<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 1-8157
PANENERGY CORP
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 74-2150460
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
5400 WESTHEIMER COURT
P.O. BOX 1642
HOUSTON, TEXAS 77251-1642
(Address, including zip code, of principal executive offices)
(713) 627-5400
(Telephone number, including area code)
---------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<C> <C>
Common Stock, $1.00 par value The New York Stock Exchange, Inc.
The Pacific Stock Exchange Inc.
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in any definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---------------------
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. The aggregate market value is computed by reference to the
last sale price of the Registrant's Common Stock, on the Composite Tape -- New
York Stock Exchange Transactions, on February 28, 1997.
$6,510,124,062
<TABLE>
<CAPTION>
NUMBER OF SHARES OUTSTANDING
TITLE OF EACH CLASS AS OF FEBRUARY 28, 1997
------------------- ----------------------------
<C> <C>
Common Stock, $1.00 par value 151,398,234
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
---------------------
<TABLE>
<CAPTION>
PART OF
FORM 10-K
- ---------
<S> <C>
Part I Portions of the Annual Report to Stockholders of PanEnergy
Corp for the year ended December 31, 1996
Part II Portions of the Annual Report to Stockholders of PanEnergy
Corp for the year ended December 31, 1996
Part III Portions of the Definitive Joint Proxy Statement/Prospectus
of Duke Power Company and PanEnergy Corp, dated March 13,
1997
Part IV Portions of the Annual Report to Stockholders of PanEnergy
Corp for the year ended December 31, 1996
</TABLE>
================================================================================
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. Business.................................................... 1
General..................................................... 1
Natural Gas Transmission Group.............................. 2
LNG Operations.............................................. 4
Energy Services Group....................................... 5
Investments................................................. 7
Regulation.................................................. 8
Rates and Regulatory Proceedings............................ 9
Competition................................................. 9
Environmental Matters....................................... 9
General Matters............................................. 10
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Executive Officers of Registrant............................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 16
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 16
Item 8. Financial Statements and Supplementary Data................. 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 16
Item 11. Executive Compensation...................................... 16
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 16
Item 13. Certain Relationships and Related Transactions.............. 16
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 17
Index to Financial Statements and Schedules................. 21
</TABLE>
---------------------
All gas volumes used herein are stated at 14.73 pounds per square inch, on
a dry basis, at 60 degrees Fahrenheit.
i
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
PanEnergy Corp ("PEC") is a holding company whose subsidiaries are
primarily engaged in the interstate transportation and storage of natural gas,
in the gathering, processing, marketing and intrastate transportation of natural
gas, natural gas liquids ("NGLs") and crude oil, in the marketing of electric
power and in risk-management services. As used herein, and unless otherwise
stated, "PEC" refers to PanEnergy Corp, and "Company" refers to PanEnergy Corp
and its subsidiaries.
Services relating to the interstate transportation and storage of natural
gas are provided by the Company's natural gas transmission group. This group
includes four major interstate pipeline subsidiaries of PEC -- Texas Eastern
Transmission Corporation ("TETCO"), Algonquin Gas Transmission Company
("Algonquin"), Panhandle Eastern Pipe Line Company ("PEPL") and Trunkline Gas
Company ("Trunkline"). Together, these subsidiaries own and operate one of the
nation's largest gas transmission networks. This fully interconnected
22,000-mile system can receive natural gas from most major North American
producing regions for delivery to markets in the Mid-Atlantic, New England,
Midwest and Gulf Coast states.
Services relating to the gathering, processing, marketing, intrastate
transportation and storage of natural gas, NGLs and crude oil, as well as to the
marketing of electric power and to risk-management services, are provided by the
Company's energy services group. This group operates through PanEnergy Services,
Inc. and its subsidiaries.
PEC also owns other subsidiaries engaged in domestic and international
energy development, importation of liquefied natural gas ("LNG") from Algeria,
and the transportation, storage and regasification of LNG. In addition, PEC,
through subsidiaries, owns interests in a partnership operating a cogeneration
facility; in a joint venture that owns and operates a chemical-grade methanol
plant and an MTBE (methyl tertiary butyl ether) plant in Saudi Arabia; and in
master limited partnerships engaged in the transportation of natural gas in
interstate commerce and in the transportation and storage of petroleum products.
On November 25, 1996, PEC, Duke Power Company ("Duke Power") and Duke
Transaction Corporation announced a definitive merger agreement for a tax-free,
stock-for-stock transaction. Under the agreement, each share of PEC common stock
would be converted into 1.0444 common shares of Duke Power. The merger is
conditioned upon, among other things, the approval of PEC 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 PEC will become a wholly-owned
subsidiary of Duke Energy. The merger will be accounted for under the pooling of
interests method.
Financial information concerning the Company's business segments and
sources of revenues is set forth in Note 3 of Notes to Consolidated Financial
Statements on page 44, and in the Consolidated Statement of Income on page 37,
of the 1996 Annual Report to Stockholders of PanEnergy Corp (the "Annual
Report"), filed as Exhibit 13, which are incorporated herein by reference.
PEC is a Delaware corporation organized in 1981 in connection with the
corporate restructuring of PEPL, which was incorporated in 1929. Executive
offices of PEC are located at 5400 Westheimer Court, Houston, Texas 77056-5310,
and the telephone number is (713) 627-5400.
Certain Terms
Certain terms used in the description of the Company's business are
explained below.
Federal Energy Regulatory Commission ("FERC"): The agency that regulates
the transportation of natural gas in interstate commerce under the Natural Gas
Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the "NGPA").
FERC's jurisdiction includes rate-making, construction of facilities and
authorization to provide service.
1
<PAGE> 4
Firm Service: Transportation or storage of third-party gas, for which
customers pay a charge to reserve pipeline or storage capacity.
Gathering Systems: Pipeline, processing and related facilities that access
production and other sources of natural gas supplies for delivery to mainline
transportation systems.
Interruptible Service: Transportation or storage of third-party gas
provided by pipelines on a capacity-available, non-firm basis.
Local Distribution Company ("LDC"): A municipal or investor-owned utility
that sells or transports gas to local commercial, industrial and residential
consumers.
Order 636: The FERC pipeline service restructuring rule that guided the
industry's transition to unbundled, open-access pipeline contract transportation
and related services, creating a more market-responsive environment.
Reservation Charge: The amount paid by firm transportation or storage
customers to reserve pipeline or storage capacity.
Transition Costs: Those costs incurred as a result of the pipelines'
transition to unbundled services under Order 636. The disposition of natural gas
contracts tied to the former merchant function comprises the majority of such
costs.
Units of Measure:
<TABLE>
<S> <C>
BBtu: Billion British thermal units
BBtu/d: Billion British thermal units per day
TBtu: Trillion British thermal units
TBtu/d: Trillion British thermal units per day
MMcf: Million cubic feet
MMcf/d: Million cubic feet per day
Bcf: Billion cubic feet
Bcf/d: Billion cubic feet per day
Tcf: Trillion cubic feet
MBbl/d: Thousand barrels per day
MW: Megawatts, one million watts
GWh: Gigawatt-hour, one billion watt-hours
</TABLE>
NATURAL GAS TRANSMISSION GROUP
General
The Company's interstate pipelines serve principal markets in the
Mid-Atlantic, New England and Midwest states. During 1996, the pipelines
delivered approximately 12% of natural gas consumed in the U.S.
