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 September 30, 1997 Commission File Number 1-2921
PANHANDLE EASTERN PIPE LINE COMPANY
(Exact name of Registrant as Specified in its Charter)
Delaware 44-0382470
(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)
Registrant's telephone number, including area code: 713-627-5400
No Change
(Former name, former address and former fiscal year,
if changed since last report)
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 10Q and is therefore filing this Form 10Q 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.
All of the Registrant's common shares 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.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock, no par value, outstanding at October 31,
1997: 1,000 shares
PANHANDLE EASTERN PIPE LINE COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Consolidated Statements of Income for the Three Months Ended
and Year To Date September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for Year To Date
September 30, 1997 and 1996 3
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 4
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
1
Part I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
Three Months Ended Year To Date
September 30 September 30
------------------ ---------------
1997 1996 1997 1996
------ ------ ------ ------
Operating Revenues
Transportation and storage of natural gas $109.5 $117.2 $376.5 $374.9
Other 6.1 7.1 24.8 22.2
------ ------ ------ ------
Total operating revenues 115.6 124.3 401.3 397.1
------ ------ ------ ------
Operating Expenses
Operation and maintenance 70.2 68.1 180.7 196.4
Depreciation and amortization 14.6 13.8 44.0 43.3
Property and other taxes 6.5 6.4 20.5 20.5
------ ------ ------ ------
Total operating expenses 91.3 88.3 245.2 260.2
------ ------ ------ ------
Operating Income 24.3 36.0 156.1 136.9
------ ------ ------ ------
Other Income and Expenses (0.6) 11.1 11.4 12.3
------ ------ ------ ------
Earnings Before Interest and Taxes 23.7 47.1 167.5 149.2
Interest Expense 18.1 15.5 55.2 44.9
------ ------ ------ ------
Earnings Before Income Taxes 5.6 31.6 112.3 104.3
Income Taxes 2.0 12.3 42.7 40.5
------ ------ ------ ------
Net Income $ 3.6 $ 19.3 $ 69.6 $ 63.8
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
2
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
Year To Date
September 30
-------------------
1997 1996
----- -----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $69.6 $63.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 45.6 43.3
Deferred income taxes 4.5 (26.0)
Rate settlement (Note 3) (70.5) --
Net change in current assets and liabilities (48.6) 11.4
Other, net 43.3 3.0
----- -----
Net cash provided by operating activities 43.9 95.5
----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (64.5) (32.0)
Net increase (decrease) in advances and note receivable - parent 18.7 (93.8)
Retirements and other investing 1.8 30.1
----- -----
Net cash used in investing activities (44.0) (95.7)
----- -----
Net decrease in cash and cash equivalents (0.1) (0.2)
Cash and cash equivalents at beginning of period 0.1 0.2
----- -----
Cash and cash equivalents at end of period $ -- $ --
===== =====
See Notes to Consolidated Financial Statements.
3
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
September 30, December 31,
1997 1996
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ -- $ 0.1
Receivables 41.8 58.1
Inventory and supplies 52.8 44.3
Current deferred income tax 2.0 8.6
Current portion of regulatory assets 7.4 8.9
Other 34.3 48.5
-------- --------
Total current assets 138.3 168.5
-------- --------
Investments and Other Assets
Advances and note receivable - parent 634.2 652.9
Investment in affiliates 46.7 44.6
Other 7.1 15.3
-------- --------
Total investments and other assets 688.0 712.8
-------- --------
Property, Plant and Equipment
Cost 2,716.1 2,672.2
Less accumulated depreciation and amortization 1,777.2 1,749.6
-------- --------
Net property, plant and equipment 938.9 922.6
-------- --------
Regulatory Assets
Debt expense 13.1 14.9
Other 30.0 81.1
-------- --------
Total regulatory assets 43.1 96.0
-------- --------
Total Assets $1,808.3 $1,899.9
======== ========
See Notes to Consolidated Financial Statements.
