating revenues 196 192 396 400
-------- ---------- ---------- ----------
Operating Expenses
Operation and maintenance 50 57 111 114
Depreciation and amortization 21 23 42 46
Property and other taxes 11 11 23 23
-------- ---------- ---------- ----------
Total operating expenses 82 91 176 183
-------- ---------- ---------- ----------
Operating Income 114 101 220 217
Other Income and Expenses 1 - 1 -
Interest Expense 11 13 22 28
-------- ---------- ---------- ----------
Earnings Before Income Taxes 104 88 199 189
Income Taxes 38 32 71 68
-------- ---------- ---------- ----------
Net Income $ 66 $ 56 $ 128 $ 121
======== ========== ========== ==========
See Notes to Consolidated Financial Statements.
1
TEXAS EASTERN TRANSMISSION, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Six Months Ended
June 30,
-----------------------
2002 2001
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES $ 242 $ 217
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (61) (73)
Net increase in advances receivable - affiliate (181) (143)
Retirements and other - 9
--------- ---------
Net cash used in investing activities (242) (207)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES - (10)
--------- ---------
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
--------- ---------
Cash and cash equivalents at end of period $ - $ -
========= =========
TEXAS EASTERN TRANSMISSION, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(In million)
June 30, December 31,
2002 2001
(Unaudited)
ASSETS ----------- ------------
Current Assets
Accounts receivable $ 70 $ 76
Inventory 26 25
Other 54 35
------- -------
Total current assets 150 136
------- -------
Investments and Other Assets
Advances receivable - affiliate 569 386
Goodwill, net of accumulated amortization 136 136
------- -------
Total investments and other assets 705 522
------- -------
Property, Plant and Equipment
Cost 3,946 3,888
Less accumulated depreciation and amortization 1,228 1,193
------- -------
Net property, plant and equipment 2,718 2,695
------- -------
Regulatory Assets and Deferred Debits 145 159
------- -------
Total Assets $ 3,718 $ 3,512
======= =======
See Notes to Consolidated Financial Statements.
3
TEXAS EASTERN TRANSMISSION, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(In million)
June 30, December 31,
2002 2001
(Unaudited)
----------- ------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 19 $ 13
Taxes accrued 204 148
Current maturities of long-term debt 100 100
Other 119 82
------- -------
Total current liabilities 442 343
------- -------
Long-term Debt 435 435
------- -------
Deferred Credits and Other Liabilities
Deferred income taxes 674 658
Other 127 158
------- -------
Total deferred credits and other liabilities 801 816
------- -------
Partners' Capital
Partners' capital 2,042 1,908
Accumulated other comprehensive (loss) income (2) 10
------- -------
Total partners' capital 2,040 1,918
------- -------
Total Liabilities and Partners' Capital $ 3,718 $ 3,512
======= =======
See Notes to Consolidated Financial Statements.
4
TEXAS EASTERN TRANSMISSION, LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net Income $ 66 $ 56 $ 128 $ 121
Other Comprehensive Income (Loss), net of tax
Cumulative effect of change in accounting principle - - - (2)
Unrealized net loss on cash flow hedges (5) - (10) (4)
Reclassification adjustment into earnings - - (2) 1
------- ------- ------- -------
Total Other Comprehensive Income (Loss) (5) - (12) (5)
------- ------- ------- -------
Total Comprehensive Income $ 61 $ 56 $ 116 $ 116
======= ======= ======= =======
See Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Operations
Texas Eastern Transmission, LP (together with its subsidiaries, the "Company")
is an indirect, wholly owned subsidiary of Duke Energy Corporation (Duke
Energy). The Company's limited partner filed an election with the Internal
Revenue Service to be taxed as a C-corporation for federal income tax purposes.
The Company is also subject to corporate income tax as a division of the limited
partner.
The Company is primarily engaged in the interstate transportation and storage of
natural gas. The Company's interstate natural gas transmission and storage
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC).
2. Summary of Significant Accounting Policies
Consolidation. The Consolidated Financial Statements include the accounts of the
Company and all majority-owned subsidiaries, after eliminating significant
intercompany transactions and balances. These Consolidated Financial Statements
reflect all normal recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position and results of operations for
the respective periods. Amounts reported in the interim Consolidated Statements
of Operations are not necessarily indicative of amounts expected for the
respective annual periods due to the effects of seasonal temperature variations
on energy consumption.
