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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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------------------
FORM 10-Q
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QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996
Commission File No. 1-8157
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PANENERGY CORP
(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 October 31, 1996
-------------------------- -------------------------------
Common Stock, $1 par value 151,066,410
===========================================================================<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
PanEnergy Corp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Periods Ended September 30
Three Months Nine Months
------------------ ------------------
Millions, except per share amounts 1996 1995 1996 1995
- ---------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues
Sales of natural gas and
petroleum products $1,428.6 $ 746.4 $3,771.7 $2,476.4
Transportation and storage
of natural gas 370.8 370.4 1,131.4 1,128.3
Other 32.6 16.9 77.6 44.4
-------- -------- -------- --------
Total (Note 2) 1,832.0 1,133.7 4,980.7 3,649.1
-------- -------- -------- --------
Costs and Expenses
Natural gas and petroleum
products purchased 1,360.5 682.9 3,494.4 2,293.8
Operating and maintenance 153.3 149.4 464.3 432.4
General and administrative 56.5 51.5 191.0 152.7
Depreciation and amortization 73.1 70.0 217.3 208.3
Miscellaneous taxes 19.4 21.3 61.5 65.6
-------- -------- -------- --------
Total 1,662.8 975.1 4,428.5 3,152.8
-------- -------- -------- --------
Operating Income 169.2 158.6 552.2 496.3
-------- -------- -------- --------
Other Income and Deductions
Equity in earnings of
unconsolidated affiliates 13.4 11.0 26.5 44.3
Other income, net of deductions 13.9 12.8 23.9 9.9
-------- -------- -------- --------
Total 27.3 23.8 50.4 54.2
-------- -------- -------- --------
Earnings Before Interest and Tax 196.5 182.4 602.6 550.5
Interest Expense 57.1 59.4 171.2 176.4
-------- -------- -------- --------
Earnings Before Minority Interest
and Income Tax 139.4 123.0 431.4 374.1
Minority Interest 2.2 - 2.2 -
Income Tax 51.1 49.4 161.5 148.9
-------- -------- -------- --------
NET INCOME $ 86.1 $ 73.6 $ 267.7 $ 225.2
======== ======== ======== ========
Average Common Shares Outstanding 151.0 149.9 150.8 149.5
======== ======== ======== ========
Earnings per Common Share $ 0.57 $ 0.49 $ 1.78 $ 1.51
======== ======== ======== ========
Dividends per Common Share $ 0.240 $ 0.225 $ 0.705 $ 0.66
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
PanEnergy Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
Millions 1996 1995
- -------- ------------ ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 37.2 $ 50.8
Accounts and notes receivable, net 734.3 505.1
Inventory and supplies 128.7 135.8
Current deferred income tax 71.7 80.8
Other (Notes 2 and 5) 266.5 239.8
--------- ---------
Total 1,238.4 1,012.3
--------- ---------
Investments
Affiliates 263.0 164.3
Other 55.3 65.8
--------- ---------
Total 318.3 230.1
--------- ---------
Plant, Property and Equipment
Original cost 8,610.6 8,400.7
Accumulated depreciation and amortization (3,309.3) (3,250.9)
--------- ---------
Net plant, property and equipment 5,301.3 5,149.8
--------- ---------
Deferred Charges
Goodwill, net 193.5 239.7
Prepaid pension 275.0 259.3
Other (Notes 2 and 5) 627.8 736.1
--------- ---------
Total 1,096.3 1,235.1
--------- ---------
TOTAL ASSETS $ 7,954.3 $ 7,627.3
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
PanEnergy Corp and Subsidiaries
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
Millions 1996 1995
- -------- ------------- ------------
<S> <C> <C>
Current Liabilities
Long-term debt due within
one year (Note 7) $ 542.4 $ 179.6
Notes payable 17.0 145.0
Accounts payable 570.0 391.2
Rate refund provisions (Note 2) 38.7 53.6
Accrued interest 62.9 69.1
Taxes payable 80.6 65.0
Other (Notes 2 and 5) 383.8 419.9
-------- --------
Total 1,695.4 1,323.4
-------- --------
Deferred Liabilities and Credits
Deferred income tax 1,239.7 1,182.9
Other (Notes 2 and 5) 739.3 802.1
-------- --------
Total 1,979.0 1,985.0
-------- --------
Long-term Debt (Note 7) 1,769.7 2,091.6
-------- --------
Commitments and Contingent Liabilities
(Notes 2, 3, 5 and 6)
Minority Interest 106.3 -
-------- --------
Common Stockholders' Equity
Common stock, 151 million (1996) and
150.2 million (1995) shares issued and
outstanding, $1 par value per share 151.0 150.2
Paid-in capital 2,234.0 2,219.7
Retained earnings (deficit) 18.9 (142.6)
-------- --------
Total (Note 4) 2,403.9 2,227.3
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,954.3 $7,627.3
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
Item 1. Financial Statements - Unaudited (Continued)
PanEnergy Corp and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
Millions 1996 1995
- -------- ------- -------
<S> <C> <C>
Operating Activities
Net income $ 267.7 $ 225.2
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 217.3 208.3
Deferred income tax expense 49.1 78.4
Earnings of unconsolidated affiliates,
net of distributions (18.5) (13.6)
Net pension benefit (15.7) (14.8)
Other non-cash items in net income 5.2 (32.5)
Net change in operating assets
and liabilities 107.0 (14.3)
------- -------
Net Cash Flows Provided by Operating Activities 612.1 436.7
------- -------
Investing Activities
Capital expenditures (416.2) (291.8)
Investment expenditures (59.9) (6.5)
Investment decreases 13.2 25.9
Property retirements and other 34.2 10.1
------- -------
Net Cash Flows Used in Investing Activities (428.7) (262.3)
------- -------
Financing Activities
Retirement of debt (53.9) (185.1)
Issuance of debt 100.0 200.0
Net decrease in notes payable (128.0) -
Accounts payable - banks (16.3) (53.0)
Common stock issuance 8.8 12.3
Dividends paid (106.3) (98.2)
Other (1.3) (3.4)
------- -------
Net Cash Flows Used in Financing Activities (197.0) (127.4)
------- -------
Net Change in Cash
Increase (decrease) in cash and cash equivalents (13.6) 47.0
Cash and cash equivalents, beginning of period 50.8 33.3
------- -------
Cash and Cash Equivalents, End of Period $ 37.2 $ 80.3
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 168.1 $ 167.6
Cash paid for income tax 43.6 47.8
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<PAGE>
PanEnergy Corp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General
PanEnergy Corp (PanEnergy) and its subsidiaries (the Company) are
involved in the transportation, storage, gathering and processing of
natural gas. The Company is also a leading marketer of natural gas,
electricity, liquefied petroleum gases and related energy services. The
interstate natural 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) operations
of Trunkline LNG Company and Algonquin LNG, Inc. are subject to the
rules, regulations and accounting procedures of the Federal Energy
Regulatory Commission (FERC).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements. Certain amounts of reported revenues and expenses
are also affected by these estimates and assumptions. Actual results
could differ from those estimates. The consolidated financial
statements reflect all normal recurring adjustments that are, in the
opinion of management, necessary for fair presentation. Certain amounts
for the prior periods have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of the
revenues collected by each interstate 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
significant pending rate cases before FERC and certain regulatory
matters.