Market and Supply Area Deliveries
Market-area natural gas deliveries by the Company's interstate pipelines
were 2,668 TBtu in 1996, up from the 2,415 TBtu delivered in 1995. Consolidated
pipeline deliveries totaled 2,939 TBtu, compared to 2,703 TBtu in 1995, an
increase of 9%, resulting primarily from market-expansion projects and increased
demand related to colder winter weather.
As used herein, "market area" with respect to each pipeline refers to those
portions of the pipeline that include primarily delivery points for natural gas
leaving the pipeline, and "supply area" with respect to each pipeline refers to
those portions of the pipeline that include primarily receipt points for gas
entering the pipeline. Market-area deliveries represent volumes of gas delivered
to the market area, while supply-area deliveries represent volumes of gas
delivered to the supply area. Generally, rates for supply-area service have
lower margins than rates for market-area service.
2
<PAGE> 5
A substantial majority of the delivered volumes of the Company's interstate
pipelines represents gas transported under long-term firm service agreements
with LDC customers in the pipelines' market areas. Firm transportation services
are also provided under contract to gas marketers, producers, other pipelines,
electric power generators and a variety of end-users. In addition, the pipelines
offer interruptible transportation to customers on a short-term or seasonal
basis. See "Regulation" and "Competition."
Set forth below is information concerning throughput volumes for the
Company's interstate natural gas transmission group for 1996, 1995 and 1994
(volumes in TBtu).
<TABLE>
<CAPTION>
1996 % TOTAL 1995 % TOTAL 1994 % TOTAL
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Market Area
TETCO.............................. 1,214 41 1,106 41 1,049 41
Algonquin.......................... 327 11 331 12 288 11
PEPL............................... 654 22 619 23 582 23
Trunkline.......................... 529 18 403 15 449 17
Intercompany Eliminations.......... (56) (2) (44) (2) (91) (4)
----- --- ----- --- ----- ---
Total...................... 2,668 90 2,415 89 2,277 88
----- --- ----- --- ----- ---
Supply Area
TETCO.............................. 135 5 128 5 145 6
PEPL............................... 33 1 44 2 44 2
Trunkline.......................... 103 4 116 4 111 4
----- --- ----- --- ----- ---
Total...................... 271 10 288 11 300 12
----- --- ----- --- ----- ---
Total Volumes.............. 2,939 100 2,703 100 2,577 100
===== === ===== === ===== ===
Summary by Pipeline (Total Volumes)
TETCO.............................. 1,349 46 1,234 46 1,194 47
Algonquin.......................... 327 11 331 12 288 11
PEPL............................... 687 23 663 25 626 25
Trunkline.......................... 632 22 519 19 560 21
Intercompany Eliminations.......... (56) (2) (44) (2) (91) (4)
----- --- ----- --- ----- ---
Total...................... 2,939 100 2,703 100 2,577 100
===== === ===== === ===== ===
</TABLE>
Demand for gas transmission on the Company's interstate pipeline systems is
seasonal, with the highest throughput occurring during the colder periods in the
first and fourth quarters -- the winter heating season.
Northeast Area
TETCO's major customers are located in Pennsylvania, New Jersey and New
York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York
City metropolitan areas. Total throughput increased 9% in 1996 on the TETCO
system.
In June 1996, TETCO filed with FERC to construct and lease approximately
142 BBtu/d of firm transportation capacity to Columbia Gas Transmission
Corporation ("Columbia") starting in 1997, with full volumes flowing in 1999 for
15 years. TETCO plans to construct 26 miles of 36-inch- and 24-inch-diameter
pipeline and add compression in Pennsylvania for the project.
In another project, previously called WinterNet, TETCO will lease firm
transportation capacity to CNG Transmission Corporation ("CNG") beginning in
1997 and reaching full volumes of 64 BBtu/d in the year 2000 under a 22-year
agreement. TETCO filed with FERC in June 1996 to construct eight miles of
36-inch-diameter pipeline looping in Pennsylvania for the project.
The final phase of the Integrated Transportation Program ("ITP") was
completed as planned in 1996. ITP utilizes transportation services on all four
of the Company's interstate natural gas pipeline systems, with ultimate delivery
by TETCO and Algonquin, and serves five Northeast customers.
3
<PAGE> 6
TETCO and PEPL signed contracts to provide 50 BBtu/d of firm service to a
new market, the greater Cincinnati area, starting in November 1996. The
contracts with the Cincinnati Gas & Electric Co call for firm transportation
service by TETCO and firm transportation and storage service by PEPL. Also,
Trunkline will provide interruptible transportation service.
Algonquin's major customers include LDCs and electric power generators
located in the Boston, Hartford, New Haven, Providence and Cape Cod areas.
Algonquin's total throughput for 1996 decreased slightly compared to 1995.
In February 1996, Algonquin filed with FERC to construct an 8.4-mile,
20-inch-diameter lateral pipeline to deliver 83 BBtu/d of firm transportation
service by July 1997 to Connecticut Light and Power Company's Middletown
electric-generation plant.
In July 1996, Algonquin began service to the Canal Electric Plant at
Sandwich, Massachusetts, under a long-term contract for 75 BBtu/d of firm
transportation service.
Midwest Area
PEPL's market volumes are concentrated among approximately 20 utilities
located in the Midwest market area that encompasses large portions of Michigan,
Ohio, Indiana, Illinois and Missouri. PEPL's total deliveries increased 4% in
1996.
Trunkline's major customers include eight utilities located in portions of
Tennessee, Missouri, Illinois, Indiana and Michigan. Trunkline's total
throughput increased 22% in 1996.
In April 1996, PEPL and Trunkline began providing 85 BBtu/d of additional
firm transportation service to CoEnergy Trading Company for its Michigan
customers under five-year contracts.
Trunkline filed with FERC in late 1996 for an expansion of its Terrebonne
system with a planned 1998 in-service date, targeting expanding natural gas
production in the Gulf of Mexico.
Storage
TETCO provides firm and interruptible open-access storage services. Since
the implementation of the Order 636 restructuring, storage is offered as a
stand-alone unbundled service or as part of a no-notice bundled service. TETCO's
storage services utilize two joint venture storage projects in Pennsylvania and
one wholly-owned and operated storage field in Maryland. TETCO also leases
storage capacity. TETCO's certificated working capacity in these three fields is
70 Bcf, and on December 31, 1996, the combined working gas in storage was 59
Bcf. Algonquin owns no storage fields.
PEPL owns and operates three underground storage fields located in
Illinois, Michigan and Oklahoma. Trunkline owns and operates one storage field
in Louisiana. The combined maximum working gas capacity is 44 Bcf. Additionally,
PEPL, through its Pan Gas Storage Company ("Pan Gas") subsidiary, is the owner
of a storage field in Kansas with an estimated maximum capacity of 26 Bcf. PEPL
is the operator of the field. Since the implementation of the Order 636
restructuring, PEPL, Trunkline and Pan Gas all offer firm and interruptible
storage on an open-access basis. In addition to owning storage fields, PEPL also
leases storage capacity. PEPL and Trunkline have retained the right to use up to
15 Bcf and 10 Bcf, respectively, of their storage capacity for system needs. In
January 1997, PEPL filed with FERC to transfer its storage facilities to Pan
Gas.
