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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 March 31, 1997
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 April 30, 1997
-------------------------- -----------------------------
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
Three Months Ended
March 31
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Millions 1997 1996
- -------- ------ ------
Operating Revenues
Transportation and storage of natural gas $154.1 $145.2
Other 11.0 6.2
------ ------
Total (Note 2) 165.1 151.4
------ ------
Costs and Expenses
Operating and maintenance 41.4 45.5
General and administrative 14.8 30.0
Depreciation and amortization 14.7 14.8
Miscellaneous taxes 7.3 7.7
------ ------
Total 78.2 98.0
------ ------
Operating Income 86.9 53.4
------ ------
Other Income and Deductions
Equity in earnings of unconsolidated affiliates 1.3 1.4
Other income, net of deductions 7.7 (0.5)
------ ------
Total 9.0 0.9
------ ------
Earnings Before Interest and Tax 95.9 54.3
------ ------
Interest Expense
Parent 11.9 8.4
Other 6.7 6.6
------ ------
Total 18.6 15.0
------ ------
Earnings Before Income Tax 77.3 39.3
Income Tax 29.6 15.3
------ ------
NET INCOME $ 47.7 $ 24.0
====== ======
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
March 31, December 31,
Millions 1997 1996
- -------- --------- ------------
Current Assets
Cash and cash equivalents $ - $ 0.1
Accounts receivable, net 52.9 58.1
Inventory and supplies 35.4 44.3
Current deferred income tax 10.3 8.6
Other (Note 3) 55.6 57.4
--------- ---------
Total 154.2 168.5
--------- ---------
Investments
Advances and note receivable - parent 662.0 652.9
Other 52.3 51.7
--------- ---------
Total 714.3 704.6
--------- ---------
Plant, Property and Equipment
Original cost 2,679.4 2,672.2
Accumulated depreciation and amortization (1,761.3) (1,749.6)
--------- ---------
Net plant, property and equipment 918.1 922.6
--------- ---------
Deferred Charges 47.2 104.2
--------- ---------
TOTAL ASSETS $ 1,833.8 $ 1,899.9
========= =========
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
March 31, December 31,
Millions 1997 1996
- -------- --------- ------------
Current Liabilities
Notes payable - parent $ 600.0 $ 600.0
Rate refund provisions (Note 2) 37.8 37.0
Accounts payable 28.8 30.4
Accrued income tax - parent 21.5 63.4
Other accrued taxes 28.1 23.0
Other (Note 3) 89.6 87.9
-------- --------
Total 805.8 841.7
-------- --------
Deferred Liabilities and Credits
Deferred income tax 92.3 165.0
Other 93.1 98.3
-------- --------
Total 185.4 263.3
-------- --------
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 76.5 28.8
-------- --------
Total 543.4 495.7
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,833.8 $1,899.9
======== ========
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
Three Months Ended
March 31
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Millions 1997 1996
- -------- ------ ------
Operating Activities
Net income $ 47.7 $ 24.0
Adjustments to reconcile net income to operating
cash flows
Depreciation and amortization 14.7 14.8
Deferred income tax expense (benefit) 5.1 (16.2)
Regulatory resolutions (27.7) -
Other non-cash items in net income 0.1 0.4
Net change in operating assets
and liabilities (16.2) (15.1)
------ ------
Net Cash Flows Provided by Operating Activities 23.7 7.9
------ ------
Investing Activities
Capital and investment expenditures (10.8) (4.3)
Net increase in advances and
note receivable - parent (8.6) (24.1)
Property retirements and other - 24.0
------ ------
Net Cash Flows Used in Investing Activities (19.4) (4.4)
------ ------
Financing Activities
Net decrease in accounts payable - banks (4.4) (1.8)
------ ------
Net Cash Flows Used in Financing Activities (4.4)(1.8)
------ ------
Net Change in Cash
Increase (decrease) in cash and cash equivalents (0.1) 1.7
Cash and cash equivalents, beginning of period 0.1 0.2
------ ------
Cash and Cash Equivalents, End of Period $ - $ 1.9
====== ======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 8.1 $ 20.4
Cash paid for income tax (including
intercompany amounts) 63.4 55.3
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 primarily
involved in the interstate transportation and storage of natural gas.