New Accounting Standards. The Company adopted Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets," as of January
1, 2002. SFAS No. 142 requires that goodwill no longer be amortized over an
estimated useful life, as previously required. Instead, goodwill amounts are
subject to a fair-value-based annual impairment assessment. The Company did not
have any impairments that were recognized due to the implementation of SFAS No.
142. The standard also requires certain identifiable intangible assets to be
recognized separately and amortized as appropriate upon reassessment. No such
intangibles were identified by the Company at transition.
The following table shows what net income would have been if amortization
(including any related tax effects) related to goodwill that is no longer being
amortized had been excluded from prior periods.
- --------------------------------------------------------------------------------
Goodwill - Adoption of SFAS No. 142 (in millions)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------
2002 2001 2002 2001
----------------------------------------
Net Income
Reported net income $ 66 $ 56 $ 128 $ 121
Add back: Goodwill amortization, net of tax - 1 - 2
----------------------------------------
Adjusted net income $ 66 $ 57 $ 128 $ 123
- ---------------------------------------------------------------------------------------
The changes in the carrying amount of goodwill for the six months ended June 30,
2002 and June 30, 2001 are as follows:
- -----------------------------------------------------------------
Goodwill (in millions)
- -----------------------------------------------------------------
Balance Balance
December 31, 2001 Acquired Other June 30, 2002
Goodwill
- -----------------------------------------------------------------
$ 136 $ - $ - $ 136
- -----------------------------------------------------------------
Balance Balance
December 31, 2000 Acquired Other June 30, 2001
Goodwill
- -----------------------------------------------------------------
- -----------------------------------------------------------------
$ 141 $ - $ (2) $ 139
- -----------------------------------------------------------------
6
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" on January 1, 2002. The new rules supersede SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." The new rules retain many of the fundamental recognition and
measurement provisions, but significantly change the criteria for classifying an
asset as held-for-sale or as a discontinued operation. Adoption of the new
standard had no material adverse effect on the Company's consolidated results of
operations or financial position.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred, if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset. This additional carrying amount is
then depreciated over the life of the asset. The liability is increased due to
the passage of time based on the time value of money until the obligation is
settled.
The Company is required and plans to adopt the provisions of SFAS No. 143 as of
January 1, 2003. To accomplish this, the Company must identify any legal
obligations for asset retirement obligations, and determine the fair value of
these obligations on the date of adoption. The determination of fair value is
complex and requires gathering market information and developing cash flow
models. Additionally, the Company will be required to develop processes to track
and monitor these obligations. Because of the effort needed to comply with the
adoption of SFAS No. 143, the Company is currently assessing the new standard
but has not yet determined the impact on its consolidated results of operations,
cash flows or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." The Company will adopt
the provisions of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date of
the company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
3. Credit Risk
The Company's principal customers 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
some customers may be similarly affected by changes in economic, regulatory or
other factors. Where 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 those limits on an
ongoing basis.
In view of the current challenges in the energy sector, the Company is
increasing its efforts to monitor the liquidity of its customers, and will
obtain security and evaluate other options, as appropriate, to manage its
transportation and storage contract positions.
7
4. Regulatory Matters
In 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 1/2-year period
ending September 1, 2002, and requiring interstate pipelines to 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 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 that
were implemented by the Company during 2000. Additionally, Order 637 permits
pipelines to propose peak/off-peak rates and term-differentiated rates, and
encourages pipelines to propose experimental capacity auctions. By Order 637-A,
issued in 2000, the FERC generally denied requests for rehearing and several
parties, including the Company's parent, Duke Energy, have filed appeals in the
District of Columbia Circuit Court of Appeals (Court) seeking court review of
various aspects of the Order. On April 5, 2002, the Court issued an opinion on
the appeals of Order 637. The Court reversed and/or remanded certain issues for
further review by the FERC. On May 16, 2002, the FERC issued an interim policy
on certain of the remanded issues to be effective until it can address the
issues raised by the Court's remand. On May 31, 2002, the FERC issued a notice
requesting comments on the remanded issues. The Company, through Duke Energy,
filed comments with the FERC on the remanded issues on July 30, 2002, and the
matter is now pending before the FERC.
