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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 September 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 October 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 September 30
Three Months Nine Months
--------------- ---------------
Millions 1996 1995 1996 1995
- -------- ------ ------ ------ ------
Operating Revenues
Transportation and storage
of natural gas $117.2 $134.5 $374.9 $390.1
Other 6.0 5.9 18.1 17.6
------ ------ ------ ------
Total (Note 2) 123.2 140.4 393.0 407.7
------ ------ ------ ------
Costs and Expenses
Operating and maintenance 51.5 49.2 132.0 148.2
General and administrative 16.6 17.5 64.4 53.1
Depreciation and amortization 13.8 14.6 43.3 44.0
Miscellaneous taxes 6.4 6.7 20.5 21.6
------ ------ ------ ------
Total 88.3 88.0 260.2 266.9
------ ------ ------ ------
Operating Income 34.9 52.4 132.8 140.8
------ ------ ------ ------
Other Income and Deductions
Equity in earnings of
unconsolidated affiliates 1.1 1.1 4.1 6.2
Other income, net of deductions 11.1 1.3 12.3 (3.8)
------ ------ ------ ------
Total 12.2 2.4 16.4 2.4
------ ------ ------ ------
Earnings Before Interest and Tax 47.1 54.8 149.2 143.2
------ ------ ------ ------
Interest Expense
Parent 9.6 - 26.3 -
Other 5.9 10.0 18.6 30.2
------ ------ ------ ------
Total 15.5 10.0 44.9 30.2
------ ------ ------ ------
Earnings Before Income Tax 31.6 44.8 104.3 113.0
Income Tax 12.3 17.7 40.5 44.5
------ ------ ------ ------
NET INCOME $ 19.3 $ 27.1 $ 63.8 $ 68.5
====== ====== ====== ======
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, December 31,
Millions 1996 1995
- -------- ------------- ------------
Current Assets
Cash and cash equivalents $ - $ 0.2
Accounts receivable, net 15.4 39.2
Inventory and supplies 58.2 55.3
Current deferred income tax 3.7 13.0
Other (Note 3) 65.5 46.1
--------- ---------
Total 142.8 153.8
--------- ---------
Investments
Advances and note receivable - parent 662.0 566.9
Other 53.2 48.3
--------- ---------
Total 715.2 615.2
--------- ---------
Plant, Property and Equipment
Original cost 2,656.8 2,782.1
Accumulated depreciation and amortization (1,738.2) (1,818.8)
--------- ---------
Net plant, property and equipment 918.6 963.3
--------- ---------
Deferred Charges 118.7 155.1
--------- ---------
TOTAL ASSETS $ 1,895.3 $ 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
September 30, December 31,
Millions 1996 1995
- -------- ------------- ------------
Current Liabilities
Long-term debt due within one year $ - $ 4.5
Notes payable - parent (Note 4) 500.0 400.0
Rate refund provisions (Note 2) 38.3 53.3
Accounts payable 20.8 31.0
Accrued income tax - parent 50.0 55.3
Other accrued taxes 30.7 18.8
Other (Note 3) 63.7 59.1
-------- --------
Total 703.5 622.0
-------- --------
Deferred Liabilities and Credits
Deferred income tax 140.5 176.5
Other (Note 2) 180.3 181.7
-------- --------
Total 320.8 358.2
-------- --------
Long-term Debt 299.2 299.2
-------- --------
Commitments and Contingent Liabilities
(Notes 2, 5, 6 and 7)
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 (Note 4) 104.9 141.1
-------- --------
Total 571.8 608.0
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,895.3 $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
Nine Months Ended
September 30
---------------------
Millions 1996 1995
- -------- ------ ------
Operating Activities
Net income $ 63.8 $ 68.5
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 43.3 44.0
Deferred income tax benefit (26.0)(5.7)
Other non-cash items in net income (5.4) (15.5)
Net change in operating assets
and liabilities 22.2 2.6
------ ------
Net Cash Flows Provided by Operating Activities 97.9 93.9
------ ------
Investing Activities
Net increase in advances and
note receivable - parent (93.8) (64.3)
Capital expenditures (32.0) (36.9)
Property retirements and other 30.1 10.6
------ ------
Net Cash Flows Used in Investing Activities (95.7) (90.6)
------ ------
Financing Activities
Accounts payable - banks (2.4) (3.5)
------ ------
Net Cash Flows Used in Financing Activities (2.4)(3.5)
------ ------
Net Change in Cash
Decrease in cash and cash equivalents (0.2)(0.2)
Cash and cash equivalents, beginning of period 0.2 0.4
------ ------
Cash and Cash Equivalents, End of Period $ - $ 0.2
====== ======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 51.5 $ 32.7
Cash paid for income tax (including
intercompany amounts) 58.2 70.4
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.
