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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 September 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 (IRS Employer Identification No.)
of Incorporation)
5400 Westheimer Court
P.O. Box 1642
Houston, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
713-627-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No __
The Registrant meets the conditions set forth in General Instructions (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format. Part I, Item 2 has been reduced and Part II, 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 SEPTEMBER 30, 2002
INDEX
Item Page
PART I. FINANCIAL INFORMATION
1. Financial Statements 1
Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 1
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 2
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 3
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended
September 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
3. Quantitative and Qualitative Disclosures About Market Risk. 14
4. Controls and Procedures 14
PART II. OTHER INFORMATION
1. Legal Proceedings 15
6. Exhibits and Reports on Form 8-K 15
Signature 16
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:
o 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 industry;
o the outcomes of litigation and regulatory investigations, proceedings or
inquiries;
o industrial, commercial and residential growth in our service territories;
o the weather and other natural phenomena;
o the timing and extent of changes in commodity prices and interest rates;
o general economic conditions;
o 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;
o 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;
o the level of creditworthiness of counterparties to our transactions;
i
o growth in opportunities, including the timing and success of efforts to
develop pipeline infrastructure projects;
o the performance of pipeline and gas processing facilities;
o the extent of success in connecting natural gas supplies to gathering and
processing systems and in connecting and expanding gas markets; and
o the effect of accounting pronouncements 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. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
TEXAS EASTERN TRANSMISSION, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ----- ---- ----
Operating Revenues
Transportation of natural gas $ 155 $ 152 $ 468 $ 454
Storage of natural gas and other services 38 43 121 139
-- -- --- ---
Total operating revenues 193 195 589 593
--- --- --- ---
Operating Expenses
Operation and maintenance 56 66 167 180
Depreciation and amortization 21 21 63 67
Property and other taxes 11 11 34 34
-- -- -- --
Total operating expenses 88 98 264 281
-- -- --- ---
Operating Income 105 97 325 312
Other Income and Expenses 2 1 3 3
Interest Expense 22 13 44 41
-- -- -- --
Earnings Before Income Taxes 85 85 284 274
Income Taxes 29 31 100 99
-- -- --- --
Net Income $ 56 $ 54 $ 184 $ 175
==== ==== ===== =====
See Notes to Consolidated Financial Statements
1
TEXAS EASTERN TRANSMISSION, LP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Nine Months Ended
September 30,
----------------------
2002 2001
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES $ 360 $ 326
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (124) (114)
Net increase in advances receivable-affiliate (886) (109)
Retirements and other - 7
---- ----
Net cash used in investing activities (1,010) (216)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of long-term debt 750 -
Payments for the redemption of long-term debt (100) (110)
---- ----
Net cash provided by (used in) financing activities 650 (110)
---- ----
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
---- ----
Cash and cash equivalents at end of period $ - $ -
=== ===
See Notes to Consolidated Financial Statements
2
TEXAS EASTERN TRANSMISSION, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
2002 2001
(Unaudited)
----------- ------------
ASSETS
Current Assets
Accounts receivable $ 61 $ 76
Inventory 26 25
Other 41 35
-- --
Total current assets 128 136
--- ---
Investments and Other Assets
Advances receivable - affiliate 1,272 386
Goodwill, net of accumulated amortization 136 136
--- ---
Total investments and other assets 1,408 522
----- ---
Property, Plant and Equipment
Cost 4,004 3,888
Less accumulated depreciation and amortization 1,243 1,193
----- -----
Net property, plant and equipment 2,761 2,695
----- -----
Regulatory Assets and Deferred Debits 131 159
--- ---
Total Assets $ 4,428 $ 3,512
======= =======
See Notes to Consolidated Financial Statements
3
TEXAS EASTERN TRANSMISSION, LP
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
September 30, December 31,
2002 2001
(Unaudited)
------------- --------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Accounts payable $ 16 $ 13
Taxes accrued 231 148
Current maturities of long-term debt - 100
Accrued interest 23 8
Other 78 74
--- --
Total current liabilities 348 343
--- ---
Long-term Debt 1,185 435
----- ---
Deferred Credits and Other Liabilities
Deferred income taxes 679 658
Other 125 158
--- ---
Total deferred credits and other liabilities 804 816
--- ---
Partners' Capital
Partners' capital 2,098 1,908
Accumulated other comprehensive (loss) income (7) 10
-- --
Total partners' capital 2,091 1,918
----- -----
Total Liabilities and Partners' Capital $ 4,428 $ 3,512
======= =======
See Notes to Consolidated Financial Statements
4
TEXAS EASTERN TRANSMISSION, LP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2002 2001 2002 2001
------ ------ ------ ------
Net Income $ 56 $ 54 $ 184 $ 175
Other Comprehensive Income (Loss), net of tax
Cumulative effect of change in accounting principle - - - (2)
Unrealized net loss on cash flow hedges (7) 7 (17) (1)
Reclassification adjustment into earnings 2 (1) - 4
-- -- -- --
Total Other Comprehensive (Loss) Income (5) 6 (17) 1
-- -- --- --
Total Comprehensive Income $ 51 $ 60 $ 167 $ 176
==== ==== ===== =====
See Notes to 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 Nine Months Ended
September 30, September 30,
---------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------
Net Income
Reported net income $ 56 $ 54 $ 184 $ 175
Add back: Goodwill
amortization, net of tax - 1 - 3
---------------------------------------------------
Adjusted net income $ 56 $ 55 $ 184 $ 178
- --------------------------------------------------------------------------------
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 and 2001 are as follows:
- --------------------------------------------------------------------------------
Goodwill (in millions)
- --------------------------------------------------------------------------------
Balance Balance
December 31, 2001 Acquired Other September 30, 2002
Goodwill
- --------------------------------------------------------------------------------
$ 136 $ - $ - $ 136
- --------------------------------------------------------------------------------
Balance Balance
December 31, 2000 Acquired Other September 30, 2001
Goodwill
- --------------------------------------------------------------------------------
$ 141 $ - $ (3) $ 138
- --------------------------------------------------------------------------------
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 retirements, 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.