LNG OPERATIONS
Subsidiaries of PEC entered into LNG import agreements with Sonatrach, the
national oil and gas company of Algeria, in 1987. The agreements provide for the
importation of up to 3.3 Tcf of LNG over a period of up to 20 years. The
agreements impose no take-or-pay or ship-or-pay obligations upon the Company and
do not establish any minimum annual purchase volumes.
4
<PAGE> 7
In 1989, Trunkline LNG Company ("Trunkline LNG") activated the LNG program
at its Lake Charles, Louisiana facility. Activation of the program was based
primarily on the agreements with Sonatrach, as well as a long-term contract with
Citrus Trading Corp. ("Citrus") that provides for the sale of up to 110 MMcf/d
of gas. This maximum volume decreased to 86 MMcf/d for the remaining term of the
contract beginning on September 1, 1995. Citrus can elect not to purchase gas in
any month if residual fuel oil prices during the previous month fall below a
specified level. However, in the event of such election, the Company has the
option to require Citrus to purchase nominated volumes at a contractually
determined reduced price. Therefore, volumes and prices under the Citrus
contract are not certain. In 1996, deliveries of gas to Citrus were made during
four months of the year, averaging 41 MMcf/d. In 1996, the Company sold a total
of 6.9 Bcf of regasified LNG. In October 1996, Trunkline LNG filed an
application with FERC seeking authorization to offer LNG terminal service to
shippers on an open-access basis.
Algonquin LNG, Inc. ("Algonquin LNG"), a subsidiary of Algonquin, owns and
operates an LNG facility in Providence, Rhode Island. The facility provides LNG
handling services, including receipt, storage and redelivery. To meet growing
New England demand for flexible natural gas storage and peak delivery services,
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.
ENERGY SERVICES GROUP
General
The Company's energy services group, through PanEnergy Services, Inc. and
its subsidiaries, is engaged in the gathering, processing, marketing, storage
and intrastate transportation of natural gas, NGLs and crude oil, as well as in
the marketing of electric power and risk-management services.
Gas and Power Services Group
Since August 1, 1996, the gas and power marketing operations of the Company
have been conducted through a company conducting business as PanEnergy Trading
and Market Services, L.L.C. in the United States and as PanEnergy Marketing
Limited Partnership in Canada ("PTMS"). PanEnergy owns 60%, and Mobil
Corporation and its subsidiaries ("Mobil") own 40%, of PTMS. A subsidiary of
PanEnergy acts as operator of PTMS. All of Mobil's U.S. and Canadian natural gas
production is committed to be marketed through PTMS for at least a 10-year
period.
The Company, through PTMS, markets natural gas primarily to LDCs, electric
power generators, industrial end-users and gas marketing companies. Marketing
operations encompass both on-system and off-system sales. With respect to
on-system sales, the Company generally purchases natural gas from producers at
the wellhead, gathers and (if necessary) processes the gas in the Company's own
facilities (see "Field Services Group" below) and delivers the gas to an
intrastate or interstate pipeline for redelivery to another customer. With
respect to off-system sales, the Company purchases natural gas from producers,
pipelines and other suppliers not connected with the Company's facilities for
resale to customers. The Company also provides energy-marketing services, such
as supply and market aggregation, dispatching, balancing, transportation,
storage, contract negotiation and administration, as well as energy commodity
risk-management products and services.
The Company currently provides marketing services to customers transporting
gas on substantially all pipeline systems serving the lower 48 states and
Canada. In 1996, natural gas volumes marketed increased by 1.9 TBtu/d over the
1995 volumes to 5.5 TBtu/d.
The Company has a balanced portfolio of short-term and long-term gas sales
agreements with customers, the vast majority of which incorporate
market-sensitive pricing terms. Long-term gas purchase agreements with
producers, principally entered into in connection with on-system sales, also
generally include market-sensitive pricing provisions. Purchases and sales of
off-system supply are normally made under short-term contracts. Purchase and
sales commitments involving significant price and location risk are generally
hedged
5
<PAGE> 8
with commodity futures, swaps and options. For information concerning the
Company's risk-management activities, see Note 6 of Notes to Consolidated
Financial Statements on pages 46 through 48 of the Annual Report, which is
incorporated herein by reference.
The Company's power marketing and related operations are also conducted
through PTMS. The Company traded 4,229 GWh in 1996, more than eight times the
amount marketed in 1995.
In 1996, the Company increased the number of retail natural gas customers
including restaurants and hotels such as Boston Market and Holiday Inn, and
participated in one of the nation's first retail electric power sales by an
independent marketer, providing Reynolds Metal Company with electric power. In
November 1996, PTMS entered into a venture with Associated Electric Cooperative,
Inc. to coordinate marketing of electrical capacity and energy generated from a
250 MW, gas fired, combined cycle power plant to be constructed in southeastern
Missouri by 1999.
Field Services Group
The Company's field services group, which operates mainly through PanEnergy
Field Services, Inc., achieved a 53% increase in volumes of natural gas
gathered, from 1.9 TBtu/d in 1995 to 2.9 TBtu/d in 1996. The Company owns and
operates approximately 15,000 miles of natural gas gathering systems, including
intrastate pipelines, and 27 natural gas processing plants in the United States.
The Company also owns interests in 12 other plants.
The Company's gathering systems are located in 10 states. These systems
serve major gas-producing regions in the Rocky Mountain, Mid-Continent and Gulf
Coast areas. Included in the Company's gathering operations are several
intrastate pipeline systems and natural gas storage facilities.
The Company's NGL processing operations involve the extraction of NGLs from
natural gas and, at certain facilities, the fractionation of the NGLs into their
individual components (ethane, propane, butane and natural gasoline). The
natural gas used in the Company's processing operations is generally gathered on
the Company's gathering system or, in the case of two facilities -- the National
Helium Corporation ("National Helium") plant in Liberal, Kansas and the Wilcox
plant in Goliad, Texas -- from the natural gas stream on the Company's
transmission system. NGLs are sold by the Company to a variety of customers
ranging from large multi-national petrochemical and refining companies to small
family-owned retail propane distributors. NGL sales are made based upon current
market-related prices. The Company also provides, on a more limited basis,
processing services to producers and others for a stipulated fee. During 1996,
NGL production at the Company's facilities averaged approximately 76.5 MBbl/d, a
40% increase over 1995. The Company also produces helium at the National Helium
facility.
The most significant 1996 expansion was the purchase of U.S. gathering and
processing assets belonging to Mobil, including seven processing plants and
interests in 12 others, which are primarily located in the Mid-Continent, Gulf
Coast and Permian Basin of West Texas. During 1996, the Company also 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, the Company completed the acquisitions of a 300-mile natural gas gathering
system in south Texas and a 500-mile intrastate pipeline system in northern
Louisiana.
Crude Oil Group/NGLs
The Company's crude oil group, which provides services through PanEnergy
Transport and Trading Company and its affiliates, operates approximately 1,300
miles of intrastate crude oil pipelines in the Mid-Continent and South Texas and
approximately 450 miles of NGL pipelines in the Texas Gulf Coast area.
The crude oil pipeline system provides gathering and mainline
transportation service, for a volumetric fee, based on published tariffs. In
1996, the group's throughput of crude oil averaged approximately 68.4 MBbl/d,
down 10% from 1995. This group also purchases crude oil from producers and
markets it to end users.
The NGL transportation system transports NGLs received from 12 processing
plants in South Texas. During 1996, NGL throughput averaged approximately 19.1
MBbl/d, a 16% increase over 1995.
