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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 1995
Commission File No. 1-2921
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PANHANDLE EASTERN PIPE LINE COMPANY
(Exact name of registrant as specified in its charter)
A Delaware Corporation
(State of Incorporation or Organization)
44-0382470
(IRS Employer Identification No.)
5400 Westheimer Court, P.O. Box 1642, Houston, Texas 77251-1642
(Address of principal executive offices, including 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 twelve 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 the 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.
The Registrant's parent, Panhandle Eastern Corporation (File No. 1-8157),
files reports and proxy materials pursuant to the Securities Exchange Act of
1934.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at July 31, 1995
-------------------------- -----------------------------
Common Stock, no par value 1,000
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Periods Ended June 30
Three Months Six Months
---------------- ----------------
Millions 1995 1994 1995 1994
- - -------- ------ ------ ------ ------
Operating Revenues
Transportation and storage
of natural gas $119.2 $123.0 $255.6 $269.1
Sales of natural gas - 54.1 - 115.8
Other 5.7 5.5 11.7 13.2
------ ------ ------ ------
Total (Note 2) 124.9 182.6 267.3 398.1
------ ------ ------ ------
Costs and Expenses
Natural gas purchased - 54.1 - 115.8
Operating and maintenance 49.5 50.2 99.0 94.8
General and administrative 16.4 20.9 35.6 42.6
Depreciation and amortization 14.7 13.5 29.4 26.8
Miscellaneous taxes 7.2 7.0 14.9 14.3
------ ------ ------ ------
Total 87.8 145.7 178.9 294.3
------ ------ ------ ------
Operating Income 37.1 36.9 88.4 103.8
------ ------ ------ ------
Other Income and Deductions
Equity in earnings of
unconsolidated affiliates 1.2 1.4 5.1 2.8
Interest income - parent 0.1 9.9 0.3 17.5
Other income, net of deductions 0.6 1.0 (1.4) 0.8
------ ------ ------ ------
Total 1.9 12.3 4.0 21.1
------ ------ ------ ------
Gross Income 39.0 49.2 92.4 124.9
Interest Expense 12.2 12.6 24.2 25.3
------ ------ ------ ------
Income Before Income Tax 26.8 36.6 68.2 99.6
Income Tax 10.5 14.0 26.8 38.7
------ ------ ------ ------
NET INCOME $ 16.3 $ 22.6 $ 41.4 $ 60.9
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See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
June 30, December 31,
Millions 1995 1994
- - -------- --------- ------------
Current Assets
Cash and cash equivalents $ 0.2 $ 0.4
Note receivable - parent - 8.0
Accounts receivable, net 50.8 38.9
Inventory and supplies 61.8 65.7
Other (Note 2) 70.8 63.6
--------- ---------
Total 183.6 176.6
--------- ---------
Investments
Advances and note receivable - parent 574.0 583.8
Other 58.4 45.1
--------- ---------
Total 632.4 628.9
--------- ---------
Plant, Property and Equipment
Original cost 2,751.2 2,742.8
Accumulated depreciation and amortization (1,801.6) (1,763.2)
--------- ---------
Net plant, property and equipment 949.6 979.6
--------- ---------
Deferred Charges (Notes 2 and 4) 168.5 198.5
--------- ---------
TOTAL ASSETS $ 1,934.1 $ 1,983.6
========= =========
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDER'S EQUITY
June 30, December 31,
Millions 1995 1994
- - -------- -------- ------------
Current Liabilities
Long-term debt due within one year $ 4.5 $ -
Rate refund provisions (Note 2) 56.1 51.2
Accounts payable 21.1 29.8
Accrued income tax - parent 32.0 69.0
Other accrued taxes 25.4 19.2
Other (Note 4) 58.5 59.8
-------- --------
Total 197.6 229.0
-------- --------
Deferred Liabilities and Credits
Deferred income tax 171.1 191.9
Rate refund provisions (Note 2) 71.7 81.8
Other (Note 4) 121.0 139.2
-------- --------
Total 363.8 412.9
-------- --------
Long-term Debt 424.1 428.5
-------- --------
Commitments and Contingent Liabilities
(Notes 2, 3, 4 and 5)
Common Stockholder's Equity
Common stock, one thousand shares
authorized, issued and outstanding,
no par value 1.0 1.0
Paid-in capital 465.8 471.8
Retained earnings 481.8 440.4
-------- --------
Total 948.6 913.2
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,934.1 $1,983.6
======== ========
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30
-----------------
Millions 1995 1994
- - -------- ------ ------
Operating Activities
Net income $ 41.4 $ 60.9
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 29.4 26.8
Deferred income tax expense (benefit) 11.1 (2.1)
Interest income - parent (0.3) (17.5)
