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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 1997
Commission File No. 1-8157
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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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at April 30, 1997
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Common Stock, $1 par value 151,527,819
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
PanEnergy Corp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
March 31
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Millions, except per share amounts 1997 1996
- ---------------------------------- -------- --------
<S> <C> <C>
Operating Revenues
Sales of natural gas, petroleum products and power $2,209.8 $1,271.2
Transportation and storage of natural gas 410.0 400.9
Other 23.2 19.8
-------- --------
Total (Note 3) 2,643.0 1,691.9
-------- --------
Costs and Expenses
Natural gas, petroleum products and power purchased 2,051.3 1,156.6
Operating and maintenance 159.7 152.6
General and administrative 54.6 74.8
Depreciation and amortization 78.2 72.1
Miscellaneous taxes 29.7 22.6
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Total 2,373.5 1,478.7
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Operating Income 269.5 213.2
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Other Income and Deductions
Equity in earnings of unconsolidated affiliates 9.5 5.1
Other income, net of deductions 5.0 3.7
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Total 14.5 8.8
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Earnings Before Interest and Tax 284.0 222.0
Interest Expense 50.5 58.3
-------- --------
Earnings Before Minority Interest and Income Tax 233.5 163.7
Minority Interest 10.5 -
Income Tax 86.7 61.9
-------- --------
NET INCOME $ 136.3 $ 101.8
======== ========
Average Common Shares Outstanding 151.3 150.5
======== ========
Earnings per Common Share $ 0.90 $ 0.68
======== ========
Dividends per Common Share $ 0.24 $ 0.225
======== ========
</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>
March 31, December 31,
Millions 1997 1996
- -------- --------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 25.8 $ 57.2
Accounts and notes receivable, net 928.4 1,178.0
Inventory and supplies 103.3 132.1
Current deferred income tax 61.6 50.4
Other (Notes 3, 5 and 7) 382.5 217.8
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Total 1,501.6 1,635.5
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Investments
Affiliates 340.7 313.9
Other 56.9 58.4
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Total 397.6 372.3
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Plant, Property and Equipment
Original cost 8,867.7 8,822.5
Accumulated depreciation and amortization (3,436.3) (3,365.8)
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Net plant, property and equipment 5,431.4 5,456.7
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Deferred Charges
Prepaid pension 286.4 280.6
Goodwill, net 189.1 191.4
Other (Notes 3 and 5) 557.1 631.3
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Total 1,032.6 1,103.3
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TOTAL ASSETS $ 8,363.2 $ 8,567.8
========= =========
</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>
March 31, December 31,
Millions 1997 1996
- -------- --------- ------------
<S> <C> <C>
Current Liabilities
Long-term debt due within one year $ 23.8 $ 138.3
Notes payable and commercial paper 275.3 354.1
Accounts payable 700.1 959.2
Rate refund provisions (Note 3) 37.8 37.0
Accrued interest 52.4 59.7
Taxes payable 114.6 73.8
Other (Notes 3, 5 and 7) 667.4 435.9
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Total 1,871.4 2,058.0
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Deferred Liabilities and Credits
Deferred income tax 1,296.7 1,242.9
Other (Notes 3 and 5) 633.4 785.1
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Total 1,930.1 2,028.0
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Long-term Debt 1,947.4 1,947.0
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Commitments and Contingent Liabilities
(Notes 3, 5, 6 and 7)
Minority Interest 57.4 82.3
-------- --------
Common Stockholders' Equity
Common stock, 151.5 million (1997) and
151.1 million (1996) shares issued and
outstanding, $1 par value per share 151.5 151.1
Paid-in capital 2,246.4 2,242.1
Retained earnings 159.0 59.3
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Total (Note 4) 2,556.9 2,452.5
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,363.2 $8,567.8
======== ========
</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>
Three Months Ended
March 31
--------------------
Millions 1997 1996
- -------- ------- -------
<S> <C> <C>
Operating Activities
Net income $ 136.3 $ 101.8
Adjustments to reconcile net income to operating
cash flows
Depreciation and amortization 78.2 72.1
Deferred income tax expense 39.4 21.4
Minority interest in earnings 10.5 -
Earnings of unconsolidated affiliates,
net of distributions (1.9) (2.3)
Net pension benefit (5.8) (5.0)
Other non-cash items in net income (20.2) 5.5
Net change in operating assets
and liabilities 100.6 (42.9)
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Net Cash Flows Provided by Operating Activities 337.1 150.6
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Investing Activities
Capital expenditures (50.2) (41.8)
Investment expenditures (26.3) (3.0)
Net investment decreases (increases) 1.7 (1.1)
Property retirements and other 1.8 24.4
------- -------
Net Cash Flows Used in Investing Activities (73.0) (21.5)
------- -------
Financing Activities
Retirement of debt (114.5) (40.1)
Net decrease in notes payable and commercial paper (78.8) (101.1)
Net increase (decrease) in accounts payable - banks (32.3) 30.2
Dividends paid (36.3) (33.8)
Minority interest distributions, net (35.5) -
Other 1.9 4.4
------- -------
Net Cash Flows Used in Financing Activities (295.5) (140.4)
------- -------
Net Change in Cash
Decrease in cash and cash equivalents (31.4) (11.3)
Cash and cash equivalents, beginning of period 57.2 50.8
------- -------
Cash and Cash Equivalents, End of Period $ 25.8 $ 39.5
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 38.9 $ 54.0
Cash paid (received) for income tax (0.5) 1.3
</TABLE>
See accompanying notes to consolidated financial statements
<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 and the production of natural gas liquids (NGLs). The
Company is also a leading marketer of natural gas, electricity,
liquefied petroleum gases and related energy services.
