<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
______________
Date of Report: February 10, 1997
Date of Earliest Event Reported: February 10, 1997
PANENERGY CORP
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-8157
(Commission File Number)
74-2150460
(I.R.S. Employer Identification Number)
5400 Westheimer Court
P.O. Box 1642
Houston, Texas 77251-1642
(Address, including zip code, of principal executive offices)
______________
Registrant's telephone number, including area code:
(713) 627-5400
<PAGE> 2
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule for December 31, 1996.
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.2 Independent Auditors' Report -- KPMG Peat Marwick LLP.
99.3 Audited Consolidated Balance Sheet of PanEnergy Corp as of December
31, 1996 and 1995 and Consolidated Statements of Income, Common
Stockholders' Equity and Cash Flows for each of the years in the
three year period ended December 31, 1996, and Notes to Consolidated
Financial Statements.
99.4 Consolidated Quarterly Financial Data.
99.5 Summary of Selected Consolidated Financial and Operating Data.
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANENERGY CORP
By: /s/ PAUL F. FERGUSON, JR.
---------------------------------
Paul F. Ferguson, Jr.
Senior Vice President and
Chief Financial Officer
Date: February 10, 1997
<PAGE> 4
Exhibit List
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule for December 31, 1996.
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
99.2 Independent Auditors' Report -- KPMG Peat Marwick LLP.
99.3 Audited Consolidated Balance Sheet of PanEnergy Corp as of December
31, 1996 and 1995 and Consolidated Statements of Income, Common
Stockholders' Equity and Cash Flows for each of the years in the
three year period ended December 31, 1996, and Notes to Consolidated
Financial Statements.
99.4 Consolidated Quarterly Financial Data.
99.5 Summary of Selected Consolidated Financial and Operating Data.
<PAGE> 1
EXHIBIT 23
ACCOUNTANTS' CONSENT
The Board of Directors
PanEnergy Corp:
We consent to incorporation by reference in the Registration Statements
listed below of PanEnergy Corp of our report dated January 16, 1997, relating
to the consolidated balance sheets of PanEnergy Corp and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
common stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1996, which report is included herein.
1. Form S-8 Registration Statements for the following:
(A) 1989 Nonemployee Directors Stock Option Plan (No. 33-28912)
(B) 1977 Non-Qualified Stock Option Plan (No. 2-61225)
(C) 1982 Key Employee Stock Option Plan (No. 2-79180)
(D) Special Recognition Bonus Plan (No. 33-35253)
(E) 1990 Long Term Incentive Plan (No. 33-35251)
(F) Employees' Savings Plan (No. 33-36698)
(G) Employees' Savings Plan (No. 33-41079)
(H) 1994 Long Term Incentive Plan (No. 33-55119)
(I) Tax Credit Employee Stock Ownership Plan (No. 333-02877)
2. Form S-3 Registration Statements for the following:
(A) Dividend Reinvestment and Stock Purchase Plan (No. 33-28914)
(B) Debt Securities (No. 333-10219)
KMPG PEAT MARWICK LLP
Houston, Texas
February 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from PanEnergy
Corp's audited consolidated balance sheet as of December 31, 1996 and 1995, and
audited consolidated financial statements of income for each of the years in the
three year period ended December 31, 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 57,200
<SECURITIES> 0
<RECEIVABLES> 1,178,000
<ALLOWANCES> 0
<INVENTORY> 132,100
<CURRENT-ASSETS> 1,635,500
<PP&E> 8,822,500
<DEPRECIATION> 3,365,800
<TOTAL-ASSETS> 8,567,800
<CURRENT-LIABILITIES> 2,058,000
<BONDS> 1,947,000
<COMMON> 151,100
0
0
<OTHER-SE> 2,301,400
<TOTAL-LIABILITY-AND-EQUITY> 8,567,800
<SALES> 5,957,000
<TOTAL-REVENUES> 7,536,800
<CGS> 5,523,600
<TOTAL-COSTS> 6,129,000
<OTHER-EXPENSES> 377,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,100
<INCOME-PRETAX> 589,400
<INCOME-TAX> 222,100
<INCOME-CONTINUING> 361,100
<DISCONTINUED> 0
<EXTRAORDINARY> (16,700)
<CHANGES> 0
<NET-INCOME> 344,400
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 2.28
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PANENERGY CORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information is provided to facilitate increased understanding
of the 1996, 1995 and 1994 consolidated financial statements and accompanying
notes of PanEnergy Corp (PanEnergy) and its subsidiaries (the Company). 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 Federal Energy
Regulatory Commission (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 combining to form full-service
energy enterprises. On November 25, 1996, PanEnergy and Duke Power Company
(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 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 Company anticipates that
the stockholder and regulatory approvals can be completed within 12 months. 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. The
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.
The Energy Services segment of the Company, which includes the Field
Services and the Gas and Power operating groups, continued to grow through
acquisitions, expansions and joint ventures in 1996 and is expected to continue
this growth in 1997 and beyond. The Field Services group, which gathers,
aggregates, stores and processes natural gas and also markets natural gas
liquids (NGLs), continued to add significant processing and gathering
facilities. The Company in 1996 acquired Mobil's interest in certain natural
gas gathering, processing and related assets for approximately $300 million and
purchased a general partnership interest in Dauphin Island Gathering Partners,
which owns a natural gas gathering system in the Gulf of Mexico. In addition,
in November 1996, Field Services completed the acquisitions of a 300-mile
natural gas gathering system in south Texas and a 500-mile intrastate gathering
pipeline system in northern Louisiana.
The Gas and Power Services group also experienced significant growth during
the year. On August 1, 1996, PanEnergy and Mobil Corporation (Mobil) combined
their marketing operations to form a 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. PanEnergy owns 60% of
PTMS and, upon completion of the merger with Duke Power, expects to combine
PTMS operations with Duke/Louis Dreyfus, which is currently the second largest
marketer of electricity in the nation.
[CAPITAL/INVESTMENT EXPENDITURES GRAPH]
To capitalize on opportunities created by FERC Order 888, in August 1996,
the Company formed a partnership with Associated Electric Cooperative, Inc. to
construct a 250-megawatt, gas fired, combined cycle power plant in southeastern
Missouri and to jointly market the plant's generation. In addition, the Company
in October 1996 acquired a 32.5% interest in United American Energy Corp., an
independent power producer engaged in the ownership and management of energy
assets. The Company plans to participate further in the open-access electric
market by providing expanded energy options to customers.
The Natural Gas Transmission segment, which consists of Texas Eastern
Transmission Corporation (TETCO), Algonquin Gas Transmission Company
(Algonquin), Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas
Company (Trunkline), continues to advance projects that provide expanded
services to meet the specific needs of customers. The pipelines offer selective
discounting to maximize revenues from existing capacity.
26
<PAGE> 2
TETCO announced two projects that reflect the growing trend of pipeline
companies working together to more efficiently increase service to markets. In
June 1996, TETCO filed with FERC to construct and lease firm transportation
capacity to Columbia Gas Transmission Corp., starting in 1997 with full volumes
flowing in 1999 for 15 years. In another project, previously called WinterNet,
TETCO will lease firm transportation capacity to CNG Transmission Corporation
beginning in 1997, reaching full volumes in 2000 under a 22-year agreement.
To meet growing New England demand for flexible natural gas storage and peak
delivery services, Algonquin LNG, Inc. (Algonquin LNG) filed with FERC in May
1996 to expand its capacity. The expansion, serving the EnergyPlus Project,
includes installing liquefaction and gasification facilities, purchasing two
pipelines and constructing another to connect with the Algonquin system. Also
during 1996, Algonquin filed with FERC to construct a lateral pipeline to
provide firm transportation service to an electric generation plant in
Connecticut in 1997; while Trunkline filed with FERC for a $50 million
expansion of its Terrebonne system, with a planned 1998 in-service date,
targeting expanding natural gas production in the Gulf of Mexico.
In July 1996, FERC gave preliminary approval for Phase I of the Maritimes &
Northeast Pipeline Project (Maritimes) and in the fall of 1996, the Maritimes'
partners filed with FERC and the National Energy Board of Canada to construct
approximately 730 miles of pipeline under Phase II of the project. This pipeline
will deliver natural gas from a major new natural gas supply basin offshore
Nova Scotia to emerging markets in Canadian Maritimes provinces and Northeast
markets as early as November 1999. Transportation service for customers in New
Hampshire and Maine could begin as early as 1998 under Maritimes' Phase I
construction.
During 1996, preliminary work began and financial closing was reached for an
integrated gas and power project to be located near Aguaytia, Peru in which the
Company owns a 24% interest. 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
Energy Services segments. These opportunities are expected to increase as the
Company combines its natural gas expertise with the electric power capabilities
of Duke Power.
RESULTS OF OPERATIONS
The continued strong performance of the Natural Gas Transmission segment and
the growing Energy Services segment helped the Company achieve a 13% increase
in net income in 1996 as compared to 1995. The Company reported 1996
consolidated income of $361.1 million, or $2.39 per share, before an
extraordinary item, and net income of $344.4 million, or $2.28 per share. This
compares with consolidated net income in 1995 of $303.6 million, or $2.03 per
share, and $225.2 million, or $1.51 per share, in 1994.
EARNINGS BEFORE INTEREST AND TAX ANALYSIS
EARNINGS BEFORE INTEREST AND TAX BY BUSINESS GROUP
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Natural Gas Transmission
TETCO $327.7 $297.8 $258.4
Algonquin 72.4 74.8 67.1
PEPL 149.3 149.2 148.8
Trunkline 46.8 47.9 47.3
--------------------------------
Total 596.2 569.7 521.6
--------------------------------
Energy Services
Field Services 133.0 91.3 51.2
Gas and Power Services 49.0 17.2 16.9
Crude Oil 10.3 8.8 9.1
--------------------------------
Total 192.3 117.3 77.2
--------------------------------
Other Operations 26.0(1) 48.1 16.4(2)
--------------------------------
Consolidated Earnings
Before Interest and Tax $814.5 $735.1 $615.2
======================================================================================
</TABLE>
(1) Includes expenses incurred of $7.6 million for the pending merger with
Duke Power.
(2) Includes nonrecurring expenses of $16.2 million for the Associated
Natural Gas Corporation merger.
The rate of inflation in the United States has been relatively low in 1996
and recent years, and has not had a material impact on the Company. Under the
ratemaking process applicable to regulated portions of the Company's business,
recovery of plant costs through depreciation and the allowed return on plant
investment is limited to historical cost, which is significantly less than
current replacement cost.
Included in the amounts discussed below are intercompany transactions that
do not impact consolidated earnings before interest and tax.
NATURAL GAS TRANSMISSION
Earnings before interest and tax from the Natural Gas Transmission segment
totaled $596.2 million in 1996, representing a $26.5 million increase from
1995, which was $48.1 million higher than 1994 results.
TETCO, Algonquin, Algonquin LNG, PEPL and Trunkline are subject to the
accounting requirements of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Accordingly, certain costs have been deferred as regulatory assets for amounts
recoverable from customers, including costs related to environmental matters,
Order 636 transition, certain employee benefits and the early retirement of
debt. The Company regularly evaluates the continued applicability of
27
<PAGE> 3
SFAS No. 71, considering such factors as regulatory changes and the impact of
competition.
TEXAS EASTERN TRANSMISSION CORPORATION
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $913.6 $874.4 $826.7
Operating Expenses 447.2 436.4 420.9
Depreciation and Amortization 145.8 143.9 141.1
Other Income, Net of Deductions 7.1 3.7 (6.3)
------------------------------
EARNINGS BEFORE
INTEREST AND TAX $327.7 $297.8 $258.4
=========================================================================================
VOLUMES, TBtu(1)
Market-area 1,214 1,106 1,049
Supply-area 135 128 145
------------------------------
Total Deliveries 1,349 1,234 1,194
=========================================================================================
</TABLE>
(1) Trillion British thermal units
TETCO's earnings before interest and tax increased $29.9 million in 1996 as
compared with 1995. Revenues increased $39.2 million, or 4%, primarily due to a
9% increase in throughput, resulting from new pipeline expansion projects
placed in service in late 1995, including the Integrated Transportation Program
(ITP) and the Riverside project, and colder weather. This increase in revenues
was partially offset by increased operating expenses in 1996, which included
higher benefit costs and $2.3 million of severance expense. Operating expenses
in 1995 included a $40 million charge for higher Order 636 transition cost
estimates, as well as a $33 million benefit for lower-than-projected PCB
(polychlorinated biphenyl) cleanup costs incurred.
Earnings before interest and tax for TETCO increased $39.4 million in 1995
as compared with 1994. Transportation and storage revenues increased $54.5
million, or 7%, reflecting new expansion projects placed in service in late
1994. Also contributing to the increase were $43 million of higher transition
costs recoveries, partially offset by $16 million of lower PCB cost recoveries.
