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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 1996
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)
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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, PanEnergy Corp (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, 1996
-------------------------- ----------------------------
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 1996 1995 1996 1995
- -------- ------ ------ ------ ------
Operating Revenues
Transportation and storage
of natural gas $112.5 $119.2 $257.7 $255.6
Other 5.9 5.7 12.1 11.7
------ ------ ------ ------
Total (Note 2) 118.4 124.9 269.8 267.3
------ ------ ------ ------
Costs and Expenses
Operating and maintenance 35.0 49.5 80.5 99.0
General and administrative 17.8 16.4 47.8 35.6
Depreciation and amortization 14.7 14.7 29.5 29.4
Miscellaneous taxes 6.4 7.2 14.1 14.9
------ ------ ------ ------
Total 73.9 87.8 171.9 178.9
------ ------ ------ ------
Operating Income 44.5 37.1 97.9 88.4
------ ------ ------ ------
Other Income and Deductions
Equity in earnings of
unconsolidated affiliates 1.6 1.2 3.0 5.1
Other income, net of deductions 1.7 (1.7) 1.2 (5.1)
------ ------ ------ ------
Total 3.3 (0.5) 4.2 -
------ ------ ------ ------
Earnings Before Interest and Tax 47.8 36.6 102.1 88.4
------ ------ ------ ------
Interest Expense
Parent 8.3 - 16.7 -
Other 6.1 9.8 12.7 20.2
------ ------ ------ ------
Total 14.4 9.8 29.4 20.2
------ ------ ------ ------
Earnings Before Income Tax 33.4 26.8 72.7 68.2
Income Tax 12.9 10.5 28.2 26.8
------ ------ ------ ------
NET INCOME $ 20.5 $ 16.3 $ 44.5 $ 41.4
====== ====== ====== ======
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 1996 1995
- -------- --------- ------------
Current Assets
Cash and cash equivalents $ 0.5 $ 0.2
Accounts receivable, net 47.9 39.2
Inventory and supplies 61.8 55.3
Current deferred income tax 4.0 13.0
Other (Note 3) 64.8 46.1
--------- ---------
Total 179.0 153.8
--------- ---------
Investments
Advances and note receivable - parent 607.9 566.9
Other 61.6 48.3
--------- ---------
Total 669.5 615.2
--------- ---------
Plant, Property and Equipment
Original cost 2,645.1 2,782.1
Accumulated depreciation and amortization (1,730.4) (1,818.8)
--------- ---------
Net plant, property and equipment 914.7 963.3
--------- ---------
Deferred Charges 125.7 155.1
--------- ---------
TOTAL ASSETS $ 1,888.9 $ 1,887.4
========= =========
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 1996 1995
- -------- -------- ------------
Current Liabilities
Long-term debt due within one year $ 4.5 $ 4.5
Note payable - parent 400.0 400.0
Rate refund provisions (Note 2) 46.8 53.3
Accounts payable 18.7 31.0
Accrued income tax - parent 42.9 55.3
Other accrued taxes 26.4 18.8
Other (Note 3) 69.3 59.1
-------- --------
Total 608.6 622.0
-------- --------
Deferred Liabilities and Credits
Deferred income tax 145.3 176.5
Other (Note 2) 183.3 181.7
-------- --------
Total 328.6 358.2
-------- --------
Long-term Debt 299.2 299.2
-------- --------
Commitments and Contingent Liabilities
(Notes 2, 4, 5 and 6)
Common Stockholder's Equity
Common stock, one thousand shares
authorized, issued and outstanding,
no par value 1.0 1.0
Paid-in capital 465.9 465.9
Retained earnings 185.6 141.1
-------- --------
Total 652.5 608.0
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,888.9 $1,887.4
======== ========
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 1996 1995
- -------- ------ ------
Operating Activities
Net income $ 44.5 $ 41.4
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 29.5 29.4
Deferred income tax expense (benefit) (21.6)11.1
Other non-cash items in net income (7.4) 0.7
Net change in operating assets
and liabilities (15.1) (84.2)
------ ------
Net Cash Flows Provided by (Used in)
Operating Activities 29.9 (1.6)
------ ------
Investing Activities
Net decrease (increase) in advances and
note receivable - parent (40.1)18.1
Capital expenditures (14.6) (18.1)
Property retirements and other 26.8 1.0
------ ------
Net Cash Flows Provided by (Used in)
Investing Activities (27.9) 1.0
------ ------
Financing Activities
Accounts payable - banks (1.7) 0.4
------ ------
Net Cash Flows Provided by (Used in)
Financing Activities (1.7) 0.4
------ ------
Net Change in Cash
Increase (decrease) in cash and cash equivalents 0.3 (0.2)