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.
Reclassifications. Certain prior period amounts have been reclassified to
conform to the current presentation.
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
risk factors can negatively impact the credit quality of the entire sector.
Where exposed to credit risk, the Company analyzes the counterparties' financial
condition prior to entering into an agreement, establishes credit limits in
accordance with corporate credit policy and monitors the appropriateness of
those limits on an ongoing basis.
In view of the current challenges in the energy sector, the Company has
increased 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. Among the
significant actions taken are 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 (ROFR) 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, filed appeals in the
District of Columbia Circuit Court of Appeals (Court) seeking review of various
aspects of the Order. On April 5, 2002, the Court issued an opinion on the
appeals of Order 637, reversing and/or remanding certain issues for further
review by the FERC. On October 31, 2002, FERC issued an order on remand
requiring interstate pipelines to remove the term matching cap for the ROFR
which had been set previously at five (5) years. As a result of this
determination, an existing customer seeking to exercise its ROFR to renew an
expiring contract will have to match the term of any third party's competing
bid, regardless of the length of such term. FERC also found that shippers should
have certain rights to forwardhaul and backhaul service to the same delivery
point in excess of the maximum daily quantity under their service contracts.
FERC required interstate pipelines to make tariff filings to comply with the
October 31 remand order. Interested parties have until December 2, 2002 to file
for rehearing and/or clarification of the remand order.
In addition to the FERC's general Order 637 rulemaking proceeding, FERC also
required each interstate pipeline company to make individual compliance filings
to implement the specific requirements of Order 637. The Company made its
individual 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.
Notice of Proposed Rulemaking (NOPR). NOPR on Standards of Conduct. In September
2001, the FERC issued a NOPR announcing that it is considering new regulations
regarding standards of conduct that would apply uniformly to natural gas
pipelines and electric transmitting public utilities that are currently subject
to different gas or electric standards. The proposed standards would change how
companies and their affiliates interact and share information by broadening the
definition of "affiliate" covered by the standards of conduct. Various entities
filed comments on the NOPR with the FERC, including Duke Energy, in December
2001. In April 2002, the FERC Staff issued an analysis of the comments received
from these entities. In several areas, the staff's analysis reflects important
changes to the NOPR. However, with regard to corporate governance, the staff's
analysis recommended adoption of an automatic imputation rule which could impact
parent company oversight of subsidiaries with pipeline transmission functions
such as the Company. A public conference was held in May 2002 to discuss the
proposed revisions to the gas standards of conduct. Duke Energy filed
supplemental comments with respect to the FERC Staff's analysis in June 2002.
Issuance of a final rule is now pending before the FERC.
NOPR on Asset Retirement Obligations. On October 30, 2002, the FERC issued a
NOPR which seeks to establish a more transparent, complete and consistent
reporting of liabilities associated with the retirement of long-lived assets.
Among other things, the FERC proposes adding new balance sheet and income
statement accounts to reflect the value of such liabilities, similar to the
provisions in SFAS No. 143 (see Note 2). The changes are proposed to take effect
on January 1, 2003 and apply to public utilities, natural gas firms and oil
pipeline companies. The Company has initiated a detailed review of the NOPR. The
Company is currently assessing the NOPR but has not yet determined the impact on
its consolidated results of operations, cash flows or financial position.
8
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
$25 million as of September 30, 2002 and $15 million as of December 31, 2001,
and Other Current Liabilities include $37 million as of September 30, 2002 and
$41 million as of December 31, 2001, related to gas imbalances (see Note 7).