These higher net cost recoveries of $27 million were offset by a corresponding
increase in operating expenses. Operating expenses in 1995 also included a $40
million charge for higher transition cost estimates, as well as a $33 million
benefit for lower-than-projected PCB cleanup costs incurred. Operating
expenses, excluding transition and PCB costs, declined primarily due to a $5
million charge to income in 1994 related to the Edison, New Jersey pipeline
rupture and cost-management initiatives in 1995. Other income, net of
deductions increased $10 million, primarily due to $6.2 million of reduced rate
refund provisions and a $3.8 million write-off in 1994 of costs expended on the
discontinued Liberty Pipeline Project.
ALGONQUIN GAS TRANSMISSION COMPANY
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $151.4 $152.1 $144.4
Operating Expenses 50.8 51.3 54.5
Depreciation and Amortization 28.8 27.5 24.0
Other Income, Net of Deductions 0.6 1.5 1.2
-----------------------------
EARNINGS BEFORE
INTEREST AND TAX $72.4 $74.8 $67.1
========================================================================================
VOLUMES, TBtu
Market-area 327 331 288
========================================================================================
</TABLE>
Earnings before interest and tax for Algonquin decreased $2.4 million in
1996 as compared with 1995. The primary reason for the decline was $4 million
of income recognized in 1995 for the resolution of a regulatory issue and lower
natural gas demand for electric power generation due to higher natural gas
prices throughout the year as compared to alternate fuels. This decrease was
partially offset by revenues from pipeline expansion projects to serve
electric power generators.
Algonquin's earnings before interest and tax increased $7.7 million in 1995
compared with 1994. Expansion projects contributed approximately $9 million of
additional income in 1995. This increase was partially offset by lower income
from resolutions of regulatory issues which totaled $4 million in 1995, versus
$8 million in 1994.
PANHANDLE EASTERN PIPE LINE COMPANY
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $338.5 $371.7 $387.7
Operating Expenses 167.8 193.1 206.5
Depreciation and Amortization 30.1 34.7 30.1
Equity in Earnings of Northern
Border Partners, L.P. 4.4 7.2 4.5
Other Income, Net of Deductions 4.3 (1.9) (6.8)
-----------------------------
EARNINGS BEFORE
INTEREST AND TAX $149.3 $149.2 $148.8
=========================================================================================
VOLUMES, TBtu
Market-area 654 619 582
Supply-area 33 44 44
-----------------------------
Total Deliveries 687 663 626
=========================================================================================
</TABLE>
Earnings before interest and tax for PEPL remained steady at $149.3 million
in 1996. Earnings in 1996 included $19.6 million of income for the resolution
of regulatory matters as compared to $25.5 million for similar resolutions in
1995. Higher earnings in 1996 from increased rate realization and colder
weather combined with lower operating expenses more than offset $9.5 million of
severance expense recorded in 1996. Revenue declines due to the transfer of
gathering assets to an affiliated Field Services subsidiary in August 1995 were
substantially offset by related operating and depreciation expense reductions.
28
<PAGE> 4
PEPL's earnings before interest and tax increased slightly to $149.2 million
in 1995 as compared with 1994. The results include the effects of $25.5 million
of earnings recorded in 1995 for the resolution of certain regulatory matters,
offset by $35.6 million recorded in 1994 for similar regulatory resolutions.
The transfer of gathering assets to an affiliated Field Services subsidiary in
August 1995 resulted in lower revenues and expenses of approximately $11.4
million and $10.2 million, respectively, as compared with 1994. Excluding the
impact of these items, PEPL's revenues from its core business were stable and
earnings improved due to lower operating expenses. Depreciation and
amortization increased due to a 1994 rate reduction amounting to $2.9 million
and depreciation on market-expansion projects.
TRUNKLINE GAS COMPANY
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
=========================================================================================
<S> <C> <C> <C>
Revenue $178.9 $160.1 $354.0
Natural Gas Purchased -- -- 177.9
------------------------------
Net Revenue 178.9 160.1 176.1
Operating Expenses 108.2 92.1 106.8
Depreciation and Amortization 23.5 22.4 21.6
Other Income, Net of Deductions (0.4) 2.3 (0.4)
------------------------------
EARNINGS BEFORE
INTEREST AND TAX $46.8 $47.9 $47.3
=========================================================================================
VOLUMES, TBtu
Market-area 529 403 449
Supply-area 103 116 111
------------------------------
Total Deliveries 632 519 560
=========================================================================================
</TABLE>
Earnings before interest and tax for Trunkline decreased $1.1 million in
1996 as compared with 1995. The decrease was due to the recognition of $10.3
million of nonrecurring additional lease expense and $5 million of severance
expense in 1996. These expense increases were offset by higher transportation
revenue from new contracts and colder weather in 1996.
Earnings before interest and tax for Trunkline increased $0.6 million to
$47.9 million in 1995 as compared with 1994. Decreased transportation and
storage revenues were primarily due to lower volumes attributable to warmer
weather during the first half of 1995, as well as $4 million of 1994 revenues
related to a contract settlement. The revenue decrease was mostly offset by
lower operating costs. Sales revenue and associated gas purchased costs
declined $177.9 million as a result of the elimination of Trunkline's merchant
function in late 1994.
ENERGY SERVICES
Earnings before interest and tax for the Energy Services segment in 1996 was
$192.3 million, a 64% increase over 1995 earnings of $117.3 million. Energy
Services' earnings before interest and tax in 1996 represented 24% of the
Company's consolidated earnings, as compared with 16% in 1995 and 13% in 1994.
In addition to providing gathering, processing and storage services, this
segment also markets natural gas and petroleum products and began marketing
electric power and providing energy management services in 1995.
COMMODITY RISK MANAGEMENT. At December 31, 1996, the Company held or issued
several 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's market exposure, primarily within PTMS, arises
from inventory balances and fixed-price purchase and sale commitments that
extend for periods of up to 10 years. The Company uses futures, swaps and
options to manage and hedge price and location risk related to these market
exposures. PTMS also provides risk management services to its customers through
a variety of energy commodity financial instruments. 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. During 1996, 1995 and 1994, the Company recognized
gains of $25.4 million, $10.5 million and $0.7 million respectively, from
trading activities. The Company manages open positions with strict policies
which limit 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
earnings at risk as well as a total value at risk measurement. The
weighted-average life of the Company's commodity risk portfolio was
approximately 11 months at December 31, 1996.
[ENERGY SERVICES REVENUES GRAPH]
29
<PAGE> 5
New York Mercantile Exchange (Exchange) traded futures and option contracts
are guaranteed by the Exchange and have nominal credit risk. On all other
transactions, the Company is exposed to credit risk in the event of
nonperformance by the counterparties. For each counterparty, the Company
analyzes their financial condition prior to entering into an agreement,
establishes credit limits and monitors the appropriateness of these limits on
an ongoing basis.
FIELD SERVICES
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
========================================================================================
<S> <C> <C> <C>
Revenue $1,390.0 $804.6 $730.1
Products Purchased 1,068.0 598.6 551.5
-------------------------------
Net Revenue 322.0 206.0 178.6
Operating Expenses 138.8 88.1 101.2
Depreciation and Amortization 55.5 37.3 28.2
Equity in Earnings of
Unconsolidated Affiliates 3.0 1.6 1.7
Other Income, Net of Deductions 2.3 9.1 0.3
-------------------------------
EARNINGS BEFORE
INTEREST AND TAX $133.0 $91.3 $51.2
========================================================================================
VOLUMES
Natural Gas Gathered/
Processed, TBtu/d(1) 2.9 1.9 1.6
NGL Production, MBbl/d(2) 76.5 54.8 49.4
========================================================================================
</TABLE>
(1) Trillion British thermal units per day
(2) Thousand barrels per day
Earnings before interest and tax for Field Services increased $41.7 million,
or 46%, in 1996 as compared with 1995. Net revenues increased $116 million, or
56%, resulting from strong processing margins and increased gathering and
processing volumes related to expansion projects and asset acquisitions,
primarily the Mobil transaction. Average NGL prices increased 30%, while NGL
production increased 40%, mostly in the Gulf Coast and Permian Basin regions.
Natural gas gathered and processed volumes increased 53%. These improvements
were partially offset by increased operating expenses and depreciation as a
result of the Mobil asset acquisition and projects placed in service. An $8.1
million gain on the sale of an investment in Seagull Shoreline System in 1995
caused a reduction in other income.
Field Services' earnings before interest and tax increased $40.1 million, or
78%, for 1995 as compared with 1994. Net revenues increased $27.4 million, or
15%, resulting from higher natural gas processing margins, gathering volumes
and NGL production. Gas processing margins improved due to lower replacement
gas prices, which declined approximately 21% in 1995. A 9% increase in average
NGL prices in 1995 also contributed to higher margins. Gas volumes gathered and
processed increased 19% from acquisitions and additional well connections. NGL
production increased 11%, primarily resulting from acquisitions and higher
efficiencies at the National Helium Corporation plant. Operating expenses were
more than $13 million lower in 1995, primarily benefitting from cost-saving
efficiencies from merging certain field operations in late 1994 and early 1995.
Other income, net of deductions increased in 1995 due to an $8.1 million gain
resulting from the sale of the investment in Seagull Shoreline System.
<PAGE> 6
GAS AND POWER SERVICES
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
REVENUE $3,841.4 $1,876.5 $1,644.3
Products Purchased 3,744.0 1,827.3 1,606.4
-------------------------------
NET REVENUE 97.4 49.2 37.9
Operating Expenses 46.0 30.1 18.3
Depreciation and Amortization 4.1 2.4 3.0
Equity in Earnings of
Unconsolidated Affiliates 0.2 0.1 --
Other Income, Net of Deductions 1.5 0.4 0.3
-------------------------------
EARNINGS BEFORE
INTEREST AND TAX(1) $49.0 $17.2 $16.9
========================================================================================
VOLUMES
Natural Gas Marketed, TBtu/d 5.5 3.6 2.7
Electricity Marketed, GWh(2) 4,229 513 --
-------------------------------
Gas Marketed Unit
Margin, $/MMBtu(3) $0.039 $0.030 $0.037
========================================================================================
</TABLE>
(1) Before deduction of $6.2 million for Mobil's minority interest in 1996.
(2) Gigawatt-hours
(3) Dollars per million Btu
The Gas and Power Services group expanded operations with the formation of
the PTMS venture with Mobil on August 1, 1996 and increased earnings before
interest and tax $31.8 million to $49 million in 1996 as compared with 1995.
The increase primarily results from higher gas volumes, improved margins
resulting from colder weather and gas price volatility, and higher trading
margins. Total gas volumes marketed increased 53% to 5.5 TBtu/d and margins
improved 30% to $0.039 per million Btu. The increase in margins was partially
offset by higher operating expenses of PTMS.
Gas and Power Services' earnings before interest and tax was $17.2 million
in 1995 versus $16.9 million in 1994. Net revenues increased $11.3 million as a
result of a 33% increase in marketed volumes, partly resulting from the
acquisition of a Canadian gas marketing company. Excluding trading gains,
gas unit margins dropped to $0.030 per million Btu. The net revenue increase was
offset by higher operating expenses attributable to expanded operations,
including start-up costs for the electric power marketing area in 1995.
30
<PAGE> 7
CRUDE OIL
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------
Revenue $1,257.5 $978.8 $580.3
Products Purchased 1,229.5 953.8 560.1
-------------------------------
Net Revenue 28.0 25.0 20.2
Operating Expenses 14.5 13.2 9.1
Depreciation and Amortization 3.2 3.0 2.1
Other Income, Net of Deductions -- -- 0.1
-------------------------------
EARNINGS BEFORE
INTEREST AND TAX $10.3 $8.8 $9.1
========================================================================================
VOLUMES, MBbl/d
Crude Oil Pipeline 68.4 76.2 52.0
NGL Pipeline 19.1 16.5 16.0
========================================================================================
</TABLE>
Earnings before interest and tax for Crude Oil increased $1.5 million to
$10.3 million in 1996 as compared with 1995. An increase in net revenues related
to higher margins was partially offset by increased expenses.
Crude Oil's earnings before interest and tax decreased slightly to $8.8
million in 1995 as compared with 1994. Higher crude oil volumes contributed to
a $398.5 million increase in gross revenues and a $4.8 million, or 24%,
increase in net revenues, which was more than offset by higher expenses.
OTHER OPERATIONS
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
LNG Project $0.4 $4.5 $(8.5)
Midland Cogeneration Venture 10.9 11.6 2.8
National Methanol Company 16.6 22.5 26.2
TEPPCO Partners, L.P. 8.9 6.4 3.6
Other (10.8) 3.1 (7.7)
----------------------------
TOTAL EARNINGS
BEFORE INTEREST AND TAX $26.0 $48.1 $16.4
========================================================================================
</TABLE>
Earnings before interest and tax from other operations totaled $26 million
in 1996, compared with $48.1 million in 1995, which was $31.7 million higher
than 1994 results.