The interstate natural gas transmission and storage 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. (Algonquin
LNG), are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC). TETCO, Algonquin, PEPL, Trunkline and
Algonquin LNG meet the criteria and, accordingly, follow the reporting
and accounting requirements of Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of Regulation." Accordingly, certain net costs totaling $438.8 million
at December 31, 1996 have been deferred as regulatory assets for amounts
recoverable from customers, including costs related to environmental
matters, FERC Order 636 transition, certain employee benefits and the
early retirement of debt.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts in the financial
statements. Actual results could differ from those estimates. The
consolidated financial statements reflect all normal recurring
adjustments that are, in the opinion of management, necessary for fair
presentation. Certain amounts for the prior periods have been
reclassified in the consolidated financial statements to conform to the
current presentation.
2. Pending Duke Power Company Merger
On November 25, 1996, PanEnergy and Duke Power Company (Duke Power)
announced a definitive merger agreement for a tax-free, stock-for-stock
transaction. The merger is conditioned upon, among other things, the
approval of PanEnergy and Duke Power shareholders, and approvals of
appropriate state and federal regulatory agencies. The proposed merger
has already received PanEnergy and Duke Power shareholders' approvals
and regulatory approval from the utilities commissions of North Carolina
and South Carolina. Additionally, the Federal Trade Commission granted
early termination of the waiting period prescribed under the
Hart-Scott-Rodino Antitrust Improvements Act. As of the date of this
report, the merger is awaiting regulatory approval from FERC. The
Company anticipates that FERC approval will be granted by the originally
targeted timeframe of November 1997. At closing, Duke Power will change
its name to Duke Energy Corporation (Duke Energy) and PanEnergy will
become a wholly-owned subsidiary of Duke Energy. <PAGE>
<PAGE>
3. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of the
revenues collected by interstate natural gas pipelines is subject to
possible refund. The Company has established adequate reserves where
required for such cases. The following is a summary of significant
pending rate cases before FERC and related regulatory matters.
FERC Order 636 and Transition Costs
The Company's interstate natural gas pipelines primarily provide
transportation and storage services pursuant to FERC Order 636. This
order allows pipelines to recover eligible costs resulting from
implementation of the order (transition costs). On July 16, 1996, the
U.S. Court of Appeals for the District of Columbia upheld, in general,
all aspects of Order 636 and remanded certain issues, including recovery
of gas supply realignment (GSR) costs, for further explanation. This
decision is on appeal to the U.S. Supreme Court. On February 27, 1997,
FERC issued an order reaffirming the right of interstate pipelines to
recover 100% of GSR costs.
TETCO's final and nonappealable Order 636 settlement, implemented in
1994, provides for the recovery of a significant portion of 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 contract
reserve levels.
At March 31, 1997 and December 31, 1996, the Company's interstate
pipelines had recorded $67 million and $235.2 million (1997), and
$67.9 million and $250 million (1996), of current and long-term
regulatory assets, respectively, representing transition costs incurred
or estimated to be incurred that will be recovered. At March 31, 1997
and December 31, 1996, the Company had recorded estimated current and
long-term liabilities related to Order 636 transition costs of
$115.4 million and $66.6 million (1997), and $84.4 million and
$121.9 million (1996), respectively.
