10-Q 1 d10q.txt TEXAS EASTERN TRANSMISSION, LP ================================================================================ 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, 2001 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 II, Item 4 has 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. ================================================================================ TEXAS EASTERN TRANSMISSION, LP FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2001 INDEX

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, the Company's reports, filings and other public announcements may include assumptions, projections, expectations, intentions or beliefs about future events. These statements are intended as "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. The Company cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that actual results will not differ materially from those expressed or implied by the forward-looking statements. Some of the factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements include state and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures and affect the speed and degree to which competition enters the natural gas industry; the weather and other natural phenomena; the timing and extent of changes in commodity prices and interest rates; changes in environmental and other laws and regulations to which the Company is subject or other external factors over which the Company has no control; the results of financing efforts, including the Company's ability to obtain financing on favorable terms, which can be affected by the Company's credit rating and general economic conditions; growth in opportunities for the Company; and the effect of accounting policies issued periodically by accounting standard-setting bodies. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. TEXAS EASTERN TRANSMISSION, LP CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In millions)

See Notes to Consolidated Financial Statements. 1 TEXAS EASTERN TRANSMISSION, LP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions)

See Notes to Consolidated Financial Statements. 2 TEXAS EASTERN TRANSMISSION, LP CONSOLIDATED BALANCE SHEETS (In millions)

See Notes to Consolidated Financial Statements. 3 TEXAS EASTERN TRANSMISSION, LP CONSOLIDATED BALANCE SHEETS (In millions)

See Notes to Consolidated Financial Statements. 4 TEXAS EASTERN TRANSMISSION, LP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In millions)