4
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions)
September 30, December 31,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 43.9 $ 30.4
Notes payable - parent 600.0 600.0
Taxes accrued 64.4 86.4
Interest accrued 2.3 8.0
Other 60.5 116.9
-------- --------
Total current liabilities 771.1 841.7
-------- --------
Long-term Debt 299.2 299.2
-------- --------
Deferred Credits and Other Liabilities
Deferred income taxes 81.9 83.5
Other 90.8 179.8
-------- --------
Total deferred credits and other liabilities 172.7 263.3
-------- --------
Common Stockholder's Equity
Common stock, no par, 1,000 shares authorized, issued and outstanding 1.0 1.0
Paid-in capital 465.9 465.9
Retained earnings 98.4 28.8
-------- --------
Total common stockholder's equity 565.3 495.7
-------- --------
Total Liabilities and Stockholder's Equity $1,808.3 $1,899.9
======== ========
See Notes to Consolidated Financial Statements.
5
PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations
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. The interstate natural gas
transmission operations of PEPL and Trunkline are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC) with respect to
rates and other related matters.
The Company is a wholly owned subsidiary of PanEnergy Corp (PanEnergy), which is
an indirect wholly owned subsidiary of Duke Energy Corporation (Duke Energy). On
June 18, 1997, PanEnergy was merged with a subsidiary of Duke Energy, with
PanEnergy as the surviving corporation. Pursuant to the merger, each share of
PanEnergy's outstanding common stock was converted into the right to receive
1.0444 shares of Duke Energy common stock. In addition, each option to purchase
PanEnergy common stock became an option to purchase common stock of Duke Energy.
The merger was accounted for as a pooling of interests.
2. Accounting Policies
General - The consolidated financial statements include the accounts of the
Company and all majority owned subsidiaries. These quarterly 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 Consolidated
Statements of Income are not necessarily indicative of amounts expected for the
respective years due primarily to the effect of seasonal temperature variations
on energy consumption.
Supplemental Cash Flow Information - Total income taxes paid for the year to
date September 30, 1997 and 1996 were $64.8 million and $58.2 million,
respectively. Interest paid, net of amounts capitalized, for the year to date
September 30, 1997 and 1996 was $68.3 million and $51.5 million, respectively.
Reclassification - Certain amounts for the prior periods have been reclassified
in the consolidated financial statements to conform to the current presentation.
3. Rate Matters
Rate Actions
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
6
cost recoveries related to Order 636. As a result of the resolution of this and
other matters, PEPL recorded pre-tax earnings of $32.7 million year to date
September 1997 and refunded $37.8 million to customers. The settlement did not
have a material impact on future operating revenues.
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.
Hearings were completed in the third quarter of 1997.
4. Related Party Transactions
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows :
September 30, December 31,
In Millions 1997 1996
----------------------------------------------------------
Receivables $ 5.5 $ 5.0
Accounts payable $ 36.1 $ 19.6
Taxes accrued $ 33.6 $ 63.4
The notes payable to parent matured on June 30, 1997 and were refinanced.
Interest expense included $13.7 million and $9.6 million for the three months
ended September 30, 1997 and 1996, respectively, of interest associated with
notes payable to parent. Interest expense for the year to date September 30,
1997 and 1996 included $37.9 million and $26.3 million, respectively, of
interest associated with notes payable to parent.
5. Gas Imbalances
The Consolidated Balance Sheets included in-kind balances as a result of
differences in gas volumes received and delivered. At September 30, 1997 and
December 31, 1996, other current assets included $14.9 million and $20.4
million, respectively, for these imbalances. Also, at September 30, 1997 and
December 31, 1996, other current liabilities included $17.7 million and $14.1
million, respectively, for gas imbalances.
6. Commitments and Contingencies
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 and
1997 further alleged that PEPL and PanEnergy, through economic coercion, had
attempted to drive Midwest out of business. This matter was disposed
7
of by the parties in July 1997 and did not have a material adverse effect on the
financial position of the Company.
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 this matter
will not have a material adverse effect on the Company's 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. Because this matter is in the early stages of litigation, the Company
cannot estimate the effects of this matter on the results of operations or
financial position.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits against
PEPL and other affiliates, as defendants, both in the United States District
Court for the Southern District of Texas and State District Court of Harris
County, Texas. Anadarko claims that it was effectively indemnified by the
defendants against any responsibility for refunds of Kansas ad-valorem taxes
which are due purchasers of gas from Anadarko, retroactive to 1983. Because this
matter is in the early stages of litigation, PEPL cannot estimate the effects of
this matter on results of operations or financial position.
The Company is also involved in various other legal, tax and regulatory
proceedings before various courts, regulatory commissions and government
agencies arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate for all of these matters, the Company has
made accruals in accordance with Statement of Financial Accounting Standards No.
5, "Accounting for Contingencies," in order to provide for such matters.