The Company believes the exposure associated with gas purchase contract
commitments is substantially mitigated by transition cost recoveries
pursuant to customer settlements, Order 636 and other mechanisms, and
that this issue will not have a material adverse effect on the Company's
consolidated results of operations, financial position or liquidity.
<PAGE>
<PAGE>
In 1993, the U.S. Department of the Interior announced its intention to
seek additional royalties from gas producers as a result of payments
received by such producers in connection with past take-or-pay
settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. 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 substantial time to resolve.
If required to reimburse or indemnify the producers, the Company's
pipelines will file with FERC to recover a portion of these costs from
pipeline customers. The Company believes the resolution of this matter
will not have a material adverse effect on the Company's consolidated
financial position or liquidity.
Jurisdictional Transportation and Sales Rates
PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into effect,
subject to refund, general rate increases. On February 26, 1997, FERC
approved PEPL's settlement agreement which provides final resolution of
refund matters and establishes prospective rates. The agreement
terminates other actions relating to these proceedings as well as PEPL's
restructuring of rates and transition cost recoveries related to
Order 636. As a result of the resolution of this matter, PEPL recorded
pre-tax earnings of $27.7 million in the first quarter of 1997 and in
April 1997 refunded $37.8 million to customers. The settlement will not
have a material impact on future operating revenues.
Trunkline - Effective August 1, 1996, Trunkline placed into effect a
general rate increase, subject to refund, reflecting an annual cost of
service increase of $5 million. The rate proceeding is in the discovery
phase, with hearings scheduled to commence in the third quarter of 1997.
4. Common Stockholders' Equity
Under the most restrictive covenants contained in the Company's debt
agreements, $1.3 billion of PanEnergy's consolidated common stock-
holders' equity was available for the payment of dividends at March 31,
1997.
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.
<PAGE>
<PAGE>
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. In 1996, TETCO 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. Environmental
cleanup programs are expected to continue until 2002.
PEPL is also in discussions with environmental regulatory agencies in
the states of Missouri and Illinois, and Trunkline is in similar
discussions with the state of Louisiana, regarding potential monetary
sanctions for alleged air compliance violations by facilities in those
states.
At March 31, 1997 and December 31, 1996, the Company had total current
and long-term liabilities recorded of $27.8 million and $185.6 million
(1997), and $32.4 million and $188.9 million (1996), respectively, for
remaining estimated cleanup costs on the TETCO, PEPL and Trunkline
systems. These estimates represent probable 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.
At March 31, 1997 and December 31, 1996, the Company had total current
and long-term regulatory assets recorded of $17 million and
$98.2 million (1997), and $16.7 million and $136.5 million (1996),
respectively, representing estimated 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 resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
Company's consolidated results of operations, financial position or
liquidity based upon customer settlements and past experience with
environmental cleanup costs. <PAGE>
<PAGE>
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, property losses and/or lost business income, as well as
punitive damages. The property insurers of an apartment complex
adjacent to the asphalt plant where the rupture occurred also filed
suits against TETCO and other defendants in Superior Court seeking to
recover amounts paid under pertinent policies of insurance. Quality
Materials, Inc. (Quality), the owner of the asphalt plant, has filed
a claim against TETCO seeking to recover unspecified property damages,
lost income and punitive damages. TETCO filed a counterclaim against
Quality and 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.
The findings of an investigation of the incident by the National
Transportation Safety Board indicate third-party damage to be the cause
of the rupture. The Company recorded a provision in 1994 for costs
related to this incident that are not recoverable under the Company's
insurance policies.
On August 30, 1995, two plaintiffs filed a lawsuit with class action
allegations in Jefferson County, Texas, against PanEnergy, Texas Eastern
Corporation (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 removed the suit to the U.S. District Court for the
Eastern District of Missouri, Eastern Division in July 1996. In March
1997, the case was remanded to the same state court in St. Louis. The
plaintiff seeks, in addition to class certification, recovery of
compensatory and punitive damages, in unspecified amounts, for personal
injuries and property damage resulting from alleged exposure to PCBs.
