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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 March 31, 1994
Commission File No. 1-8157
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PANHANDLE EASTERN CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation
(State of Incorporation or Organization)
74-2150460
(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:
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, 1994
-------------------------- -----------------------------
Common Stock, $1 par value 120,372,641
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
Millions, except per share amounts 1994 1993
- ---------------------------------- --------- ---------
<S> <C> <C>
Operating Revenues
Transportation of natural gas $ 333.7 $ 234.2
Sales of natural gas and liquids 115.8 321.1
Natural gas storage and other 67.8 57.3
-------- --------
Total (Note 3) 517.3 612.6
-------- --------
Costs and Expenses
Gas purchased 104.2 147.2
Operating and maintenance 120.9 140.6
General and administrative 62.0 60.6
Depreciation and amortization 58.1 56.7
Miscellaneous taxes 22.1 20.5
-------- --------
Total 367.3 425.6
-------- --------
Operating Income 150.0 187.0
-------- --------
Other Income and Deductions
Equity in earnings of unconsolidated affiliates 1.9 4.3
Other income, net of deductions 1.2 3.5
-------- --------
Total 3.1 7.8
-------- --------
Gross Income 153.1 194.8
Interest Expense 54.3 77.6
-------- --------
Income before Income Tax 98.8 117.2
Income Tax (Note 4) 40.0 47.7
-------- --------
NET INCOME $ 58.8 $ 69.5
======== ========
Average Common Shares Outstanding 120.2 108.6
======== ========
Earnings per Common Share $ 0.49 $ 0.64
======== ========
Dividends per Common Share $ 0.21 $ 0.20
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
2<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
Millions 1994 1993
- -------- --------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 10.8 $ 18.4
Accounts and notes receivable (Note 3) 296.8 294.2
Materials and supplies 110.6 114.0
Other (Notes 3, 5 and 8) 291.7 328.5
--------- ---------
Total 709.9 755.1
--------- ---------
Investments
Affiliates 131.2 129.2
Other 93.3 90.2
--------- ---------
Total 224.5 219.4
--------- ---------
Plant, Property and Equipment
Original cost 7,093.8 7,076.2
Accumulated depreciation and amortization (2,783.4) (2,732.9)
--------- ---------
Net plant, property and equipment 4,310.4 4,343.3
--------- ---------
Deferred Charges
Goodwill, net 517.1 520.5
Prepaid pension 227.0 222.8
Other (Notes 3 and 8) 847.6 866.2
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Total 1,591.7 1,609.5
--------- ---------
TOTAL ASSETS $ 6,836.5 $ 6,927.3
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
3<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
Millions 1994 1993
- -------- --------- ------------
<S> <C> <C>
Current Liabilities
Long-term debt due within one year $ 62.5 $ 62.5
Notes payable - 18.4
Rate refund provisions (Note 3) 74.1 67.8
Accounts payable 87.4 67.2
Accrued interest 62.0 60.6
Taxes payable 54.7 70.9
Other (Notes 3, 5 and 8) 479.2 564.4
-------- --------
Total 819.9 911.8
-------- --------
Deferred Liabilities and Credits
Deferred income tax (Note 4) 1,335.1 1,308.6
Deferred revenue - liquefied
natural gas project 75.2 78.1
Other (Notes 3 and 8) 1,020.6 1,040.7
-------- --------
Total 2,430.9 2,427.4
-------- --------
Long-term Debt 1,877.9 1,922.5
-------- --------
Commitments and Contingent Liabilities
(Notes 3, 4, 6, 8 and 9)
Common Stockholders' Equity
Common stock, 120.4 million (1994) and
120 million (1993) shares issued and
outstanding, $1 par value per share 120.4 120.0
Paid-in capital 2,048.7 2,040.4
Retained earnings (deficit) (461.3) (494.8)
-------- --------
Total (Note 7) 1,707.8 1,665.6
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,836.5 $6,927.3
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Corporation and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
Millions 1994 1993
- -------- ------- --------
<S> <C> <C>
Operating Activities
Net income $ 58.8 $ 69.5
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 58.1 56.7
Deferred income tax expense 24.1 32.2
Net pension benefit (4.9) (3.9)
Other non-cash items in net income (5.2) 5.4
Net change in operating assets
and liabilities (27.3) (10.9)
------- -------
Net Cash Flows Provided by Operating Activities 103.6 149.0
------- -------
Investing Activities
Additions to plant, property and equipment (29.3) (37.6)
Net investment proceeds (purchases) (3.8) 0.8
Property sales, retirements and other 7.4 41.6
------- -------
Net Cash Flows Provided by (Used in)
Investing Activities (25.7) 4.8
------- -------
Financing Activities
Retirement of debt (50.0) (200.0)
Issuance of debt - 100.0
Net increase (decrease) in notes payable (18.4) 5.5
Common stock issuance 8.2 -
Dividends paid (25.3) (21.7)
Other - 6.9
------- -------
Net Cash Flows Used in Financing Activities (85.5) (109.3)
------- -------
Net Change in Cash
Increase (decrease) in cash and cash equivalents (7.6) 44.5
Cash and cash equivalents, beginning of period 18.4 3.0
------- -------
Cash and Cash Equivalents, End of Period $ 10.8 $ 47.5
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized)$ 46.2 $ 66.2
Cash paid for income tax 21.7 0.2
</TABLE>
See accompanying notes to consolidated financial statements
5<PAGE>
<PAGE>
PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. References
Panhandle Eastern Corporation (PEC) and its subsidiaries (the
Company) are predominantly involved in the interstate transportation
and storage of natural gas. The interstate gas transmission
operations of Texas Eastern Transmission Corporation (TETCO),
Algonquin Gas Transmission Company (Algonquin), Panhandle Eastern
Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline), and
the liquefied natural gas (LNG) facilities of Trunkline LNG Company
(Trunkline LNG), are subject to the rules, regulations and accounting
procedures of the Federal Energy Regulatory Commission (FERC).