Natural gas volumes owed to (from) the Company are valued at natural gas market
prices as of the balance sheet dates.
6. Long-term Debt
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 in July 2002 and other pipeline and corporate activities,
including pipeline expansion and maintenance projects and advances to
affiliates.
7. Related Party Transactions
- --------------------------------------------------------------------------------------------------
Income Statement Transactions (in millions)
- --------------------------------------------------------------------------------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------
Transportation of natural gas $ 6 $ 8 $ 21 $ 22
Storage of natural gas and other services 16 21 48 76
Operation and maintenance (a) 20 17 56 75
- --------------------------------------------------------------------------------------------------
(a) Includes allocated retirement plan costs
- --------------------------------------------------------------------------------
Balance Sheet Transactions (in millions)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
----------------------------------
Accounts receivable $ 8 $ 9
Other current assets - gas imbalances 3 2
Accounts payable 2 -
Other current liabilities - gas imbalances 26 25
Taxes accrued 172 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. The
increase in Advances receivable-affiliate is primarily a result of advancing the
remaining proceeds of the $750 million bond issuances in July 2002 to Duke
Capital Corporation, which manages the cash of its subsidiaries, including the
Company, on a centralized basis (see Note 6).
8. 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.
9
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 in the second quarter of 2002.
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 $41 million in capital costs for additional emission controls through 2006 to
comply with these new EPA and state rules.
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.
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 nine months ended September 30, 2002 increased $9 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 of Texas (US District Court) terminating a 1989 consent decree
with the Company. In addition, operating expenses were lower comparing the
periods and depreciation and amortization expense decreased as a result of the
discontinuation of the amortization of goodwill in accordance with the adoption
of Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill and
Other Intangible Assets," in 2002. These increases to net income were partially
offset by lower other revenues due to a decrease in the price of energy related
products and associated volumes. Interest expense increased primarily as a
result of the bond issuances in July 2002.
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures for the first nine months of 2002 were $124 million and
$114 million for the comparable 2001 period. Projected 2002 capital
expenditures, including allowance for funds used during construction, are
approximately $190 million, with market-expansion expenditures approximating 62%
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.
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 in July 2002 and other pipeline and corporate activities,
including pipeline expansion and maintenance projects and advances to affiliates
(see Note 7 to the Consolidated Financial Statements, "Related Party
Transactions.").
In August 2002, Standard & Poor's (S&P) downgraded its long term ratings for
Duke Energy, Duke Capital Corporation, and the Company, one ratings level,
changing its outlook to Stable. S&P's actions were based principally on a
reassessment of Duke Energy's consolidated creditworthiness and S&P's perceived
increase in risk of energy trading and merchant generation activities.
In September 2002, Moody's Investors Service (Moody's) placed the long term and
short term ratings of Duke Energy, and the long term ratings of Duke Capital
Corporation and the Company, on Review for Potential Downgrade. This action
followed Duke Energy's recent decision to reduce its earnings outlook for the
remainder of 2002 and 2003. A resolution to Moody's action is expected during
the fourth quarter of 2002.
11
In October 2002, Fitch Ratings (Fitch) downgraded its ratings for Duke Energy
and Duke Capital Corporation one ratings level due primarily to the credit
impacts from Duke Energy's reduced earnings outlook for the remainder of 2002
and 2003. However, the ratings of the Company's senior unsecured notes were not
changed by Fitch. Fitch concluded its ratings action leaving Duke Energy, Duke
Capital Corporation, and the Company, on Negative Outlook due to the on-going
uncertainty surrounding the merchant power industry and investigations by the
FERC and the Securities and Exchange Commission.
The ratings of the Company and its parent companies may be dependent on, among
other things, the earnings for 2002 and the outlook for 2003 of the parent
companies. Management believes the earnings for 2003 of our parent companies
could be below those of 2002 without an improvement in market conditions. If, as
a result of market conditions or other factors affecting our businesses, the
parent companies are unable to achieve their earnings outlook or lower their
earnings outlook, the ratings for the parent companies and the Company could be
adversely affected.
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. Among the significant actions taken are 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 (ROFR) 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, filed appeals in the District of Columbia Circuit
Court of Appeals (Court) seeking review of various aspects of the Order. On
April 5, 2002, the Court issued an opinion on the appeals of Order 637,
reversing and/or remanding certain issues for further review by the FERC. On
October 31, 2002, FERC issued an order on remand requiring interstate pipelines
to remove the term matching cap for the ROFR which had been set previously at
five (5) years. As a result of this determination, an existing customer seeking
to exercise its ROFR to renew an expiring contract will have to match the term
of any third party's competing bid, regardless of the length of such term. FERC
also found that shippers should have certain rights to forwardhaul and backhaul
service to the same delivery point in excess of the maximum daily quantity under
their service contracts. FERC required interstate pipelines to make tariff
filings to comply with the October 31 remand order. Interested parties have
until December 2, 2002 to file for rehearing and/or clarification of the remand
order.