The Company made an Order 637 compliance filing with the FERC during the third
quarter of 2001. On February 27, 2002, the FERC issued an order approving,
subject to modifications, the pro forma tariff sheets submitted by the Company
during the third quarter of 2001. The Company has filed for rehearing of the
February 27, 2002 order with respect to certain issues. Other parties have also
sought rehearing of this order. The Company submitted revised tariff sheets on
May 29, 2002 reflecting the modifications required by the FERC, and the matter
is now pending before the FERC.
Management believes the effects of these matters will have no material adverse
effect on the Company's future consolidated results of operations, cash flows or
financial position.
5. Gas Imbalances
The Consolidated Balance Sheets include in-kind balances as a result of
differences in gas volumes received and delivered. Other Current Assets include
$38 million as of June 30, 2002 and $15 million as of December 31, 2001, and
Other Current Liabilities include $72 million as of June 30, 2002 and $41
million as of December 31, 2001, related to gas imbalances (see Note 6, "Related
Party Transactions."). Natural gas volumes owed to (from) the Company are valued
at natural gas market prices as of the balance sheet dates. The increased
balances at June 30, 2002 are primarily the result of increased imbalance
volumes.
6. Related Party Transactions
- --------------------------------------------------------------------------------------------------
Income Statement Transactions (in millions)
- --------------------------------------------------------------------------------------------------
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------------------------------
2002 2001 2002 2001
------------ ----------- ------------ -----------
Transportation of natural gas $ 7 $ 8 $ 15 $ 14
Storage of natural gas and other services 18 26 32 55
Operation and maintenance /a/ 22 35 36 58
- --------------------------------------------------------------------------------------------------
/a/ Includes allocated retirement plan costs
8
- --------------------------------------------------------------------------------
Balance Sheet Transactions (in millions)
- --------------------------------------------------------------------------------
June 30, December 31,
2002 2001
----------------- ----------------
Accounts receivable $ 12 $ 3
Other current assets - gas imbalances - 2
Accounts payable 9 -
Other current liabilities - gas imbalances 59 25
Taxes accrued 150 99
- --------------------------------------------------------------- ----------------
Advances receivable-affiliate 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.
7. 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.
The Company owns a site which is currently being investigated for possible
cleanup of historic contamination. Third parties may be responsible for some or
all of any cleanup costs. In addition, the Company may have some liability at
two sites where it is alleged to have sent wastes in the past. Based on the
information known at present, management believes resolution of these matters
will have no material adverse effect on the Company's consolidated results of
operations, cash flows or financial position.
On April 8, 2002, the United States District Court for the Southern District of
Texas (US District Court) terminated the 1989 federal consent decree between the
Environmental Protection Agency (EPA) and the Company. In so doing, the US
District Court and the federal government agreed that the Company had
successfully completed all the requirements of the federal consent decree
regarding polychlorinated biphenyl contamination at numerous sites along the
pipeline system. As such, provisions for environmental clean-up commitments were
reduced by approximately $9 million.
Air Quality Control. In 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
2000, the court upheld most aspects of the EPA rule. The same court subsequently
extended the compliance deadline for implementation of emission reductions to
May 31, 2004.
In 2000, the EPA finalized another ozone-related rule under Section 126 of the
Clean Air Act (CAA). Section 126 of the CAA has virtually identical emission
control requirements as the 1998 action. In addition to the Section 126 rule,
the EPA is in the process of finalizing new requirements for EPA approved state
programs regarding the control of emissions of nitrogen oxides (NOx). Section
126 affects large turbines and the NOx state program requirements affect large
reciprocating engines. The compliance date for both the Section 126 rule and the
state NOx requirements is May 1, 2003. In addition to these regulatory
developments, several states are in the process of finalizing ozone-related
rules that will affect smaller turbines and reciprocating engines. The
anticipated compliance date for most of these state rules for smaller sources is
January 1, 2005. Finally, the EPA is also in the process of issuing a new
standard under the National Emission Standards for Hazardous Pollutants (NESHAP)
for control of formaldehyde emissions. This rule will affect facilities with a
significant amount of reciprocating engine capacity. The anticipated compliance
date of this NESHAP rule is 2004. Management estimates the Company will spend up
to $55 million in capital costs for additional emission controls through 2006 to
comply with these new EPA and state rules.