Certain amounts for the prior period have been reclassified in the
consolidated financial statements to conform to the current
presentation.
2. Accounting Policy Change
The Company adopted Statement of Financial Accounting Standards
(Accounting Standard) No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. This standard
requires accruals for benefits provided by the Company to certain
former or inactive employees. As a result of implementation of
Accounting Standard No. 112, the Company recorded additional
liabilities and regulatory assets of approximately $17 million. The
Company's pipelines have received permission from FERC to defer such
costs, pending future rate filings requesting recovery. The earnings
impact of this change in accounting policy is not significant.
3. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of the
revenues collected by each natural gas pipeline 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 related regulatory matters.
FERC Order 636
During the second and third quarters of 1993, the Company's natural
gas pipelines began providing restructured services pursuant to FERC
Order 636.
This order, which is on appeal to the courts, requires pipeline
service restructuring that "unbundles" each of the services--sales,
transportation and storage--that had historically been provided by
pipelines. 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 demand component of rates.
In addition, Order 636 allows pipelines to recover 100% of prudently
incurred eligible costs resulting from implementation of the order
(transition costs). FERC, however, is encouraging pipelines to
settle such issues with customers through a negotiated process.
6<PAGE>
<PAGE>
On May 12, 1994, TETCO received FERC approval, subject to rehearing,
of a comprehensive settlement that resolves TETCO's regulatory issues
regarding Order 636 implementation, including the recovery of
transition costs, and FERC proceedings dating back to 1985 related to
bundled merchant services prior to Order 636.
The Company currently estimates transition costs to range from
$600 million to $725 million, including amounts incurred to date. As
of March 31, 1994, the Company's pipelines were recovering
approximately $250 million in transition costs from customers,
pursuant to FERC filings, and had collected approximately
$185 million of such costs, subject to refund. Certain challenges to
transition cost recoveries of the Company's pipelines are pending
further FERC action. Included in these FERC proceedings are issues
related to eligibility under Order 636 and the prudence of such
costs.
Additional transition cost filings and billings will be made by the
Company's pipelines in the future, including quarterly filings by
TETCO to recover gas supply realignment (GSR) costs pending a final
order on the settlement. Any GSR costs otherwise determined to be
ineligible for recovery under Order 636 may be recoverable through a
FERC Order 528 mechanism that provides for recovery of up to 75% of
certain contract costs, or may be recoverable via alternate
mechanisms.
TETCO's settlement resolves a broad range of issues, primarily
related to TETCO's Order 636 transition costs discussed above, as
well as purchased gas adjustment and gas inventory charge collections
that are the subject of an evidentiary hearing before a FERC
Administrative Law Judge (ALJ). In 1993, the Company established an
additional provision to reflect the impact of TETCO's settlement,
including certain amounts collected that would be refunded to
customers. As a result, the Company recorded current and long-term
regulatory assets of approximately $25 million and $325 million,
respectively, for estimated amounts to be recovered from customers
pursuant to this settlement, and estimated current and long-term
liabilities related to these issues of approximately $160 million and
$290 million, respectively. The settlement provides for the recovery
of transition costs through volumetric and reservation surcharges
through the year 2002.
The Company believes the exposure associated with gas purchase
contract commitments and the significant reduction of the Company's
merchant services during 1993 will be substantially mitigated by
transition cost recovery under TETCO's filed settlement, Order 636
and other mechanisms, including assignments of certain gas purchase
contracts to third parties. As a result, the Company believes that
implementation issues related to Order 636 will not have a material
adverse effect on future consolidated results of operations or
financial position.
7<PAGE>
<PAGE>
Jurisdictional Transportation and Sales Rates
Algonquin - Algonquin filed a general rate increase effective
May 1, 1993, subject to refund, which reflected throughput changes
due to contract restructuring and a return to incremental rates with
SFV rate design. On March 1, 1994, Algonquin filed a comprehensive
settlement that, if approved, will resolve virtually all of
Algonquin's regulatory issues with respect to this rate case and
Order 636 implementation, including the recovery of transition costs.