Other non-cash items in net income 1.0 (8.8)
Net change in operating assets
and liabilities (84.2) 19.6
------ ------
Net Cash Flows Provided by (Used in)
Operating Activities (1.6) 78.9
------ ------
Investing Activities
Additions to plant, property and equipment (18.1) (34.4)
Net decrease (increase) in advances/note
receivable - parent 18.1 (6.1)
Property retirements and other 1.0 11.7
------ ------
Net Cash Flows Provided by (Used in)
Investing Activities 1.0 (28.8)
------ ------
Financing Activities
Retirement of debt - (50.0)
Other 0.4 (0.1)
------ ------
Net Cash Flows Provided by (Used in)
Financing Activities 0.4 (50.1)
------ ------
Net Change in Cash
Decrease in cash and cash equivalents (0.2) -
Cash and cash equivalents, beginning of period 0.4 0.4
------ ------
Cash and Cash Equivalents, End of Period $ 0.2 $ 0.4
====== ======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 21.1 $ 21.2
Cash paid for income tax (including
intercompany amounts) 70.0 82.1
See accompanying notes to consolidated financial statements
PANHANDLE EASTERN PIPE LINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. References
Panhandle Eastern Pipe Line Company (PEPL) and its subsidiaries (the
Company), including Trunkline Gas Company (Trunkline), are involved in
the interstate transportation and storage of natural gas. PEPL is a
wholly-owned subsidiary of Panhandle Eastern Corporation (PEC). The
interstate gas transmission operations of PEPL and Trunkline are subject
to the rules, regulations and accounting procedures of the Federal
Energy Regulatory Commission (FERC). Certain amounts for the prior
periods have been reclassified in the consolidated financial statements
to conform to the current presentation.
2. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of revenues
collected by PEPL and Trunkline is subject to possible refunds. The
Company has established adequate reserves where required for such cases.
The following is a summary of pending rate cases before FERC and certain
regulatory matters.
FERC Order 636 and Merchant Services
During 1993, PEPL and Trunkline began providing restructured services
pursuant to FERC Order 636. This order, which is on appeal to the
courts, requires pipeline service restructuring that "unbundles" sales,
transportation and storage services. Order 636 provides for the use of
the straight fixed-variable (SFV) rate design, which assigns return on
equity, related taxes and other fixed costs to the reservation component
of rates. In addition, Order 636 allows pipelines to recover eligible
costs resulting from implementation of the order (transition costs).
At June 30, 1995, the Company had incurred approximately $60 million of
transition costs, including amounts that have been recovered from
customers. Transition cost recoveries, which are subject to certain
challenges that are pending before FERC, will occur over the next three
years.
In the past, during the normal course of business, PEPL and Trunkline
entered into certain gas purchase contracts containing take-or-pay
provisions, which exposed the Company to financial risk. As of June 30,
1995, all such contracts had been terminated or assigned to third
parties. PEPL and Trunkline are currently collecting certain
take-or-pay settlement costs through volumetric surcharges with interest
through 1997.
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, and
buyouts and buydowns of gas sales contracts with natural gas pipelines.
PEPL and Trunkline, with respect to certain producer contract
settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. If PEPL
and Trunkline ultimately have to reimburse or indemnify the producers,
PEPL and Trunkline will file with FERC to recover a portion of these
costs from pipeline customers. 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 a substantial period of
time to resolve.
The Company believes that Order 636 transition cost issues and
take-or-pay settlement matters will not have a material adverse effect
on future consolidated results of operations or financial position.
Jurisdictional Transportation and Sales Rates
PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into effect,
subject to refund, general rate increases incorporating the SFV rate
design. Hearings in these rate proceedings were completed in the first
half of 1994. The FERC issued an order on May 25, 1995 on the earlier
rate proceeding and PEPL has requested rehearing of that order. The
latter rate proceeding is pending FERC review of the initial
Administrative Law Judge decision.