Earnings before interest and tax in 1996 for the Liquefied Natural Gas (LNG)
project decreased $4.1 million as a result of a $10.4 million contract
provision reversal in 1995. During 1996, the Company experienced higher income
from LNG sales and fully chartered its two LNG tankers for 22 years starting as
early as 1999. Equity earnings in National Methanol Company (National
Menthanol) declined $5.9 million in 1996 as compared with 1995 as a result of
lower methanol prices. Other activities in 1996 include $7.6 million of
incurred expenses (before and after tax) related to the pending Duke Power
merger.
Earnings before interest and tax for the LNG Project increased $13 million
comparing 1995 with 1994. A $10.4 million provision reversal recorded in 1995
and higher LNG tanker charter revenues contributed to the increase. Higher
revenue from increased capacity and lower fuel costs contributed to an $8.8
million increase in earnings from Midland Cogeneration Venture (MCV). National
Methanol's 1995 earnings declined $3.7 million as compared with 1994, reflecting
lower average methanol margins, partially offset by higher sales of MTBE (methyl
tertiary butyl ether). Earnings from other operations in 1995 improved from 1994
due to $16.2 million of expenses recorded in 1994 for the Associated Natural Gas
Corporation merger, partially offset by higher expenses in 1995 for PanEnergy
Information services.
INTEREST EXPENSE AND EXTRAORDINARY ITEM. Interest expense in 1996 decreased
compared with 1995 as a result of lower average interest rates and lower
average debt balances outstanding. Interest expense in 1995 increased compared
with 1994 primarily as a result of higher average debt balances outstanding.
On October 1, 1996, TETCO redeemed its $150 million, 10% debentures due 2011
and its $100 million, 10 1/8% debentures also due 2011. TETCO recorded a
non-cash extraordinary charge of $16.7 million (net of income tax of $10.3
million) related to the unamortized discount on this early retirement of debt.
INCOME TAX. The effective tax rates for 1996, 1995 and 1994 differed from
the statutory federal income tax rates primarily because of the effect of state
income taxes.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION
OPERATING CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Cash Flows Provided
by Operating Activities $843.8 $573.1 $448.0
- -----------------------------------------------------------------------------------------
</TABLE>
Operating cash flows increased $270.7 million from 1995 to 1996, primarily
reflecting higher 1996 earnings, net cash inflows related to Order 636
transition costs and lower tax payments, net of $63.5 million of refunds
received. In 1996, TETCO received $98.6 million from the sale of the right to
collect certain Order 636 transition costs, with limited recourse. Increases
in accounts receivable, related to higher levels of gas and power marketing
activities of PTMS, were mostly offset by corresponding increases in accounts
payable.
Operating cash flows increased $125.1 million from 1994 to 1995. This
increase primarily reflects higher 1995 earnings as well as lower cash
requirements for transition cost payments in excess of recoveries. Increases in
accounts receivable were mostly offset by corresponding increases in accounts
payable.
ORDER 636 TRANSITION COSTS. With implementation of Order 636 and the
unbundling of services, the Company's interstate natural gas pipelines are
incurring certain costs
31
<PAGE> 8
related to the transition, primarily TETCO's gas purchase contract
commitments. At December 31, 1996, 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 deliverability and
natural gas prices.
In 1994, TETCO refunded $84 million to customers pursuant to a FERC-approved
settlement that resolved regulatory issues related primarily to Order 636
transition costs and a number of other issues related to services prior to
Order 636. TETCO's final and nonappealable settlement 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 1995, based upon producers' discoveries of additional natural gas reserves,
TETCO increased its estimated liabilities for transition costs by $125.8
million. Under the terms of the existing settlement, regulatory assets were
increased $85.8 million and TETCO recognized a $40 million charge to operating
expenses ($26 million after tax).
[OPERATING CASH FLOWS GRAPH]
At December 31, 1996 and 1995, the Company's interstate pipelines had
recorded $67.9 million and $250 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 December 31, 1996 and 1995, the Company had recorded estimated
current and long-term liabilities related to Order 636 transition costs of
$84.4 million and $121.9 million (1996), and $125 million and $165 million
(1995), respectively.
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.
Net cash receipts related to transition costs are expected to occur thereafter.
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 consolidated results of operations,
financial position or liquidity.
ENVIRONMENTAL MATTERS. TETCO is currently conducting PCB 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. 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.
At December 31, 1996 and 1995, the Company had total current and long-term
liabilities recorded of $32.4 million and $188.9 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 $77.6 million 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, TETCO's share of the cleanup estimate
was lowered, which decreased operating expenses $33 million ($21.5 million
after tax) and reduced related regulatory assets by $44.6 million. At December
31, 1996 and 1995, the Company had total current and long-term regulatory
assets recorded of $16.7 million and $136.5 million (1996), and $21.3 million
and $176.6 million (1995), respectively, representing costs to be recovered
from customers.
32
<PAGE> 9
The Company believes it will be able to fund the PCB and other cleanup costs
from recoveries from customers and other cash flows, and that the resolution of
these matters will not have a material adverse effect on consolidated results
of operations, financial position or liquidity.
LITIGATION. In connection with a rupture and fire that occurred on TETCO's
natural gas pipeline in Edison, New Jersey, claims have been made and numerous
lawsuits have been filed 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 claimants include
Quality Materials, Inc. (Quality), the owner of the asphalt plant where the
rupture occurred. TETCO has filed a counterclaim against Quality and has
settled the claims of 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.
In 1995, two plaintiffs filed a lawsuit with class action allegations
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 in 1996 in another court. The plaintiff seeks recovery of
compensatory and punitive damages, in unspecified amounts, for personal
injuries and property damage resulting from alleged exposure to PCBs.
In 1995, Midwest Gas Storage, Inc. (Midwest) filed suit against PEPL and
PanEnergy, alleging that PEPL breached an interconnection agreement and used
its superior bargaining position to force Midwest to accept terms and
conditions which were not in the original agreement. Amended petitions filed in
1996 further allege that PEPL and PanEnergy, through economic coercion, have
attempted to drive Midwest out of business. Asserting fraud and violations of
Texas anti-trust laws, among other counts, Midwest seeks compensatory and
punitive damages in unspecified amounts.
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.
A lawsuit filed by a natural gas producer was served in July 1996 naming
certain PanEnergy subsidiaries as defendants. The action was brought against 70
defendants, including every major pipeline, asserting that the defendants
intentionally underreported volumes and heating content of gas purchased on
federal and Indian lands, with the result that royalties were underpaid. The
plaintiff seeks recovery of royalty amounts due the United States, treble
damages and civil penalties. While this matter is in the early stages of
litigation, based on information currently available to the Company, the Company
believes the resolution of this matter will not have material adverse effect on
consolidated financial position or liquidity.
In December 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 Contract) with TETCO. In TETCO's view, the tendered substitute
gas reserves, deliverability and leases are not subject to the Contract and
TETCO filed a declaratory judgment action seeking a ruling that Marathon's
interpretation of the Contract is incorrect. Marathon filed a counterclaim
seeking a declaratory judgment enforcing its interpretation of the Contract.
The potential liability of the Company should TETCO be contractually obligated
to purchase natural gas based upon the substituted gas reserves, deliverability
and leases, and the effect on 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. While this matter is in the
early stages of litigation, based on information currently available to the
Company, the Company believes the resolution of this matter will not have
material adverse effect on consolidated financial position or liquidity.
The Company is also involved in various other legal actions and claims
arising in the normal course of business. Based on 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 on the consolidated results
of operations or 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.
OTHER MATTERS. 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
33
<PAGE> 10
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 overturned a lower court ruling in favor of the government in
litigation brought on behalf of producers. The Department's petition for
rehearing was denied in November 1996. The Department may continue to seek
further appellate review. 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. The Company
believes the resolution of this matter will not have a material adverse effect
on the Company's consolidated financial position or liquidity.
The Company fully utilized its investment tax credit carryforward in 1996
and expects to generate sufficient future taxable income from operations to
fully utilize remaining deferred tax assets, net of valuation allowance. In
addition, the Company's exposure to risk of foreign currency fluctuations is
immaterial.
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>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Cash Flows Used in
Investing Activities $710.5 $419.7 $584.0
- ----------------------------------------------------------------------------------------
</TABLE>
Cash flows used in investing activities increased in 1996 by $290.8 million
as compared with 1995 due to a $310.9 million increase in capital and
investment expenditures.
Cash flows used in investing activities decreased in 1995 by $164.3 million
as compared with 1994 primarily resulting from $122.2 million of lower capital
expenditures in 1995 and decreased tax payments for past asset sales.
CAPITAL AND INVESTMENT EXPENDITURES. Capital and investment expenditures
totaled $753.2 million in 1996, compared with $442.3 million for 1995.
Market-expansion projects represented approximately 80% of 1996 total
expenditures. Expenditures in 1996 included the acquisition of Mobil's
interest in certain natural gas gathering, processing and related assets for
approximately $300 million and the purchase of a general partnership interest
in a natural gas gathering system in the Gulf of Mexico. Expenditures in 1996
also included the purchases of a 500-mile gathering pipeline in northern
Louisiana and a 300-mile natural gas gathering system in south Texas. Capital
expenditures in 1995 included the acquisition of a natural gas gathering and
processing system in central Colorado for approximately $60 million, and in
1994 included the purchase of certain intrastate natural gas pipeline, storage
and processing facilities in Texas for more than $100 million.
[CAPITAL/INVESTMENT EXPENDITURES GRAPH]
The Company currently expects to invest approximately $500 million in 1997
capital and investment expenditures, with approximately 60% for Natural Gas
Transmission and 30% for Energy Services, with the remainder budgeted for
international and other development projects. The Company's 1997 base
expenditure plans include approximately $350 million for market-expansion
projects. See further discussion of projects under "Operating Environment and
Outlook."
ASSET SALES. The Company sold certain gathering assets in 1996 for
approximately $23 million and its investment in the Seagull Shoreline System in
1995 for approximately $13 million. In addition, the Company will likely be
required to dispose of its investment in MCV in connection with the pending
merger with Duke Power.
In 1990, the Internal Revenue Service (IRS) issued regulations which
disallow for tax purposes losses incurred in the Company's 1989 sales of
certain assets that were acquired in the purchase of TEC. Consequently, the
Company established a provision in 1990 for this and certain other issues,
resulting in an increase in goodwill and the deferred income tax liability.
Following further discussions with the IRS, the Company revised its estimates
in 1994 with respect to the disallowed loss issue and in 1995 and 1996 with
respect to the remaining issues. As a result, the Company reduced the related
goodwill and deferred income tax liability by approximately $40 million, $100
million and $200 million in 1996, 1995 and 1994, respectively. Investing cash
flows for 1995 and 1994 include payments by the Company of $12 million and $41
million, respectively, for prior year tax liabilities primarily related to
asset sales.
34
<PAGE> 11
OTHER. In 1994, the Company formed a joint venture that provides gathering,
processing and marketing services for natural gas producers and contributed
$13.6 million of net assets to the venture during 1996. The Company also
contributed certain assets in 1996 to Altra Energy Technologies, L.L.C., a
limited liability company, that provides electronic information products and
services for the energy industry.
FINANCING CASH FLOW
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Cash Flows Provided by
(Used in) Financing Activities $(126.9) $(135.9) $208.3
- ----------------------------------------------------------------------------------------
</TABLE>
Cash flows used in financing activities decreased $9 million from 1995 to
1996. Debt issuances in 1996, which included $250 million of long-term debt and
$209 million of net short-term bank borrowings and commercial paper, were $113
million higher than 1995. Debt retirements in 1996 included the early
retirement of $250 million of TETCO's debentures.
In September and October 1996, respectively, PanEnergy issued $100 million
of seven-year notes bearing interest at 7 3/8% and $150 million of 10-year
notes bearing interest at 7%. Also in October 1996, TETCO redeemed its
outstanding $150 million, 10% debentures due 2011 and its outstanding $100
million, 10 1/8% debentures also due 2011.
Financing cash flows in 1995 were $344.2 million lower than 1994. Debt
issuances in 1995 included $200 million of long-term debt and a $145 million
net increase in short-term bank borrowings. During 1995, the Company repaid
$185 million of amounts outstanding under the bank credit facility and redeemed
PEPL's $125 million, 9 7/8% debentures.
DEBT AND CREDIT FACILITIES. PanEnergy initiated a commercial paper program
in the fourth quarter 1996 for amounts up to $400 million, supported by its
existing bank credit agreements. There are two variable-rate bank credit
agreements, dated January 31, 1996 and September 18, 1996, 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 the
aggregate. At December 31, 1996, there was $102.2 million of commercial paper
outstanding and no amounts outstanding under the credit agreements. In
addition, there were $251.9 million of short-term money market borrowings
outstanding at December 31, 1996.
[OUTSTANDING DEBT CHART]
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.
COMMON STOCKHOLDERS' EQUITY. In the determination of the amount of dividends
to be paid to common stockholders, management and the board of directors
regularly review, among other factors, the Company's projected operating
results, cash flows and financial position. The board of directors increased
the quarterly dividend from $0.225 to $0.24 effective with the 1996 second
quarter. Under the most restrictive covenants contained in the Company's debt
agreements, $1.1 billion of PanEnergy's consolidated common stockholders'
equity was available for the payment of dividends at December 31, 1996.