See Notes to Consolidated Financial Statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Nature of Operations On April 16, 2001, Texas Eastern Transmission Corporation (TETCO), a Delaware corporation, changed its form of organization from a corporation to a limited partnership. Pursuant to the conversion, all rights and liabilities of TETCO vested in Texas Eastern Transmission, LP, a Delaware limited partnership (together with its subsidiaries, the "Company"). 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 will also be subject to corporate income tax as a division of the limited partner. There was no effect on the Company's results of operations, cash flows or financial position as a result of this conversion. The Company is primarily engaged in the interstate transportation and storage of natural gas. The interstate natural gas transmission and storage operations of the Company are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC). The Consolidated Financial Statements include the accounts of the Company and all majority-owned subsidiaries after the elimination of 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 results of operations, cash flows and financial position for the respective periods. Note 2. Summary of Significant Accounting Policies Accounting for Hedges. The Company enters into derivative transactions that are hedges of the future cash flows of forecasted transactions (cash flow hedges). These derivatives are recognized on the balance sheet at their fair value as Regulatory Assets and Deferred Debits or Deferred Credits and Other Liabilities, as appropriate. The Company formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Cash Flow Hedges. Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are included in the Consolidated Statements of Comprehensive Income as Other Comprehensive Income (OCI) until earnings are affected by the hedged item. Settlement amounts and ineffective portions of cash flow hedges are removed from OCI and recorded in the Consolidated Statements of Operations in the same accounts as the item being hedged. The Company discontinues hedge accounting prospectively when it is determined that the derivative no longer qualifies as an effective hedge. When hedge accounting is discontinued, the derivative will continue to be carried on the Consolidated Balance Sheets at its fair value with subsequent changes in its fair value recognized in current-period earnings. Gains and losses related to discontinued hedges that were accumulated in OCI will remain in OCI until earnings are affected by the hedged item. If the forecasted transaction is no longer probable, then such gains and losses are recognized in current period earnings. Cumulative Effect of Change in Accounting Principle. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001. In accordance with the transition provisions of SFAS No. 133, the Company recorded a net-of-tax cumulative effect adjustment reducing OCI and Partners' Equity for $1.5 million. For the six months ended June 30, 2001, the Company reclassified $1 million from OCI into earnings for derivatives included in the transition adjustment related to hedge transactions that settled. There was no impact on the Company's consolidated results of operations from the implementation of SFAS No. 133. 6 New Accounting Standards. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and will be adopted by the Company 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 will be subject to a fair-value-based annual impairment assessment. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. The Company expects that the adoption of SFAS No. 142 will not have a significant impact on future financial statements with the discontinuation of goodwill amortization expense. For the six months ended June 30, 2001, amortization expense for goodwill was $2 million. The Company is preparing to implement the new standard and currently does not expect any material impact on its consolidated results of operations, cash flows or financial position. In July 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and early adoption is permitted. The Company is currently assessing the new standard and has not yet determined the impact on its consolidated results of operations, cash flows or financial position. Note 3. Regulatory Matters On February 9, 2000, the FERC issued Order 637, which sets forth revisions to its regulations governing short-term natural gas transportation services and policies governing the regulation of interstate natural gas pipelines. "Short-term" has been defined as all transactions of less than one year. Among the significant actions taken were the lifting of the price cap for short-term capacity release by pipeline customers for an experimental 2 1/2-year period ending September 1, 2002, and requiring that interstate pipelines file pro forma tariff sheets to (i) provide for nomination equality between capacity release and primary pipeline capacity; (ii) implement imbalance management services (for which interstate pipelines may charge fees) while at the same time reducing the use of operational flow orders and penalties; and (iii) provide segmentation rights if operationally feasible. Order 637 also narrowed the right of first refusal to remove economic biases perceived in the current rule. Order 637 imposed significant new reporting requirements for interstate pipelines that were implemented by the Company during the third quarter of 2000. Additionally, Order 637 permitted pipelines to propose peak/off-peak rates and term-differentiated rates, and encouraged pipelines to propose experimental capacity auctions. By Order 637-A, issued in February 2000, the FERC generally denied requests for rehearing and several parties, including the Company, have filed appeals in the District of Columbia Court of Appeals seeking court review of various aspects of the Order. During the third quarter of 2001, the Company submitted revised pro forma tariff sheets to update the filings originally submitted in 2000. These filings are currently subject to review and approval by the FERC. Note 4. Related Party Transactions Certain balances due to or from related parties included in the Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 are as follows: --------------------------------------------------- In millions --------------------------------------------------- June 30, December 31, 2001 2000 --------------------------- Accounts receivable $ 7 $ 6 Taxes accrued 170 128 --------------------------------------------------- For the three and six months ended June 30, 2000, there was $13 million and $26 million respectively, of interest expense associated with notes payable to parent that were repaid in the fourth quarter of 2000. 