FERC Order 636 and Transition Costs
During 1993, the Company's interstate natural gas pipelines began
providing restructured services pursuant to FERC Order 636. This order
requires pipeline service restructuring that unbundles sales,
transportation and storage services. Order 636 allows pipelines to
recover eligible costs resulting from implementation of the order
(transition costs). On July 16, 1996, the U.S. Court of Appeals for the
District of Columbia upheld, in general, all aspects of Order 636 and
remanded certain issues for further explanation. One of the issues
remanded for further explanation is whether pipelines should be entitled
to recover 100% of gas supply realignment (GSR) costs. This matter is
substantially mitigated by TETCO's and PEPL's Order 636 settlements.
<PAGE>
<PAGE>
TETCO's final and nonappealable Order 636 settlement, implemented on
August 1, 1994, provides for the recovery of certain transition costs
through volumetric and reservation charges through 2002 and beyond, if
necessary. Pursuant to the settlement, TETCO will absorb a certain
portion of the transition costs, the amount of which continues to be
subject to change dependent upon natural gas prices and deliverability
levels. In 1993, the Company established an additional provision to
reflect the impact of the settlement and increased its liabilities in
1995 upon producers' discoveries of additional natural gas reserves.
PEPL's transition cost recoveries, which are subject to certain
challenges pending before FERC and the courts, will occur through 1999.
At September 30, 1996 and December 31, 1995, the Company's interstate
pipelines had recorded $68.3 million and $274.6 million (1996), and
$70 million and $310 million (1995), of current and long-term regulatory
assets, respectively, representing transition costs incurred or
estimated to be incurred that will be recovered. At September 30, 1996
and December 31, 1995, the Company had recorded estimated current and
long-term liabilities related to Order 636 transition costs of
$84 million and $140 million (1996), and $125 million and $165 million
(1995), respectively.
In July 1996, TETCO received $76 million for the sale of the right to
receive certain Order 636 GSR surcharges, with limited recourse. In the
opinion of management, the probability that TETCO will be required to
perform under the recourse provisions is remote.
In the past, during the normal course of business, the Company's
interstate pipelines entered into certain gas purchase contracts
containing take-or-pay provisions, which may expose the Company to
financial risk. Trunkline is currently collecting certain take-or-pay
settlement costs with respect to such contracts through volumetric
surcharges with interest through 1997 and intends to file after 1997 for
recovery of amounts not fully recovered by these surcharges.
In 1993, the U.S. Department of the Interior (the Department) announced
its intention to seek additional royalties from gas producers as a
result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts
with natural gas pipelines. 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. The potential liability of the producers to the
government and of the pipelines to the producers involves complex issues
of law and fact which are likely to take a substantial period of time
to resolve. On August 27, 1996, the U.S. Court of Appeals for the
District of Columbia Circuit overturned a lower court ruling in favor
of the government in litigation brought on behalf of producers
challenging the Department's attempts to seek the additional royalties.
The Department is seeking further review of the appellate ruling. If
the Company's pipelines ultimately have to reimburse or indemnify the
producers, the Company's pipelines will file with FERC to recover a
portion of these costs from pipeline customers.
<PAGE>
<PAGE>
The Company believes the exposure associated with gas purchase contract
commitments and the termination of the Company's pipeline merchant
services is substantially mitigated by transition cost recoveries
pursuant to TETCO's settlement, Order 636 and other mechanisms. As a
result, the Company believes that Order 636 transition cost issues and
take-or-pay settlement matters will not have a material adverse effect
on future consolidated results of operations or financial position.
Jurisdictional Transportation and Sales Rates
PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into effect,
subject to refund, general rate increases. FERC issued an order on
May 25, 1995 on the earlier rate proceeding and PEPL has requested
rehearing of certain matters in that order. On February 5, 1996, FERC
issued an order on the latter rate proceeding and PEPL has also
requested rehearing of various items in this order. On September 12,
1996, PEPL filed a settlement proposal relating to both rate proceedings
on behalf of itself and the majority of its largest customers. The
settlement proposal is pending FERC review.
Trunkline - Effective August 1, 1996, Trunkline placed into effect,
subject to refund, a general rate increase.
Algonquin - On June 14, 1996, Algonquin submitted a compliance filing
reflecting changes in net plant, property and equipment pursuant to a
FERC order issued on Algonquin's March 29, 1996 limited rate filing.
On October 16, 1996, FERC accepted the filing and denied all protests
and requests for rehearing and technical conferences.
3. Other Contingencies
TEPPCO Partners, L.P. - The Company has a 10.45% ownership interest in
TEPPCO Partners, L.P., a master limited partnership (MLP) that owns and
operates a petroleum products pipeline. A subsidiary partnership of the
MLP has $339.5 million in First Mortgage Notes outstanding at
September 30, 1996 with recourse to the general partner, a subsidiary
of PanEnergy. These notes have annual principal payments due through
2010. In the opinion of management, the probability that the PanEnergy
subsidiary will be required to perform under this recourse provision is
remote.
Petrolane Incorporated (Petrolane) - In connection with the sale of
Petrolane in 1989, Texas Eastern Corporation (TEC), a subsidiary of
PanEnergy, 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 as of December 31, 1995 totaled
approximately $73 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.
<PAGE>
<PAGE>
Northern Border Pipeline Company (Northern Border) - PEPL owns an
effective 5.95% ownership interest in Northern Border through an MLP.
Under the terms of a settlement related to a transportation agreement
between PEPL and Northern Border, PEPL guarantees payment to Northern
Border under a transportation agreement by an affiliate of Pan-Alberta
Gas Limited. The transportation agreement requires estimated total
payments of $163 million for 1996 through 2001. In the opinion of
management, the probability that PEPL will be required to perform under
this guarantee is remote.
4. Common Stockholders' Equity
Under the most restrictive covenants contained in the Company's debt
agreements, $1.1 billion of PanEnergy's consolidated common stock-
holders' equity was available for the payment of dividends at
September 30, 1996.
5. Environmental Matters
TETCO is currently conducting PCB (polychlorinated biphenyl) assessment
and cleanup programs at certain of its compressor station sites under
conditions stipulated by a U.S. Consent Decree. The programs include
on- and off-site assessment, installation of on-site source control
equipment and groundwater monitoring wells, and on- and off-site cleanup
work. TETCO expects to complete these cleanup programs during 1997.