Cash and cash equivalents, beginning of period 0.2 0.4
------ ------
Cash and Cash Equivalents, End of Period $ 0.5 $ 0.2
====== ======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 28.6 $ 21.1
Cash paid for income tax (including
intercompany amounts) 56.7 70.0
See accompanying notes to consolidated financial statements
Panhandle Eastern Pipe Line Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
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 PanEnergy Corp (PanEnergy). 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).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Certain amounts of reported revenues and expenses
are also affected by these estimates and assumptions. Actual results
could differ from those estimates. The consolidated financial
statements reflect all normal recurring adjustments that are, in the
opinion of management, necessary for fair presentation. 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 the
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 significant pending rate cases
before FERC and certain regulatory matters.
FERC Order 636
During 1993, PEPL and Trunkline began providing restructured services
pursuant to FERC Order 636. This order requires pipeline service
restructuring that unbundles sales, transportation and storage services.
Order 636 allows pipelines to recover eligible costs resulting from
implementation of the order (transition costs). On July 16, 1996, the
U.S. Court of Appeals for the District of Columbia upheld, in general,
all aspects of Order 636 and remanded certain issues for further
explanation. One of the issues remanded for further explanation is
whether pipelines should be entitled to recover 100% of gas supply
realignment (GSR) costs. This matter is substantially mitigated by
PEPL's Order 636 settlements with customers.
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. Trunkline is
currently collecting certain take-or-pay settlement costs with respect
to such contracts through volumetric surcharges with interest through
1997 and intends to file after 1997 for recovery of amounts not fully
recovered by these surcharges.
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. 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. If PEPL and
Trunkline ultimately have to reimburse or indemnify the producers, they
will file with FERC to recover a portion of these costs from pipeline
customers.
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. FERC issued an order on
May 25, 1995 on the earlier rate proceeding and PEPL has requested
rehearing of certain matters in that order. On February 5, 1996, FERC
issued an order on the latter rate proceeding and PEPL has also
requested rehearing of various items in this order.
Effective April 1, 1989, PEPL placed into effect, subject to refund,
sales and transportation rates reflecting a general rate increase,
including seasonal rate structures. On December 7, 1995, FERC issued
an order, subject to rehearing, which addressed all remaining matters
on the rate proceeding, with no additional refunds due customers.
Trunkline - Effective August 1, 1996, Trunkline placed into effect,
subject to refund, a new general rate increase.
Other - PEPL and Trunkline have, pursuant to FERC requirements,
requested FERC approval to record the impact of adopting Statement of
Financial Accounting Standards 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 denied approval of
these requests pending future rate proceedings, and PEPL and Trunkline
filed for rehearing. In July 1996, FERC issued an order, which is
subject to rehearing, which clarifies the accounting branch order and
supports the accounting treatment requested by PEPL and Trunkline. The
Company believes the ultimate resolution of this matter will not have
a material adverse effect on consolidated financial position.
3. Gas Imbalances
The consolidated balance sheet includes in-kind balances as a result of
differences in gas volumes received and delivered. At June 30, 1996 and
December 31, 1995, other current assets and other current liabilities
included $26.8 million and $29.6 million (1996) and $11.1 million and
$11.2 million (1995), respectively, for these imbalances.
4. Other Contingency
PEPL owns an effective 5.95% ownership interest in Northern Border
Pipeline Company (Northern Border) through a master limited partnership.