7 Note 5. Gas Imbalances The Consolidated Balance Sheets include in-kind balances as a result of differences in gas volumes received and delivered. At June 30, 2001 and December 31, 2000, Other Current Assets included $42 million and $101 million, respectively, and Other Current Liabilities included $85 million and $178 million, respectively, related to gas imbalances. Natural gas volumes owed to (from) the Company are valued at natural gas market prices as of the balance sheet dates. Note 6. Derivative Instruments and Hedging Activities Commodity Cash Flow Hedges. The Company is exposed to market fluctuations in the prices of energy-related commodities. The Company closely monitors the potential impacts of commodity price changes, and where appropriate, uses various instruments to lock in margins for a portion of its future revenues. These swap instruments serve as cash flow hedges for natural gas liquids transactions. The maximum term over which the Company is hedging exposures to the price variability of these commodities is five years. For the six months ended June 30, 2001, the ineffective portion of commodity cash flow hedges and the amount recognized for transactions that no longer qualified as cash flow hedges were not material. As of June 30, 2001, $3 million of after-tax deferred net losses on derivative instruments accumulated in OCI are expected to be reclassified to earnings during the next twelve months. These losses will generally be more than offset by the related revenues. Due to the volatility of the commodities markets, the value of the derivative instrument is subject to change prior to its reclassification to earnings. Market and Credit Risk. The Company's principal markets for natural gas transportation and storage services are industrial end-users and utilities located throughout the Mid-Atlantic and northeastern states. The Company has concentrations of receivables from natural gas and electric utilities and their affiliates, as well as industrial customers and gas marketers throughout these regions. These concentrations of customers may affect the Company's overall credit risk in that certain customers may be similarly affected by changes in economic, regulatory or other factors. On all transactions where the Company is exposed to credit risk, the Company analyzes the counterparties' financial condition prior to entering into an agreement, establishes credit limits and monitors the appropriateness of these limits on an ongoing basis. Note 7. Commitments and Contingencies Litigation. The Company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding performance, contracts and other matters arising in the ordinary course of business, some of which involve substantial amounts. Management believes that the final disposition of these proceedings will not have a material adverse effect on consolidated results of operations, cash flows or financial position. Environmental Matters. Air Quality Control. In October 1998, the Environmental Protection Agency (EPA) issued a final rule on regional ozone control that required 22 eastern states and the District of Columbia to revise their State Implementation Plans to significantly reduce emissions of nitrogen oxide by May 1, 2003. The EPA's rule was challenged in court by various states, industry and other interests, including the Company's parent Duke Energy. In March 2000, the court upheld most aspects of the EPA's rule. The same court subsequently issued a decision that extended the compliance deadline for implementation of emission reductions to May 31, 2004. In January 2000, the EPA finalized another ozone-related rule under Section 126 of the Clean Air Act that has virtually identical emission control requirements as its October 1998 action, but with a May 1, 2003 compliance date. This rule was challenged in court and on May 14, 2001 the US Court of Appeals for the DC Circuit issued its decision. The court sided with the EPA on all issues except the electric generating unit (EGU) growth rate factor determinations used to establish each state's emission cap. Because the EPA has yet to act on the court's remand order, a group of utilities, including Duke Energy, has filed a motion with the court. The motion requests the court to reconsider its decision not to vacate the EGU portion of the rule, or to suspend the May 1, 2003 compliance date until the EPA acts in accordance with the court's remand order. It is not known at this time how the EPA will respond or if the May 1, 2003 compliance date will be changed as a result of the court's decision. Depending on the resolution of these matters, costs to the Company may range up to $10 million for additional capital improvements. 8 Other Commitments and Contingencies. In 1993, the U.S. Department of the Interior announced its intention to seek additional royalties from gas producers as a result of payments received by such producers in connection with past take-or-pay settlements, buyouts and buydowns of gas sales contracts with natural gas pipelines. The Company, with respect to certain producer contract settlements, may be contractually required to reimburse or, in some instances, to indemnify producers against such royalty claims. The potential liability of the producers to the government and of the pipelines to the producers involves complex issues of law and fact which are likely to take substantial time to resolve. If required to reimburse or indemnify the producers, the Company will file with FERC to recover a portion of these costs from pipeline customers. Periodically, the Company may become involved in contractual disputes with natural gas transmission customers involving potential or threatened abrogation of contracts by the customers. If the customers are successful, the Company may not receive the full value of anticipated benefits under the contracts. Management believes that these commitments and contingencies will not have a material adverse effect on consolidated results of operations, cash flows or financial position. 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. INTRODUCTION On April 16, 2001, Texas Eastern Transmission Corporation (TETCO), a Delaware corporation, changed its form of organization from a corporation to a limited partnership. Pursuant to the conversion, all rights and liabilities of TETCO vested in Texas Eastern Transmission, LP, a Delaware limited partnership (together with its subsidiaries, the "Company"). 