Groundwater monitoring activities will continue beyond 1997.
In 1987, the Commonwealth of Kentucky instituted suit in state court
against TETCO, alleging improper disposal of PCBs at TETCO's three
compressor station sites in Kentucky. This suit, which is still
pending, seeks penalties for violations of Kentucky environmental
statutes. The Company previously established a reserve for potential
fines and penalties. TETCO has completed cleanup of these sites.
The Company has also 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 and the prior use of wastewater collection
facilities and other on-site disposal areas. Soil and sediment testing,
to date, has detected no significant off-site contamination. The
Company has communicated with the Environmental Protection Agency and
appropriate state regulatory agencies on these matters. In August 1995,
Trunkline entered into a consent order under a cleanup program with the
Tennessee Department of Environment and Conservation for the cleanup of
its Tennessee facility. In June 1996, Trunkline entered into an
agreement with the Indiana Department of Environmental Management for
the cleanup of one of its Indiana facilities. Cleanups in other states
by PEPL and Trunkline are also proceeding. The environmental cleanup
programs are expected to continue until 2002.
<PAGE>
<PAGE>
At September 30, 1996 and December 31, 1995, the Company had total
current and long-term liabilities recorded of $75.6 million and
$167.3 million (1996), and $56.3 million and $225.8 million (1995),
respectively, for remaining estimated cleanup costs on the TETCO, PEPL
and Trunkline systems. These cost estimates represent gross cleanup
costs expected to be incurred, have not been discounted or reduced by
customer recoveries and do not include fines, penalties or third-party
claims. Estimated liabilities for remaining TETCO PCB cleanup costs
were reduced in the fourth quarter 1995 as a result of
lower-than-projected cleanup costs incurred on completed sites. As a
result of the reduction in estimated cleanup costs, the related
regulatory assets were also reduced. At September 30, 1996 and
December 31, 1995, the Company had total current and long-term
regulatory assets recorded of $25.1 million and $135 million (1996), and
$21.3 million and $176.6 million (1995), respectively, representing
costs to be recovered from customers.
The federal and state cleanup programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. The
Company believes the ultimate resolution of matters relating to the
environmental issues discussed above will not have a material adverse
effect on consolidated results of operations or financial position.
6. Litigation
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, claims
have been made and numerous lawsuits have been filed in the Superior
Court of New Jersey, Middlesex County against TETCO and other private
and governmental entities by or on behalf of hundreds of individuals and
businesses. These claimants seek compensatory damages for personal
injuries and/or property losses, as well as punitive damages. The
property insurers of an apartment complex adjacent to the asphalt plant
where the rupture occurred also have filed suits against TETCO and other
defendants in Superior Court seeking to recover amounts paid under
pertinent policies of insurance. TETCO has settled the claims of the
property insurers and some individuals and businesses, while retaining
the right to seek recovery of those settlement amounts from other
defendants. Quality Materials, Inc. (Quality), the owner of the
asphalt plant, 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. TETCO filed a counterclaim
against Quality. In April 1996, the U.S. District Court dismissed the
suit by Quality and the counterclaim by TETCO on the grounds that all
claims should be resolved in the pending Middlesex County litigation.
The findings of an investigation of the incident by the Company and the
National Transportation Safety Board (NTSB) indicate third-party damage
to be the cause of the rupture. Additionally, an NTSB report found that
TETCO's pipeline operations met or exceeded federal safety regulations.
The Company recorded a provision in 1994 for costs related to this
incident that are not recoverable under the Company's insurance
policies.
<PAGE>
<PAGE>
On August 30, 1995, two plaintiffs filed a lawsuit with class action
allegations in Jefferson County, Texas, against PanEnergy, TEC and
TETCO, among others. While that suit ultimately was dismissed, one of
the two original plaintiffs refiled the suit on June 3, 1996 in the
Circuit Court of the City of St. Louis, Missouri. The defendants now
have removed the suit to the U.S. District Court for the Eastern
District of Missouri, Eastern Division. The plaintiff seeks recovery
of compensatory and punitive damages, in unspecified amounts, for
personal injuries and property damage resulting from alleged exposure
to PCBs.
A lawsuit filed in the United States District Court for the District of
Columbia by natural gas producer Jack Grynberg was served in July 1996
naming TETCO, PEPL, Trunkline and PanEnergy Services, Inc. (a sub-
sidiary, formerly Centana Energy Corporation) as defendants, among
others. The action was brought under the federal False Claims Act
against 70 defendants, including every major pipeline, asserting that
the defendants intentionally underreported volumes and heating content
of gas purchased from producers on federal lands, with the result that
the United States was underpaid royalties. The plaintiff seeks recovery
of the royalty amounts due the United States, treble damages, civil
penalties and compliance with "appropriate" techniques for measuring
gas.
The Company expects the resolution of all the above litigation matters
will not have a material adverse effect on consolidated results of
operations or financial position.
The Company is also involved in various other legal actions and claims
arising in the normal course of business. Based upon its current
assessment of the facts and the law, management does not believe that
the outcome of any such action or claim will have a material adverse
effect upon the consolidated financial position of the Company.
However, these actions and claims in the aggregate seek substantial
damages against the Company and are subject to the uncertainties
inherent in any litigation. The Company is defending itself vigorously
in all the above suits.
7. Subsequent Events
On October 1, 1996, TETCO redeemed its outstanding $150 million,
10% debentures due 2011 and its outstanding $100 million,
10 1/8% debentures also due 2011. Accordingly, the Company has
classified these debentures as current liabilities in the consolidated
balance sheet as of September 30, 1996. The Company recorded a non-cash
extraordinary charge of $16.8 million (net of income tax of
$10.2 million) in October 1996 in connection with this early retirement
of debt.
<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 1996 and 1995 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.
Material period-to-period variances in the consolidated statement of income
are discussed under "Results of Operations." The "Capital Resources, Liquidity
and Financial Position" section analyzes cash flows and financial position.
Throughout these discussions, management addresses items that are reasonably
likely to materially affect future earnings or liquidity.
This quarterly report may contain certain forward-looking information
regarding the Company, including projections, estimates, forecasts, plans and
objectives. Although management believes that all such statements are based
upon reasonable assumptions, no assurance can be given that the actual results
will not differ materially from those contained in such forward-looking
statements.
Important factors that could cause actual results to differ include, but are
not limited to, general economic conditions, natural gas and liquids prices,
competition from other pipelines and alternative fuels, weather conditions,
state and federal regulation, legal and regulatory proceedings, the
development of new markets, services and products, and the condition of the
capital markets utilized by the Company.
OPERATING ENVIRONMENT AND OUTLOOK
The changing environment resulting from the restructuring of the natural gas
industry under Order 636 has led to industry consolidations and created
additional growth opportunities for the Company. The Company continues its
growth strategy of expanding non-jurisdictional businesses, while also
continuing to advance interstate gas pipeline market-expansion projects and
provide new services to customers.