On August 31, 1995, Midwest Gas Storage, Inc. (Midwest) filed suit
against PanEnergy and PEPL in the 58th Judicial District Court,
Jefferson County, Texas, alleging that PEPL breached an interconnection
agreement with Midwest and used its superior bargaining position to
force Midwest to accept terms and conditions which were not in the
original agreement. Amended petitions filed in 1996 further allege that
PanEnergy and PEPL, through economic coercion, have attempted to drive
Midwest out of business. Asserting fraud and violations of Texas
anti-trust laws, among other counts, Midwest seeks compensatory and
punitive damages in unspecified amounts. <PAGE>
<PAGE>
A lawsuit filed in the United States District Court for the District of
Columbia by a natural gas producer was served in July 1996 naming TETCO,
PEPL, Trunkline and PanEnergy Services, Inc. (a subsidiary) as
defendants, among others. The action was brought under the federal
False Claims Act against 70 defendants, including every major pipeline,
asserting that the defendants intentionally underreported volumes and
heating content of gas purchased from producers on federal and Indian
lands, with the result that the United States was underpaid royalties.
The plaintiff seeks recovery of the royalty amounts due the United
States, treble damages and civil penalties. The Company's named
affiliates and many of the other defendants were dismissed from the
lawsuit on March 27, 1997. The plaintiff retains the right to refile
the claims against the various defendants under certain conditions.
The Company believes the resolution of the legal matters discussed above
will not have a material adverse effect on the Company's consolidated
results of operations, financial position or liquidity.
On December 16, 1996, TETCO received notification that Marathon Oil
Company (Marathon) intended to commence substitution of other gas
reserves, deliverability and leases for those dedicated to a certain
natural gas purchase contract (the Marathon Contract) with TETCO. In
TETCO's view, the tendered substitute gas reserves, deliverability and
leases are not subject to the Marathon Contract and TETCO filed a
declaratory judgment action on December 17, 1996 in the U.S. District
Court for the Eastern District of Louisiana seeking a ruling that
Marathon's interpretation of the Marathon Contract is incorrect. On
January 7, 1997, Marathon filed an answer and a counterclaim to TETCO's
complaint seeking a declaratory judgment enforcing its interpretation
of the Marathon Contract.
On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified
TETCO that it intended to commence substitution of other gas reserves,
deliverability, and leases for those dedicated to its natural gas
purchase contract (the Amerada Hess Contract) with TETCO. On the same
date, Amerada Hess also filed a petition in the District Court of Harris
County, Texas, 157th Judicial District, seeking a declaratory judgment
that its interpretation of the Amerada Hess Contract, which covers the
same leases and reserves as the Marathon Contract, is correct. TETCO
removed that suit to the U.S. District Court for the Southern District
of Texas, Houston Division. TETCO also filed a declaratory judgment
action with respect to Amerada Hess contentions in the U.S. District
Court for the Eastern District of Louisiana on February 21, 1997. The
Texas action has been transferred to the Eastern District of Louisiana.
That suit and the Louisiana action filed by TETCO have been transferred
to the judge presiding over the Marathon Contract matter. <PAGE>
<PAGE>
The potential liability of the Company should TETCO be contractually
obligated to purchase natural gas based upon the substitute gas
reserves, deliverability and leases, and the effect of transition cost
recoveries pursuant to TETCO's Order 636 settlement involve numerous
complex legal and factual matters which will take a substantial period
of time to resolve. Because these matters are in the early stages of
litigation, the Company cannot estimate the effects of this issue, based
on information currently available.
On April 25, 1997, a group of affiliated plaintiffs that own and/or
operate various pipeline and marketing partnerships in Kansas and
Missouri filed suit against PEPL in the United States District Court for
the Western District of Missouri. The plaintiffs allege that PEPL has
engaged in unlawful and anti-competitive conduct with regard to requests
for interconnects with the PEPL system for service to the Kansas City
area. Asserting that PEPL has violated the antitrust laws and
tortiously interfered with plaintiffs' contracts with third parties,
plaintiffs seek compensatory and punitive damages in unspecified
amounts. As of the date of this report, PEPL has not been served with
the complaint. Accordingly, the Company cannot estimate the effects of
this issue, based on information currently available.
On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron Capital
and Trade Resources Corporation, as successor to Enron Gas Marketing
Corporation, filed suit in the District Court of Harris County, Texas,
against PanEnergy LNG Sales, Inc. (formerly Pan National Gas Sales,
Inc.), a subsidiary of PanEnergy, alleging breach of a gas purchase
contract (the Contract) for regasified LNG entered into between Citrus
and Pan National Gas Sales, Inc. Plaintiffs allege that PanEnergy LNG
Sales, Inc. failed to deliver LNG pursuant to the terms of the Contract.