9
Other Commitments and Contingencies. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company, with respect to certain producer contract
settlements, may be contractually required to reimburse or, in some instances,
to indemnify producers against such royalty claims. The potential liability of
the producers to the government and of the pipelines to the producers involves
complex issues of law and fact which are likely to take substantial time to
resolve. If required to reimburse or indemnify the producers, the Company will
file with the FERC to recover a portion of these costs from pipeline customers.
Management believes that these commitments and contingencies will have no
material adverse effect on the Company's consolidated results of operations,
cash flows or financial position.
8. Subsequent Events
In July 2002, the Company issued $300 million of 5.25% senior unsecured bonds
due in 2007 and $450 million of 7.0% senior unsecured bonds due in 2032. The
proceeds from these issuances were used for the repayment of $100 million, 8%
notes payable due in July 2002 and other pipeline and corporate activities,
including pipeline expansion and maintenance projects and advances to
affiliates.
In July 2002, Standard & Poor's (S&P) placed its rating for the Company on
CreditWatch with negative implications. Also in July, Moody's Investors Service
and Fitch Ratings changed their ratings outlooks for the Company from Stable to
Negative. In August 2002, the Company was informally advised by S&P that its
credit rating described above would be lowered one rating level and S&P would
change its negative outlook to stable. The Company does not anticipate these
actions to have a material adverse impact on its financial results.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Texas Eastern Transmission, LP (Texas Eastern) is an indirect wholly owned
subsidiary of Duke Energy Corporation (Duke Energy). Texas Eastern 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. Interstate natural gas transmission and
storage operations are subject to the Federal Energy Regulatory Commission's
(FERC's) rules and regulations.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net income for the six months ended June 30, 2002 increased $7 million compared
to the same period in 2001. The increase was mainly attributable to a reduction
of provisions for environmental clean-up commitments that was recorded as a
result of an order received from the United States District Court for the
Southern District (US District Court) terminating a 1989 consent decree with the
Company, and the discontinuation of the amortization of goodwill in accordance
with the adoption of Statement of Financial Accounting Standard No. 142 in 2002,
partially offset by lower other revenues due to a decrease in the price of
energy related products. Interest expense decreased as a result of the
retirement of debt in August 2001.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the first six months of 2002 were $61 million and $73
million for the comparable 2001 period. Projected 2002 capital expenditures,
including allowance for funds used during construction, are approximately $191
million, with market-expansion expenditures approximating 63% of the capital
budget. All projected capital expenditures are subject to periodic review and
revision and may vary significantly depending on a number of factors, including,
but not limited to, industry restructuring, regulatory constraints, acquisition
opportunities, market volatility and economic trends. The Company's growth
initiatives, debt repayments and operating requirements are expected to be
funded primarily by cash from operations and the proceeds from the debt
issuance. Management believes the Company has adequate financial resources to
meet its future cash flow needs.
Effective July 2002, the Company sold $750 million aggregate principal amount
of senior unsecured debt securities which fully utilized the (S&P) amount
available for issuance under its Securities and Exchange Commission shelf
registration statement. For further information, see Note 8 to the Consolidated
Financial Statements, "Subsequent Events."
In July 2002, Standard & Poor's (S&P) placed its ratings for the Company on
CreditWatch with negative implications. Also in July, Moody's Investors Service
and Fitch Ratings changed their ratings outlooks for the Company from Stable to
Negative. In August 2002, the Company was informally advised by S&P that its
credit rating described above would be lowered one rating level and S&P would
change its negative outlook to stable. The Company does not anticipate these
actions to have a material adverse impact on its financial results.
CURRENT ISSUES
Competition. Wholesale Competition. In 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
1/2-year period ending September 1, 2002, and requiring interstate pipelines to
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
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 that were implemented by the Company during 2000.