A hearing on limited issues related to this proceeding was held in
April 1994.
PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into
effect, subject to refund, general rate increases incorporating the
SFV rate design. A hearing on the earlier rate proceeding was
completed in February 1994 and decisions by the ALJ and FERC are
expected later in 1994. Hearings in the latter rate case are
scheduled to commence on May 17, 1994.
Effective April 1, 1989, PEPL placed into effect, subject to refund,
sales and transportation rates reflecting a redesign of rates,
including seasonal rate structures. PEPL and others are appealing
various FERC orders related to these rates.
Other - The Company's pipelines, pursuant to FERC requirements,
requested FERC approval to record the impact of adopting Accounting
Standard No. 109, "Accounting for Income Taxes," including the
recognition of a portion of the impact as an increase to
stockholders' equity. FERC has denied approval of certain of these
requests, pending rate case decisions. The Company's pipelines plan
to file for rehearing. The Company believes the ultimate resolution
of this matter will not have a material adverse effect on
consolidated financial position.
Take-or-Pay
In the past, during the normal course of business, the Company's
pipelines entered into certain gas purchase contracts containing
take-or-pay provisions, which may expose the Company to financial
risk. Based on market and regulatory conditions, including Order 636
provisions that provide for the recovery of prudently incurred
transition costs, the Company believes such risk was not material to
the Company's consolidated results of operations or financial
position as of March 31, 1994.
PEPL and Trunkline are currently collecting certain take-or-pay
settlement costs through a combination of direct billings and
volumetric surcharges. The volumetric surcharges are being collected
with interest over a period extending through 1997. TETCO has flowed
through to customers its pipeline suppliers' take-or-pay costs
pursuant to FERC-approved filings, subject to refund. Comprehensive
settlements have been filed by TETCO and its upstream suppliers,
which, if approved by FERC, will resolve this matter with no
financial impact to the Company.
8<PAGE>
<PAGE>
The U.S. Department of the Interior has 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, buyouts and buydowns of gas sales contracts with natural
gas pipelines. The Company's pipelines, 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 the pipelines ultimately have to reimburse or
indemnify the producers, the potential exists for some recovery 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. Management believes this matter will not have a
material adverse effect on the Company's consolidated financial
position.
4. Income Tax
The Company's investment tax credit carryforward (ITC) of
$72.1 million at December 31, 1993 will begin to expire in 1996 and
will be extinguished in 2002 if not utilized sooner. The alternative
minimum tax credit carryforward of $57.3 million at December 31, 1993
can be carried forward indefinitely.
In 1990, the Internal Revenue Service (IRS) adopted regulations that,
if not amended or held to be invalid, would result in the
disallowance for tax purposes of losses incurred in the Company's
1989 sales of certain Texas Eastern Corporation (TEC) assets. The
Company established a provision in 1990 for this issue, resulting in
an increase in goodwill and the deferred income tax liability. In
discussions with the U.S. Treasury Department and the IRS, the
Company's position has been that no prior notice was given of the
regulations' retroactive application to the sales and that such
application would be both unfair and contrary to law. The Company
continues to vigorously contest any additional tax payable pursuant
to such regulations.
5. Gas Imbalances
The consolidated balance sheet includes in-kind balances as a result
of differences in gas volumes received and delivered. At March 31,
1994 and December 31, 1993, other current assets and other current
liabilities included $30.8 million and $24.3 million (1994) and
$64.8 million and $67.9 million (1993), respectively, for these
imbalances.
9<PAGE>
6. Other Contingencies
TEPPCO Partners, L.P. - TEPPCO Partners, L.P. is a master limited
partnership (MLP) that owns and operates a petroleum products
pipeline. The Company has a 10.45% ownership interest in the MLP, of
which 8.45% is a deferred participation interest (DPI). Effective
April 1, 1994, the DPI participates in allocations of income or loss
and cash distributions. To support the MLP's ability to make the
minimum quarterly distributions on all MLP Units, PEC has agreed,
under certain circumstances and subject to certain limitations, to
contribute cash to the MLP in return for additional limited partner
interests (APIs). Subject to certain exceptions, the support period
will extend through December 31, 1994. PEC's obligation to purchase
APIs is limited to an aggregate of $50 million (maximum outstanding
at any time) during the support period. No API purchases have been
required since inception through the date of this report.
Furthermore, a subsidiary partnership of the MLP has $356.5 million
in First Mortgage Notes outstanding with recourse to the general
partner, a subsidiary of TEC. These notes have annual principal
payments due through 2010.
Petrolane Incorporated (Petrolane) - In connection with the sale of
Petrolane in 1989, TEC agreed to indemnify Petrolane against certain
obligations for guaranteed leases and environmental matters. Certain
of the lease obligations relate to Petrolane's divestiture of
supermarket operations prior to its acquisition by TEC and total
approximately $95.7 million over the remaining terms of the leases,
which expire in 2006. In the opinion of management, the probability
that TEC will be required to perform under this indemnity provision
is remote.