Plaintiffs seek compensatory damages in unspecified amounts for losses
allegedly incurred as a result of the contract breach as well as a
declaratory judgment that PanEnergy LNG Sales Inc.'s assertions of force
majeure due to the interruption in the supply of LNG to PanEnergy LNG
Sales, Inc. do not constitute force majeure under the Contract. Because
this matter is in the early stages of litigation, the Company cannot
estimate the effects of this issue, based on information currently
available.
The Company is also involved in various other legal actions and claims
arising in the normal course of business. Based upon its current
assessment of the facts and the law, management does not believe that
the outcome of any such action or claim will have a material adverse
effect upon the Company's consolidated results of operations, financial
position or liquidity. 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.
<PAGE>
<PAGE>
7. Other Matters
TEPPCO Partners, L.P. - The Company has a 10% 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 $326.5 million in First Mortgage Notes outstanding at March 31,
1997 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, 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, 1996 totaled approximately
$62.2 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.
Northern Border Pipeline Company (Northern Border) - PEPL owns an
effective 6% 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 $94.4 million for 1997 through 2001. In the opinion of
management, the probability that PEPL will be required to perform under
this guarantee is remote.
Commodity Risk Management - The Company holds and issues instruments
that reduce the Company's exposure to market fluctuations in the price
and transportation costs of natural gas, petroleum products and electric
power. The Company uses futures, swaps and options to manage and hedge
price and location risk related to market exposures. In addition to
hedging activities, the Company also engages in the trading of such
instruments, and therefore experiences net open positions in terms of
price, volume and specified delivery point. At March 31, 1997, the
Company had unrealized gains of $215 million and unrealized losses of
$194.5 million recorded as other current assets and other current
liabilities, respectively, related to derivatives utilized for trading
purposes. The Company manages open positions with strict policies which
limits its exposure to market risk and require daily reporting to
management of potential financial exposure. These policies include
statistical risk tolerance limits using historical price movements to
calculate a daily earning at risk as well as a total value at risk
measurement.
<PAGE>
<PAGE>
ACCOUNTING STANDARDS
The Company adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," on
a prospective basis effective January 1, 1997, with no significant
impact on the Company's results of operations or financial position.
PanEnergy will implement SFAS No. 128, "Earnings per Share," for
year-end 1997 financial reporting. This standard requires presentation
of both "basic" and, where capital structures are complex, "diluted"
earnings per share disclosure in the statement of income. The Company
expects that implementation of this standard will not have a material
effect on earnings per share as currently calculated.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information is provided to facilitate increased understanding
of the 1997 and 1996 interim consolidated financial statements and
accompanying notes presented in Item 1. 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.
OPERATING ENVIRONMENT AND OUTLOOK
The restructuring of the natural gas industry under FERC Order 636 and the
electric power industry under FERC Order 888 has created additional growth
opportunities for the Company. Increasingly, companies in these industries
are planning combinations to form full-service energy enterprises. On
November 25, 1996, PanEnergy and Duke Power, one of the nation's largest and
lowest-cost investor-owned electric utilities, announced a definitive merger
agreement for a tax-free, stock-for-stock transaction. The pending merger
will create an integrated energy and energy services provider, with the
ability to offer physical delivery and management of both natural gas and
electricity throughout the country.
<PAGE>
<PAGE>
The Company continues its growth strategy of expanding non-jurisdictional
businesses, while also continuing to develop interstate gas pipeline
market-expansion projects and new services for customers. In the Energy
Services segment, the Company in the second half of 1996 formed the marketing
company PanEnergy Trading and Market Services (PTMS), whose operations are
expected to be combined with those of Duke/Louis Dreyfus upon completion of
the merger with Duke Power. Also in 1996, the Company purchased various
natural gas gathering, processing and related assets and gathering systems,
and also purchased a general partnership interest in Dauphin Island Gathering
Partners (Dauphin Island). In January 1997, Dauphin Island combined its
offshore gathering system with Main Pass Gathering Company, in which the
Company also has ownership interests, and subsequently filed to construct
additional gathering facilities in the Gulf of Mexico. In the Natural Gas
Transmission segment, the Company in March 1997 announced the Excelsior(sm)
and Spectrum(sm) projects, with proposed in-service dates of the year 2000,
that would increase delivery capability to New York and the East Coast,
respectively, by approximately 500 billion British thermal units per day for
each project.