In addition to the FERC's general Order 637 rulemaking proceeding, FERC also
required each interstate pipeline company to make individual compliance filings
to implement the specific requirements of Order 637. The Company made its
individual 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.
12
Notice of Proposed Rulemaking (NOPR). NOPR on Standards of Conduct. In September
2001, the FERC issued a NOPR announcing that it is considering new regulations
regarding standards of conduct that would apply uniformly to natural gas
pipelines and electric transmitting public utilities that are currently subject
to different gas or electric standards. The proposed standards would change how
companies and their affiliates interact and share information by broadening the
definition of "affiliate" covered by the standards of conduct. Various entities
filed comments on the NOPR with the FERC, including Duke Energy, in December
2001. In April 2002, the FERC Staff issued an analysis of the comments received
from these entities. In several areas, the staff's analysis reflects important
changes to the NOPR. However, with regard to corporate governance, the staff's
analysis recommended adoption of an automatic imputation rule which could impact
parent company oversight of subsidiaries with pipeline transmission functions
such as the Company. A public conference was held in May 2002 to discuss the
proposed revisions to the gas standards of conduct. Duke Energy filed
supplemental comments with respect to the FERC Staff's analysis in June 2002.
Issuance of a final rule is now pending before the FERC.
NOPR on Asset Retirement Obligations. On October 30, 2002, the FERC issued a
NOPR which seeks to establish a more transparent, complete and consistent
reporting of liabilities associated with the retirement of long-lived assets.
Among other things, the FERC proposes adding new balance sheet and income
statement accounts to reflect the value of such liabilities, similar to the
provisions in SFAS No. 143, "Accounting for Asset Retirement Obligations." (see
Note 2 to the Consolidated Financial Statements, "Summary of Significant
Accounting Policies."). The changes are proposed to take effect on January 1,
2003 and apply to public utilities, natural gas firms and oil pipeline
companies. The Company has initiated a detailed review of the NOPR. The Company
is currently assessing the NOPR but has not yet determined the impact on its
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 in the second quarter of 2002.
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 $41 million in capital costs for additional emission controls through 2006 to
comply with these new EPA and state rules.
13
Item 3. 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
risk factors can negatively impact the credit quality of the entire sector.
Where exposed to credit risk, the Company analyzes the counterparties' financial
condition prior to entering into an agreement, establishes credit limits in
accordance with corporate credit policy and monitors the appropriateness of
those limits on an ongoing basis.
In view of the current challenges in the energy sector, the Company has
increased 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.
Item 4. Controls and Procedures.
The Company's management, including the President and Chief Financial Officer,
have conducted an evaluation of the effectiveness of the Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-14 during October
and November 2002. Based on that evaluation, the President and Chief Financial
Officer concluded that the disclosure controls and procedures are effective in
ensuring that all material information required to be filed in this quarterly
report has been made known to them in a timely fashion. The required information
was effectively recorded, processed, summarized and reported within the time
period necessary to prepare this quarterly report. The Company's disclosure
controls and procedures are effective in ensuring that information required to
be disclosed in the Company's reports under the Exchange Act are accumulated and
communicated to management, including the President and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the
President and Chief Financial Officer completed their evaluation.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning material litigation and other contingencies, see Note
8 to the Consolidated Financial Statements, "Commitments and Contingencies."
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number
- -------
4.1 Third Supplemental Indenture dated as of July 2, 2002, by and between Texas
Eastern Transmission, LP and JPMorgan Chase Bank (formerly known as The
Chase Manhattan Bank), as Trustee, including the form of 5.25% Notes Due
July 15, 2007 and 7.00% Notes Due July 15, 2032.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 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 third quarter of 2002.
15
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
November 14, 2002 /s/ Dorothy M. Ables
---------------------------
Dorothy M. Ables
Senior Vice President, Finance and
Administration and Chief Financial Officer
16
CERTIFICATIONS
I, Dorothy M. Ables certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas Eastern
Transmission, LP;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Dorothy M. Ables
----------------------------
Dorothy M. Ables
Senior Vice President, Finance & Administration
and Chief Financial Officer
Duke Energy Gas Transmission Services, LLC
General Partner of Texas Eastern Transmission, LP
17
CERTIFICATIONS
I, Thomas C. O'Connor certify that:
1. I have reviewed this quarterly report on Form 10-Q of Texas Eastern
Transmission, LP;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Thomas C. O'Connor
--------------------------------
Thomas C. O'Connor
President
Duke Energy Gas Transmission Services, LLC
General Partner of Texas Eastern Transmission, LP
18