6
<PAGE> 9
INVESTMENTS
Midland Cogeneration Venture
A Company subsidiary owns an approximate 18% interest in Midland
Cogeneration Venture ("MCV"), which became operational in 1990. MCV converted an
incomplete nuclear power plant to a dual-purpose energy unit that uses natural
gas to generate electricity and produce industrial process steam. PEPL and
Trunkline provide approximately 97 TBtu/d of firm transportation to MCV.
National Methanol Company
The Company owns a 25% interest in National Methanol Company ("National
Methanol"), a joint venture that owns and operates a chemical-grade methanol
plant and an MTBE (methyl tertiary butyl ether) plant in Jubail, Saudi Arabia.
The other partners are Hoechst Celanese Corporation, with a 25% interest, and
majority state-owned Saudi Basic Industries Corporation, with a 50% interest.
Northern Border Partners, L.P.
A PEPL subsidiary owns an approximate 8% interest (a 33% voting interest)
in Northern Border Partners, L.P. ("Northern Border MLP"), consisting of general
partner and subordinated limited partner interests. Northern Border MLP owns a
70% interest in Northern Border Pipeline Company ("Northern Border Pipeline"),
which owns and operates a transmission system consisting of 969 miles of
pipeline extending from the Canadian border through Montana to Iowa. Northern
Border Pipeline transports natural gas both under traditional long-term
contracts and on an open-access basis. It has a certificated transport capacity
of 975 MMcf/d.
TEPPCO Partners, L.P.
A PEC subsidiary owns a 2% general partner interest and an approximate 8%
limited partner interest in TEPPCO Partners, L.P. ("TEPPCO Partners"). TEPPCO
Partners owns and operates an approximate 4,300-mile refined petroleum products
and liquefied petroleum gases ("LPGs") pipeline system extending from southeast
Texas through the midwestern and central United States to the northeastern
United States. The pipeline system includes delivery terminals along the
pipeline for outloading product to tank trucks, rail cars or barges, as well as
storage capacity at Mont Belvieu, Texas, the largest LPG storage complex in the
United States, and at other locations. TEPPCO Partners also owns two marine
receiving terminals at Beaumont, Texas and Providence, Rhode Island. The TEPPCO
Partners pipeline system is the only pipeline that transports LPGs to the
Northeast.
Maritimes & Northeast Pipeline Project
PEC, through its affiliates, is responsible for the overall development and
will operate the U.S. portion of the Maritimes & Northeast Pipeline Project
("Maritimes"), to be owned in conjunction with three other sponsors. In July
1996, FERC gave preliminary approval for Phase I of 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. Maritimes is expected to deliver natural gas from a major new natural
gas supply basin offshore Nova Scotia to emerging markets in Canadian Maritimes
provinces and Northeast markets starting around 1999. Transportation service for
customers in New Hampshire and Maine could begin as early as 1998 under
Maritimes' Phase I construction.
Aguaytia Project
The Company, through a subsidiary, owns a 24% equity interest in the
Aguaytia project, the first private, integrated energy project in Peru.
Facilities to generate up to 155 MW and deliver electricity and process natural
gas are scheduled to be in service by late 1997.
7
<PAGE> 10
REGULATION
TETCO, Algonquin, PEPL, Trunkline, Trunkline LNG, Algonquin LNG and Pan Gas
are "natural gas companies" under the NGA and NGPA and, as such, are subject to
the jurisdiction of FERC.
The NGA grants to FERC authority over the construction and operation of
pipeline and related facilities utilized in the transportation and sale of
natural gas in interstate commerce, including the extension, enlargement or
abandonment of such facilities. The Company's subsidiaries hold required
certificates of public convenience and necessity issued by FERC, authorizing
them to construct and operate the pipelines, facilities and properties now in
operation for which certificates are required, and to transport and store
natural gas in interstate commerce.
FERC also has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. The Company's subsidiaries file with
FERC applications for changes in transportation and storage rates and charges.
These changes are normally allowed to become effective after a suspension
period, subject to refund, until such time as FERC authorizes the actual level
of rates and charges.
TETCO, Algonquin, PEPL and Trunkline operate as open-access transporters of
natural gas. In 1992, FERC issued Order 636, which requires open-access
pipelines to provide firm and interruptible transportation services on an equal
basis for all gas supplies, whether purchased from the pipeline or from another
gas supplier. To implement this requirement, Order 636 provided, among other
things, for mandatory unbundling of services that have historically been
provided by pipelines into separate open-access transportation, sales and
storage services.
Order 636 provides for the use of the straight fixed-variable rate design,
which assigns return on equity, related taxes and other fixed costs to the
reservation component of rates. In addition, Order 636 allows pipelines to
recover eligible costs resulting from implementation of Order 636 ("transition
costs"). On July 16, 1996, the U.S. Court of Appeals for the District of
Columbia upheld, in general, all aspects of Order 636 and remanded certain
issues, including recovery of gas supply realignment costs, for further
explanation. This decision is on appeal to the U.S. Supreme Court. On February
27, 1997, FERC issued an order reaffirming the right of interstate pipelines to
recover 100% of gas supply realignment costs. In addition, this matter is
substantially mitigated by TETCO's and PEPL's transition cost settlements.
On August 1, 1994, TETCO implemented 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. The Company has
established provisions to reflect the impact of the settlement.
The intrastate pipelines owned by the field services group are subject to
state regulation and, to the extent they provide services under Section 311 of
the NGPA, are also subject to FERC regulation.
The Company's natural gas gathering activities are generally not subject to
regulation by FERC under the NGA and the NGPA, but are subject to state
regulation. In this regard, in May 1994, FERC issued orders announcing that it
would not exercise jurisdiction over natural gas gathering activities operated
by affiliates of interstate pipeline companies. Such orders have been upheld by
the courts. FERC's orders are expected to enable the Company to compete with
non-regulated service providers, which account for the majority of the sector's
operations. With respect to the Company's natural gas marketing activities, such
activities may, in certain circumstances, be subject to the jurisdiction of
FERC. Current FERC policies permit the Company's gas marketing entities subject
to FERC jurisdiction to market natural gas at market-based rates pursuant to a
blanket certificate. The Company's electric power marketing operations are also
subject to the jurisdiction of FERC under the Federal Power Act. Current FERC
policies permit the Company's electric marketing entity to market electricity at
market-based rates.
8
<PAGE> 11
Regulation of the importation and exportation of natural gas is vested in
the Secretary of Energy, who has delegated various aspects of this jurisdiction
to FERC and the Office of Fossil Fuels of the Department of Energy.
The Company's subsidiaries are subject to the Natural Gas Pipeline Safety
Act of 1968, which regulates gas pipeline and LNG plant safety requirements; to
the Hazardous Liquid Pipeline Safety Act of 1979, which regulates oil and
petroleum pipelines; and to federal and state environmental legislation.
RATES AND REGULATORY PROCEEDINGS
When rate cases are pending final FERC approval, a portion of the revenues
collected by the Company's natural gas pipelines is subject to possible refund.
A summary of the status of significant pending rate cases and related regulatory
matters involving TETCO, Algonquin, PEPL and Trunkline is contained in Note 4 of
the Notes to Consolidated Financial Statements on pages 44 and 45 of the Annual
Report, which are incorporated herein by reference.