In 1993, the U.S. Department of the Interior (the Department) 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. On August 27, 1996, the U.S. Court of Appeals for the
District of Columbia Circuit overturned a lower court ruling in favor
of the government in litigation brought on behalf of producers
challenging the Department's attempts to seek the additional royalties.
The Department is seeking further review of the appellate ruling. 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. On September 12,
1996, PEPL filed a settlement proposal relating to both rate proceedings
on behalf of itself and the majority of its largest customers. The
settlement proposal is pending FERC review.
Trunkline - Effective August 1, 1996, Trunkline placed into effect,
subject to refund, a general rate increase.
3. Gas Imbalances
The consolidated balance sheet includes in-kind balances as a result of
differences in gas volumes received and delivered. At September 30,
1996 and December 31, 1995, other current assets and other current
liabilities included $30.3 million and $27.5 million (1996), and
$11.1 million and $11.2 million (1995), respectively, for these
imbalances.
4. Common Stockholder's Equity
In July 1996, PEPL declared and paid a dividend on common stock of
$100 million in the form of a promissory note due PanEnergy bearing
interest at prime and maturing on December 31, 1996.
5. 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 1996 through 2001. In the opinion of
management, the probability that PEPL will be required to perform under
this guarantee is remote.
6. 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.
7. Litigation
A lawsuit filed in the United States District Court for the District of
Columbia by natural gas producer Jack Grynberg was served in July 1996
naming PEPL, Trunkline and certain affiliated companies as defendants,
among others. The action was brought under the federal False Claims Act
against 70 defendants, including every major pipeline, asserting that
the defendants intentionally underreported volumes and heating content
of gas purchased from producers on federal lands, with the result that
the United States was underpaid royalties. The plaintiff seeks recovery
of the royalty amounts due the United States, treble damages, civil
penalties and compliance with "appropriate" techniques for measuring
gas. The Company expects the resolution of this matter will not have
a material adverse effect on consolidated results of operations or
financial position.
The Company is also involved in various other 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 all the above 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.
This quarterly report may contain certain forward-looking information
regarding the Company, including projections, estimates, forecasts, plans and
objectives. Although management believes that all such statements are based
upon reasonable assumptions, no assurance can be given that the actual results
will not differ materially from those contained in such forward-looking
statements.
Important factors that could cause actual results to differ include, but are
not limited to, general economic conditions, natural gas and liquids prices,
competition from other pipelines and alternative fuels, weather conditions,
state and federal regulation, legal and regulatory proceedings, the
development of new markets, services and products, and the condition of the
capital markets utilized by the Company.
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 and the courts, 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, 5, 6 and 7 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated net income for the nine months ended September 30, 1996 was
$63.8 million compared with $68.5 million for the same period in 1995. Total
natural gas transportation volumes for the Company increased 13% to
961 trillion British thermal units comparing the first nine 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
$6 million to $149.2 million in the first nine months of 1996 compared with
the same period in 1995.
PEPL - PEPL's earnings before interest and tax decreased $0.3 million
comparing the first nine months of 1996 with the prior-year period. Higher
earnings in 1996 primarily from colder weather and lower net operating
expenses more than offset $9.5 million of severance expense recorded in the
first quarter 1996. Also contributing to the decrease was a $2.9 million
reduction in equity earnings from Northern Border Partners, L.P. and a
$1.1 million net decrease related to regulatory settlements, which included
$11.4 million and $20.7 million recorded in the third quarters of 1996 and
1995, respectively.
Trunkline - Earnings before interest and tax for Trunkline increased
$5.2 million comparing the first nine 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 the recognition of additional lease expense in the third
quarter 1996 and $5 million of severance expense in the first quarter 1996.
Interest Expense
Interest expense in the first nine months of 1996 increased $14.7 million
compared with the same period in 1995 as a result of higher average debt
balances outstanding.
CAPITAL EXPENDITURES
Capital expenditures totaled $32 million in the first nine months of 1996,
compared with $36.9 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 for 1996 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. The
Company's current estimate for 1997 capital expenditures is $40 million to
$50 million.
DIVIDENDS
In July 1996, PEPL declared and paid a dividend on common stock of
$100 million in the form of a promissory note due PanEnergy bearing interest
at prime and maturing on December 31, 1996.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 2, 6 and 7 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
and Treasurer
Date: November 12, 1996
0075rpt.cpz
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
9-MOS
DEC-31-1996
SEP-30-1996
0
0
15,400
0
58,200
142,800
2,656,800
1,738,200
1,895,300
703,500
299,200
1,000
0
0
570,800
1,895,300
0
393,000
0
132,000
63,800
0
44,900
104,300
40,500
63,800
0
0
0
63,800
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