[EQUITY TO CAPITALIZATION CHART]
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, periodic sales of
customer accounts with limited recourse and/or available credit facilities.
FORWARD-LOOKING INFORMATION
This annual 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.
35
<PAGE> 12
APPENDIX TO EXHIBIT 99.1
PANENERGY CORP AND SUBSIDIARIES
Descriptions of Graphics Contained Within
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Located on page 26, a bar chart titled "Capital/Investment Expenditures"
depicts capital and investment expenditures for the years 1994, 1995 and 1996.
Each bar contains two sections, representing Market Expansion and Other as
follows: $412 million and $152 million (1994); $260 million and $182 million
(1995); and $614 million and $139 million (1996), respectively. The bottom of
each bar states a total capital/investment expenditure of $564 million, $442
million and $753 million for the years 1994, 1995 and 1996, respectively. The
following caption appears below the chart: "Capital spending on market
expansion projects positions the Company for future profitability."
Located on page 29, a bar chart titled "Energy Services Revenues" depicts
operating revenues of $2,953 million, $3,448 million and $6,018 million for
the years 1994, 1995 and 1996, respectively. The following caption appears
below the chart: "Energy Services' revenues increased 75% in 1996, primarily
from expanded marketing operations."
Located on page 32, a bar chart titled "Operating Cash Flows" depicts operating
cash flows of $448 million, $573 million and $844 million for the years 1994,
1995 and 1996, respectively. The following caption appears below the chart:
"The Company continues to produce significant cash flows from operations."
Located on page 34, a bar chart titled "Capital/Investment Expenditures"
depicts capital and investment expenditures for the years 1994, 1995 and 1996.
Each bar contains sections representing the Natural Gas Transmission segment,
the Energy Services segment and Other. The sections of the bars are
proportioned, in the order previously described, as follows: $303 million,
$255 million and $6 million (1994); $227 million, $202 million and $13 million
(1995); and $185 million, $537 million and $31 million (1996), respectively.
The bottom of each bar states a total capital/investment expenditure of $564
million, $442 million and $753 million for the years 1994, 1995 and 1996,
respectively. The following caption appears below the chart: "Purchases of
gathering and processing assets comprised most of the Company's 1996 capital
spending."
Located page 35, a bar chart titled "Outstanding Debt" depicts outstanding debt
as of December 31, 1994, 1995 and 1996. Each bar contains two sections,
representing Long-term Debt and Short-term Issues as follows: $2,368 million and
$0 million (1994); $2,271 million and $145 million (1995); and $2,085 million
and $354 million (1996), respectively. The following caption appears below the
chart: "The Company is utilizing more short-term debt, which carries lower
interest rates."
Located on page 35, a bar chart titled "Equity to Capitalization" depicts the
ratio of equity of capitalization of 46 percent, 48 percent and 50 percent as
of December 31, 1994, 1995 and 1996, respectively. The following caption
appears below the chart: "Equity as a percentage of capitalization rose 2% in
1995 and 1996."
<PAGE> 1
EXHIBIT 99.2
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PanEnergy Corp:
We have audited the accompanying consolidated balance sheets of PanEnergy
Corp and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, common stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PanEnergy
Corp and Subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Houston, Texas
January 16, 1997
<PAGE> 1
EXHIBIT 99.3
PANENERGY CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
MILLIONS, EXCEPT PER SHARE AMOUNTS 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING Sales of natural gas, petroleum products and power $ 5,957.0 $3,407.0 $3,044.0
REVENUES Transportation and storage of natural gas 1,522.9 1,500.6 1,432.8
Other 56.9 59.9 108.3
--------------------------------
OPERATING REVENUES (Note 4) 7,536.8 4,967.5 4,585.1
- ---------------------------------------------------------------------------------------------------------------------------------
COSTS AND Natural gas, petroleum products and power purchased 5,523.6 3,131.2 2,829.4
EXPENSES Operating and maintenance (Note 4) 605.4 598.4 570.6
General and administrative (Note 2) 272.3 207.0 258.8
Depreciation and amortization (Note 9) 297.2 279.0 257.0
Miscellaneous taxes 80.7 83.2 84.0
--------------------------------
Total 6,779.2 4,298.8 3,999.8
--------------------------------
OPERATING INCOME 757.6 668.7 585.3
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME Equity in earnings of unconsolidated affiliates (Note 8) 38.8 50.6 40.9
AND DEDUCTIONS Interest and miscellaneous income 38.9 36.8 23.0
Miscellaneous deductions (20.8) (21.0) (34.0)
--------------------------------
Total 56.9 66.4 29.9
--------------------------------
EARNINGS BEFORE INTEREST AND TAX 814.5 735.1 615.2
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE Interest on debt (Note 10) 216.3 225.0 218.3
Other interest 8.8 8.7 10.3
--------------------------------
Total 225.1 233.7 228.6
--------------------------------
EARNINGS BEFORE MINORITY INTEREST AND INCOME TAX 589.4 501.4 386.6
- ---------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST, Minority interest 6.2 -- --
INCOME TAX AND Income tax (Note 5) 222.1 197.8 161.4
EXTRAORDINARY ITEM --------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 361.1 303.6 225.2
Extraordinary item, net of tax (Note 10) (16.7) -- --
--------------------------------
NET INCOME $ 344.4 $ 303.6 $ 225.2
=================================================================================================================================
=================================================================================================================================
COMMON SHARES Average common shares outstanding 150.9 149.7 148.7
Earnings per common share
Before extraordinary item $ 2.39 $ 2.03 $ 1.51
Net income 2.28 2.03 1.51
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 2
PANENERGY CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET-ASSETS
<TABLE>
<CAPTION>
December 31
----------------------
MILLIONS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS Cash and cash equivalents $ 57.2 $ 50.8
Accounts and notes receivable (Note 6)
Customers 1,151.3 487.7
Other 26.7 17.4
Inventory and supplies (Note 7) 132.1 135.8
Current deferred income tax (Note 5) 50.4 80.8
Other (Notes 4, 6 and 13) 217.8 239.8
----------------------
Total 1,635.5 1,012.3
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENTS Affiliates 313.9 164.3
Other 58.4 65.8
----------------------
Total (Note 8) 372.3 230.1
- ---------------------------------------------------------------------------------------------------------------------------------
PLANT, PROPERTY Original cost 8,822.5 8,400.7
AND EQUIPMENT Accumulated depreciation and amortization (3,365.8) (3,250.9)
----------------------
Net plant, property and equipment (Note 9) 5,456.7 5,149.8
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED CHARGES Prepaid pension (Note 15) 280.6 259.3
Goodwill, net (Notes 1 and 5) 191.4 239.7
Other (Notes 1, 4 and 13) 631.3 736.1
----------------------
Total 1,103.3 1,235.1
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 8,567.8 $ 7,627.3
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 3
PANENERGY CORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET-LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
MILLIONS 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES Long-term debt due within one year (Note 10) $ 138.3 $ 179.6
Notes payable and commercial paper (Note 10) 354.1 145.0
Accounts payable 959.2 391.2
Rate refund provisions (Note 4) 37.0 53.6
Accrued interest 59.7 69.1
Accrued wages and benefits 61.8 64.7
Taxes payable (Note 5) 73.8 65.0
Other (Notes 4 and 13) 374.1 355.2
--------------------
Total 2,058.0 1,323.4
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED LIABILITIES Deferred income tax (Note 5) 1,242.9 1,182.9
AND CREDITS Other (Notes 4 and 13) 785.1 802.1
--------------------
Total 2,028.0 1,985.0
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT Notes payable 1,320.2 1,244.2
Debentures 298.8 519.4
Revenue bonds 328.0 328.0
--------------------
Total (Note 10) 1,947.0 2,091.6
- ---------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND
CONTINGENT LIABILITIES (Notes 4, 6, 8, 11, 13, 14 and 15)
- ---------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST Minority interest (Note 2) 82.3 --
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS' Common stock, 151.1 million (1996) and 150.2 million (1995)
EQUITY shares issued and outstanding, 300 million shares authorized,
$1 par value per share 151.1 150.2
Paid-in capital 2,242.1 2,219.7
Retained earnings (deficit) 59.3 (142.6)
--------------------
Total (Notes 10 and 12) 2,452.5 2,227.3
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,567.8 $7,627.3
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
PANENERGY CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
MILLIONS, EXCEPT PER SHARE AMOUNTS 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK Balance at beginning of year $ 150.2 $ 149.1 $ 147.6
Stock issued for purchase of assets -- 0.1 0.5
Dividend reinvestment and employee stock plans -- 0.1 0.6
Stock option plans and awards 0.9 0.9 0.4
--------------------------------
BALANCE AT END OF YEAR (Note 12) $ 151.1 $ 150.2 $ 149.1
- ---------------------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL Balance at beginning of year $2,219.7 $2,199.8 $2,168.2
Excess of proceeds over par value of common stock
Stock issued for purchase of assets -- 2.4 9.5
Dividend reinvestment and employee stock plans 1.5 0.4 14.3
Stock option plans and awards 21.0 16.6 6.5
Unearned compensation (0.1) 0.5 1.3
--------------------------------
BALANCE AT END OF YEAR (Note 12) $2,242.1 $2,219.7 $2,199.8
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS Balance at beginning of year $ (142.6) $ (313.7) $ (436.4)
(DEFICIT) Net income 344.4 303.6 225.2
Conform fiscal year end of Associated Natural Gas -- -- 0.5
Common stock dividends paid, $0.945, $0.885 and $0.84
per share in 1996, 1995 and 1994, respectively (142.5) (132.5) (103.0)
--------------------------------
BALANCE AT END OF YEAR (Notes 10 and 12) $ 59.3 $ (142.6) $ (313.7)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $2,452.5 $2,227.3 $2,035.2
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
PANENERGY CORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------
MILLIONS 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING Net income $ 344.4 $ 303.6 $ 225.2
ACTIVITIES Adjustments to reconcile net income to operating cash flows
Depreciation and amortization 297.2 279.0 257.0
Deferred income tax expense 102.3 109.2 114.8
Earnings of unconsolidated affiliates, net of distributions (18.2) (7.9) (29.1)
Net pension benefit (21.3) (19.5) (20.0)
Extraordinary charge, net of tax 16.7 -- --
Other non-cash items in net income 24.9 (28.8) (16.8)
Net change in operating assets
and liabilities (detail below) 97.8 (62.5) (83.1)
--------------------------------
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 843.8 573.1 448.0
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING Capital expenditures (663.3) (433.1) (555.3)
ACTIVITIES Investment expenditures (89.9) (9.2) (8.4)
Other investment decreases (increases) 9.1 7.7 (36.3)
Property retirements and other 33.6 14.9 16.0
--------------------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (710.5) (419.7) (584.0)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING Retirement of debt (432.4) (314.1) (279.0)
ACTIVITIES Issuance of debt 248.8 200.0 574.0
Net increase (decrease) in notes payable and commercial paper 209.1 145.0 (18.4)
Net increase (decrease) in accounts payable - banks (6.7) (47.2) 19.3
Common stock issuance 11.8 16.5 17.6
Dividends paid (142.5) (132.5) (103.0)
Other (15.0) (3.6) (2.2)
--------------------------------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (126.9) (135.9) 208.3
- ---------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH Increase in cash and cash equivalents 6.4 17.5 72.3
Cash flows of Associated Natural Gas Corporation
for the three months ended December 31, 1994 -- -- (116.6)
Cash and cash equivalents, beginning of year 50.8 33.3 77.6
--------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 57.2 $ 50.8 $ 33.3
=================================================================================================================================
NET CHANGE IN OTHER Accounts and notes receivable $ (625.3) $ (149.2) $ 58.9
OPERATING ASSETS Inventory and supplies 4.6 (11.7) 4.4
AND LIABILITIES Other current assets 28.0 92.7 116.4
Accounts payable 568.2 89.0 (71.3)
Rate refund provisions 6.6 14.1 35.0
Other current liabilities (19.3) (8.5) (105.0)
Transition cost recoveries (payments), net 90.9 (85.2) (104.9)
Other deferred charges and liabilities, net 44.1 (3.7) (16.6)
--------------------------------
Total $ 97.8 $ (62.5) $ (83.1)
=================================================================================================================================
SUPPLEMENTAL Cash paid for interest (net of amount capitalized) $ 223.9 $ 222.9 $ 221.0
DISCLOSURES Cash paid for income tax 58.6 78.5 46.0
=================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
PANENERGY CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX
<S> <C>
1. Accounting Policies Summary...........................42
2. Business Combinations.................................43
3. Business Segments.....................................44
4. Natural Gas Revenues and Regulatory Matters...........44
5. Income Tax............................................45
6. Financial Instruments and Risk Management.............46
7. Inventory.............................................48
8. Investments...........................................48
9. Plant, Property and Equipment.........................49
10. Debt and Credit Facilities............................50
11. Leases and Other Commitments..........................51
12. Stock Based Compensation..............................51
13. Environmental Matters.................................52
14. Litigation............................................52
15. Pension and Other Benefits............................53
</TABLE>
1. ACCOUNTING POLICIES SUMMARY
The accounting policies are presented to assist the reader in evaluating the
consolidated financial statements of PanEnergy Corp (PanEnergy) and its
subsidiaries (the Company). Certain amounts for prior years have been
reclassified in the consolidated financial statements to conform to the current
presentation.