Petrolane was named in a suit filed by the city of Fresno, California
(the City) in the U.S. District Court for the Eastern District of
California on February 18, 1993 seeking contribution from 22 parties
for characterization and remediation costs related to the Fresno
Sanitary Landfill (the Landfill). The City, under a mandate from the
U.S. Environmental Protection Agency (EPA), is obligated to
characterize and remediate environmental contamination at the
Landfill, which is on the National Priorities List. One of
Petrolane's former subsidiaries is alleged to have disposed of
hazardous substances at the Landfill. Since characterization of the
Landfill has not been completed, the Company is unable at this time
to estimate its share of cleanup costs or the timing of such costs,
but expects that this matter will not have a material adverse effect
on the Company's consolidated financial position.
Northern Border Pipeline Company (Northern Border) - 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 $212.8 million for the years 1994 through 2001. In the
opinion of management, the probability that performance will be
required under this guarantee is remote.
10<PAGE>
7. Stockholders' Equity
Under the most restrictive covenants contained in the Company's debt
agreements, $709.9 million of PEC's common stockholders' equity was
available for the payment of dividends at March 31, 1994.
8. Environmental Matters
TETCO - TETCO is currently conducting a PCB (polychlorinated
biphenyl) characterization and cleanup program at certain of its
compressor station sites under conditions stipulated by a U.S.
Consent Decree. The program includes on- and off-site
characterization, installation of on-site source control equipment
and groundwater monitoring wells, and on-site cleanup work. TETCO
expects to complete the program at up to 89 sites in as many as
14 states over an approximate 10-year period that began in 1990.
TETCO also has ongoing cleanup and remediation programs in
Pennsylvania and New Jersey, implemented pursuant to settlement
agreements with those states. In 1991, TETCO entered into an Interim
Agreed Order with the state of Kentucky concerning characterization
of TETCO's three compressor station sites in Kentucky. The Company
is negotiating an Agreed Order with the state of Kentucky for
remediation of those sites. The state of Kentucky is currently
considering the imposition of a fine. The Company previously
established a reserve for potential fines and penalties.
Additionally, under a consent order with the state of Mississippi,
TETCO is conducting site assessment and characterization in that
state. The cleanup programs are not expected to interrupt or
diminish TETCO's operational ability to deliver natural gas to
customers.
At March 31, 1994 and December 31, 1993, TETCO had recorded current
and long-term liabilities of $93 million and $295.6 million (1994)
and $93 million and $298.7 million (1993), respectively, for
remaining estimated cleanup costs. These cost estimates represent
gross cleanup costs expected to be incurred by TETCO, have not been
reduced by customer or insurance recoveries and do not include fines,
penalties or third-party claims. TETCO is recovering 57.5% of
cleanup costs in rates pursuant to a stipulation and agreement
approved by FERC in 1992. At March 31, 1994 and December 31, 1993,
TETCO had recorded current and long-term regulatory assets of
$32.9 million and $186.9 million (1994) and $31.1 million and
$196.3 million (1993), respectively, representing costs to be
recovered from customers.
TETCO's litigation with its insurance carriers to recover cleanup and
other costs and to enforce the carriers' duty to defend and indemnify
TETCO is continuing. On January 10, 1994, the Court of Appeals for
the Third Circuit, on rehearing, affirmed the lower court's summary
judgment rulings in favor of the insurance carriers. TETCO's
petition for rehearing en banc was denied by the Court on February 3,
1994. TETCO is planning to file a petition for a writ of certiorari
with the U.S. Supreme Court by July 1, 1994.
11<PAGE>
<PAGE>
TEC and TETCO, as well as certain other TEC subsidiaries in some of
the cases, are defendants in several private plaintiff suits in
various courts. These suits seek relief for actual and punitive
damages that allegedly resulted from the release of PCBs and other
hazardous substances in violation of federal and state laws. The
Company is continuing to defend itself vigorously in these suits.
The Company believes the ultimate resolution of these matters
relating to the PCB cleanup programs will not have a material adverse
effect on consolidated results of operations or financial position.
PEPL and Trunkline - The Company has notified the EPA of PCB
contamination at up to 41 sites on the PEPL and Trunkline systems,
and is undertaking a remediation program at these sites, while
continuing to discuss with and provide information to the EPA on
these matters. Localized contamination of these sites resulted from
the past use of lubricants containing PCBs in auxiliary equipment.
Soil and sediment testing, to date, has detected no significant
off-site contamination. Under a consent order with the state of
Mississippi, Trunkline conducted a sampling program at its two
compressor station sites in Mississippi and submitted a report to the
state. Trunkline will develop cleanup plans based on this report.
The Company is also involved in the cleanup and removal of wastewater
collection facilities at 14 PEPL and Trunkline sites. The PCB and
wastewater cleanup programs are expected to extend over a 10-year
period that began in 1992. In addition to these ongoing assessments,
PEPL and Trunkline are evaluating the prior use of disposal areas to
determine if those areas potentially contain hazardous substances.