In the Energy Services segment, on August 1, 1996, a company that combines the
marketing operations of Gas and Power Services with those of Mobil Corporation
(Mobil) was formed. The Company operates and owns 60% of the new marketing
company (PTMS) which conducts business as PanEnergy Trading and Market
Services, L.L.C. in the United States and as PanEnergy Marketing L.P. in
Canada. The Company also acquired Mobil's interest in certain natural gas
gathering, processing and related assets for approximately $300 million and
has entered into an agreement to purchase a 500-mile intrastate gathering
pipeline in northern Louisiana.
In April 1996, FERC issued Order 888 requiring traditional power companies to
render open-access transmission under uniform tariffs, which should further
open the electric power market to competition. To capitalize on this order,
in August 1996, the Company formed a partnership for the construction of a
proposed 250-megawatt, gas fired, combined cycle power plant and the joint
marketing of the plant's generation. In addition, the Company in October 1996
acquired a 32.5% interest in an independent power producer engaged in the
ownership and management of energy assets. An agreement was also entered into
with this producer to jointly pursue the potential acquisition, financing and
management of other electric generating facilities.
<PAGE>
The Company plans to continue to pursue strategic opportunities that emerge,
in the U.S. and internationally, via joint ventures, expansion projects and
acquisitions in both the Natural Gas Transmission and the Energy Services
segments.
RESULTS OF OPERATIONS
Consolidated net income for the nine months ended September 30, 1996 was
$267.7 million, or $1.78 per share on 150.8 million average common shares
outstanding, compared with $225.2 million, or $1.51 per share on 149.5 million
average common shares outstanding, for the same period in 1995.
Earnings Before Interest and Tax Analysis
Consolidated earnings before interest and tax increased to $602.6 million in
the first nine months of 1996 compared with $550.5 million for the same period
in 1995, reflecting improvements in both the Natural Gas Transmission and
Energy Services groups. Improved operations from business expansions and
increased margins, coupled with low storage levels as a result of slightly
colder-than-normal winter temperatures, contributed to a $52.1 million, or 9%,
increase in earnings before interest and tax. This increase is net of a
non-recurring $17 million charge in first quarter 1996 for a work
force reduction.
Ea rnings Before Interest and Tax by Business Group
- -- ------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
Millions 1996 1995
-------- ------ ------
<S> <C> <C>
Natural Gas Transmission
TETCO $247.9 $225.0
Algonquin 53.7 57.8
PEPL 116.1 116.4
Trunkline 31.9 26.7
------ ------
Total 449.6 425.9
------ ------
Energy Services
Field Services 81.9 64.8
Gas and Power Services 37.7 11.2
Crude Oil 7.6 6.4
------ ------
Total 127.2 82.4
------ ------
Other Operations 25.8 42.2
------ ------
Consolidated Earnings Before
Interest and Tax $602.6 $550.5
====== ======
</TABLE>
<PAGE>
Equity in Earnings (Losses) of Unconsolidated Affiliates
(included in Earnings Before Interest and Tax)
--------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
Millions 1996 1995
-------- ------ ------
<S> <C> <C>
Natural Gas Transmission
Northern Border Partners, L.P. $ 3.2 $ 6.1
------ ------
Energy Services
Various affiliates 1.5 1.6
------ ------
Other Operations
National Methanol Company 10.8 21.8
TEPPCO Partners, L.P. 6.3 4.7
Midland Cogeneration Venture 8.3 8.8
Other affiliates (3.6) 1.3
------ ------
Total 21.8 36.6
------ ------
Total Equity in Earnings $ 26.5 $ 44.3
====== ======
</TABLE>
<PAGE>
<PAGE>
Operating Data
--------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1996 1995
----- -----
<S> <C> <C>
Natural Gas Transmission Volumes,
Trillion British Thermal Units
Market Area
TETCO 895 801
Algonquin 233 242
PEPL 472 443
Trunkline 391 288
Eliminations (40) (35)
----- -----
Total 1,951 1,739
----- -----
Supply Area
TETCO 106 92
PEPL 26 34
Trunkline 72 86
----- -----
Total 204 212
----- -----
Total Volumes 2,155 1,951
===== =====
Energy Services Volumes
Field Services
Natural gas gathered/
processed, TBtu/d(1) 2.7 1.8
NGL production, MBbl/d(2) 67.8 53.2
Gas and Power Services
Natural gas marketed, TBtu/d 4.7 3.4
Electricity marketed, GWh(3) 2,058 227
Crude Oil
Crude oil pipeline volumes, MBbl/d 68.0 79.0
NGL pipeline volumes, MBbl/d 19.6 16.6
----------
(1) Trillion British thermal units per day.
(2) Thousand barrels per day.
(3) Gigawatt-hours.
</TABLE>
<PAGE>
<PAGE>
Natural Gas Transmission
Earnings before interest and tax for Natural Gas Transmission increased
$23.7 million, or 6%, to $449.6 million in the first nine months of 1996
compared with the same period in 1995.
TETCO - Earnings before interest and tax for TETCO increased $22.9 million
comparing the first nine months of 1996 with the prior-year period. Revenues
increased $31.4 million, or 5%, primarily due to colder weather and new pipe-
line expansion projects. Higher operating expenses, including $2.3 million
of severance expense recorded in the first quarter 1996, partially offset the
increase in revenues.
Algonquin - Algonquin's earnings before interest and tax decreased
$4.1 million in the first nine months of 1996 compared with the same period
in 1995. The primary reason for the decline was $4 million of revenues
recognized in the first quarter 1995 applicable to the resolution of a
regulatory issue. Lower natural gas demand for electric power generation due
to higher gas prices as compared to alternate fuels was mostly offset by
earnings from new services and projects.
PEPL - PEPL's earnings before interest and tax decreased $0.3 million
comparing the first nine months of 1996 with the prior-year period. Higher
earnings in 1996 primarily from colder weather and lower net operating
expenses more than offset $9.5 million of severance expense recorded in the
first quarter 1996. Also contributing to the decrease was a $2.9 million
reduction in equity earnings from Northern Border Partners, L.P. and a
$1.1 million net decrease related to regulatory settlements, which included
$11.4 million and $20.7 million recorded in the third quarters of 1996 and
1995, respectively.
Trunkline - Earnings before interest and tax for Trunkline increased
$5.2 million comparing the first nine months of 1996 with the same period in
1995. The net increase was due to higher throughput and transportation
revenues during the colder winter weather and lower expenses, which were
partially offset by the recognition of additional lease expense in the third
quarter 1996 and $5 million of severance expense in the first quarter 1996.
Energy Services
Earnings before interest and tax for Energy Services increased $44.8 million,
or 54%, comparing the first nine months of 1996 with the same period in 1995,
primarily from strong marketing margins and increased natural gas liquids
(NGL) prices in addition to higher natural gas, NGL and trading volumes. The
increased volumes resulted primarily from PTMS trading activity and the
acquisition of certain natural gas gathering and processing assets from Mobil.