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. These opportunities are expected to increase as the Company
combines its natural gas expertise with the electric power capability of Duke
Power.
RESULTS OF OPERATIONS
Consolidated net income for the three months ended March 31, 1997 was
$136.3 million, or $0.90 per share on 151.3 million average common shares
outstanding, compared with $101.8 million, or $0.68 per share on 150.5 million
average common shares outstanding, for the same period in 1996.
Operating Income and Earnings Before Interest and Tax Analysis
Consolidated operating income increased to $269.5 million in the first three
months of 1997 compared with $213.2 million for the same period in 1996, while
consolidated earnings before interest and tax increased to $284 million in the
first three months of 1997 as compared with $222 million in 1996. These
increases reflect improvements in both the Natural Gas Transmission and Energy
Services groups. Business expansions, increased margins and the impact of
rate case resolutions contributed to these improvements. These increases are
net of $8 million and $17 million of work-force reduction charges in 1997 and
1996, respectively.
<PAGE>
<PAGE>
Operating Income and Earnings Before Interest and Tax (EBIT)
by Business Group
------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------------
Operating Income EBIT
---------------- ----------------
Millions 1997 1996 1997 1996
-------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Natural Gas Transmission
TETCO $ 89.8 $ 85.1 $ 92.2 $ 86.8
Algonquin 16.0 17.9 16.2 18.1
PEPL 67.9 32.1 76.9 33.2
Trunkline 20.6 20.6 20.5 20.2
------ ------ ------ ------
Total 194.3 155.7 205.8 158.3
------ ------ ------ ------
Energy Services
Field Services 46.0 31.6 48.1 34.0
Gas and Power Services 28.7 21.6 24.0 21.8
------ ------ ------ ------
Total 74.7 53.2 72.1 55.8
------ ------ ------ ------
Other Operations 0.5 4.3 6.1 7.9
------ ------ ------ ------
Consolidated Total $269.5 $213.2 $284.0 $222.0
====== ====== ====== ======
</TABLE>
<PAGE>
<PAGE>
Equity in Earnings (Losses) of Unconsolidated Affiliates
(included in Earnings Before Interest and Tax)
--------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------
Millions 1997 1996
-------- ----- -----
<S> <C> <C>
Natural Gas Transmission
Northern Border Partners, L.P. $ 1.3 $ 1.1
----- -----
Energy Services
Various affiliates 2.0 0.5
----- -----
Other Operations
National Methanol Company 1.8 2.7
TEPPCO Partners, L.P. 2.9 2.7
Midland Cogeneration Venture 1.0 (0.3)
Other affiliates 0.5 (1.6)
----- -----
Total 6.2 3.5
----- -----
Total Equity in Earnings $ 9.5 $ 5.1
===== =====
</TABLE>
<PAGE>
<PAGE>
Operating Data
--------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1997 1996
---- ----
<S> <C> <C>
Natural Gas Transmission Volumes,
Trillion British Thermal Units
Market Area
TETCO 350 401
Algonquin 109 105
PEPL 196 210
Trunkline 135 153
Eliminations (20) (12)
---- ----
Total 770 857
---- ----
Supply Area
TETCO 31 32
PEPL 8 8
Trunkline 33 28
---- ----
Total 72 68
---- ----
Total Volumes 842 925
==== ====
Energy Services Volumes
Field Services
Natural gas gathered/
processed, TBtu/d(1) 3.4 2.5
NGL production, MBbl/d(2) 101.6 58.2
Crude oil pipeline volumes, MBbl/d 64.0 68.4
NGL pipeline volumes, MBbl/d 18.3 20.2
Gas and Power Services
Natural gas marketed, TBtu/d 6.9 4.4
Electricity marketed, GWh(3) 3,793 171
----------
(1) Trillion British thermal units per day.
(2) Thousand barrels per day.
(3) Gigawatt-hours.
</TABLE>
<PAGE>
<PAGE>
Natural Gas Transmission
Operating income for Natural Gas Transmission increased to $194.3 million in
the first three months of 1997 compared with $155.7 million for the same
period in 1996, while earnings before interest and tax increased
$47.5 million, or 30%, to $205.8 million in the first three months of 1997.