The Company is unable at this time to estimate the remediation costs,
if any, that might result from these evaluations.
The Company has recorded $33 million for liabilities relating to PEPL
and Trunkline existing cleanup programs and has recorded regulatory
assets for the same amount, representing costs to be recovered from
customers. The Company does not expect the resolution of the PEPL
and Trunkline environmental matters to have a material adverse effect
on consolidated financial position.
9. Litigation
In connection with a rupture and fire that occurred on TETCO's
36-inch natural gas pipeline on March 23, 1994, in Edison, New
Jersey, 13 lawsuits have been filed to date against the Company and
other defendants in the Superior Court of New Jersey, Middlesex
County, on behalf of nearly 80 individuals seeking unspecified
compensatory damages for personal injuries and property losses, as
well as punitive damages. Plaintiffs' requests for class action
certification have been denied by the Court and the cases are
expected to be consolidated for trial on the issue of liability. The
Company has also received numerous letters from attorneys claiming to
represent, in total, over 700 individuals with unspecified claims
against the Company. In addition, Quality Materials, Inc., the owner
of the asphalt plant located at the site of the rupture, has filed
suit in the U.S. District Court for the District of New Jersey
against TETCO seeking to recover unspecified property damages, lost
income and punitive damages.
12<PAGE>
<PAGE>
The cause of the rupture is under investigation by the National
Transportation Safety Board. The Company has recorded a $5 million
after-tax charge for costs related to this incident that are not
recoverable under the Company's insurance policies. The Company does
not expect the resolution of these matters to 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.
10. Fair Presentation
The information as furnished reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a
fair presentation of financial position as of March 31, 1994, and
results of operations and cash flows for the three months ended
March 31, 1994 and 1993.
13<PAGE>
<PAGE>
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 1994 and 1993 interim consolidated financial statements and
accompanying notes presented in Item 1. The discussion of the Company's
"Operating Environment and Outlook" addresses key trends and future plans.
The "Capital Resources, Liquidity and Financial Position" section analyzes
cash flows and financial position. Material period-to-period variances in
the consolidated statement of income are discussed under "Results of
Operations." Throughout these discussions, management has addressed items
that are reasonably likely to materially affect future liquidity or
earnings.
OPERATING ENVIRONMENT AND OUTLOOK
As discussed in Note 3 of the Notes to Consolidated Financial Statements,
all four of the Company's pipelines implemented restructured services in the
second and third quarters of 1993 pursuant to FERC Order 636.
TETCO has received FERC approval, subject to rehearing, of a comprehensive
settlement resolving regulatory issues regarding Order 636 implementation,
including the recovery of transition costs, and issues related to bundled
merchant services prior to Order 636. This settlement and other Order 636
transition issues are further discussed under "Operating Cash Flow."
As a result of the SFV rate design required by Order 636 and the resulting
elimination by PEPL of seasonal rates, the historical seasonal variations
in revenues and receivables have continued to diminish. Generally, pipeline
earnings have become more evenly distributed throughout the year. In
addition, earnings from interruptible transportation revenues have been
significantly reduced as a result of Order 636 rate design changes and
capacity release mechanisms that allow firm customers to sell unused
customer capacity. The Company's pipelines continue to offer selective
discounting and short-term firm transportation contracts to utilize
available capacity.
Transportation and storage services form the core of the Company's business
in the Order 636 environment. Trunkline, however, continues to offer
unbundled sales service that will end in late 1994. Upon implementation of
Order 636, operating revenues and gas purchase costs decreased primarily as
a result of elimination of natural gas sales by TETCO, Algonquin and PEPL,
while operating income generated by firm transportation and storage services
increased. These trends are expected to continue until all traditional
pipeline sales services cease.
14<PAGE>
<PAGE>
The Company expects to benefit from the environment created by the
regulatory changes of Order 636 by expanding the natural gas pipeline
network via major capital projects and by developing innovative services for
customers. Natural gas storage, gathering and marketing are among the areas
of opportunity that the Company is examining for potential growth. The
Company's Market and Supply Services group, as well as each of the four
natural gas pipelines, are involved in responding to new markets created,
in part, by Order 636, and to increased demand for natural gas as both a
sound economic and environmental solution to the nation's energy needs. See
further discussion in "Investing Cash Flow."
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION
Operating Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
Millions 1994 1993
- -------- ------- ------
<S> <C> <C>
Net Cash Flows Provided by
Operating Activities $103.6 $149.0
------ ------
</TABLE>
Historical Analysis - Operating cash flows decreased $45.4 million comparing
the three-month period in 1994 to the same period in 1993. This decrease
reflects reduced first quarter earnings and lower operating cash activity
caused by the elimination of sales services, partially offset by 1994
collections of purchased gas costs incurred in prior years.