Field Services - Field Services' earnings before interest and tax increased
$17.1 million for the first nine months of 1996 as compared with the
prior-year period. Net revenues increased $63.9 million, or 45%, resulting
from higher NGL prices and increased gathering and processing volumes related
to expansion projects and the Mobil asset acquisition. These improvements
were partially offset by higher operating expenses and the $8.1 million gain
on the sale of an investment in Seagull Shoreline System in 1995. <PAGE>
<PAGE>
Gas and Power Services - Earnings before interest and tax for Gas and Power
Services increased $26.5 million for the first nine months of 1996 compared
with the same period in 1995, primarily due to higher gas volumes, improved
margins resulting from colder weather and gas price volatility, and higher
risk management margins. The increase in margins was partially offset by
higher operating expenses. Total marketed gas volumes increased 38% to
4.7 TBtu/d primarily as a result of the formation of PTMS in the third quarter
1996.
Crude Oil - Earnings before interest and tax for Crude Oil increased
$1.2 million comparing the first nine months of 1996 with the same period in
1995, primarily because of higher marketing margins due to higher crude
prices.
Risk Management - The Company uses financial instruments to reduce its
exposure to market fluctuations in the price and transportation costs of
natural gas and petroleum products. The Company's general strategy is to
hedge price and location risk with futures, swaps and options; however, net
open positions in terms of price, volume and specified delivery point do
occur. In addition to hedging activities, the Company also engages in the
trading of such instruments. The Company manages open positions with strict
policies which limit its exposure to market risk and require reporting to
management potential financial exposure on a daily basis. These policies
include statistical risk tolerance limits using weighted price movements to
calculate a daily earning at risk (DEAR) as well as a total value at risk
(VAR) measurement.
Other Operations
Earnings before interest and tax from other operations decreased $16.4 million
comparing the first nine months of 1996 with the same period in 1995. Equity
in earnings from National Methanol Company declined $11 million to
$10.8 million in 1996 due primarily to significantly lower methanol margins.
Also contributing to the decrease in other operations was a 1995 provision
reversal of $10.4 million on the LNG Project, which was partially offset by
increased LNG tanker charter revenues and higher LNG sales prices in 1996.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION
Operating Cash Flow
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
Millions 1996 1995
- -------- ------ ------
<S> <C> <C>
Net Cash Flows Provided by Operating Activities $612.1 $436.7
------ ------
</TABLE>
Historical Analysis - Operating cash flows increased $175.4 million comparing
the first nine months in 1996 with the same period in 1995. This increase
primarily reflects higher 1996 earnings and decreased net cash outflows
related to transition costs.
<PAGE>
Order 636 Transition Costs - With implementation of Order 636 and the
elimination of pipeline merchant services, the Company's interstate natural
gas pipelines are incurring certain costs related to the transition, primarily
TETCO's gas purchase contract commitments. TETCO's gross commitments under
gas purchase contracts that do not contain market-sensitive pricing provisions
are approximately $160 million, $115 million, $60 million and $25 million for
the years 1996 through 1999, respectively, with no significant amounts
thereafter. These estimates reflect significant assumptions regarding
deliverability and natural gas prices.
TETCO's final and nonappealable Order 636 settlement, implemented on August 1,
1994, provides for the recovery of certain transition costs through volumetric
and reservation charges through 2002 and beyond, if necessary. Pursuant to
the settlement, TETCO will absorb a certain portion of the transition costs,
the amount of which continues to be subject to change dependent upon natural
gas prices and deliverability levels. The Company has established provisions
to reflect the impact of the settlement. PEPL's transition cost recoveries,
which are subject to certain challenges pending before FERC and the courts,
will occur through 1999. In July 1996, TETCO received $76 million for the
sale of certain Order 636 GSR surcharges, with limited recourse. See Note 2
of the Notes to Consolidated Financial Statements.
Environmental Matters - For information concerning cleanup programs and
environmental litigation, see Notes 5 and 6 of the Notes to Consolidated
Financial Statements.
Litigation - For information concerning other litigation matters, see Note 6
of the Notes to Consolidated Financial Statements.
Other - See Notes 2 and 3 of the Notes to Consolidated Financial Statements
for a discussion of certain other regulatory proceedings and other
contingencies.
The carrying value of LNG project assets is expected to be recovered through
estimated future cash flows. Current estimates of future cash flows are based
on significant business relationships and assumptions of future natural gas
prices, supply availability and demand for LNG, which are subject to change.
The Company has chartered its two LNG tankers to Nigeria LNG Limited for
22 years starting as early as 1999.
The Company believes the regulatory, environmental and legal issues discussed
above will not have a material adverse effect on the Company's consolidated
results of operations, financial position or liquidity.
<PAGE>
<PAGE>
Investing Cash Flow
<TABLE>
<CAPTION>
Nine Months Ended
September 30
- --------------------
Millions 1996 1995
- -------- ------ ------
<S> <C> <C>
Net Cash Flows Used in Investing Activities $428.7 $262.3
------ ------
</TABLE>
Capital and Investment Expenditures - Capital and investment expenditures
totaled $476.1 million in the first nine months of 1996, compared with
$298.3 million for the same period in 1995. Expenditures in 1996 included
approximately $200 million of asset purchases from Mobil. The Company
currently expects to invest up to $900 million in 1996 capital and investment
expenditures, with approximately 70% for Energy Services and 25% for Natural
Gas Transmission, with the remainder budgeted for international and other
development projects. The Company's 1996 expenditure plans include
approximately $700 million for market-expansion projects by the Natural Gas
Transmission and Energy Services segments. The Company's current estimate for
1997 capital and investment expenditures is $400 million to $600 million.
Financing Cash Flow
<TABLE>
<CAPTION>
Nine Months Ended
September 30
- --------------------
Millions 1996 1995
- -------- ------ ------
<S> <C> <C>
Net Cash Flows Used in Financing Activities $197.0 $127.4
------ ------
</TABLE>
Debt and Credit Facilities - PanEnergy has two variable-rate bank credit
agreements, dated January 31, 1996 and September 18, 1996, respectively, that
permit PanEnergy to borrow up to $400 million under a five-year facility and
$400 million under a 364-day facility. At September 30, 1996, there were no
amounts outstanding under the credit agreements.
In September 1996, PanEnergy issued $100 million of seven-year notes bearing
interest at 7 3/8%. In October 1996, PanEnergy issued $150 million of 10-year
notes bearing interest at 7%. As of the date of this report, PanEnergy, TETCO
and PEPL have effective shelf registration statements with the Securities and
Exchange Commission for the issuance of $50 million, $100 million and
$100 million, respectively, of unsecured debt securities. <PAGE>
<PAGE>
On October 1, 1996, TETCO redeemed its outstanding $150 million, 10% deben-
tures due 2011 and its outstanding $100 million, 10 1/8% debentures also due
2011. The Company recorded a non-cash extraordinary charge of $16.8 million
(net of income tax of $10.2 million) in October 1996 in connection with this
early retirement of debt.