The Company is one of North America's leading energy services companies,
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, is one of the nation's
largest natural gas liquids (NGL) producers and has holdings in pipeline and
other energy-related businesses worldwide.
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. (Algonquin LNG) are subject to
the rules and regulations of the Federal Energy Regulatory Commission (FERC).
TETCO, Algonquin, Algonquin LNG, PEPL and Trunkline meet the criteria and,
accordingly, follow the reporting and accounting requirements of Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of
Certain Types of Regulation." The Company regularly evaluates the continued
applicability of SFAS No. 71, considering such factors as regulatory changes
and the impact of competition.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of PanEnergy and all significant subsidiaries, including
majority-owned subsidiaries. Significant intercompany items have been
eliminated in consolidation. Investments in 20% to 50%-owned affiliates and in
less than 20%-owned affiliates where the Company has general partnership
interests and significant influence over operations are accounted for on the
equity method. See Note 8.
USE OF ESTIMATES. 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.
REVENUE RECOGNITION. The Company recognizes revenues on sales of natural gas
and petroleum products in the period of delivery, and transportation and storage
revenues in the period service is provided. 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. See Note 4 for a summary of pending
rate cases before FERC and related regulatory matters.
GAS SUPPLY COSTS. Provisions are made in the consolidated statement of
income for all estimated future losses associated with gas supply contracts.
See Note 4 for a discussion of pipeline gas supply and other costs related to
the FERC Order 636 transition.
COMMODITY PRICE RISK MANAGEMENT. Commodity derivatives utilized as hedges
include futures, swaps and options. In order to qualify as a hedge, the price
movements in the underlying commodity derivatives must be sufficiently
correlated with the hedged commodity. Gains and losses related to commodity
derivatives which qualify as hedges of commodity commitments are recognized in
income when the underlying hedged physical transaction closes and are included
in natural gas, petroleum products and power purchased in the consolidated
statement of income. Gains and losses related to such instruments, to the
extent settled in cash, are reported as other deferred credits or charges, as
appropriate, in the consolidated balance sheet until recognized in income.
Commodity derivatives utilized for trading include futures, swaps and options.
Gains and losses on derivatives utilized for trading are recognized on a
current basis and are also included in natural gas, petroleum products and
power purchased. See Note 6.
42
<PAGE> 7
CASH AND CASH EQUIVALENTS. All liquid investments with maturities at date of
purchase of three months or less are considered cash equivalents.
PLANT, PROPERTY AND EQUIPMENT. Plant, property and equipment is stated at
original cost, which does not purport to represent replacement or realizable
value. Assets, including goodwill, are grouped and evaluated for potential
impairment based on the ability to identify separate cash flows generated
therefrom.
At the time FERC-regulated properties are retired, the original cost plus
the cost of retirement, less salvage, is charged to accumulated depreciation
and amortization. When entire FERC-regulated operating units are sold or
non-regulated properties are retired or sold, the plant and related accumulated
depreciation and amortization accounts are reduced and any gain or loss is
credited or charged to income, unless otherwise required by FERC.
Depreciation of plant, property and equipment is generally computed using
the straight-line method. The LNG facilities are depreciated using a modified
unit-of-production method based on the life of the project's LNG supply
contract. See Note 9.
AMORTIZATION OF GOODWILL. The Company amortizes goodwill related to the
purchase of Texas Eastern Corporation (TEC) in 1989 and the purchases of
certain other natural gas gathering, transmission and processing facilities on
a straight-line basis over 40 years and 15 years, respectively. Accumulated
amortization of goodwill at December 31, 1996 and 1995 was $98.4 million and
$96.1 million, respectively. See Note 5.
EARLY RETIREMENT OF DEBT. The Company defers certain costs and losses, as
permitted by FERC, related to the early retirement of long-term debt of its
FERC-regulated subsidiaries and amortizes such amounts as they are recovered
through rates. At December 31, 1996 and 1995, other deferred charges included
$61.2 million and $54.7 million, respectively, of such costs. See Note 10.
INTEREST COST CAPITALIZATION. The Company capitalizes interest on major
projects during construction. The rates used by regulated companies are
calculated pursuant to FERC rules and include an allowance for equity funds.
DEFERRED INCOME TAX. The Company follows the asset and liability method of
accounting for income tax. Under this method, the effect of a change in tax
rates on deferred tax assets and liabilities is recognized in income in the
period the rate change is enacted. See Note 5.
COMMON STOCK OPTIONS AND AWARDS. The Company follows the intrinsic value
method of accounting for common stock options and awards issued to employees.
See Note 12.
EARNINGS PER COMMON SHARE. The computation of earnings per common share is
based on the monthly weighted-average number of shares of common stock
outstanding. Convertible debt and unexercised stock options do not have a
dilutive effect on the reported amount of earnings per common share. See Notes
10 and 12.
2. BUSINESS COMBINATIONS
DUKE POWER COMPANY. On November 25, 1996, PanEnergy and Duke Power Company
(Duke Power) announced a definitive merger agreement for a tax-free,
stock-for-stock transaction. Under the agreement, each share of PanEnergy
common stock would be converted into 1.0444 common shares of Duke Power. The
merger is conditioned upon, among other things, the approval of PanEnergy and
Duke Power stockholders, and approvals of appropriate state and federal
regulatory agencies. The Company anticipates that the stockholder and
regulatory approvals can be completed within 12 months. 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. The merger will be
accounted for under the pooling of interests method. Expenses incurred in the
fourth quarter 1996 as a direct result of the anticipated merger totaled $7.6
million before and after tax.
PANENERGY TRADING AND MARKET SERVICES, L.L.C. On August 1, 1996, a
wholly-owned subsidiary of PanEnergy formed a natural gas and power marketing
company with Mobil Corporation (Mobil) affiliates. The marketing company (PTMS)
conducts business as PanEnergy Trading and Market Services, L.L.C. in the
United States and as PanEnergy Marketing L.P. in Canada. PanEnergy operates the
new company and owns a 60% interest, with Mobil owning a 40% minority interest.
ASSOCIATED NATURAL GAS CORPORATION. On December 15, 1994, a wholly-owned
subsidiary of PanEnergy merged with Associated Natural Gas Corporation
(Associated), now PanEnergy Natural Gas Corporation (PanEnergy Natural Gas), on
a tax-free, stock-for-stock basis. The merger was accounted for under the
pooling of interests method. Nonrecurring expenses recorded in 1994 as a direct
result of the merger totaled $16.2 million ($14.2 million after tax).
The consolidated financial statements were restated in 1994 to include the
results of Associated for the 12 months ended September 30. Effective with the
date of the merger, the fiscal year end of Associated was changed from September
30 to December 31. Associated's net income for the three months ended December
31, 1994 was recorded
43
<PAGE> 8
directly to retained earnings and its cash activity for that period is shown
separately on the consolidated statement of cash flows.
3. BUSINESS SEGMENTS
The Company's operations are classified into two major business segments.
The Natural Gas Transmission segment is involved in the interstate
transportation and storage of natural gas. Principal markets are utilities,
marketers, end-users and producers in the Mid-Atlantic, New England, Midwest
and Gulf Coast states.
The Energy Services segment is involved in the purchasing, gathering,
processing, marketing and intrastate transportation of natural gas, NGLs, crude
oil and electricity. Gathering, processing and transportation services are
provided to producers, refiners and a variety of wholesale and retail customers
located in the Mid-Continent, Gulf Coast and Rocky Mountain states. The
principal markets for energy marketing services, including natural gas and
electric power marketing, comprehensive energy management services and
financial products, are industrial end-users and utilities located throughout
the United States, in Canada and, to a lesser extent, the United Kingdom.
"Other Operations" includes, among other things, corporate investments,
intersegment eliminations and the Company's LNG project, which imports LNG from
Algeria, stores and regasifies LNG, and provides worldwide LNG shipping
services.
Selected financial data for the Company's segments follows. Identifiable
assets are those assets used in the Company's operations in each segment.
<TABLE>
<CAPTION>
REVENUES
---------------------------------
EARNINGS CAPITAL AND
INTER- DEPRECIATION OPERATING BEFORE INTEREST INVESTMENT IDENTIFIABLE
MILLIONS UNAFFILIATED SEGMENT TOTAL & AMORTIZATION INCOME (LOSS) AND TAX EXPENDITURES ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Natural Gas
Transmission
1996 $1,464.4 $ 86.4 $1,550.8 $228.2 $580.1 $596.2 $185.3 $5,267.2
1995 1,473.0 53.1 1,526.1 228.5 556.9 569.7 227.0 5,352.6
1994 1,637.5 44.8 1,682.3 216.8 529.4 521.6 303.4 5,655.8
Energy Services
1996 6,006.3 11.8 6,018.1 62.8 185.3 192.3 537.4 2,514.7
1995 3,447.1 0.5 3,447.6 42.7 106.1 117.3 202.6 1,404.5
1994 2,892.8 60.2 2,953.0 33.3 74.8 77.2 254.5 1,118.7
Other Operations
1996 66.1 (98.2) (32.1) 6.2 (7.8)(1) 26.0(1) 30.5 785.9
1995 47.4 (53.6) (6.2) 7.8 5.7 48.1 12.7 870.2
1994 54.8 (105.0) (50.2) 6.9 (18.9)(2) 16.4(2) 5.8 733.0
- -----------------------------------------------------------------------------------------------------------------------------
Consolidated
1996 $7,536.8 -- $7,536.8 $297.2 $757.6(1) $814.5(1) $753.2 $8,567.8
1995 4,967.5 -- 4,967.5 279.0 668.7 735.1 442.3 7,627.3
1994 4,585.1 -- 4,585.1 257.0 585.3(2) 615.2(2) 563.7 7,507.5
=============================================================================================================================
</TABLE>
(1) Includes expenses incurred of $7.6 million for the pending merger with
Duke Power Company.
(2) Includes nonrecurring expenses of $16.2 million for the Associated Natural
Gas Corporation merger.
4. NATURAL GAS REVENUES AND 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. 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 transition cost settlements.
In 1994, TETCO refunded $84 million to customers pursuant to a FERC-approved
settlement that resolved regulatory issues related primarily to Order 636
transition costs and a number of other issues related to services prior to
Order 636. TETCO's final and nonappealable settlement 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
44
<PAGE> 9
levels. In 1995, based upon producers' discoveries of additional natural gas
reserves, TETCO increased its estimated liabilities for transition costs by
$125.8 million. Under the terms of the existing settlement, regulatory assets
were increased $85.8 million and TETCO recognized a $40 million charge to
operating expenses ($26 million after tax).
At December 31, 1996 and 1995, the Company's interstate pipelines had
recorded $67.9 million and $250 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 December 31, 1996 and 1995, the Company had recorded estimated
current and long-term liabilities related to Order 636 transition costs of
$84.4 million and $121.9 million (1996), and $125 million and $165 million
(1995), 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 adverse effect on consolidated results of operations or
financial position.
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 substantial time to
resolve. On August 27, 1996, the U.S. Court of Appeals for the District of
Columbia overturned a lower court ruling in favor of the government in
litigation brought on behalf of producers. The Department's petition for
rehearing was denied in November 1996. The Department may continue to seek
further appellate review. 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. The Company
believes the resolution of this matter will not have a material adverse effect
on the Company's consolidated financial position.
JURISDICTIONAL TRANSPORTATION AND SALES RATES
PEPL. On April 1, 1992 and November 1, 1992, PEPL placed into effect,
subject to refund, general rate increases. On September 12, 1996, PEPL filed a
settlement proposal relating to both rate proceedings on behalf of itself and
the majority of its largest customers. On December 20, 1996, FERC approved
PEPL's settlement agreement which resolves refund matters and establishes
prospective rates for settling parties. The agreement, which remains subject to
rehearing, 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 certain proceedings, PEPL recorded earnings
before interest and tax of $8 million, $20.6 million and $25 million in 1996,
1995 and 1994, respectively.
TRUNKLINE. Effective August 1, 1996, Trunkline placed into effect a general
rate increase, subject to refund.
ALGONQUIN. On June 14, 1996, Algonquin submitted a compliance filing
reflecting changes in net plant, property and equipment pursuant to a previous
rate settlement. On October 16, 1996, FERC accepted the filing and denied all
protests.