TETCO - Higher operating income drove TETCO's $5.4 million increase in
earnings before interest and tax, comparing the first three months of 1997
with the prior-year period. The operating income increase was attributable
to higher revenues related to new pipeline expansion projects, partially
offset by severance costs and lower volumes due to warmer weather.
Algonquin - Algonquin's earnings before interest and tax decreased
$1.9 million in the first three months of 1997 compared with the same period
in 1996 as a result of decreased operating income resulting from severance
expense of $3.8 million in the first quarter 1997 related to the previously
announced office consolidation. Excluding this item, earnings before interest
and tax increased $1.9 million primarily due to higher throughput to fuel
electricity generation.
PEPL - PEPL's earnings before interest and tax increased $43.7 million to
$76.9 million in the first quarter of 1997 compared with the prior-year
period, primarily due to increased operating income. A $27.7 million
provision reversal in 1997 related to the final settlement of three rate
proceedings, $9.5 million of severance expense in 1996 and lower operating
costs contributed to the increase in earnings before interest and tax.
Trunkline - Earnings before interest and tax for Trunkline increased
$0.3 million to $20.5 million in the first three months of 1997 as compared
with the same period in 1996, while operating income of $20.6 million remained
steady. Decreased expenses in 1997, including the impact of higher severance
costs recorded in 1996, were offset by the effects of lower volumes due to
warmer weather.
Energy Services
Earnings before interest and tax for Energy Services increased $16.3 million,
or 29%, comparing the first three months of 1997 with the same period in 1996,
primarily as a result of higher operating income driven by higher natural gas
gathering and trading volumes as well as higher NGL volumes and prices.
Field Services - Field Services, which includes the Crude Oil group, increased
earnings before interest and tax $14.1 million for the first three months of
1997 as compared with the prior-year period due to higher operating income.
Net revenues increased $26.9 million, or 35%, resulting from higher NGL prices
and increased gathering and processing volumes related to expansion projects
and the 1996 Mobil assets acquisition. NGL production increased 75% to
101,600 million barrels per day, and gathering and processing volumes
increased 36% to 3.4 TBtu/d. <PAGE>
<PAGE>
Gas and Power Services - Operating income and earnings before interest and tax
for Gas and Power Services increased $7.1 million and $2.2 million,
respectively, for the first three months of 1997 compared with the same period
in 1996. Significantly higher gas volumes more than offset lower margins and
a one-time charge related to the disposition of the United Kingdom marketing
operations. Total marketed gas volumes increased 57% to 6.9 TBtu/d and
electricity marketed increased to 3,793 GWh, primarily as a result of the
formation of PTMS in the third quarter 1996. Earnings for the first quarter
of 1997 reflect a $10.5 million minority interest for Mobil's investment in
PTMS.
Commodity Risk Management - See Note 7 of the Notes to Consolidated Financial
Statements for information concerning commodity risk management.
Other Operations
A decrease in charter income from the liquefied natural gas project caused
lower operating income when comparing the first three months of 1997 with the
same period in 1996. In addition, lower equity earnings from National
Methanol Company contributed to the $1.8 million decrease in earnings before
interest and tax.
Accounting Standards
See Note 7 of the Notes to Consolidated Financial Statements for a discussion
of standards adopted and to be adopted.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION
Operating Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------
Millions 1997 1996
- -------- ------ ------
<S> <C> <C>
Net Cash Flows Provided by Operating Activities $337.1 $150.6
------ ------
</TABLE>
Historical Analysis - Operating cash flows increased $186.5 million comparing
the first three months in 1997 with the same period in 1996. This increase
primarily reflects higher 1997 earnings. In addition, net decreases in
accounts receivable partially offset by net decreases in accounts payable
reflect the seasonal declines from high levels of winter period trading
activity.
<PAGE>
<PAGE>
Order 636 Transition Costs - With implementation of FERC Order 636 and the
unbundling of 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 were
approximately $120 million, $55 million, $50 million and $15 million for the
years 1997 through 2000, respectively, with no significant amounts thereafter.
These estimates reflect significant assumptions regarding natural gas contract
reserves and prices.
As a result of the sale in 1996 of the right to collect certain Order 636
transition costs, above-market gas purchase contract payments by TETCO are
expected to exceed transition cost collections from customers through 2000.
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 3 and 7 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 fully chartered its two LNG tankers for 22 years starting as
early as 1999.