Additionally, Order 637 permits pipelines to propose peak/off-peak rates and
term-differentiated rates, and encourages pipelines to propose experimental
capacity auctions. By Order 637-A, issued in 2000, the FERC generally denied
requests for rehearing and several parties, including the Company's parent, Duke
Energy, have filed appeals in the District of Columbia Circuit Court of Appeals
(Court) seeking court review of various aspects of the
11
Order. On April 5, 2002, the Court issued an opinion on the appeals of Order
637. The Court reversed and/or remanded certain issues for further review by the
FERC. On May 16, 2002, the FERC issued an interim policy on certain of the
remanded issues to be effective until it can address the issues raised by the
Court's remand. On May 31, 2002 the FERC issued a notice requesting comments on
the remanded issues. The Company, through Duke Energy, filed comments with the
FERC on the remanded issues on July 30, 2002, and the matter is now pending
before the FERC.
The Company made an Order 637 compliance filing with the FERC during the third
quarter of 2001. On February 27, 2002, the FERC issued an order approving,
subject to modifications, the pro forma tariff sheets submitted by the Company
during the third quarter of 2001. The Company has filed for rehearing of the
February 27, 2002 order with respect to certain issues. Other parties have also
sought rehearing of this order. The Company submitted revised tariff sheets on
May 29, 2002 reflecting the modifications required by the FERC, and the matter
is now pending before the FERC.
Management believes that the effects of these matters will have no material
effect on the Company's future consolidated results of operations, cash flows or
financial position.
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.
The Company owns a site which is currently being investigated for possible
cleanup of historic contamination. Third parties may be responsible for some or
all of any cleanup costs. In addition, the Company may have some liability at
two sites where it is alleged to have sent wastes in the past. Based on the
information known at present, management believes resolution of these matters
will have no material adverse effect on the Company's consolidated results of
operations, cash flows or financial position.
On April 8, 2002, the US District Court terminated the 1989 federal consent
decree between the Environmental Protection Agency (EPA) and the Company. In so
doing, the US District Court and the federal government agreed that the Company
had successfully completed all the requirements of the federal consent decree
regarding polychlorinated biphenyl contamination at numerous sites along the
pipeline system. As such, provisions for environmental clean-up commitments were
reduced by approximately $9 million.
Air Quality Control. In 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
2000, the court upheld most aspects of the EPA rule. The same court subsequently
extended the compliance deadline for implementation of emission reductions to
May 31, 2004.
In 2000, the EPA finalized another ozone-related rule under Section 126 of the
Clean Air Act (CAA). Section 126 of the CAA has virtually identical emission
control requirements as the 1998 action. In addition to the Section 126 rule,
the EPA is in the process of finalizing new requirements for EPA approved state
programs regarding the control of emissions of nitrogen oxides (NOx). Section
126 affects large turbines and the NOx state program requirements affect large
reciprocating engines. The compliance date for both the Section 126 rule and the
state NOx requirements is May 1, 2003. In addition to these regulatory
developments, several states are in the process of finalizing ozone-related
rules that will affect smaller turbines and reciprocating engines. The
anticipated compliance date for most of these state rules for smaller sources is
January 1, 2005. Finally, the EPA is also in the process of issuing a new
standard under the National Emission Standards for Hazardous Pollutants (NESHAP)
for control of formaldehyde emissions. This rule will affect facilities with a
significant amount of reciprocating engine capacity. The anticipated compliance
date of this NESHAP rule is 2004. Management estimates the Company will spend up
to $55 million in capital costs for additional emission controls through 2006 to
comply with these new EPA and state rules.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
The Company's principal customers 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
some customers may be similarly affected by changes in economic, regulatory or
other factors. Where 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 those limits on an
ongoing basis.
In view of the current challenges in the energy sector, the Company is
increasing its efforts to monitor the liquidity of its customers, and will
obtain security and evaluate other options, as appropriate, to manage its
transportation and storage contract positions.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning material litigation and other contingencies, see Note
7 to the Consolidated Financial Statements, "Commitments and Contingencies."
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number
- ------
99.1 Certification Pursuant to 18 U.S.C.(S)1350, as Adopted Pursuant to
(S)906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C.(S)1350, as Adopted Pursuant to
(S)906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the second quarter of 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEXAS EASTERN TRANSMISSION, LP
By: Duke Energy Gas Transmission Services, LLC,
its General Partner
August 14, 2002 /s/ Dorothy M. Ables
---------------------------
Dorothy M. Ables
Senior Vice President, Finance and Administration and
Chief Financial Officer
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