5. INCOME TAX
Income tax as presented in the consolidated statement of income is
summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $95.7 $ 67.8 $ 40.6
State 18.9 13.8 6.0
Foreign 5.2 7.0 --
-------------------------
Total current 119.8 88.6 46.6
-------------------------
Deferred
Federal 89.8 91.8 94.6
State 12.5 17.4 20.2
-------------------------
Total deferred 102.3 109.2 114.8
-------------------------
Total income tax $222.1 $197.8 $161.4
=========================
</TABLE>
45
Total income tax differs from the amount computed by applying the federal
income tax rate to income before income tax. The reasons for this difference
are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
=========================
Income tax, computed at the
statutory rate $204.1 $175.5 $135.3
Adjustments resulting from
State income tax, net of
federal income tax effect 20.4 20.3 17.0
Goodwill amortization 2.8 3.2 4.1
Insurance premiums (5.3) (5.8) (4.1)
Other items, net 0.1 4.6 9.1
-------------------------
Total income tax $222.1 $197.8 $161.4
=========================
Effective tax rate 38.1% 39.4% 41.7%
=========================
</TABLE>
<PAGE> 10
The tax effects of temporary differences that resulted in deferred income
tax assets and liabilities, and a description of the significant financial
statement items that created these differences, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
Deferred liabilities and credits $ 211.5 $ 263.0
Investment tax credit carryforward -- 24.5
Alternative minimum tax credit carryforward 72.6 78.6
Other accrued liabilities 78.1 104.3
Rate refund provisions 13.3 17.3
Deferred revenue - LNG project 18.9 22.1
State deferred income tax,
net of federal tax effect 15.4 15.8
Other 15.6 20.8
----------------------
Total deferred income tax assets 425.4 546.4
Valuation allowance and other tax reserves (141.1) (142.5)
----------------------
Net deferred income tax assets 284.3 403.9
----------------------
Plant, property and equipment (931.4) (914.0)
Deferred charges (216.0) (252.6)
Investments (87.0) (90.7)
State deferred income tax,
net of federal tax effect (103.0) (100.9)
Prepaid pension (98.2) (90.7)
Other (41.2) (57.1)
----------------------
Total deferred income tax liabilities (1,476.8) (1,506.0)
----------------------
Net deferred income tax liability,
net of current amounts $ (1,192.5) $ (1,102.1)
======================
</TABLE>
If tax benefits relating to the valuation allowance for deferred income tax
assets and other tax reserves are recognized subsequent to December 31, 1996,
approximately $28.6 million will be allocated to goodwill.
The investment tax credit carryforward was fully utilized in 1996 and the
alternative minimum tax credit carryforward can be carried forward
indefinitely.
In 1990, the Internal Revenue Service (IRS) issued regulations which
disallow for tax purposes losses incurred in the Company's 1989 sales of
certain assets that were acquired in the purchase of TEC. Consequently, the
Company established a provision in 1990 for this and certain other issues,
resulting in an increase in goodwill and deferred income tax liability.
Following further discussions with the IRS, the Company revised its estimates
in 1994 with respect to the disallowed loss issue, and in 1995 and 1996 with
respect to the remaining issues. As a result, the Company reduced the related
goodwill and deferred income tax liability by approximately $40 million, $100
million and $200 million in 1996, 1995 and 1994, respectively.
6. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
APPROXIMATE
MILLIONS BOOK VALUE FAIR VALUE
- -----------------------------------------------------------------
Assets (Liabilities)
<S> <C> <C> <C>
December 31, 1996
Cash Note 1 $ 57.2 $ 57.2
Other current receivables 26.7 26.7
Other investments Note 8 38.0 38.0 (1)
Notes payable
and commercial paper Note 10 (354.1) (354.1)
Long-term debt Note 10 (2,085.3) (2,226.0)(2)
Interest rate swaps -- 0.2 (3)
December 31, 1995
Cash Note 1 $ 50.8 $ 50.8
Other current receivables 17.4 17.4
Other investments Note 8 44.8 44.7 (1)
Notes payable Note 10 (145.0) (145.0)(2)
Long-term debt Note 10 (2,271.2) (2,551.5)(2)
Foreign currency
exchange contract 32.7 34.0 (3)
Interest rate swaps -- 0.9 (3)
- -----------------------------------------------------------------
</TABLE>
(1) The fair value of these financial instruments, which include insurance
contracts and long-term receivables, is based on determinations by
insurance companies and discounted cash flows, as applicable.
(2) Based on quoted market prices for the same or similar issues, discounted
cash flows and/or rates currently available to the Company for debt with
similar terms and remaining maturities.
(3) Represents estimated amounts the Company would receive if agreements were
settled, considering current market rates and the creditworthiness of the
parties to the agreements.
The Company has implemented an agreement to sell with limited recourse, on a
continuing basis, current accounts receivable at a discount. The Company
received $100 million for accounts receivable sold that remained outstanding at
December 31, 1996. In 1996, TETCO received $98.6 million from the sale of the
right to collect certain Order 636 transition costs, with limited recourse. In
1993, the Company sold LNG project settlement receivables, with limited
recourse. At December 31, 1996, $87.3 million and $29.9 million remained
outstanding on the transition cost recovery rights sold and the LNG settlement
receivables sold, respectively. In the opinion of
46
<PAGE> 11
management, the probability that the Company will be required to perform under
any of the above recourse provisions is remote.
The following financial instruments have no book value associated with them
and there are no fair values readily determinable since quoted market prices
are not available: recourse provisions of the TEPPCO Partners, L.P. First
Mortgage Notes (Note 8); the LNG project settlement, trade accounts receivable
and Order 636 transition cost recovery sales agreements; the Northern Border
Pipeline Company (Northern Border Pipeline) transportation agreement guarantee
(Note 8); and the Petrolane Incorporated (Petrolane) lease indemnification
(Note 11).
At December 31, 1996, the Company had two interest rate swaps for a total
outstanding notional amount of approximately $29.9 million that were entered
into as a result of the sale of the LNG project settlement receivables.
Pursuant to these swaps, the Company makes payments to the counterparty at a
rate based on LIBOR (London Interbank Offered Rates) and receives payments
based on the FERC prime rate. The notional amount decreases as the outstanding
balance of the settlement receivables decreases, and the swaps terminate in
conjunction with collection of the receivables, which will be no later than
1998. Other interest expense is adjusted for the net amount of these swap
receipts and payments.
COMMODITY RISK MANAGEMENT. At December 31, 1996, the Company held or issued
several instruments that reduce the Company's exposure to market fluctuations
in the price and transportation costs of natural gas, petroleum products and
power. The Company's market exposure, primarily within PTMS, arises from
inventory balances and fixed-price purchase and sale commitments that extend
for periods of up to 10 years. The Company uses futures, swaps and options to
manage and hedge price and location risk related to these market exposures.
PTMS also provides risk management services to its customers through a variety
of energy commodity financial instruments. 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. The Company manages open positions with strict policies which limit 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 earnings at risk as well
as a total value at risk measurement. The weighted-average life of the
Company's commodity risk portfolio was approximately 11 months at December 31,
1996.
Natural gas futures involve the buying or selling of natural gas at a fixed
price. Over-the-counter swap agreements require the Company to receive or make
payments based on the difference between a specified price and the actual price
of natural gas. The Company uses futures and swaps to manage margins on
offsetting fixed-price purchase or sale commitments for physical quantities of
natural gas. Natural gas options held to hedge price risk provide the right,
but not the requirement, to buy or sell natural gas at a fixed price. The
Company utilizes options to manage margins and to limit overall price risk
exposure.
At December 31, 1996 and 1995, the Company had outstanding futures, swaps
and options for an absolute notional contract quantity of 104 billion cubic
feet (Bcf) and 223 Bcf of natural gas, respectively, which are in place to
offset the risk of price fluctuations under fixed-price commitments for
delivering and purchasing natural gas. The gains, losses and costs related to
those financial instruments that qualify as a hedge are not recognized until the
underlying physical transaction occurs. At December 31, 1996 and 1995, the
Company had unrecognized net losses of $5.1 million and $15.4 million,
respectively, related to financial instruments which are offset by corresponding
unrecognized net gains from the Company's obligations to sell physical
quantities of gas and power. The fair value of energy commodity swaps held at
December 31, 1996 was an asset of $86.5 million with a notional amount of $95.9
million.
During 1996, 1995 and 1994, the Company recognized gains of $25.4 million,
$10.5 million and $0.7 million, respectively, from trading activities. The
values of energy commodities futures, swaps and options held for trading
purposes were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------- ---------------------
MILLIONS ASSETS LIABILITIES ASSETS LIABILITIES
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair Value at December 31 $719 $731 $406 $424
Average Fair Value 458 466 277 289
Notional Amount 698 692 430 447
</TABLE>
MARKET AND CREDIT RISK. New York Mercantile Exchange (Exchange) traded
futures and option contracts are guaranteed by the Exchange and have nominal
credit risk. On all other transactions described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. For each
counterparty, the Company analyzes their financial condition prior to entering
into an agreement, establishes credit limits and monitors the appropriateness
of these limits on an ongoing basis. The change in market value of
Exchange-traded futures and options contracts requires daily cash settlement in
margin accounts with brokers. Swap contracts and most other over-the-counter
instruments are generally settled at the expiration of the contract term and
may be subject to margin require-
47
<PAGE> 12
ments with the counterparty. At December 31, 1996 and 1995, the Company had
$20.2 million and $14.3 million, respectively, in margin cash accounts to
service these financial instruments of which $1.6 million and $2 million,
respectively, was available for general corporate purposes.
The Company has a concentration of receivables due from customers throughout
the United States and Canada. These include, among others, gas and electric
utilities and their affiliates, as well as industrial customers. These
concentrations of customers may affect the Company's overall credit risk in
that certain customers may be similarly affected by changes in economic,
regulatory or other factors. Trade receivables are generally not
collateralized; however, the Company analyzes customers' credit positions
prior to extending credit.
7. INVENTORY
A summary of inventory and supplies by category follows:
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS 1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Gas held for resale $ 31.7 $ 30.1
Crude oil 14.7 10.6
NGLs 16.3 11.2
Materials and operating supplies 69.4 83.9
------------------
Total inventory and supplies $132.1 $135.8
==================
</TABLE>
Inventory and supplies are recorded at the lower of cost or market using the
average cost method and the last-in first-out method, and do not exceed
recoverable cost. Materials and operating supplies includes gas held for
operations.
8. INVESTMENTS
AFFILIATES
The Company has investments in the following companies that are accounted
for using the equity method. These investments include undistributed earnings
of $62.7 million in 1996 and $45.6 million in 1995 related to 50% or less owned
entities.
INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS OWNERSHIP 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
National Methanol Company 25% $ 65.9 $ 54.9
Dauphin Island Gathering Partners 37 51.9 --
Northern Border Partners, L.P. 8 33.8 34.4
Midland Cogeneration Venture 18 31.5 20.6
TEPPCO Partners, L.P. 10 25.9 23.8
Westana Gathering Company 50 10.8 4.4
Other affiliates Various 94.1 26.2
---------------
Total investments in affiliates $313.9 $164.3
===============
</TABLE>
EQUITY IN EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
National Methanol Company $ 16.6 $ 22.5 $ 26.2
Dauphin Island Gathering Partners 0.8 -- --
Northern Border Partners, L.P. 4.4 7.2 4.5
Midland Cogeneration Venture 10.9 11.6 2.8
TEPPCO Partners, L.P. 8.9 6.4 3.6
Westana Gathering Company 1.3 0.3 0.8
Other affiliates (4.1) 2.6 3.0
---------------------------
Total equity in earnings $ 38.8 $ 50.6 $ 40.9
===========================
</TABLE>
Distributions and dividends received amounted to $20.6 million, $42.7 million
and $11.7 million in 1996, 1995 and 1994, respectively.
Summarized combined balance sheet and income statement information of the
entities that are accounted for using the equity method are as follows:
<TABLE>
<CAPTION>
MILLIONS 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets $ 697.9 $ 506.3 $ 525.1
Noncurrent assets 4,531.7 4,280.2 4,453.0
-----------------------------
Total $5,229.6 $4,786.5 $4,978.1
=============================
LIABILITIES AND EQUITY
Current liabilities $ 514.1 $ 395.2 $ 424.2
Noncurrent liabilities 3,159.7 3,239.7 3,609.7
Equity 1,555.8 1,151.6 944.2
-----------------------------
Total $5,229.6 $4,786.5 $4,978.1
=============================
INCOME
Operating revenues $1,438.9 $1,390.0 $1,221.9
Operating expenses 943.8 855.3 763.9
Net income 239.4 264.4 226.8
</TABLE>
NATIONAL METHANOL COMPANY (NATIONAL METHANOL). National Methanol, doing
business as Ibn Sina, is a joint venture that owns and operates a methanol
plant and an MTBE (methyl tertiary butyl ether) plant in Jubail, Saudi Arabia.
Both plants are among the largest such plants in the world, producing 985,000
metric tons of methanol and 905,000 metric tons of MTBE in 1996.
DAUPHIN ISLAND GATHERING PARTNERS. Dauphin Island Gathering Partners is a
partnership which owns the Dauphin Island Gathering system and the Main Pass
Gas Gathering system, which are natural gas gathering systems in the Gulf of
Mexico.