COMPETITION
The Company's interstate pipeline subsidiaries compete with other
interstate and intrastate pipeline companies in the transportation and storage
of natural gas. The principal elements of competition among pipelines are rates,
terms of service, and flexibility and reliability of service. The Company's
pipelines continue to offer selective discounting to maximize revenues from
existing capacity.
In the Mid-Atlantic and Northeast markets, TETCO competes directly with
Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company
("TGPC"), Iroquois Gas Transmission System ("Iroquois"), CNG and Columbia.
Algonquin competes directly in certain market areas with TGPC and Iroquois. PEPL
and Trunkline compete directly with ANR Pipeline Company, Natural Gas Pipeline
Company of America and Texas Gas Transmission Corporation in the Midwest market
area.
The Company's energy services group faces competition both in acquiring
natural gas supplies and in marketing natural gas, NGLs and crude oil.
Competition for natural gas supplies is primarily based on efficiency,
reliability, availability of transportation and ability to obtain a satisfactory
price for the producer's natural gas. Competition for customers is primarily
based upon reliability and price of delivered natural gas, NGLs and crude oil.
The Company's competitors for obtaining additional natural gas supplies, for
gathering and processing natural gas and for marketing and transporting natural
gas, NGLs and crude oil include major integrated oil companies, major interstate
pipelines and their marketing affiliates and national and local natural gas
gatherers, brokers, marketers and distributors of varying size, financial
resources and experience.
Natural gas competes with other forms of energy available to the Company's
customers and end users, including electricity, coal and fuel oils. The primary
competitive factor is price. Changes in the availability or price of natural gas
and other forms of energy, the level of business activity, conservation,
legislation and governmental regulations, the capability to convert to
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by the Company.
Electric power marketing faces competition from other forms of energy, such
as natural gas, coal and fuel oil, as well as electric utilities and other
electric power marketers. The independent electric power market is still in the
early stages of development and primarily regional in nature.
ENVIRONMENTAL MATTERS
For a discussion of environmental matters involving the Company, see Notes
13 and 14 of the Notes to Consolidated Financial Statements on pages 52 and 53
of the Annual Report, which is incorporated herein by reference. Except as set
forth therein, compliance with Federal, State and local provisions which have
been enacted or adopted regulating the discharge of materials into the
environment, or otherwise protecting the environment, are not expected to have a
material effect upon the capital expenditures, earnings or financial position of
the Company.
9
<PAGE> 12
GENERAL MATTERS
During 1996, no single customer accounted for 10% or more of the Company's
consolidated revenues.
While the Company does engage in some research and development activities,
no such activities conducted during the past three years have been material to
the Company's business, nor have there been any material customer-sponsored
research activities during that period relating to the Company's business
activities.
TETCO, Algonquin, PEPL and Trunkline are members of and provide support to
the Gas Research Institute ("GRI"), which plans and manages research and
development efforts for the gas industry. The funds used to support GRI are
derived from a surcharge on the pipelines' rates pursuant to FERC authorization.
Payments amounted to approximately $15.4 million, $16.2 million and $22.1
million in 1996, 1995 and 1994, respectively, for the four companies combined.
Foreign operations and export sales are not material to the Company's
business as a whole. As of December 31, 1996, the Company had approximately
5,000 employees.
ITEM 2. PROPERTIES
Natural Gas Transmission Group
TETCO's gas transmission system extends approximately 1,700 miles from
producing fields in the Gulf Coast region of Texas and Louisiana to Ohio,
Pennsylvania, New Jersey and New York. It consists of two parallel systems, one
consisting of three large-diameter parallel pipelines and the other consisting
of from one to three large-diameter pipelines over its length. TETCO's system,
including the gathering systems, has 73 compressor stations. The TETCO system
connects with the PEPL and Trunkline systems through the Lebanon Lateral.
Algonquin's transmission system connects with TETCO's facilities in
Lambertville and Hanover, New Jersey, and extends through New Jersey, New York,
Connecticut, Rhode Island and Massachusetts to the Boston area. The system
consists of approximately 250 miles of pipeline with six compressor stations.
PEPL's transmission system, which consists of four large-diameter parallel
pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan.
Trunkline's transmission system extends approximately 1,400 miles from the
Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border near Elkhart, Indiana. The system consists principally
of three large-diameter parallel pipelines and 18 mainline compressor stations.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico. TETCO owns and operates two offshore Louisiana gas supply
systems, which extend over 100 miles into the Gulf of Mexico and consist of 490
miles of pipeline.
For information concerning natural gas storage properties, see "Natural Gas
Transmission Group -- Storage" under Item 1, which is incorporated herein by
reference.
LNG Facilities
Algonquin LNG owns and operates an LNG storage facility in Providence,
Rhode Island. This facility has a storage capacity of 600,000 barrels, which
approximates 2 Bcf, and a design output capacity of 100 MMcf/d.
10
<PAGE> 13
Trunkline LNG owns a marine terminal, storage and regasification facility
for LNG located near Lake Charles, Louisiana. The Trunkline LNG facilities have
a design output capacity of approximately 700 MMcf/d and a storage capacity of
approximately 1.8 million barrels, which approximates 6 Bcf.
Lachmar, a partnership in which subsidiaries of PEC own all of the
partnership interests, owns two LNG ships, each with a transportation capacity
of 125,000 cubic meters of LNG. One ship is chartered to a third party through
March 1998, while the other one is engaged in serving the Company's LNG project.
Both vessels have been chartered to Nigeria LNG Limited ("Nigeria LNG") for 22
years starting around 1999. Under the terms of the charter, Nigeria LNG will
have the right to purchase the vessels. The Company continues to examine
opportunities to better utilize its LNG assets.
Energy Services Group
For information regarding the properties of the Company's energy services
segment, see "Energy Services Group" under Item 1, which is incorporated herein
by reference.
Other
None of the other properties used in connection with the Company's other
business activities is considered material to the Company's operations as a
whole.
11
<PAGE> 14
[MAP of PanEnergy Corp
Showing Pipelines, Storage Facilities,
Principal Supply Areas and Proposed Pipelines.]
12
<PAGE> 15
ITEM 3. LEGAL PROCEEDINGS
Edison. In connection with a rupture and fire that occurred on TETCO's
36-inch natural gas pipeline on March 23, 1994 in Edison, New Jersey, claims
have been made and numerous lawsuits have been filed in the Superior Court of
New Jersey, Middlesex County against TETCO and other private and governmental
entities by or on behalf of hundreds of individuals and businesses. These
claimants seek compensatory damages for personal injuries, property losses
and/or lost business income, as well as punitive damages. The property insurers
of an apartment complex adjacent to the asphalt plant where the rupture occurred
also filed suits against TETCO and other defendants in Superior Court seeking to
recover amounts paid under pertinent policies of insurance. Quality Materials,
Inc. ("Quality"), the owner of the asphalt plant, filed suit in the U.S.
District Court for the District of New Jersey against TETCO seeking to recover
unspecified property damages, lost income and punitive damages. TETCO has filed
a counterclaim against Quality and has settled the claims of the property
insurers and some individuals and businesses, while retaining the right to seek
recovery of those settlement amounts from other defendants. In April 1996, the
U.S. District Court dismissed the suit by Quality and the counterclaim by TETCO
on the grounds that all claims should be resolved in the pending Middlesex
County litigation.
The findings of an investigation of the incident by the 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.