Common Stockholders' Equity - The board of directors increased the quarterly
dividend on common stock from $0.225 to $0.24 per common share effective with
the 1996 second quarter.
Financing Requirements - Dividends and debt repayments for the next 12 months,
along with operating and investing requirements as previously discussed in the
Operating and Investing Cash Flow sections, are expected to be funded by cash
from operations, debt issuances, periodic sales of customer accounts with
limited recourse and/or available credit facilities.
Accounting Standards
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," was
issued in June 1996. The Company does not expect the implementation of this
standard in 1997 to have a significant effect on consolidated results of
operations or financial position.
<PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 2, 5 and 6 of the Notes to Consolidated Financial Statements in
Part I of this Report, which are incorporated herein by reference. See also
Item 3 of PanEnergy's Annual Report on Form 10-K for the year ended
December 31, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
10 Agreement between George L. Mazanec and PanEnergy Corp,
dated July 19, 1996.
27 Financial Data Schedule
The total amount of securities of the Registrant or its subsidiaries
authorized under any instrument with respect to long-term debt not filed
as an Exhibit does not exceed 10% of the total assets of the Registrant
and its subsidiaries on a consolidated basis. The Registrant agrees, upon
request of the Securities and Exchange Commission, to furnish copies of
any or all of such instruments.
(b) Reports on Form 8-K
A Current Report dated September 9, 1996 was filed under Item 5, "Other
Information," to provide certain information related to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
A Current Report dated September 13, 1996 was filed under Item 5, "Other
Events," and Item 7, "Financial Statements, Pro Forma Financial
Information and Exhibits," to report an underwriting agreement entered
into for the public offering of certain notes.
<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.
PanEnergy Corp
(Registrant)
/s/ Sandra P. Meyer
--------------------------------
Sandra P. Meyer, Vice President,
Treasurer and Controller
Date: November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000351696
<NAME> PANENERGY CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 37,200
<SECURITIES> 0
<RECEIVABLES> 734,300
<ALLOWANCES> 0
<INVENTORY> 128,700
<CURRENT-ASSETS> 1,238,400
<PP&E> 8,610,600
<DEPRECIATION> 3,309,300
<TOTAL-ASSETS> 7,954,300
<CURRENT-LIABILITIES> 1,695,400
<BONDS> 1,769,700
<COMMON> 151,000
0
0
<OTHER-SE> 2,252,900
<TOTAL-LIABILITY-AND-EQUITY> 7,954,300
<SALES> 3,771,700
<TOTAL-REVENUES> 4,980,700
<CGS> 3,494,400
<TOTAL-COSTS> 3,958,700
<OTHER-EXPENSES> 278,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,200
<INCOME-PRETAX> 431,400
<INCOME-TAX> 161,500
<INCOME-CONTINUING> 267,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 267,700
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.78
</TABLE>
<PAGE>
RETIREMENT AND CONSULTING AGREEMENT
This Retirement and Consulting Agreement ("Agreement") is entered
into by and between George L. Mazanec, an individual residing in Houston,
Texas, (hereinafter "Mazanec") and PanEnergy Corp, a Delaware corporation,
on July 19, 1996. For purposes of this Agreement, the term "PanEnergy"
refers, collectively, to PanEnergy Corp and all its subsidiaries and other
affiliates, including, but not limited to, Texas Eastern Transmission
Corporation, Panhandle Eastern Pipe Line Company, Trunkline Gas Company,
Algonquin Energy, Inc., and PanEnergy International Development
Corporation.
RECITALS
WHEREAS, Mazanec was employed by PanEnergy pursuant to an employment
agreement dated November 1, 1989, as amended ("1989 Agreement");
WHEREAS, PanEnergy owns and operates natural gas transmission
pipelines, gathering facilities, gas processing plants, and liquified
natural gas plants and has ownership interests in a petroleum product
pipeline, a methanol plant and other integrated energy projects.
WHEREAS, during the course of Mazanec's employment with PanEnergy,
Mazanec had access to and became acquainted with PanEnergy's trade secrets
and confidential and proprietary information and materials, including but
not limited to marketing plans and strategies;
WHEREAS, during the course of Mazanec's employment with PanEnergy,
Mazanec was aware that the confidentiality of PanEnergy's trade secrets and
confidential and proprietary information was required to be maintained by
PanEnergy's employees;
WHEREAS, during the course of Mazanec's employment with PanEnergy,
Mazanec was aware that PanEnergy's marketing plans and business strategies
were subject to restricted use and disclosure;
WHEREAS, during the course of Mazanec's employment with PanEnergy,
PanEnergy took steps to protect its trade secrets and confidential and
proprietary information;
WHEREAS, Mazanec recognizes that PanEnergy's business and goodwill
are dependent upon PanEnergy's trade secrets and confidential and
proprietary information;
WHEREAS, PanEnergy will sustain great loss and damage if Mazanec
discloses, utilizes or causes to be disclosed or utilized PanEnergy's trade
secrets and/or confidential and proprietary information to third parties or
for Mazanec's own benefit;
WHEREAS, Mazanec is not otherwise entitled to the sums being paid
under this Agreement, except as provided herein;
1 <PAGE>
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth below, the parties to this Agreement
agree as follows:
1. Term of Employment. (a) Mazanec shall from November 1, 1996
through and including August 31, 1997 remain an employee of PanEnergy. As
of January 1, 1997, Mazanec shall relinquish his position as Vice Chairman
of PanEnergy Corp and shall resign as a Director of PanEnergy Corp, and,
from January 1, 1997 through and including August 31, 1997, Mazanec shall
act in the capacity of advisor to the President and Chief Executive Officer
of PanEnergy Corp.
(b) During the period from November 1, 1996 through December 31,
1996, Mazanec shall receive his regular base salary of Sixteen Thousand Two
Hundred Fifty and No/100ths Dollars ($16,250.00) per semi-monthly pay
period, payable in accordance with PanEnergy's customary practices, and
shall remain a participant in PanEnergy Corp's Annual Cash Bonus Plan for
1996, in connection with which any earned bonus shall be paid in 1997.