Order 636 Transition Costs - With implementation of Order 636 and the
significant reduction in merchant services that has resulted, the Company
is incurring certain costs for the transition, primarily related to TETCO's
gas purchase contracts. On May 12, 1994, TETCO received FERC approval,
subject to rehearing, of a comprehensive settlement that resolves TETCO's
regulatory issues regarding Order 636 implementation and FERC proceedings
dating back to 1985 related to bundled merchant services prior to Order 636.
With implementation of Order 636, TETCO, Algonquin and PEPL no longer offer
merchant sales of natural gas, thereby substantially eliminating the need
for gas purchase contracts. Trunkline's gas purchase commitments primarily
relate to unbundled sales contracts that will end in late 1994. At
March 31, 1994, the Company's gross commitments under gas purchase contracts
that do not contain market-sensitive pricing provisions were approximately
$140 million, $125 million, $100 million, $85 million and $50 million for
the years 1994 through 1998, respectively, and a total of $65 million
thereafter. These estimates reflect significant assumptions regarding
deliverability and escalation clauses.
15<PAGE>
<PAGE>
The Company currently estimates transition costs to range from $600 million
to $725 million, including amounts incurred to date. As of March 31, 1994,
the Company's pipelines were recovering approximately $250 million in
transition costs from customers, pursuant to FERC filings, and had collected
approximately $185 million of such costs, subject to refund. Certain
challenges to transition cost recoveries of the Company's pipelines are
pending further FERC action. Included in these FERC proceedings are issues
related to eligibility under Order 636 and the prudence of such costs.
Additional transition cost filings and billings will be made by the
Company's pipelines in the future, including quarterly filings by TETCO to
recover GSR costs pending a final order on the settlement. Any GSR costs
otherwise determined to be ineligible for recovery under Order 636 may be
recoverable through a FERC Order 528 mechanism that provides for recovery
of up to 75% of certain contract costs, or may be recoverable via alternate
mechanisms.
TETCO's settlement resolves a broad range of issues, primarily related to
TETCO's Order 636 transition costs discussed above, as well as purchased gas
adjustment and gas inventory charge collections that are the subject of an
evidentiary hearing before a FERC ALJ. See Note 3 of the Notes to
Consolidated Financial Statements for further discussion.
The Company believes the exposure associated with gas purchase contract
commitments and the significant reduction of the Company's merchant services
during 1993 will be substantially mitigated by transition cost recovery
under TETCO's filed settlement, Order 636 and other mechanisms, including
assignments of certain gas purchase contracts to third parties. As a
result, the Company believes that implementation issues related to Order 636
will not have a material adverse effect on future consolidated results of
operations or financial position.
Environmental Matters - The Company believes it will be able to fund the
TETCO, PEPL and Trunkline PCB and other existing cleanup program costs from
customer recoveries and other cash flows and, therefore, the ultimate
resolution of these matters will not have a material adverse effect on
consolidated financial position or liquidity. See Note 8 of the Notes to
Consolidated Financial Statements. In addition, PEPL and Trunkline are
evaluating the prior use of disposal areas to determine if those areas
potentially contain hazardous substances. The Company is unable at this
time to estimate the remediation costs, if any, that might result from these
evaluations. As discussed in Note 6 of the Notes to Consolidated Financial
Statements, the Company is also unable at this time to estimate its share
or the timing of cleanup costs related to the Fresno Sanitary Landfill, but
expects that this matter will not have a material adverse effect on the
Company's consolidated financial position or liquidity.
16<PAGE>
<PAGE>
Litigation - In connection with a rupture and fire that occurred on TETCO's
36-inch natural gas pipeline on March 23, 1994, in Edison, New Jersey,
13 lawsuits have been filed to date against the Company and other defendants
in the Superior Court of New Jersey, Middlesex County, on behalf of nearly
80 individuals seeking unspecified compensatory damages for personal
injuries and property losses, as well as punitive damages. Plaintiffs'
requests for class action certification have been denied by the Court and
the cases are expected to be consolidated for trial on the issue of
liability. The Company has also received numerous letters from attorneys
claiming to represent, in total, over 700 individuals with unspecified
claims against the Company. In addition, Quality Materials, Inc., the owner
of the asphalt plant located at the site of the rupture, has also filed suit
in the U.S. District Court for the District of New Jersey against TETCO
seeking to recover unspecified property damages, lost income and punitive
damages.
The cause of the rupture is under investigation by the National
Transportation Safety Board. The Company has recorded a $5 million after-
tax charge for costs related to this incident that are not recoverable under
the Company's insurance policies. The Company does not expect the
resolution of these matters to have a material adverse effect on
consolidated results of operations or financial position.
Other - The Company expects to generate sufficient future taxable income
from operations to fully utilize deferred tax assets, net of valuation
allowance, including the ITC. However, if needed, the Company could
implement tax-planning strategies to accelerate approximately $300 million
of taxable income, prior to expiration of the ITC.
See Notes 3 and 5 of the Notes to Consolidated Financial Statements for a
discussion of other regulatory proceedings and gas imbalances.