PCBs. On August 30, 1995, two plaintiffs filed a lawsuit with class action
allegations in Jefferson County, Texas, against PanEnergy, Texas Eastern
Corporation and TETCO, among others. While that suit ultimately was dismissed,
one of the two original plaintiffs refiled the suit on June 3, 1996 in the
Circuit Court of the City of St. Louis, Missouri. The defendants removed the
suit to the U.S. District Court for the Eastern District of Missouri, Eastern
Division in July 1996. In March 1997, the case was remanded to the same state
court in St. Louis. The plaintiff seeks recovery of compensatory and punitive
damages, in unspecified amounts, for personal injuries and property damage
resulting from alleged exposure to PCBs.
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.
Midwest Gas Storage. On August 31, 1995, Midwest Gas Storage, Inc.
("Midwest") filed suit against PEPL and PEC in the 58th Judicial District Court,
Jefferson County, Texas, alleging that PEPL breached an interconnection
agreement with Midwest and used its superior bargaining position to force
Midwest to accept terms and conditions which were not in the original agreement.
Amended petitions filed in 1996 further allege that PEPL and PEC, 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. On February 21, 1997,
the defendants removed the case to the U.S. District Court for the Eastern
District of Texas, Beaumont Division.
The Company believes the resolution of the legal matters discussed above
under "Edison", "PCBs" and "Midwest Gas Storage" will not have a material
adverse effect on the Company's consolidated results of operations or financial
position.
Marathon/Amerada Hess. On December 16, 1996, TETCO received notification
that Marathon Oil Company ("Marathon") intended to commence substitution of
other gas reserves, deliverability and leases for those dedicated to a certain
natural gas purchase contract (the "Marathon Contract") with TETCO. In TETCO's
view, the tendered substitute gas reserves, deliverability and leases are not
subject to the Marathon Contract and TETCO filed a declaratory judgment action
on December 17, 1996 in the U.S. District Court for the Eastern District of
Louisiana seeking a ruling that Marathon's interpretation of the Marathon
Contract is incorrect. On January 7, 1997, Marathon filed an answer and
counterclaim to TETCO's complaint seeking a declaratory judgment enforcing its
interpretation of the Marathon Contract. On February 18, 1997, Amerada Hess
Corporation ("Amerada Hess") notified TETCO that it intended to commence
substitution of other gas
13
<PAGE> 16
reserves, deliverability, and leases for those dedicated to its natural gas
purchase contract (the "Amerada Hess Contract") with TETCO. On the same date,
Amerada Hess also filed a petition in the District Court of Harris County,
Texas, 157th Judicial District, seeking a declaratory judgment that its
interpretation of the Amerada Hess Contract, which covers the same leases and
reserves as the Marathon Contract, is correct. TETCO now has removed that suit
to the U.S. District Court for the Southern District of Texas, Houston Division.
TETCO also filed a declaratory judgment action with respect to Amerada Hess'
contentions in the U.S. District Court for the Eastern District of Louisiana on
February 21, 1997. The Louisiana action now has been transferred to the judge
presiding over the Marathon Contract matter. The potential liability of the
Company should TETCO be contractually obligated to purchase natural gas based
upon the substitute gas reserves, deliverability and leases, and the effect of
transition cost recoveries pursuant to TETCO's Order 636 settlement involve
numerous complex legal and factual matters which will take a substantial period
of time to resolve.
Grynberg. A lawsuit filed in the United States District Court for the
District of Columbia by natural gas producer Jack Grynberg was served in July
1996 naming TETCO, PEPL, Trunkline and PanEnergy Services, Inc. as defendants,
among others. The action was brought under the federal False Claims Act against
70 defendants, including every major pipeline, asserting that the defendants
intentionally underreported volumes and heating content of gas purchased from
producers on federal and Indian lands, with the result that the United States
was underpaid royalties. The plaintiff seeks recovery of the royalty amounts due
the United States, treble damages and civil penalties.
Because the matters discussed above under "Marathon/Amerada Hess" and
"Grynberg" are in the early stages of litigation, the Company cannot estimate
the effect of these issues based on information currently available.
The Company is also involved in various other legal actions and claims
arising in the normal course of business. Based upon its current assessment of
the facts and the law, management does not believe that the outcome of any such
action or claim will have a material adverse effect upon the 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.
For information concerning certain pending regulatory proceedings involving
the Company, see "Regulation" under Item 1 and Note 4 of the Notes to
Consolidated Financial Statements on pages 44 and 45 of the Annual Report, which
are incorporated herein by reference.
14
<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF REGISTRANT
<TABLE>
<CAPTION>
BECAME AN
AGE IN EXECUTIVE
NAME OFFICE 1996 OFFICER
---- ------ ------ ---------
<S> <C> <C> <C>
Dennis R. Hendrix(1).............. Chairman of the Board 57 1990
Paul M. Anderson(2)............... President and Chief Executive Officer 52 1991
George L. Mazanec(3).............. Vice Chairman of the Board 61 1989
James T. Hackett(4)............... Executive Vice President 43 1996
Carl B. King(5)................... Senior Vice President and General 54 1990
Counsel
Paul F. Ferguson, Jr.(6).......... Senior Vice President and Chief 48 1989
Financial Officer
Donald H. Anderson(7)............. Group Vice President 48 1996
Fred J. Fowler(8)................. Group Vice President 51 1996
Steven M. Roverud(9).............. Group Vice President 58 1996
Sandra P. Meyer(10)............... Vice President, Treasurer and 43 1993
Controller
James W. Hart, Jr.(11)............ Vice President, Public Affairs 61 1988
Bruce A. Williamson(12)........... Vice President, Finance 38 1995
</TABLE>
- ---------------
(1) Director and Chairman of the Board since November 1990; Chief Executive
Officer from November 1990 to April 1995; and President from November 1990
to December 1993.
(2) Chief Executive Officer since April 1995; President since December 1993;
Director since December 1992. Executive Vice President from March 1991 to
December 1993. Vice President, Finance and Chief Financial Officer, Inland
Steel Industries, Inc., 1990-1991.
(3) Resigned October 23, 1996, as Director, a position held since December 1992
and as Vice Chairman of the Board, a position held since December 1993;
formerly Executive Vice President from March 1991 to December 1993 and
Group Vice President from November 1989 to March 1991.
(4) Executive Vice President since January 1996. Senior Vice President of NGC
Corporation ("NGC"), 1990-1995, and President of NGC's Trident division,
1995. Member of NGC's management committee, 1993-1994.
(5) Senior Vice President and General Counsel since June 1990.
(6) Senior Vice President and Chief Financial Officer since September 1995.
Vice President, Finance and Accounting, from April 1992 to September 1995;
Vice President and Treasurer from July 1990 to April 1992.
(7) Group Vice President since May 1996. President of PanEnergy Services, Inc.
since December 1994. President of Associated Natural Gas Corporation for
more than five years prior thereto.
(8) Group Vice President since May 1996. President of TETCO since January 1994.
Employee of PEC, or a subsidiary of PEC, for more than five years.
(9) Group Vice President since May 1996. President of PEPL since January 1994.
Vice President of Marketing of PEPL from July 1992 to August 1993. Senior
Vice President of PEPL from August 1993 to January 1994.
(10) Controller since September 1993, Vice President since December 1994 and
Treasurer since August 1996. An officer or employee of PEC, or a subsidiary
of PEC, for more than five years.
