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, 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. ================================================================================ TEXAS EASTERN TRANSMISSION, LP FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 INDEX

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)

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

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)

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) --------------------------------------------------------------------------------

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

/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. 12 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. 13 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. 14 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 15

TEXAS EASTERN TRANSMISSION LP 10-Q