(c) If not previously paid, the supplemental retirement benefit
provided under paragraph 2.5 of the 1989 Agreement, consisting of Seven
Hundred Fifty Thousand Dollars ($750,000.00) and accumulated interest
thereon of Five Hundred Sixty-Six Thousand Thirty Dollars and Eighty Cents
($566,030.80), shall be paid to Mazanec in a lump sum on January 2, 1997,
notwithstanding the continuation of Mazanec's employment pursuant to this
Agreement and, provided, that the amount of such payment shall not be taken
into account in determining the amount of any other benefit or payment to
which Mazanec may be entitled under any other compensation or benefit plan,
program or arrangement, including, but not limited to, PanEnergy Corp's
1990 or 1994 Long Term Incentive, Retirement Income, Key Executive
Retirement Benefit Equalization, Employees' Savings or, Key Executive
Deferred Compensation Plan. Except as otherwise specifically provided
herein, on and after November 1, 1996, this Agreement shall supersede the
1989 Agreement.
(d) Effective January 1, 1997, and until the termination of his
employment on August 31, 1997, Mazanec's salary shall become Ten Thousand
and No/100ths Dollars ($10,000.00) per semi-monthly pay period, payable in
accordance with PanEnergy's customary practices.
(e) Except for the accumulated interest portion of the supplemental
retirement benefit referred to in clause (c) of this paragraph 1, all
amounts payable under this paragraph 1 shall be considered wages and shall
be subject to withholding for taxes and for any other lawful purpose.
(f) During the period from November 1, 1996 through August 31, 1997,
Mazanec shall be eligible to participate in PanEnergy's employee benefit
plans under the same terms as similarly situated employees of PanEnergy,
except, that for the period from November 1, 1996 through December 31,
1996, to the extent more favorable to Mazanec, as otherwise provided in the
1989 Agreement. Furthermore, certain provisions of the 1989 Agreement
respecting (i) the Texas Eastern Executive Service Supplement Plan, (ii)
vacation, and (iii) financial, legal and tax counselling shall continue in
effect through August 31, 1997 under this Agreement. Effective September 1,
1997, Mazanec shall retire from PanEnergy employment and become eligible
for such retirement benefits as are generally available to similarly
situated retirees, including retiree life and medical benefit coverages,
subject to the terms and conditions of the respective benefit plan.
2<PAGE>
<PAGE>
2. Consulting Services. (a) Effective September 1, 1997, Mazanec
shall become a consultant and shall perform consulting services for
PanEnergy through December 31, 1998, for a retainer of Twenty Thousand
Eight Hundred Thirty-Three and 33/100ths Dollars ($20,833.33) per month,
payable on the 15th day of each month. In exchange for the compensation
specified in this paragraph 2, Mazanec shall perform consulting services
for PanEnergy for as many as one hundred eighty (180) days during the
sixteen consecutive month period commencing September 1, 1997. In the
event Mazanec performs consulting services for more than 180 days during
such period, or for more than twelve (12) days during any calendar month
during such period, PanEnergy shall, upon receipt of an appropriate
invoice, compensate Mazanec for the additional days at the rate of Two
Thousand and No/100ths Dollars ($2,000) per day.
(b) During the period from September 1, 1997 through December 31,
1998, Mazanec shall advise and assist PanEnergy concerning regulatory
matters, marketing and customer relations, business strategy and such other
matters which may arise that PanEnergy determines require Mazanec's
experience and knowledge.
(c) During the period from September 1, 1997 through December 31,
1998, Mazanec shall be an independent contractor and, as such, shall
control the detail, manner and means of providing consulting services
pursuant to this Agreement. Accordingly, Mazanec shall not be required to
work any particular schedule, but shall use his best efforts to meet
PanEnergy's deadlines. Further, Mazanec shall not, within reason, be
required to work at any particular location. However, PanEnergy shall
provide reasonable and sufficient office space and clerical and office
services support when Mazanec's presence is required at PanEnergy offices.
Mazanec shall be responsible for payment of all taxes, including federal,
state and local taxes, arising from his receipt of compensation specified
in this paragraph 2 under the terms of this Agreement and, during the
period from September 1, 1997 through December 31, 1998, Mazanec shall not
be eligible to participate in any benefit or compensation plan, practice or
arrangement that PanEnergy provides its employees. Subject to the prior
approval of the President and Chief Executive Officer of PanEnergy Corp or
his designee and upon receipt of proper documentation, PanEnergy shall
reimburse Mazanec for any reasonable expenses incurred in connection with
consulting services performed under this Agreement. Mazanec shall be
entitled to utilize first class commercial air travel. In order to
minimize its costs, PanEnergy encourages, but does not require, Mazanec to
utilize PanEnergy's travel department in arranging any travel where the
costs and expenses of which would otherwise be reimbursable under this
Agreement.
3<PAGE>
<PAGE>
3. Death or Disability. In the event of Mazanec's death or
disability during the term of employment described in clause (a) of
paragraph 1 of this Agreement, PanEnergy's obligation to pay base salary as
described in clause (b) or (c) of paragraph 1 of this Agreement, whichever
is then applicable, shall end with its prorated payment thereof for the
semi-monthly pay period during which such death or disability occurs. In
the event of Mazanec's death or disability during the period for which he
is to perform consulting services as described in clause (a) of paragraph 2
of this Agreement, PanEnergy's obligation to pay the monthly retainer
described in clause (a) of paragraph 2 of this Agreement shall end with its
payment thereof for the month during which such death or disability
occurred.
4. Non-Disclosure Agreement. As a part of the consideration for the
compensation provided in this Agreement and for the other covenants made by
PanEnergy in this Agreement, Mazanec shall hold in a fiduciary capacity for
the benefit of PanEnergy all of PanEnergy's trade secrets and confidential
and proprietary information. Mazanec shall not, without the prior written
consent of PanEnergy Corp, at any time (whether before, on or after
December 31, 1998) following the termination of Mazanec's employment with
PanEnergy, utilize or communicate or divulge to anyone other than PanEnergy
and those designated by it, any of PanEnergy's trade secrets and
confidential and proprietary information. Mazanec shall provide PanEnergy
with prompt notice of any subsequent employment, including, but not limited
to, the name and address of any subsequent employer and the title and
duties of Mazanec's position therewith so that PanEnergy can take whatever
steps it deems appropriate in order to protect its interests under this
Agreement. Mazanec understands that PanEnergy can sue Mazanec and/or any
of Mazanec's future employers for tortious interference with PanEnergy's
contracts, interference with PanEnergy's prospective business relations,
and/or misappropriation of PanEnergy's trade secrets or confidential and
proprietary information. Except with respect to the monthly retainer
described in clause (a) of paragraph 2 of this Agreement, in no event shall
an asserted violation of the provisions of this paragraph 4 constitute a
basis for deferring or withholding any amounts otherwise payable to Mazanec
under this Agreement.
The prohibition against Mazanec's use of PanEnergy's trade secrets
and confidential and proprietary information, other than for the benefit of
PanEnergy, includes, but is not limited to, (a) the exploitation of any
products or services that embody or are derived from PanEnergy's trade
secrets or confidential and proprietary information, and (b) the exercise
of judgment or the performance of analysis based upon knowledge of
PanEnergy's trade secrets and confidential and proprietary information.