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership (MLP) that owns 70% of Northern Border Pipeline, a
partnership operating a pipeline transporting natural gas from Canada to the
Midwest area of the United States. The Company has general partner interests as
well as subordinated limited partnership interests, totaling 8%, in Northern
Border Partners, L.P., and through the MLP, an effective 6% ownership interest
in Northern Border Pipeline.
48
<PAGE> 13
Under the terms of a settlement related to a transportation agreement
between PEPL and Northern Border Pipeline, PEPL guarantees payment to Northern
Border Pipeline 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.
MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP (MCV). MCV converted an
incomplete nuclear plant to a dual-purpose energy unit that uses natural gas to
generate electricity and produce industrial process steam. The Company has a
general partnership interest in MCV.
TEPPCO PARTNERS, L.P. TEPPCO Partners, L.P. is an 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 December 31, 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.
WESTANA GATHERING COMPANY. Westana Gathering Company is a joint venture that
provides gathering, processing and marketing services for natural gas
producers in Oklahoma.
OTHER AFFILIATES. Other investments in affiliates include projects currently
under construction.
OTHER INVESTMENTS
Other investments include real estate holdings and financial instruments,
such as insurance contracts and long-term receivables, that are recorded at
cost in the consolidated balance sheet.
9. PLANT, PROPERTY AND EQUIPMENT
A summary of plant, property and equipment by classification follows:
<TABLE>
<CAPTION>
DEPRECIATION DECEMBER 31
MILLIONS RATES 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Transmission 2% - 7% $6,206.7 $6,044.8
Gathering 1% - 7% 431.0 511.9
Processing 4% - 5% 508.4 144.1
Underground storage 2% - 4% 450.6 488.3
LNG facilities -- * 599.8 600.3
LNG vessels 3% 151.2 150.9
General plant 3% - 33% 348.1 318.5
Construction work
in progress -- 126.7 141.9
-------------------
Total plant, property and equipment $8,822.5 $8,400.7
===================
</TABLE>
*Modified unit-of-production method.
A summary of plant, property and equipment, net of accumulated depreciation,
by classification follows:
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Transmission $3,833.2 $3,798.4
Gathering 223.4 208.1
Processing 396.6 97.9
Underground storage 322.0 368.8
LNG project 316.3 321.4
General plant 238.5 213.3
Construction work in progress 126.7 141.9
-------------------
Net plant, property and equipment $5,456.7 $5,149.8
===================
</TABLE>
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.
49
10. DEBT AND CREDIT FACILITIES
A summary of long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
PANENERGY
8 5/8% debenture maturing 2025 $ 100.0 $ 100.0
Bonds
7 3/4% revenue maturing 2022 328.0 328.0
Swiss Franc maturing 1996 -- 86.7
Notes
Medium Term, Series A,
8.5-9% maturing 1996-1997 114.5 139.0
9.55% maturing 1996-1999* 41.3 55.0
8 5/8% maturing 1999 100.0 100.0
9.9% maturing 2000-2003* 45.0 45.0
7 3/8% maturing 2003 100.0 --
9% convertible maturing 1997-2004* 10.0 10.0
7 1/4% maturing 2005 100.0 100.0
7% maturing 2006 150.0 --
TETCO
Debentures
10 1/8% maturing 2011 -- 100.0
10% maturing 2011 -- 150.0
Notes
10 3/8% maturing 2000 200.0 200.0
10% maturing 2001 100.0 100.0
8% maturing 2002 100.0 100.0
8 1/4% maturing 2004 100.0 100.0
Medium Term, Series A,
7.64-9.07% maturing 1999-2012 100.0 100.0
ALGONQUIN
Notes
8.795-8.936% maturing 1996 -- 50.0
9.13% maturing 2001-2003 100.0 100.0
PEPL
7 7/8% note maturing 2004 100.0 100.0
Debentures
7.95% maturing 2023 100.0 100.0
7.2% maturing 2024 100.0 100.0
PANHANDLE GATHERING COMPANY
4% note maturing 1996 -- 4.5
PANENERGY NATURAL GAS
6.3% note maturing 1999-2003 -- 40.0
Other -- 0.1
--------------------
Total 2,088.8 2,308.3
LESS CURRENT MATURITIES (138.3) (179.6)
LESS UNAMORTIZED DISCOUNT (3.5) (37.1)
--------------------
TOTAL LONG-TERM DEBT $1,947.0 $2,091.6
====================
</TABLE>
* These previous obligations of PanEnergy Natural Gas were assumed by
PanEnergy in 1996.
The interest rates indicated were in effect on principal balances
outstanding at December 31, 1996. Interest costs capitalized in 1996, 1995 and
1994 were $2.9 million, $3.8 million and $4.6 million, respectively.
<PAGE> 14
PanEnergy's 9% convertible notes entitle the holders, at their option, to
convert the notes into 451,875 shares of PanEnergy common stock. This
conversion right contains various anti-dilution provisions, including a
provision to adjust the conversion rate if PanEnergy sells shares at a price
less than the current market price.
Required sinking fund and installment payments applicable to long-term debt
are as follows:
<TABLE>
<CAPTION>
MILLIONS
---------------------------------------
<S> <C>
1997 $138.3
1998 13.8
1999 162.7
2000 211.3
2001 160.5
</TABLE>
On October 1, 1996, TETCO redeemed its $150 million, 10% debentures due 2011
and its $100 million, 10 1/8% debentures also due 2011. TETCO recorded a
non-cash extraordinary charge of $16.7 million (net of income tax of $10.3
million) related to the unamortized discount on this early retirement of debt.
Earnings per common share for 1996 was reduced $0.11 as a result of this
charge.
PanEnergy initiated a commercial paper program in the fourth quarter of 1996
for amounts up to $400 million, supported by its existing bank credit
agreements. 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. Amounts outstanding under the credit agreements and
commercial paper program are limited to $800 million in the aggregate. At
December 31, 1996, there was $102.2 million of commercial paper outstanding and
no amounts outstanding under the credit agreements. In addition, at December
31, 1996, the Company had $251.9 million of short-term borrowings from banks
outstanding. The weighted-average interest rate of commercial paper and bank
borrowings outstanding at December 31, 1996 was 6.19%.
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. Under the
most restrictive covenants contained in the Company's debt agreements, $1.1
billion of PanEnergy's consolidated common stockholders' equity was available
for the payment of dividends at December 31, 1996.
50
<PAGE> 15
11. LEASES AND OTHER COMMITMENTS
The Company utilizes assets under operating leases in several areas of
operations. Consolidated rental expense amounted to $49.7 million, $34.7
million and $30.6 million in 1996, 1995 and 1994, respectively. Minimum rental
payments under the Company's various operating leases for the years 1997
through 2001 are $43.9 million, $25.9 million, $22.5 million, $17.2 million and
$12.5 million, respectively. Thereafter, payments aggregate $39.6 million
through 2011.
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 total 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.
12. STOCK BASED COMPENSATION
STOCK OPTIONS AND AWARDS
Under the Company's 1994 Long Term Incentive Plan, stock options and awards
for up to three million shares of common stock may be granted to employees.
Under the 1989 Nonemployee Directors Stock Option Plan, the Company may grant
options for up to 200,000 shares to members of the board of directors. Under
each plan, the exercise price of each option granted equals the market price of
the Company's common stock on the date of grant. Vesting periods range from one
to five years with a maximum term of 10 years.
In 1996, the Company granted 144,075 performance-based stock awards and
75,000 fixed stock awards with an average grant-date fair value of $28 per
share. The Company recognized compensation expense of $8.3 million in 1996 and
none in 1995 for stock options and stock awards.
A summary of the Company's stock option grants follows:
<TABLE>
<CAPTION>
OPTIONS AVERAGE
(000'S) EXERCISE PRICE
- ------------------------------------------------------------
<S> <C> <C>
Outstanding at Dec. 31, 1993 1,761 $19
Granted 337 24
Exercised (61) 16
Expired (33) 24
Converted* 1,575 13
------
Outstanding at Dec. 31, 1994 3,579 17
Granted 919 21
Exercised (1,030) 14
Forfeited (60) 23
------
Outstanding at Dec. 31, 1995 3,408 19
Granted 477 29
Exercised (682) 17
Forfeited (68) 23
------
OUTSTANDING AT DEC. 31, 1996 3,135 21
======
</TABLE>
* Represents conversion of stock options outstanding of Associated Natural
Gas Corporation into equivalent PanEnergy options.
The Company had 2,863 options and 2,293 options exercisable at December 31,
1994 and 1995, with average exercise prices of $16 and $17 per option,
respectively. Details of stock options outstanding and options exercisable at
December 31, 1996 follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------- ----------------
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES (000'S) LIFE (YEARS) PRICE (000'S) PRICE
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$10 to $13 255 4.5 $11 255 $11
$15 to $20 751 5.6 17 751 17
$21 to $25 1,632 7.3 22 1,070 22
$26 to $28 375 8.9 28 9 26
$31 to $32 122 7.8 32 20 31
----- -----
Total 3,135 2,105 19
===== =====
</TABLE>
FAIR VALUE INFORMATION
The weighted-average fair value of options granted during 1994 and 1995 was
$7 per option each year, and $9 per option during 1996. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
1995 and 1996 grants: stock dividend yield of 2.6%; expected stock price
volatility of 26%; 1994 Plan risk-free interest rates of 7.7% and 5.7% for 1995
and 1996, respectively; 1989 Plan risk-free interest rates of 6.9% and 6.8% for
1995 and 1996, respectively; and expected option lives of seven years. Had
compensation expense for stock-based compensation been determined based on the
fair value at the grant dates, the Company's 1996 net income would have been
$343.8 million, or $2.28 per share, and 1995 net income would have been $302.4
million, or $2.02 per share.
51
<PAGE> 16
13. 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. 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.
At December 31, 1996 and 1995, the Company had total current and long-term
liabilities recorded of $32.4 million and $188.9 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 $77.6 million 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, TETCO's share of the cleanup estimate
was lowered, which decreased operating expenses $33 million ($21.5 million
after tax) and reduced related regulatory assets by $44.6 million. At
December 31, 1996 and 1995, the Company had total current and long-term
regulatory assets recorded of $16.7 million and $136.5 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.
14. LITIGATION
In connection with a rupture and fire that occurred on TETCO's natural gas
pipeline in 1994 in Edison, New Jersey, claims have been made and numerous
lawsuits have been filed 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 claimants include
Quality Materials, Inc. (Quality), the owner of the asphalt plant where the
rupture occurred. TETCO has filed a counterclaim against Quality and has
settled the claims of 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.
In 1995, two plaintiffs filed a lawsuit with class action allegations
against PanEnergy, TEC and TETCO, among others. While that suit ultimately was
dismissed, one of the two original plaintiffs refiled the suit in 1996 in
another court. The plaintiff seeks recovery of compensatory and punitive
damages, in unspecified amounts, for personal injuries and property damage
resulting from alleged exposure to PCBs.
In 1995, Midwest Gas Storage, Inc. (Midwest) filed suit against PEPL and
PanEnergy, alleging that PEPL breached an interconnection agreement and used
its superior bargaining position to force Midwest to accept terms and
conditions which were not in the original agreement. Amended petitions filed in
1996 further allege that PEPL and PanEnergy, through economic coercion, have
attempted to drive Midwest out of business. Asserting fraud and violations of
Texas anti-trust laws, among other counts, Midwest seeks compensatory and
punitive damages in unspecified amounts.
The Company believes the resolution of the legal matters discussed above
will not have a material adverse effect on the Company's consolidated results
of operations or financial position.
52
<PAGE> 17
A lawsuit filed by a natural gas producer was served in July 1996 naming
certain PanEnergy subsidiaries as defendants. The action was brought against 70
defendants, including every major pipeline, asserting that the defendants
intentionally underreported volumes and heating content of gas purchased on
federal and Indian lands, with the result that royalties were underpaid. The
plaintiff seeks recovery of royalty amounts due the United States, treble
damages and civil penalties. While this matter is in the early stages of
litigation, based on information currently available to the Company, the
Company believes the resolution of this matter will not have material adverse
effect on consolidated financial position.
In December 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 Contract) with TETCO. In TETCO's view, the tendered substitute
gas reserves, deliverability and leases are not subject to the Contract and
TETCO filed a declaratory judgment action seeking a ruling that Marathon's
interpretation of the Contract is incorrect. Marathon filed a counterclaim
seeking a declaratory judgment enforcing its interpretation of the Contract.
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 on 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. While this matter is in the
early stages of litigation, based on information currently available to the
Company, the Company believes the resolution of this matter will not have
material adverse effect on consolidated 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
results of operations or 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.
15. PENSION AND OTHER BENEFITS
PENSION BENEFITS. PanEnergy has a non-contributory trusteed pension plan
covering certain employees with a minimum of one year vesting service. The plan
provides pension benefits (i) for eligible employees of certain subsidiaries
that are generally based on an employee's years of benefit accrual service and
highest average eligible earnings, and (ii) commencing January 1, 1995, for
eligible employees of certain other subsidiaries that are generally based on
the employee's actual eligible earnings and accrued interest. The Company's
policy is to fund amounts, as necessary, on an actuarial basis to provide
assets sufficient to meet benefits to be paid to plan members.