Effective April 1, 1989, PEPL placed into effect, subject to refund,
sales and transportation rates reflecting a restructuring of rates,
including seasonal rate structures. PEPL and others are appealing
various FERC orders related to these rates. On December 7, 1994, FERC
approved a settlement agreement with a majority of the customers which
resolves refund matters and terminates other actions for the period
these rates were effective for the settling parties.
Trunkline - On September 1, 1994, Trunkline placed into effect, subject
to refund, a general rate increase as a result of a filing made in
accordance with terms of a rate case settlement in 1993. An offer of
settlement, supported by Trunkline's customers, was approved by FERC on
July 6, 1995, subject to rehearing.
Other - PEPL and Trunkline have, pursuant to FERC requirements,
requested FERC approval to record the impact of adopting Statement of
Financial Accounting Standards (Accounting Standard) No. 109,
"Accounting for Income Taxes," including the recognition of a portion
of the impact as an increase to stockholder's equity. The FERC
accounting branch has denied approval of these requests, pending future
rate proceedings, and PEPL and Trunkline have filed for rehearing. The
Company believes the ultimate resolution of this matter will not have
a material adverse effect on consolidated financial position.
3. Other Contingency
Under the terms of a settlement related to a transportation agreement
between PEPL and Northern Border Pipeline Company (Northern Border),
PEPL guarantees payment to Northern Border under a transportation
agreement by an affiliate of Pan-Alberta Gas Limited. The
transportation agreement requires estimated total payments of
$184 million for the years 1995 through 2001. In the opinion of
management, the probability that PEPL will be required to perform under
this guarantee is remote.
4. Environmental Matters
The Company has identified environmental contamination at up to 53 sites
on the PEPL and Trunkline systems and is undertaking remediation
(cleanup) programs at these sites. The contamination resulted from the
past use of lubricants containing PCBs (polychlorinated biphenyls) and
the prior use of wastewater collection facilities and other on-site
disposal areas. Soil and sediment testing, to date, has detected no
significant off-site contamination. The Company has communicated with
the U.S. Environmental Protection Agency and appropriate state
regulatory agencies on these matters. The environmental cleanup
programs are expected to continue until 2002.
At June 30, 1995 and December 31, 1994, the Company had undiscounted
liabilities recorded of $71.1 million and $70 million, respectively,
relating to PEPL and Trunkline PCB, wastewater and disposal area cleanup
programs and had regulatory assets recorded of $81.4 million and
$82.4 million, respectively, representing costs to be recovered from
customers.
The federal and state cleanup programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. The
Company believes the ultimate resolution of matters relating to the
cleanup programs will not have a material adverse effect on consolidated
results of operations or financial position.
5. Litigation
The Company is involved in various legal actions and claims arising in
the normal course of business. Based upon its current assessment of the
facts and the law, management does not believe that the outcome of any
such action or claim will have a material adverse effect upon the
consolidated financial position of the Company. However, these actions
and claims in the aggregate seek substantial damages against the Company
and are subject to the uncertainties inherent in any litigation.
6. Fair Presentation
The information as furnished reflects all normal recurring adjustments
that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position as of June 30, 1995,
results of operations for the three and six months ended June 30, 1995
and 1994, and cash flows for the six months ended June 30, 1995 and
1994.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information is provided to facilitate increased understanding
of the 1995 and 1994 interim consolidated financial statements and
accompanying notes presented in Item 1. Because all of the outstanding
capital stock of PEPL is owned by PEC, the following discussion has been
prepared in accordance with the reduced disclosure format permitted by Form
10-Q for issuers that are wholly-owned subsidiaries of reporting companies
under the Securities Exchange Act of 1934.
OPERATING ENVIRONMENT
All traditional pipeline sales services ceased during the fourth quarter of
1994 when Trunkline's unbundled sales contracts expired. Pipeline earnings
have generally become more evenly distributed throughout the year as a result
of the SFV rate design required by Order 636. PEPL and Trunkline continue to
offer selective discounting to maximize revenues from existing capacity.