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 will also be subject to corporate income tax as a division of the limited partner. There was no effect on the Company's results of operation, cash flows or financial position as a result of this conversion. The Company is primarily engaged in the interstate transportation and storage of natural gas for customers primarily in the Mid-Atlantic and New England states. The interstate natural gas transmission and storage operations of the Company are subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC). RESULTS OF OPERATIONS Net income for the six months ended June 30, 2001 increased $18 million, compared to the same period in 2000. The increase was mainly attributable to decreased interest expense as a result of repayment of notes payable to parent in the fourth quarter of 2000. The decrease in transportation revenues, which is offset by a decrease in operating costs, was the result of reduced rates effective December 1, 2000 that reflect lower recovery requirements for operating costs, primarily system fuel and FERC Order 636 transition costs. LIQUIDITY AND CAPITAL RESOURCES Capital expenditures for the first six months of 2001 and 2000 totaled $73 million and $44 million, respectively. Projected 2001 capital expenditures, including allowance for funds used during construction, are approximately $160 million, with market-expansion expenditures approximating 30% of the capital budget. These projections are subject to periodic review and revision. Actual expenditures incurred may vary from estimates due to various factors, including business expansion opportunities and environmental matters. Expenditures for 2001 are expected to be funded by cash from operations, debt issuance and/or collection of intercompany advances receivable. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risk Policies. The Company is exposed to market risks associated with interest rates and commodity prices. Comprehensive risk management policies have been established by management to monitor and manage these market risks. Duke Energy's Policy Committee is responsible for the overall approval of market risk management policies and the delegation of approval and authorization levels. The Policy Committee is comprised of senior executives of Duke Energy who receive periodic updates from Duke Energy's Chief Risk Officer (CRO) on market risk positions, corporate exposures, credit exposures and overall results of Duke Energy's risk management activities. The CRO has responsibility for the overall management of interest rate risk, foreign currency risk, credit risk and energy risk, including monitoring of exposure limits. There have been no material changes in the Company's market risk since December 31, 2000. CURRENT ISSUES Environmental Matters. Air Quality Control. In October 1998, the Environmental Protection Agency (EPA) issued a final rule on regional ozone control that required 22 eastern states and the District of Columbia to revise their State Implementation Plans to significantly reduce emissions of nitrogen oxide by May 1, 2003. The EPA's rule was challenged in court by various states, industry and other interests, including the Company's parent Duke Energy. In March 2000, the court upheld most aspects of the EPA's rule. The same court subsequently issued a decision that extended the compliance deadline for implementation of emission reductions to May 31, 2004. 10 In January 2000, the EPA finalized another ozone-related rule under Section 126 of the Clean Air Act that has virtually identical emission control requirements as its October 1998 action, but with a May 1, 2003 compliance date. This rule was challenged in court and on May 14, 2001 the US Court of Appeals for the DC Circuit issued its decision. The court sided with the EPA on all issues except the electric generating unit (EGU) growth rate factor determinations used to establish each state's emission cap. Because the EPA has yet to act on the court's remand order, a group of utilities, including Duke Energy, has filed a motion with the court. The motion requests the court to reconsider its decision not to vacate the EGU portion of the rule, or to suspend the May 1, 2003 compliance date until the EPA acts in accordance with the court's remand order. It is not known at this time how the EPA will respond or if the May 1, 2003 compliance date will be changed as a result of the court's decision. Depending on the resolution of these matters, costs to the Company may range up to $10 million for additional capital improvements. New Accounting Standards. In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and will be adopted by the Company 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 will be subject to a fair-value-based annual impairment assessment. The standard also requires acquired intangible assets to be recognized separately and amortized as appropriate. The Company expects that the adoption of SFAS No. 142 will not have a significant impact on future financial statements with the discontinuation of goodwill amortization expense. For the six months ended June 30, 2001, amortization expense for goodwill was $2 million. The Company is preparing to implement new standard and currently does not expect any material impact on its consolidated results of operations, cash flows or financial position. In July 2001, the FASB issued SFAS No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets." SFAS No. 143 provides the accounting requirements for retirement obligations associated with tangible long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and early adoption is permitted. The Company is currently assessing the new standard and has not yet determined the impact on its consolidated results of operations, cash flows or financial position. 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings. For information concerning material litigation and other contingencies, see Note 7 to the Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None. (b) Reports on Form 8-K A Current Report on Form 8-K filed on April 17, 2001 contained disclosures under Item 5, Other Events. A Current Report on Form 8-K filed on May 22, 2001 contained disclosures under Item 5, Other Events and Item 7, Financial Statements and Exhibits. 12 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 10, 2001 /s/ Dorothy M. Ables ------------------------------------------------------ Dorothy M. Ables Senior Vice President, Finance and Administration and Chief Financial Officer 13

TEXAS EASTERN TRANSMISSION LP 10-Q