The components of the net pension benefit are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Actual return on plan assets $122.1 $159.8 $ (2.1)
Amount deferred (51.7) (93.4) 67.4
---------------------------
Expected return on plan assets 70.4 66.4 65.3
Service cost benefits earned
during the period (13.1) (11.4) (12.4)
Interest cost on projected
benefit obligations (36.7) (36.8) (35.8)
Net amortization 2.7 2.9 2.9
---------------------------
Net pension benefit $ 23.3 $ 21.1 $ 20.0
===========================
</TABLE>
<PAGE> 18
The following sets forth the pension plan's funded status and the net asset
recognized by the Company:
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS 1996 1995
- -------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value
(principally common stock and
fixed income securities) $857.5 $790.0
----------------
Actuarial present value of
benefit obligations:
Vested 361.8 363.1
Nonvested 22.6 17.6
----------------
Accumulated obligations 384.4 380.7
Effects of projected future
compensation levels 78.6 107.5
----------------
Projected obligations 463.0 488.2
----------------
Plan assets in excess of
projected obligations 394.5 301.8
Unrecognized net asset (37.0) (41.7)
Unrecognized net gain (97.3) (23.0)
Unrecognized prior service cost 20.4 22.2
----------------
Prepaid pension $280.6 $259.3
================
</TABLE>
Assumptions used in the Company's pension and other postretirement benefits
accounting are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
PERCENT 1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5 7.5 8.5
Rate of increase in
compensation levels 5.0 5.0 5.0
Expected long-term rate of
return on plan assets 9.5 9.5 9.5
Assumed tax rate* 39.6 39.6 39.6
</TABLE>
* Health care portion of postretirement benefits
53
<PAGE> 19
The Company also sponsors employee savings plans which cover substantially
all employees. The Company expensed plan contributions of $12.7 million, $12.9
million and $13 million in 1996, 1995 and 1994, respectively.
OTHER POSTRETIREMENT BENEFITS. The Company's postretirement benefits consist
of certain health care and life insurance benefits. Substantially all employees
of certain subsidiaries may become eligible for these benefits when they reach
retirement age while working for such companies and have attained 10 years of
specified service. The benefits are provided through contributory and
noncontributory trusteed benefit plans.
The Company accrues such benefit costs over the active service period of
employees to the date of full eligibility for the benefits. The net
unrecognized transition obligation, resulting from the implementation of
accrual accounting in 1993, is being amortized over approximately 20 years.
It is the Company's general policy to fund accrued postretirement health
care costs. The retiree life insurance plan is fully funded based on
actuarially-determined requirements. FERC policy generally allows, subject to
individual pipeline proceedings, for current rate recovery of funded accrued
postretirement benefit costs including amortization of the transition
obligation. Pending FERC approval in rate proceedings, the Company's pipelines
have deferred certain postretirement benefit costs.
The components of the net postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
MILLIONS 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Actual return on plan assets $ 8.1 $ 14.9 $ 0.3
Amount deferred (1.2) (8.9) 5.3
-----------------------
Expected return on plan assets 6.9 6.0 5.6
Service cost benefits earned
during the period (2.0) (1.7) (2.2)
Interest cost on accumulated
obligations (16.0) (16.3) (15.6)
Net amortization and deferral (4.2) (2.7) (2.9)
-----------------------
Net postretirement benefits cost $(15.3) $(14.7) $(15.1)
=======================
</TABLE>
The following sets forth the postretirement benefit plans' funded status and
the net liability recognized by the Company:
<TABLE>
<CAPTION>
DECEMBER 31
MILLIONS 1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement
benefit obligations:
Retirees $(189.2) $(182.9)
Fully eligible active plan participants (3.0) (2.5)
Other active plan participants (40.5) (37.2)
-------------------
Accumulated obligations (232.7) (222.6)
Plan assets at fair value
(principally common stock and
fixed income securities) 97.7 86.4
-------------------
Accumulated obligations in excess
of plan assets (135.0) (136.2)
Unrecognized transition obligations 95.7 101.4
Unrecognized net loss 30.7 26.7
-------------------
Net postretirement benefits liability $ (8.6) $ (8.1)
===================
</TABLE>
The assumed health care cost trend rate used to estimate postretirement
benefits was 7% for 1997. The health care cost trend rate is expected to
decrease, with a 5.5% ultimate trend rate expected to be achieved by 1999. The
effect of a 1% increase in the assumed health care cost trend rate for each
future year is $0.7 million on the annual aggregate postretirement benefit cost
and $11.4 million on the accumulated postretirement benefit obligation at
December 31, 1996.
OTHER POSTEMPLOYMENT BENEFITS. The Company accrues such benefit costs
provided by the Company to certain former or inactive employees. The Company's
pipelines have received permission from FERC to defer such costs, pending
resolution of rate filings requesting recovery.
54
<PAGE> 1
EXHIBIT 99.4
PANENERGY CORP AND SUBSIDIARIES
CONSOLIDATED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------
1996 MILLIONS, EXCEPT PER SHARE AMOUNTS MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME Operating revenues $1,712.6 $1,436.1 $1,832.0 $2,556.1
Operating expenses 1,499.4(1) 1,266.3 1,662.8 2,350.7(2)
-------------------------------------------------
Operating income 213.2 169.8 169.2 205.4
Other income, net of deductions 8.8 14.3 27.3 6.5
-------------------------------------------------
Earnings before interest and tax 222.0 184.1 196.5 211.9
Interest expense 58.3 55.8 57.1 53.9
-------------------------------------------------
Earnings before minority interest and income tax 163.7 128.3 139.4 158.0
Minority interest -- -- 2.2 4.0
Income tax 61.9 48.5 51.1 60.6
-------------------------------------------------
Income before extraordinary item 101.8 79.8 86.1 93.4
Extraordinary item, net of tax -- -- -- (16.7)
-------------------------------------------------
Net income $ 101.8(1) $ 79.8 $ 86.1 $ 76.7(2)
- --------------------------------------------------------------------------------------------------------------------------------
COMMON Average common shares outstanding 150.5 150.8 151.0 151.1
SHARES Earnings per common share
Before extraordinary item $ 0.68 $ 0.53 $ 0.57 $ 0.62
Net income 0.68 0.53 0.57 0.51
================================================================================================================================
<CAPTION>
1995
- --------------------------------------------------------------------------------------------------------------------------------
INCOME Operating revenues $1,232.1 $1,283.3 $1,133.7 $1,318.4
Operating expenses 1,055.4 1,122.3 975.1 1,146.0
-------------------------------------------------
Operating income 176.7 161.0 158.6 172.4
Other income, net of deductions 20.1 10.3 23.8 12.2
-------------------------------------------------
Earnings before interest and tax 196.8 171.3 182.4 184.6
Interest expense 58.0 59.0 59.4 57.3
-------------------------------------------------
Earnings before income tax 138.8 112.3 123.0 127.3
Income tax 54.7 44.8 49.4 48.9
-------------------------------------------------
Net income $ 84.1 $ 67.5 $ 73.6 $ 78.4
- --------------------------------------------------------------------------------------------------------------------------------
COMMON Average common shares outstanding 149.2 149.5 149.9 150.1
SHARES Earnings per common share $ 0.56 $ 0.45 $ 0.49 $ 0.52
================================================================================================================================
</TABLE>
(1) Includes a $17 million work-force reduction charge ($11 million after
tax).
(2) Includes expenses incurred of $7.6 million (before and after tax) for the
pending merger with Duke Power Company.
<PAGE> 1
EXHIBIT 99.5
PANENERGY CORP AND SUBSIDIARIES
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
MILLIONS, EXCEPT PER SHARE AMOUNTS 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME OPERATING REVENUES $ 7,536.8 $ 4,967.5 $ 4,585.1 $ 4,302.0 $3,881.3(1)
COSTS AND EXPENSES
Natural gas, petroleum products
and power purchased 5,523.6 3,131.2 2,829.4 2,575.6 2,058.9
Operating and maintenance 605.4 598.4 570.6 663.8(2) 577.1
Depreciation and amortization 297.2 279.0 257.0 250.8 258.9
Other costs and expenses 353.0(3) 290.2 342.8(4) 320.0 337.9
---------------------------------------------------------------------
OPERATING INCOME $ 757.6 $ 668.7 $ 585.3 $ 491.8 $ 648.5
EARNINGS BEFORE INTEREST AND TAX $ 814.5 $ 735.1 $ 615.2 $ 553.4 $ 636.7
INTEREST EXPENSE $ 225.1 $ 233.7 $ 228.6 $ 262.9 $ 299.0(1)
INCOME BEFORE EXTRAORDINARY ITEM $ 361.1(3) $ 303.6 $ 225.2(4) $ 171.6(2),(6) $ 202.0(1)
NET INCOME $ 344.4(3),(5) $ 303.6 $ 225.2(4) $ 171.6(2),(6) $ 202.0(1)
AVERAGE COMMON SHARES OUTSTANDING 150.9 149.7 148.7 142.4(7) 134.6
EARNINGS PER COMMON SHARE
Before extraordinary item $ 2.39 $ 2.03 $ 1.51 $ 1.21 $ 1.50
Total $ 2.28 $ 2.03 $ 1.51 $ 1.21 $ 1.50
DIVIDENDS PER COMMON SHARE $ 0.945 $ 0.885 $ 0.84 $ 0.80 $ 0.80
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE PLANT, PROPERTY AND EQUIPMENT $ 8,822.5 $ 8,400.7 $ 8,039.9 $ 7,523.4 $7,360.2
SHEET Accumulated depreciation and amortization (3,365.8) (3,250.9) (3,032.1) (2,826.7) (2,753.8)
---------------------------------------------------------------------
Net plant, property and equipment $ 5,456.7 $ 5,149.8 $ 5,007.8 $ 4,696.7 $4,606.4
TOTAL ASSETS $ 8,567.8 $ 7,627.3 $ 7,507.5 $ 7,607.8 $7,714.9
CAPITAL STRUCTURE
Long-term debt, including
current maturities $ 2,085.3 $ 2,271.2 $ 2,367.8 $ 2,152.0 $2,811.9
Short-term issues 354.1 145.0 -- 18.4 41.7
Common stockholders' equity 2,452.5 2,227.3 2,035.2 1,879.4 1,556.8
---------------------------------------------------------------------
TOTAL CAPITALIZATION $ 4,891.9 $ 4,643.5 $ 4,403.0 $ 4,049.8 $4,410.4
BOOK VALUE PER COMMON SHARE $ 16.23 $ 14.83 $ 13.65 $ 12.73 $ 11.47
DEBT TO CAPITALIZATION RATIO 50% 52% 54% 54% 65%
- --------------------------------------------------------------------------------------------------------------------------------
CASH OPERATING CASH FLOW $ 843.8 $ 573.1 $ 448.0 $ 769.5 $ 147.6
FLOWS CAPITAL EXPENDITURES $ 663.3 $ 433.1 $ 555.3 $ 366.8 $ 356.0
Investment expenditures 89.9 9.2 8.4 -- 1.8
---------------------------------------------------------------------
Total $ 753.2 $ 442.3 $ 563.7 $ 366.8 $ 357.8
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING(8) NATURAL GAS TRANSMISSION VOLUMES, TBTU 2,939 2,703 2,577 2,475 2,450
ENERGY SERVICES VOLUMES
Natural gas gathered/processed, TBtu/d 2.9 1.9 1.6 1.4 1.2
Natural gas marketed, TBtu/d 5.5 3.6 2.7 2.1 1.7
NGL production, MBbl/d 76.5 54.8 49.4 42.0 32.6
Electricity marketed, GWh 4,229 513 -- -- --
================================================================================================================================
</TABLE>
(1) Includes revenues for the LNG project settlement of $88.6 million and
$17.5 million in reduced interest expense ($57.7 million after tax).
(2) Includes a $100 million charge ($60.2 million after tax) reflecting
TETCO's settlement of Order 636 implementation and other issues.
(3) Includes expenses incurred of $7.6 million (before and after tax) for the
pending merger with Duke Power Company.
(4) Includes nonrecurring expenses of $16.2 million ($14.2 million after tax)
for the Associated Natural Gas Corporation merger.
(5) Includes an extraordinary charge of $16.7 million (net of income tax of
$10.3 million) resulting from the early retirement of debt.
(6) Includes a gain of $48.2 million ($28.7 million after tax) resulting from
the sale of a partial interest in Northern Border Partners, L.P.
(7) Includes the issuance of 10 million shares of common stock in June 1993.
(8) Units of measure used are trillion British thermal units (TBtu), trillion
British thermal units per day (TBtu/d), thousand barrels per day (MBbl/d)
and gigawatt-hours (GWh), as applicable.
See the Notes to Consolidated Financial Statements for a
discussion of material contingencies