PEPL is a wholly-owned subsidiary of PanEnergy Corp (PanEnergy). The
interstate natural gas transmission operations of PEPL and Trunkline are
subject to the rules and regulations of the Federal Energy Regulatory
Commission (FERC). PEPL and Trunkline meet the criteria and,
accordingly, follow the reporting and accounting requirements of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation." Accordingly, certain
net costs totaling $104.9 million at December 31, 1996 have been
deferred as regulatory assets for amounts recoverable from customers,
including costs related to environmental matters, FERC Order 636
transition, certain employee benefits and the early retirement of debt.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts in the financial
statements. 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 refund.
The Company has established adequate reserves where required for such
cases. The following is a summary of significant pending rate cases
before FERC and related regulatory matters.
PEPL and Trunkline primarily provide transportation and storage services
pursuant to FERC Order 636. This order 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, including recovery of gas supply realignment (GSR)
costs, for further explanation. This decision is on appeal to the U.S.
Supreme Court. On February 27, 1997, FERC issued an order reaffirming
the right of interstate pipelines to recover 100% of GSR costs.
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, 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 substantial time to resolve.
If required to reimburse or indemnify the producers, PEPL and Trunkline
will file with FERC to recover a portion of these costs from pipeline
customers. The Company believes the resolution of this matter will not
have a material adverse effect on the Company's consolidated 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. On February 26, 1997, FERC
approved PEPL's settlement agreement which provides final resolution of
refund matters and establishes prospective rates. The agreement
terminates other actions relating to these proceedings as well as PEPL's
restructuring of rates and transition cost recoveries related to
Order 636. As a result of the resolution of this matter, PEPL recorded
pre-tax earnings of $27.7 million in the first quarter of 1997 and in
April 1997 refunded $37.8 million to customers. The settlement will not
have a material impact on future operating revenues.
Trunkline - Effective August 1, 1996, Trunkline placed into effect a
general rate increase, subject to refund, reflecting an annual cost of
service increase of $5 million. The rate proceeding is in the discovery
phase, with hearings scheduled to commence in the third quarter of 1997.
3. Gas Imbalances
The consolidated balance sheet includes in-kind balances as a result of
differences in gas volumes received and delivered. At March 31, 1997
and December 31, 1996, other current assets and other current
liabilities included $21.8 million and $16 million (1997), and
$20.4 million and $14.1 million (1996), respectively, for these
imbalances.
4. 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. Environmental cleanup programs are expected to continue until
2002.
The Company previously accrued amounts related to remaining estimated
cleanup costs. Those estimates represent probable gross cleanup costs
to be incurred by the Company, have not been discounted or reduced by
customer recoveries and do not include fines, penalties or third-party
claims.
PEPL is also in discussions with environmental regulatory agencies in
the states of Missouri and Illinois, and Trunkline is in similar
discussions with the state of Louisiana, regarding potential monetary
sanctions for alleged air compliance violations by facilities in those
states.
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 resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
Company's consolidated results of operations or financial position based
upon customer settlements and past experience with environmental cleanup
costs.
5. Litigation
On August 31, 1995, Midwest Gas Storage, Inc. (Midwest) filed suit
against PEPL and PanEnergy in the 58th Judicial District Court,
Jefferson County, Texas, alleging that PEPL breached an interconnection
agreement with Midwest and used its superior bargaining position to
force Midwest to accept terms and conditions which were not in the
original agreement. Amended petitions filed in 1996 further allege that
PEPL and PanEnergy, through economic coercion, have attempted to drive
Midwest out of business. Asserting fraud and violations of Texas
anti-trust laws, among other counts, Midwest seeks compensatory and
punitive damages in unspecified amounts.
A lawsuit filed in the United States District Court for the District of
Columbia by a natural gas producer 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 and Indian 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 and civil penalties. PEPL, Trunkline and their affiliated
companies, and many of the other defendants, were dismissed from the
lawsuit on March 27, 1997. The plaintiff retains the right to refile
the claims against the various defendants under certain conditions.
The Company believes the resolution of the legal matters discussed above
will not have a material adverse effect on the Company's consolidated
results of operations or financial position.