Mazanec represents, warrants and agrees that Mazanec has no proprietary or
ownership rights or title to any of PanEnergy's trade secrets or
confidential and proprietary information and no legal right to use,
disclose, disseminate, or publish any of PanEnergy's trade secrets or
confidential and proprietary information in any locality.
4<PAGE>
<PAGE>
5. Definition of Confidential Material. PanEnergy's "trade secrets"
and "confidential and proprietary information" include, but are not limited
to, any and all memoranda, software, data bases, computer programs,
interface systems, pricing and client information, and records pertaining
to PanEnergy's methods or practices of doing business and marketing its
services and products, whether or not developed or prepared by Mazanec
during the term of his employment with PanEnergy or in connection with his
providing consulting service to PanEnergy. PanEnergy's trade secrets and
confidential and proprietary information also includes "writing" or
"writings" which shall mean and include all works, expressed in words,
numbers or other verbal or numerical symbols, regardless of the physical
manner in which they are embodied, including, but not limited, to books,
articles, manuscripts, memoranda, computer programs, computer software
systems, maps, charts, diagrams, technical drawings, manuals, video and
audio tape recordings, and photographs, whether or not developed or
prepared by Mazanec during the term of his employment with PanEnergy or in
connection with his providing consulting services to PanEnergy.
PanEnergy's trade secrets and confidential and proprietary information
shall mean any information or material not generally known to the public
(other than by act of Mazanec or his representatives in breach of this
Agreement) which gives the holder thereof an opportunity to obtain an
advantage over competitors without knowledge of such information.
6. Non-Compete Covenants. (a) In order to protect and safeguard
PanEnergy's trade secrets and confidential information, and also
PanEnergy's goodwill with its customers, during the period beginning
November 1, 1996 and ending December 31, 1998, Mazanec will not, within a
50 mile radius of any location where PanEnergy had an office at any time
during such period or of any location where a customer of PanEnergy (which
is a customer at any time during such period), had an office at any time
during such period, directly or indirectly and without the prior written
consent of PanEnergy Corp, engage in or be interested in (as owner,
partner, shareholder, employee, director, agent, consultant or otherwise),
any business which is a competitor of PanEnergy, as hereafter defined, or
any business which is such a customer. For purposes of this Agreement, a
"competitor" of PanEnergy is any entity, including without limitation, a
corporation, sole proprietorship, partnership, joint venture, syndicate,
trust or any other form of organization or parent, subsidiary or division
of any of the foregoing, which, during such period or the immediately
preceding fiscal year of such entity, was engaged in the transportation,
purchase, brokering, marketing, or trading of natural gas or other energy
products or services.
(b) The terms of this paragraph 6 shall not apply to (i) Mazanec's
present or future investments in the securities of companies listed on a
national securities exchange or traded on the over-the-counter market to
the extent such investments do not exceed 2% of the total outstanding
shares of such company, (ii) Mazanec's employment with a competitor of
PanEnergy provided such employment is limited to areas unrelated to the
transportation, purchase, brokering, marketing or trading of natural gas or
other energy products or services, or (iii) Mazanec's engagement in or
interest in any business with the prior written consent of PanEnergy Corp.
5<PAGE>
<PAGE>
(c) For a period of one (1) year after the expiration or termination
of this Agreement for any reason, Mazanec shall not induce or otherwise
entice any employee of PanEnergy to leave PanEnergy, nor shall Mazanec
attempt to hire any of PanEnergy's employees.
(d) The foregoing restrictions contain reasonable limitations as to
the time, geographical area, and scope of activity to be restrained and
these restrictions do not impose any greater restraint than is necessary to
protect the goodwill and other legitimate business interests of PanEnergy.
7. Obligations, Enforcement. Except as otherwise provided in
paragraph 4 of this Agreement, PanEnergy's obligation to make the payments
provided for in this Agreement shall not be affected by any set-off,
counter-claim, recoupment, defense or other claim, right or action which
PanEnergy may have against Mazanec or others. In no event shall Mazanec be
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to him under any of the provisions of
this Agreement. PanEnergy shall pay, or promptly reimburse Mazanec, for
all legal fees and expenses reasonably incurred by Mazanec in connection
with Mazanec's successful enforcement of this Agreement or the 1989
Agreement.
8. Binding Consideration. Mazanec understands, represents, warrants
and agrees that the consideration provided under this Agreement is in
addition to anything of value to which he is entitled and that PanEnergy
has no contractual obligation or legal duty to pay Mazanec severance
compensation or wages in lieu of notice of termination.
9. Binding Agreement. This Agreement is and shall be binding upon
and inure to the benefit of the parties hereto and their respective
successors, heirs, executors, administrators and assigns. Mazanec
represents, warrants and agrees that he has read, understands and intends
to be bound by this Agreement and its recitals, terms, conditions and
representations. Paul Anderson, President & Chief Executive Officer of
PanEnergy Corp, who executes this Agreement on behalf of PanEnergy Corp,
represents and warrants that he has all necessary power and authority to do
so.
10. Miscellaneous. (a) This Agreement contains and states the
entire agreement of the parties hereto and, except as otherwise provided in
clauses (c) and (f) of paragraph 1 of this Agreement, supersedes and
cancels all prior written and oral agreements and understandings with
respect to the subject matter of this Agreement. This Agreement has no
effect upon any awards under PanEnergy Corp's 1990 or 1994 Long Term
Incentive Plans or, except as otherwise provided in clauses (c) and (f) of
paragraph 1 of this Agreement, upon entitlements under the Texas Eastern
Deferred Income Plan, the Texas Eastern Executive Service Supplement Plan,
PanEnergy Corp's Key Executive Deferred Compensation Plan or PanEnergy
Corp's Key Executive Retirement Benefit Equalization Plan.
(b) The term "affiliate" as used in this Agreement with respect to a
party, means any individual or entity which owns or controls, is owned or
controlled by, or is under common ownership or control with, such party.
6<PAGE>
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(c) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to Mazanec:
George L. Mazanec
302 Fall River Court
Houston, TX 77024
If to PanEnergy:
PanEnergy Corp
5400 Westheimer Court
Houston, TX 77056
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notices and communications shall be
effective when actually received by the addressee.
(d) This Agreement shall be governed by the laws of the State of
Texas and may be amended or modified only by written agreement signed by
both parties.
(e) The obligations of Mazanec hereunder are personal and cannot be
assigned.
(f) The invalidity or unenforceability of any provision shall not
affect the validity and enforceability of the remainder of this Agreement.
(g) The headings in this Agreement are not part of the provisions
hereof and shall have no force or effect.
(h) Except as otherwise provided herein, this Agreement shall
terminate on December 31, 1998.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the day and year first above written
GEORGE L. MAZANEC
___________________________________
PANENERGY CORP
By:________________________________
Paul M. Anderson
Its: President and Chief Executive Officer