(11) Vice President of the Company for more than five years.
(12) Vice President, Finance, since August 1996. Treasurer and Assistant
Secretary from June 1995 to August 1996. Assistant Treasurer, Capital
Markets, from 1993 to 1995, and Manager of E&P Risk
15
<PAGE> 18
Management from 1992 to 1993, both for Shell Oil Company. Vice President
and Treasurer of Shell Leasing Company from 1990 to 1992.
All officers of PEC are elected in April of each year at the organizational
meeting of the Board of Directors. There are no family relationships among any
directors or executive officers of PEC.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See "PanEnergy Corp Common Stock Data by Quarters" on page 57 and Note 12
of the Notes to Consolidated Financial Statements on page 51 of the Annual
Report, which are incorporated herein by reference. The Common Stock is listed
on the New York and Pacific Stock Exchanges. At February 28, 1997, there were
approximately 25,000 holders of record of the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
See page 56 of the Annual Report, which is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages 26 through 35 of the Annual Report, which are incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to "Index -- Financial Statements" under Item 14(a)(1).
See the "Consolidated Quarterly Financial Data" on page 55 of the Annual
Report, which is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See pages 106 through 108 and pages 111 and 112 of the Definitive Joint
Proxy Statement/Prospectus dated March 13, 1997, of Duke Power Company and
PanEnergy Corp ("Proxy Statement"), which are incorporated herein by reference.
See list of "Executive Officers of Registrant" on page 15, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See pages 112 through 123 of the Proxy Statement, which are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 111 through 113 of the Proxy Statement, which are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See pages 106 through 108, 114 and 115 of the Proxy Statement, which are
incorporated herein by reference.
16
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report or
incorporated herein by reference:
(1) The Consolidated Financial Statements of PanEnergy Corp and
Subsidiaries are listed on the Index, page 21.
(2) Exhibits filed herewith are designated by an asterisk (*); all
exhibits not so designated are incorporated herein by reference to a prior
filing, as indicated. Items constituting management contracts or
compensatory plans or arrangements are designated by a double asterisk
(**).
<TABLE>
<CAPTION>
EXHIBIT FILE
NUMBER DESCRIPTION ORIGINALLY FILED AS EXHIBIT NUMBER
------- ----------- --------------------------- --------
<C> <S> <C> <C>
2.01 Amended and Restated Agreement and Plan of Merger dated 2(a) to Form 8-K of PEC dated March 1-8157
March 10, 1997, among Duke Power Company, Duke 20, 1997
Transaction Corporation and PanEnergy Corp
2.02 Formation Agreement between PanEnergy Trading and Market 2 to Form 10-Q of PEC for the 1-8157
Services, Inc. and Mobil Natural Gas Inc. dated May 29, quarter ended June 30, 1996
1996
3.01 Amended and Restated Certificate of Incorporation of 3.01 to Form 10-K of PEC for year 1-8157
Panhandle Eastern Corporation, including the Certificate ended December 31, 1995
of Elimination of the Participating Stock of Panhandle
Eastern Corporation
3.03 By-Laws of Panhandle Eastern Corporation, effective July 19(a) to Form 10-Q of PEC for 1-8157
8, 1986 quarter ended September 30, 1986
4.01 Indenture, dated as of November 1, 1994, between 4.03 to Form 10-K of PEC for year 1-8157
Panhandle Eastern Corporation and The First National ended December 31, 1994
Bank of Boston, as Trustee
4.02 Credit Agreement between Panhandle Eastern Corporation, 4.02 to Form 10-K of PEC for year 1-8157
d/b/a PanEnergy Corp, the financial institutions ended December 31, 1995
identified therein, and Chemical Bank, as Administrative
Agent, dated as of January 31, 1996
*4.03 First Amendment to the Credit Agreement, dated as of
September 18, 1996, between PanEnergy Corp and The Chase
Manhattan Bank
4.04 Credit Agreement (Five Year Facility) between Panhandle 4.03 to Form 10-K of PEC for year 1-8157
Eastern Corporation, d/b/a PanEnergy Corp, the financial ended December 31, 1995
institutions identified therein, and Chemical Bank, as
Administrative Agent, dated as of January 31, 1996
**10.01 1977 Non-Qualified Stock Option Plan of Panhandle 10(f) to Form 10-K of PEC for year 1-8157
Eastern Corporation, as amended through December 3, 1986 ended December 31, 1986
(and related Agreement)
**10.02 1982 Key Employee Stock Option Plan of Panhandle Eastern 10(g) to Form 10-K of PEC for year 1-8157
Corporation, as amended through December 3, 1986 (and ended December 31, 1986
related Agreement)
**10.03 Panhandle Eastern Corporation -- Nonemployee Directors 10(w) to Form 10-K of PEC for year 1-8157
Retirement Plan (As amended May 22, 1985) ended December 31, 1985
**10.04 Deferred Compensation Plan for the Board of Directors of 10.04 to Form 10-K of PEC for year 1-8157
Panhandle Eastern Corporation (Adopted May 26, 1982; as ended December 31, 1989
amended November 29, 1989)
**10.05 Amendment to Deferred Compensation Plan for the Board of 10.05 to Form 10-K of PEC for year 1-8157
Directors of Panhandle Eastern Corporation dated January ended December 31, 1994
25, 1995
**10.06 Panhandle Eastern Corporation -- Executive Benefit 10.05 to Form 10-K of PEC for year 1-8157
Equalization Plan (As amended November 29, 1989; ended December 31, 1989
effective January 1, 1990)
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT FILE
NUMBER DESCRIPTION ORIGINALLY FILED AS EXHIBIT NUMBER
------- ----------- --------------------------- --------
<C> <S> <C> <C>
**10.07 Panhandle Eastern Corporation Retirement Benefit 10.06 to Form 10-K of PEC for year 1-8157
Equalization Plan (Adopted December 20, 1993; effective ended December 31, 1993
January 1, 1994; amends and restates Exhibit number
10.05)
**10.08 Panhandle Eastern Corporation -- Executive Severance 19(a) to Form 10-Q of PEC for 1-8157
Agreement quarter ended September 30, 1988
10.09 Change in Control Severance Pay Plan of Panhandle 19(c) to Form 10-Q of PEC for 1-8157
Eastern Corporation and Affiliates (Adopted July 8, quarter ended September 30, 1986
1986)
**10.10 1989 Nonemployee Directors Stock Option Plan (Adopted 28(a) to Form S-8 Registration 33-28912
February 1, 1989) Statement of PEC
10.11 Employees Savings Plan of Panhandle Eastern Corporation 10.12 to Form 10-K of PEC for year 1-8157
and Participating Affiliates (Effective January 1, 1991) ended December 31, 1990
10.12 Retirement Income Plan of Panhandle Eastern Corporation 10.13 to Form 10-K of PEC for year 1-8157
and Participating Affiliates (Effective January 1, 1991) ended December 31, 1990