Investing Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31
- -------------------
Millions 1997 1996
- -------- ----- -----
<S> <C> <C>
Net Cash Flows Used in Investing Activities $73.0 $21.5
----- -----
</TABLE>
<PAGE>
<PAGE>
Capital and Investment Expenditures - Capital and investment expenditures
totaled $76.5 million in the first three months of 1997, compared with
$44.8 million for the same period in 1996. The Company currently expects to
invest up to $600 million in 1997 capital and investment expenditures, with
approximately 50% for Natural Gas Transmission and 40% for Energy Services,
with the remainder budgeted for international and other development projects.
The Company's 1997 expenditure plans include approximately $425 million for
market-expansion projects.
Asset Sale - In connection with the pending merger with Duke Power, in April
1997, the Company signed a definitive agreement for the sale of its investment
in Midland Cogeneration Venture Limited Partnership. The sale is pending
regulatory approval.
Financing Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31
- --------------------
Millions 1997 1996
- -------- ------ ------
<S> <C> <C>
Net Cash Flows Used in Financing Activities $295.5 $140.4
------ ------
</TABLE>
On April 1, 1997, PanEnergy called for redemption of its outstanding
$10 million, 9% convertible notes. The note holders subsequently exercised
their right to convert the notes to PanEnergy common stock. The notes were
converted and on May 13, 1997, 451,875 shares of PanEnergy common stock were
issued. In connection with the note conversions, PanEnergy purchased
451,875 shares of its common stock on the open market during the period
April 29, 1997 through May 7, 1997 for $20.6 million.
Debt and Credit Facilities - PanEnergy increased the size of its commercial
paper program in the first quarter 1997 for amounts up to $800 million,
supported by its two variable-rate bank credit agreements that permit
PanEnergy to borrow up to $400 million under a five-year facility and
$400 million under a 364-day facility. Amounts outstanding under the credit
agreements and commercial paper program are limited to $800 million in
aggregate. At March 31, 1997, there was $249.9 million of commercial paper
outstanding and no amounts outstanding under the credit agreements.
Common Stockholders' Equity - At its April meeting, the board of directors
declared a quarterly dividend on common stock of $0.24 per common share
payable June 15, 1997, to shareholders of record on May 15, 1997.
<PAGE>
<PAGE>
Financing Requirements - Dividends and debt repayments for the next year,
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 and commercial paper issuances and/or available credit
facilities. 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.
FORWARD-LOOKING INFORMATION
This report may contain certain forward-looking information regarding the
Company, including projections, estimates, forecasts, plans, contingencies and
objectives. Although management believes that all such statements are based
upon reasonable assumptions, no assurance can be given that the actual results
will not differ materially from those contained in such forward-looking
statements.
Important factors that could cause actual results to differ include, but are
not limited to, general economic conditions, natural gas and liquids prices,
competition from other pipelines and alternative fuels, weather conditions,
state and federal regulation, legal and regulatory proceedings, the
development of new markets, services and products, and the condition of the
capital markets utilized by the Company. <PAGE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 3, 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, 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report dated February 10, 1997 was filed under Item 7,
"Financial Statements and Exhibits", to provide certain financial data of
PanEnergy and subsidiaries as of December 31, 1996 and 1995 and for each
of the years in the three year period ended December 31, 1996.
A Current Report dated March 10, 1997 was filed under Item 5, "Other
Events", to disclose Duke Power Company receiving approval by the Public
Service Commission of South Carolina for the pending merger with PanEnergy
and to file the Agreement and Plan of Merger dated as of November 24,
1996, as amended and restated as of March 10, 1997.
<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: May 14, 1997
<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
March 31, 1997 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 25,800
<SECURITIES> 0
<RECEIVABLES> 928,400
<ALLOWANCES> 0
<INVENTORY> 103,300
<CURRENT-ASSETS> 1,501,600
<PP&E> 8,867,700
<DEPRECIATION> 3,436,300
<TOTAL-ASSETS> 8,363,200
<CURRENT-LIABILITIES> 1,871,400
<BONDS> 1,947,400
<COMMON> 151,500
0
0
<OTHER-SE> 2,405,400
<TOTAL-LIABILITY-AND-EQUITY> 8,363,200
<SALES> 2,209,800
<TOTAL-REVENUES> 2,643,000
<CGS> 2,051,300
<TOTAL-COSTS> 2,211,000
<OTHER-EXPENSES> 107,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,500
<INCOME-PRETAX> 233,500
<INCOME-TAX> 86,700
<INCOME-CONTINUING> 136,300
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 136,300
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