Order 636 Transition Costs - With implementation of Order 636 and the
elimination of pipeline merchant services, the Company's pipelines are
incurring certain costs for the transition. At June 30, 1995, the Company had
incurred approximately $60 million of transition costs, including amounts that
have been recovered from customers. Transition cost recoveries, which are
subject to certain challenges pending before FERC, will occur over the next
three years. The Company believes that Order 636 transition cost issues will
not have a material adverse effect on future consolidated results of
operations or financial position.
On September 1, 1994, Trunkline placed into effect, subject to refund, a
general rate increase as a result of a filing made in accordance with terms
of a rate case settlement in 1993. An offer of settlement, supported by
Trunkline's customers, was approved by FERC on July 6, 1995, subject to
rehearing.
For information concerning certain other regulatory proceedings, environmental
matters and other contingencies, see Notes 2, 3, 4 and 5 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated net income for the six months ended June 30, 1995 was
$41.4 million compared with $60.9 million for the same period in 1994. Total
natural gas volumes for the Company decreased 9% to 586 billion cubic feet,
comparing the first six months of 1995 with the same period of 1994,
attributable to warmer weather during the first six months of 1995.
Operating Income
Consolidated operating income for the Company decreased $15.4 million
comparing the first six months of 1995 with the same period in 1994, primarily
due to lower earnings from PEPL.
PEPL - PEPL's operating income decreased $1.5 million comparing the first six
months of 1995 with the same period in 1994, excluding $10.6 million of
nonrecurring expense reductions recorded in 1994 for the resolution of gas
supply matters. Increased transportation revenue partially offset reduced
storage revenue.
Trunkline - Operating income for Trunkline decreased $3.3 million comparing
the first six months of 1995 with the same period in 1994. Decreased
transportation revenue due to lower volumes attributable to warmer weather
during the first six months of 1995 was partially offset by lower operating
costs. Sales revenue and associated gas purchased costs declined as a result
of the elimination of Trunkline's merchant function in late 1994.
Other Income and Deductions
The decrease of $17.1 million in net other income in the first six months of
1995 compared with the same period in 1994 reflects decreased interest income
on net advances receivable from PEC, as receivables for intercompany advances
no longer bear interest effective January 1, 1995.
Interest Expense
Interest expense in the first six months of 1995 decreased $1.1 million
compared with the same period in 1994 primarily as a result of lower average
debt balances outstanding.
CAPITAL EXPENDITURES
Capital expenditures totaled $18.1 million in the first six months of 1995,
compared with $34.4 million for the same period in 1994. Capital expenditures
for 1995 are expected to approximate $75 million and are being funded by cash
from operations, debt issuances and/or available credit facilities. Total
market expansion expenditures are expected to approximate 45% of the 1995
capital budget.
ACCOUNTING STANDARDS
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," issued in March 1995,
will be implemented by the Company in the first quarter of 1996. This
standard addresses the accounting for the recognition and measurement of
impairment losses for long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used. This standard also
addresses the accounting for long-lived assets and certain identifiable
intangibles to be disposed of.
The Company does not expect Accounting Standard No. 121 to have a significant
effect on consolidated results of operations or financial position upon
adoption.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 2, 4 and 5 of the Notes to Consolidated Financial Statements in
Part I of this Report which are incorporated herein by reference. See also
Item 3 of PEPL's Annual Report on Form 10-K for the year ended December 31,
1994.
Item 4. Submission of Matters to a Vote of Security Holders
On April 26, 1995, by way of action in writing by the sole common stockholder,
all directors as previously reported in PEPL's Annual Report on Form 10-K for
the year ended December 31, 1994 were re-elected for a term of one year.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized officer and chief accounting officer.
PANHANDLE EASTERN PIPE LINE COMPANY
(Registrant)
/s/ Sandra P. Meyer
---------------------------------------
Sandra P. Meyer, Vice President
Date: August 11, 1995
0075rpt.cpz
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
6-MOS
DEC-31-1995
JUN-30-1995
200
0
50,800
0
61,800
183,600
2,751,200
1,801,600
1,934,100
197,600
424,100
1,000
0
0
947,600
1,934,100
0
267,300
0
99,000
44,300
0
24,200
68,200
26,800
41,400
0
0
0
41,400
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