On April 25, 1997, a group of affiliated plaintiffs that own and/or
operate various pipeline and marketing partnerships in Kansas and
Missouri filed suit against PEPL in the United States District Court for
the Western District of Missouri. The plaintiffs allege that PEPL has
engaged in unlawful and anti-competitive conduct with regard to requests
for interconnects with the PEPL system for service to the Kansas City
area. Asserting that PEPL has violated the antitrust laws and
tortiously interfered with plaintiffs' contracts with third parties,
plaintiffs seek compensatory and punitive damages in unspecified
amounts. As of the date of this report, PEPL has not been served with
the complaint. Accordingly, the Company cannot estimate the effects of
this issue, based on information currently available.
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 Company's consolidated results of operations or
financial position. 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.
6. Other Matters
PEPL owns an effective 6% 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 $94.4 million for 1997 through 2001. In the opinion of management,
the probability that PEPL will be required to perform under this
guarantee is remote.
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," on
a prospective basis effective January 1, 1997, with no significant
impact on the Company's results of operations or financial position.
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 1997 and 1996 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
PEPL and Trunkline continue to advance projects that provide expanded service
to meet the specific needs of customers. In 1996, Trunkline filed with FERC
for a $50 million expansion of its Terrebonne system, with a planned 1998
in-service date, targeting expanding natural gas production in the Gulf of
Mexico. In 1997, PanEnergy announced the Spectrum(sm) project, which will
utilize existing and released capacity on PanEnergy's four interstate
pipelines and provide up to 500 billion British thermal units per day of firm
transportation capacity from the Chicago area to the East Coast. In addition,
PEPL and Trunkline offer selective discounting to further maximize revenues
from existing capacity.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended March 31, 1997 was
$47.7 million compared with $24 million for the same period in 1996. Total
natural gas transportation volumes for the Company decreased 7% to
372 trillion British thermal units comparing the first three months of 1997
with the same period of 1996, attributable mainly to warmer weather.
Operating Income and Earnings Before Interest and Tax
Consolidated operating income increased 63% to $86.9 million in the first
three months of 1997 compared with $53.4 million for the same period in 1996,
while consolidated earnings before interest and tax for the Company increased
$41.6 million to $95.9 million in the first three months of 1997 compared with
the same period in 1996.
PEPL - PEPL's operating income increased $35.8 million to $67.9 million, while
earnings before interest and tax increased $43.7 million to $76.9 million in
the first quarter of 1997, compared with the prior-year period. A
$27.7 million provision reversal in 1997 related to the final settlement of
three rate proceedings, $9.5 million of severance expense in 1996 and lower
operating costs contributed to the increase in earnings before interest and
tax.
Trunkline - Earnings before interest and tax for Trunkline increased
$0.3 million to $20.5 million in the first three months of 1997 as compared
with the same period in 1996, while operating income of $20.6 million remained
steady. Decreased expenses in 1997, including the impact of higher severance
costs recorded in 1996, were offset by the effects of lower volumes due to
warmer weather.
Interest Expense
Interest expense in the first three months of 1997 increased $3.6 million
compared with the same period in 1996 as a result of higher average
outstanding debt balances due to PanEnergy.
CAPITAL AND INVESTMENT EXPENDITURES
Capital and investment expenditures totaled $10.8 million in the first three
months of 1997, compared with $4.3 million for the same period in 1996. The
Company currently expects to invest approximately $90 million in 1997 capital
expenditures, with the majority of expenditures related to market expansion
projects. Expenditures for 1997 are expected to be funded by cash from
operations and/or the collection of intercompany amounts owed the Company.
FORWARD-LOOKING INFORMATION
This report may contain certain forward-looking information regarding the
Company, including projections, estimates, forecasts, plans, contingencies 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.
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,
1996.
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: May 14, 1997
0075rpt.cpz
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
3-MOS
DEC-31-1997
MAR-31-1997
0
0
52,900
0
35,400
154,200
2,679,400
1,761,300
1,833,800
805,800
299,200
1,000
0
0
542,400
1,833,800
0
165,100
0
41,400
22,000
0
18,600
77,300
29,600
47,700
0
0
0
47,700
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