On March 1, 1994, Trunkline filed a general rate increase that is in
accordance with terms of a rate case settlement in 1993. FERC accepted and
suspended this rate filing to become effective September 1, 1994, subject
to refund, and set the rate case for hearing. On April 22, 1994, the FERC
ALJ accepted a procedural schedule which would provide for a hearing to
begin in June 1995.
Operating cash requirements for the next 12 months are expected to include
rate refunds and certain Order 636 transition costs. These and any other
operating requirements are expected to be funded by cash from operations,
debt issuances and/or available credit facilities. The Company continues
to make periodic sales of trade receivables, with limited recourse.
17<PAGE>
<PAGE>
Investing Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
Millions 1994 1993
- -------- ------- ------
<S> <C> <C>
Net Cash Flows Provided by (Used in)
Investing Activities $(25.7) $4.8
------- -----
</TABLE>
Capital Expenditures - Capital expenditures totaled $29.3 million in the first
three months of 1994, compared with $37.6 million for the same period in 1993.
Capital expenditures for 1994 are expected to approximate $400 million. These
expenditures include significant amounts for TETCO and Algonquin customer-
supported market expansion projects and are being funded by cash from
operations, debt issuances and/or available credit facilities.
Liberty Pipeline Company (Liberty), in which a TETCO subsidiary owns a 30%
interest, now expects the proposed $162 million Liberty pipeline to begin
providing service in late 1996. TETCO's planned expansion to deliver natural
gas to Liberty also has been delayed a year.
The Company continues to study the potential impact of the Clean Air Act
Amendments of 1990 (the Amendments) and the related federal and state
regulations on the Company. While many of the regulations have not yet been
finalized, the Company currently estimates that capital expenditures ranging
from $60 million to $80 million may be necessary to comply with the
requirements of the Amendments and the regulations. The Company's estimated
1994 capital expenditures include approximately $20 million related to these
requirements. Management believes any expenditures necessary will be eligible
for recovery in rates.
Other - In April 1994, Centana Energy Corporation, part of the Company's
Market and Supply Services group, announced plans to purchase certain
intrastate natural gas pipeline, storage and processing facilities in Texas
for approximately $120 million, subject to regulatory approval and other
conditions. This purchase, expected to be funded by cash from operations
and/or available credit facilities, is planned for completion in June 1994 and
will enable the Company to provide expanded services for natural gas producers
and other customers in the Gulf Coast region.
The Company is participating in partnerships that are developing market-area
gas storage projects.
18<PAGE>
<PAGE>
Financing Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------
Millions 1994 1993
- -------- ----- ------
<S> <C> <C>
Net Cash Flows Used in Financing Activities $85.5 $109.3
----- ------
</TABLE>
Debt and Credit Facilities - TETCO and PEPL have variable-rate, revolving
credit agreements that permit these subsidiaries to borrow up to $700 million
on a combined basis, utilizing revolving credit borrowings and letter of
credit facilities. At March 31, 1994, there were no amounts outstanding under
these agreements.
Financing Requirements - Dividends and debt repayments for the next 12 months,
along with operating and investing requirements, are expected to be funded by
cash from operations, debt issuances and/or available credit facilities.
TETCO and PEPL have effective shelf registration statements with the
Securities and Exchange Commission for the issuance of $200 million each of
unsecured debt securities.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended March 31, 1994 was
$58.8 million, or $0.49 per share, compared with $69.5 million, or $0.64 per
share, for the same period in 1993.
Operating Income Analysis
While gas transmission operations are seasonal, with the highest throughput
occurring during the first and fourth quarters, the historical seasonal
variances in financial results began to diminish in the second quarter of 1993
as a result of the SFV rate design required by Order 636 and the resulting
termination of seasonal rates.
Consolidated operating income decreased $37 million, or 20%, in the first
three months of 1994 compared with the same period in 1993. These results
primarily reflect the pipelines' rate designs mandated by FERC Order 636,
which more evenly distribute earnings throughout the year and significantly
reduce the earnings benefit from interruptible transportation revenues.
Total natural gas volumes were up 17% comparing these same periods, due to
exceptionally cold winter weather in the market areas in the first quarter of
1994 and incremental services initiated after the 1993 first quarter. With
implementation of the SFV rate design, which assigns return on equity, related
taxes and other fixed costs to the demand component of rates, earnings
fluctuations related to throughput volumes have been minimized.