Under the terms of a settlement related to a transportation agreement
between PEPL and 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 $163 million for the years 1996 through 2001. In the
opinion of management, the probability that PEPL will be required to
perform under this guarantee is remote.
5. Environmental Matters
The Company has identified environmental contamination at certain sites
on the PEPL and Trunkline systems and is undertaking 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 Environmental
Protection Agency and appropriate state regulatory agencies on these
matters. In August 1995, Trunkline entered into a consent order under
a cleanup program with the Tennessee Department of Environment and
Conservation for the cleanup of its Tennessee facility. In June 1996,
Trunkline entered into an agreement with the Indiana Department of
Environmental Management for the cleanup of one of its Indiana
facilities. Cleanups in other states by PEPL and Trunkline are also
proceeding. The environmental cleanup programs are expected to continue
until 2002.
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
environmental issues discussed above will not have a material adverse
effect on consolidated results of operations or financial position.
6. 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. The
Company is defending itself vigorously in the suits.
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 1996 and 1995 interim consolidated financial statements and
accompanying notes presented in Item 1. Because all of the outstanding
capital stock of PEPL is owned by PanEnergy, 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
With implementation of Order 636 and the elimination of pipeline merchant
services, the Company's pipelines incurred certain costs related to the
transition. PEPL's transition cost recoveries, which are subject to certain
challenges pending before FERC, will occur through 1999. The Company believes
that Order 636 transition cost issues will not have a material adverse effect
on future consolidated results of operations, financial position or liquidity.
For information concerning certain other regulatory proceedings, environmental
matters and other contingencies, see Notes 2, 4, 5 and 6 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated net income for the six months ended June 30, 1996 was
$44.5 million compared with $41.4 million for the same period in 1995. Total
natural gas transportation volumes for the Company increased 15% to
687 trillion British thermal units comparing the first six months of 1996 with
the same period of 1995, attributable mainly to colder-than-normal winter
temperatures.
Earnings Before Interest and Tax
Consolidated earnings before interest and tax for the Company increased
$13.7 million, or 15%, to $102.1 million in the first six months of 1996
compared with the same period in 1995.
PEPL - PEPL's earnings before interest and tax increased $3.2 million, or 5%,
comparing the first six months of 1996 with the prior-year period. The
increase was primarily the result of higher earnings from increased rate
realization and cold weather. The 1996 earnings include $9.5 million of
severance expense in the first quarter, which was mostly offset by
$8.2 million of income related to the resolution of certain gas cost issues.
In addition, PEPL's results reflect a $2.8 million reduction in equity
earnings from Northern Border Partners, L.P.
Trunkline - Earnings before interest and tax for Trunkline increased
$9.4 million comparing the first six months of 1996 with the same period in
1995. The net increase was due to higher throughput and transportation
revenues during the colder winter weather and lower expenses, which were
partially offset by $5 million of severance expense recorded in the first
quarter 1996.
Interest Expense
Interest expense in the first six months of 1996 increased $9.2 million
compared with the same period in 1995 as a result of higher average debt
balances outstanding.
CAPITAL EXPENDITURES
Capital expenditures totaled $14.6 million in the first six months of 1996,
compared with $18.1 million for the same period in 1995. Capital expenditures
for 1996 are expected to approximate $50 million, with the majority of
expenditures related to further enhancement of PEPL's and Trunkline's pipeline
integrity and reliability. Expenditures are expected to be funded by cash
from operations, periodic sales of trade receivables with limited recourse
and/or collection of intercompany amounts owed the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 2, 5 and 6 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,
1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K - None
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 13, 1996
0075rpt.cpz
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
6-MOS
DEC-31-1996
JUN-30-1996
500
0
47,900
0
61,800
179,000
2,645,100
1,730,400
1,888,900
608,600
299,200
1,000
0
0
651,500
1,888,900
0
269,800
0
80,500
43,600
0
29,400
72,700
28,200
44,500
0
0
0
44,500
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