Management is of the opinion that the final disposition of these proceedings
will not have a material adverse effect on the results of operations or
financial position of the Company.
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, and buyouts and
buydowns of gas sales contracts with natural gas pipelines. PEPL and Trunkline,
with respect to certain producer contract settlements, may be
8
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 financial position.
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 held 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.
9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
On June 18, 1997, Duke Energy and PanEnergy consummated a stock-for-stock
merger. See Note 1 to the Consolidated Financial Statements for further
information.
The Company is involved in interstate transportation and storage of natural gas
to customers in the Midwest and Gulf Coast states. The Company continues to
advance new projects that provide expanded services to meet the specific needs
of customers. In addition, the Company offers selective discounting to further
maximize revenues from existing capacity.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1997 was $3.6 million,
compared with $19.3 million for the same period in 1996. The decrease was due
primarily to favorable resolution of certain regulatory matters in 1996, which
were included in revenues and other income.
Net income for the year to date September 30, 1997 was $69.6 million, compared
with $63.8 million for the same period in 1996. This increase was primarily due
to favorable resolution of certain regulatory matters in 1997 in excess of
similar items in 1996, and by decreases in operation and maintenance costs.
Revenues for the three months ended September 30, 1997 were down due to
favorable resolution of regulatory matters in 1996 and decreased
transportation volumes. Year to date revenues reflect favorable resolution
of certain regulatory matters in 1997 in excess of those in 1996 of $16.6
million, offset by decreased volumes.
Operating expenses for the year to date September 30, 1997 decreased $15
million, primarily due to costs recorded in 1996 associated with the
consolidation of certain administrative functions and a lease buyout, partially
offset by 1997 litigation expenses.
Interest expense for the quarter and year to date ended September 30, 1997
increased primarily as a result of higher average outstanding debt balances due
to PanEnergy.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures totaled $64.5 million in the first nine
months of 1997, compared with $32 million for the same period in 1996. The
Company currently expects to invest approximately $85 million in 1997 capital
expenditures, with the majority of expenditures related to market expansion
projects. In July 1997, the FERC approved Trunkline's $52 million expansion of
the Terrebonne system, with a planned 1998 in-service date, which targets
expanding natural gas production in the Gulf of Mexico. Expenditures for 1997
are expected to be funded by cash from operations and/or the collection of
intercompany amounts owed the Company.
10
In 1997, PanEnergy announced the Spectrum project, which will utilize existing
and released capacity on PanEnergy's four interstate pipelines to provide up to
500 billion British thermal units per day of firm transportation capacity from
the Chicago area to the East Coast.
OTHER
Natural Gas Transmission Competition
The market for transmission of natural gas to the Midwest is increasingly
competitive, and may become more so, in light of projects in progress to
increase Midwest transmission capacity for gas originating in Canada and the
Rocky Mountain region. As such, there continues to be pressure on prices charged
by the Company and an increasing necessity to discount the cost based rates
charged.
Currently, the interstate natural gas transmission industry is regulated on a
basis designed to recover the costs of providing services to customers. If
competitive forces do not allow interstate pipelines to charge rates that would
allow them to recover the costs of providing service, companies would no longer
be able to follow the specialized accounting rules allowing regulated companies
under Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation." Such companies would therefore be
required to write off their regulatory assets. The regulatory assets of the
Company are indicated on the Consolidated Balance Sheets. Management cannot
predict the potential impact of these competitive forces on the Company's future
results of operations or financial position. However, the Company continues to
manage costs and posture the business to operate in a competitive environment.
Other Commitments and Contingencies
For information concerning litigation and other commitments and contingencies,
see Note 6 to the Consolidated Financial Statements.
11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 7, 1997 under Item 4,
Changes in Registrant's Certifying Accountant.
12
SIGNATURES
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.
PANHANDLE EASTERN PIPE LINE
COMPANY
--------------------------------------
Paul F. Ferguson, Jr.
Senior Vice President and
Chief Financial Officer
November 14, 1997
13
5
0000076063
Panhandle Eastern Pipe Line Company
1,000
9-MOS
DEC-31-1997
SEP-30-1997
0
0
41800
0
52800
138300
2716100
1777200
1808300
771100
299200
0
0
1000
564300
1808300
0
401300
0
180700
64500
0
55200
167500
42700
69600
0
0
0
69600
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a
wholly-owned subsidiary.