19<PAGE>
<PAGE>
Consolidated Operating Income by Business Group
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
Millions 1994 1993 % Change
-------- ------- ------- --------
<S> <C> <C> <C>
Gas Transmission
TETCO $ 58.8 $ 83.6 (30)
Algonquin 14.7 17.5 (16)
PEPL 46.9 53.6 (13)
Trunkline 18.9 16.9 12
Other 1.3 1.6 (19)
------ ------ ----
Total 140.6 173.2 (19)
------ ------ ----
Market and Supply Services 5.4 10.8 (50)
LNG Project 2.3 1.4 64
Parent, Other and Eliminations 1.7 1.6 6
------ ------ ----
Consolidated Operating Income $150.0 $187.0 (20)
====== ====== ====
</TABLE>
20<PAGE>
<PAGE>
Natural Gas Pipeline Volumes
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
Billion cubic feet (Bcf) 1994 1993 % Change
------------------------ ------- ------- --------
<S> <C> <C> <C>
Market-area Transports
TETCO 330 242 36
Algonquin 96 84 14
PEPL 192 152 26
Trunkline 130 104 25
Eliminations (23) (32) (28)
------ ------ ----
725 550 32
------ ------ ----
Sales
TETCO - 7 (100)
Algonquin - 2 (100)
PEPL - 16 (100)
Trunkline -(*) 24 (100)
------ ------ ----
- 49 (100)
------ ------ ----
Total Market Area 725 599 21
------ ------ ----
Supply-area Transports
TETCO 32 34 (6)
PEPL 10 22 (55)
Trunkline 35 29 21
------ ------ ----
77 85 (9)
------ ------ ----
Total Volumes 802 684 17
====== ====== ====
----------
(*) Excludes 11 Bcf which was both sold and transported, and is
included in transportation throughput.
</TABLE>
TETCO - Operating income for TETCO decreased $24.8 million comparing the first
three months of 1994 with the same period in 1993 primarily due to reduced
interruptible transportation revenues. Net sales revenue decreased $74.3 mil-
lion, reflecting the elimination of TETCO's traditional merchant function
effective June 1, 1993. Transportation revenue increased $59.1 million, or
51%, as volumes increased 31%, reflecting the SFV rate design and the
conversion of sales contracts to firm transportation. Storage revenues
declined 40%, or $12.4 million, resulting from the conversion of a portion of
the storage revenues to transportation revenues following the unbundling of
services pursuant to Order 636.
21<PAGE>
<PAGE>
Algonquin - Algonquin's operating income decreased $2.8 million for the first
three months of 1994 compared with the same period in 1993. The decrease was
primarily a result of reduced interruptible transportation volumes related to
the Order 636 rate design. Transportation revenue increased $8.6 million,
partially offsetting the declines in net sales revenue and storage revenue.
The decreases in net sales and storage revenues reflect the elimination of
Algonquin's traditional merchant function and the conversion of storage
revenues to transportation revenues upon implementation of Order 636.
PEPL - This pipeline's operating income decreased $6.7 million comparing the
first quarters of 1994 and 1993. The decrease resulted from the elimination
of seasonal rates that were in effect prior to PEPL's implementation of
Order 636 on May 1, 1993. Increased revenues from unbundled transportation
and storage services partially offset reduced net sales revenues resulting
from the elimination of PEPL's merchant function. Operating expenses
decreased primarily as a result of lower expenses related to sales volumes,
as well as the release in 1994 of a $7.8 million provision established for gas
supply matters that have been resolved.
Trunkline - Operating income for Trunkline increased $2 million comparing the
first three months of 1994 with the same period in 1993. Transportation
revenue increases, which reflected increased volumes and margins attributable
to colder weather, offset the decline in net sales revenue. Trunkline's
unbundled sales service will end in late 1994.
Other Operating Income - Operating income for Market and Supply Services
decreased $5.4 million comparing the first quarters of 1994 and 1993. This
decrease is primarily attributable to the lower sales prices of natural gas
liquids in 1994, partially offset by revenues from new services provided by
1 Source Corporation.
Other Income and Deductions - Other income and deductions decreased
$4.7 million for the first three months of 1994 compared with the same period
in 1993. This decrease primarily reflects decreased earnings from investments
in affiliates as a result of the sale of a portion of the Company's interest
in Northern Border Partners, L.P. in late 1993, and interest income earned on
the LNG project settlement receivables prior to the sale of these receivables
in the second and third quarters of 1993.
Interest Expense - Interest expense in the first three months of 1994 was
$23.3 million, or 30%, lower than the same period in 1993. This reduction
reflects reduced average debt balances during the first quarter of 1994
compared with the same period in 1993, primarily resulting from the Company's
early retirement in the last nine months of 1993 of four issues of relatively
high-interest debt. Also contributing to the decrease was interest in 1993
on refunds of production-related costs.
22<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 3, 6, 8 and 9 of the Notes to Consolidated Financial Statements in
Part I of this Report which are incorporated herein by reference. See also
Item 3 of PEC's Annual Report on Form 10-K for the year ended December 31,
1993.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - A Current Report on Form 8-K was filed on
January 21, 1994 under Item 5, "Other Events" and Item 7, "Financial
Statements and Exhibits" announcing that, on January 19, 1994, TETCO sent
its customers a proposed settlement resolving issues connected to
implementation of FERC Order 636. A related charge to earnings was also
announced.
23<PAGE>
<PAGE>
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 CORPORATION
(Registrant)
/s/ Sandra P. Meyer
---------------------------------------
Sandra P. Meyer, Controller
Date: May 13, 1994
24