**10.13 Panhandle Eastern Corporation Key Executive Retirement 10.12 to Form 10-K of PEC for year 1-8157
Benefit Equalization Plan (Adopted December 20, 1993; ended December 31, 1993
effective January 1, 1994)
**10.14 Panhandle Eastern Corporation Key Executive Deferred 10.13 to Form 10-K of PEC for year 1-8157
Compensation Plan (Adopted December 20, 1993; effective ended December 31, 1993
January 1, 1994)
**10.15 1990 Long Term Incentive Plan (Adopted November 29, 10.14 to Form 10-K of PEC for year 1-8157
1989) ended December 31, 1990
10.16 Special Recognition Bonus Plan (Adopted November 29, 10.15 to Form 10-K of PEC for year 1-8157
1989) ended December 31, 1990
10.17 Annual Cash Bonus Plan of Panhandle Eastern Corporation 19.3 to Form 10-Q of PEC for 1-8157
(Adopted October 25, 1989; effective January 1, 1990) quarter ended September 30, 1989
10.18 Texas Eastern Deferred Income Program; First Amendment, 10.9 to Form 10-K of TEC for years 1-7587
dated December 5, 1985; and Second Amendment, dated ended December 31, 1984 and 1986; 8
August 15, 1988 to Schedule 14D-9 of TEC, dated
January 30, 1989
**10.19 Panhandle Eastern Corporation 1994 Long Term Incentive 10.18 to Form 10-K of PEC for year 1-8157
Plan ended December 31, 1993
**10.20 Agreement, dated November 1, 1989, between G. L. Mazanec 10.27 to Form 10-K of PEC for year 1-8157
and Panhandle Eastern Corporation ended December 31, 1990
**10.21 Amendment to Employment Agreement, effective November 1, 10.17 to Form 10-K of PEC for year 1-8157
1992, between G. L. Mazanec and Panhandle Eastern ended December 31, 1992
Corporation
**10.22 Agreement, dated November 12, 1990, between D. R. 10.28 to Form 10-K of PEC for year 1-8157
Hendrix and Panhandle Eastern Corporation ended December 31, 1990
**10.23 Amendment, dated March 12, 1993 to be effective as of 10.19 to Form 10-K of PEC for year 1-8157
February 24, 1993, to Agreement dated November 12, 1990, ended December 31, 1992
between D. R. Hendrix and Panhandle Eastern Corporation
**10.24 Second Amendment, dated December 20, 1993, to Agreement 10.23 to Form 10-K of PEC for year 1-8157
dated November 12, 1990, between Dennis Hendrix and ended December 31, 1993
Panhandle Eastern Corporation
**10.25 Agreement, dated November 12, 1990, between P. J. 10.31 to Form 10-K of PEC for year 1-8157
Burguieres and Panhandle Eastern Corporation ended December 31, 1990
**10.26 Agreement, effective January 1, 1991, between P. J. 10.32 to Form 10-K of PEC for year 1-8157
Burguieres and Panhandle Eastern Corporation ended December 31, 1990
**10.27 Agreement, effective March 1, 1991, between Paul M. 10.24 to Form 10-K of PEC for year 1-8157
Anderson and Panhandle Eastern Corporation ended December 31, 1991
10.28 Settlement Agreement, dated July 21, 1986, among 19.4 to Form 10-Q of PEC for 1-8157
Sonatrach, Panhandle Eastern Corporation, Panhandle quarter ended June 30, 1986
Eastern Pipe Line Company and Trunkline LNG Company
</TABLE>
18
<PAGE> 21
<TABLE>
<C> <S> <C> <C>
10.29 Amendment, dated August 11, 1986, to Settlement 19.5 to Form 10-Q of PEC for 1-8157
Agreement, dated July 21, 1986, among Sonatrach, quarter ended June 30, 1986
Panhandle Eastern Corporation, Panhandle Eastern Pipe
Line Company and Trunkline LNG Company
10.30 Amendment No. 2, dated August 1, 1988, to Settlement 19(e) to Form 10-Q of PEC for 1-8157
Agreement, dated July 21, 1986, among Sonatrach, quarter ended June 30, 1988
International Petroleum Investment Partnership,
Panhandle Eastern Corporation, Panhandle Eastern Pipe
Line Company and Trunkline LNG Company
10.31 Purchase Agreement, dated April 26, 1987, between 19(a) to Form 10-Q of PEC for 1-8157
Sonatrading Amsterdam B.V. and Trunkline LNG Company quarter ended March 31, 1987
10.32 Mutual Assurances Agreement, dated April 26, 1987, among 19(b) to Form 10-Q of PEC for 1-8157
Sonatrach, Sonatrading Amsterdam B.V., Panhandle Eastern quarter ended March 31, 1987
Corporation and Trunkline LNG Company
10.33 Tanker Utilization Agreement, dated April 26, 1987, 19(c) to Form 10-Q of PEC for 1-8157
between Sonatrading Amsterdam B.V. and Trunkline LNG quarter ended March 31, 1987
Company
10.34 Transportation Agreement, dated April 26, 1987, between 19(d) to Form 10-Q of PEC for 1-8157
Sonatrach and Trunkline LNG Company quarter ended March 31, 1987
**10.35 Letter Agreement constituting a Contract of Employment 10.35 to Form 10-K of PEC for 1-8157
between James T. Hackett and Panhandle Eastern year ended December 31, 1995
Corporation, dated December 19, 1995
**10.36 Retirement Income Plan of Panhandle Eastern Corporation 10.36 to Form 10-K of PEC for 1-8157
and Participating Affiliates, as amended and restated year ended December 31, 1995
effective January 1, 1995
**10.37 Amendment No. 1 to the Retirement Income Plan of 10.37 to Form 10-K of PEC for 1-8157
Panhandle Eastern Corporation and Participating year ended December 31, 1995
Affiliates, effective January 1, 1996
**10.38 Amendment No. 2 to the Retirement Income Plan of 10.38 to Form 10-K of PEC for 1-8157
Panhandle Eastern Corporation and Participating year ended December 31, 1995
Affiliates, effective January 1, 1996
10.39 Agreement between PanEnergy Corp and Verner, Liipfert, 10.1 to Form 10-Q of PEC for 1-8157
Bernhard, McPherson and Hand, Chartered, dated April 2, quarter ended June 30, 1996
1996
**10.40 Amendment to the 1994 Long Term Incentive Plan 10.2 to Form 10-Q of PEC for 1-8157
quarter ended June 30, 1996
**10.41 Agreement between George L. Mazanec and PanEnergy Corp, 10 to Form 10-Q of PEC for 1-8157
dated July 19, 1996 quarter ended September 30, 1996
**10.42 Employment Agreement for Paul M. Anderson 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.43 Employment Agreement for James T. Hackett 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.44 Employment Agreement for Fred J. Fowler 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.45 Employment Agreement for L.B. Gatewood 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.46 Employment Agreement for Jim W. Mogg 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.47 Employment Agreement for Bruce Williamson 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
*13 PanEnergy Corp 1996 Annual Report to Stockholders
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
EXHIBIT FILE
NUMBER DESCRIPTION ORIGINALLY FILED AS EXHIBIT NUMBER
------- ----------- --------------------------- --------
<C> <S> <C> <C>
21 List of Certain Subsidiaries of the Registrant and state
of incorporation (100% owned except as indicated):
(a) Algonquin Energy, Inc. (Delaware)
(b) Algonquin Gas Transmission Company (Delaware)
(c) National Helium Corporation (Delaware)
(d) PanEnergy Field Services, Inc. (Colorado)
(e) PanEnergy Natural Gas Corporation (Delaware)
(f) PanEnergy Services, Inc. (Delaware)
(g) PanEnergy Trading and Market Services, L.L.C.
(Delaware) -- 60% owned
(h) PanEnergy Transport and Trading Company (Colorado)
(i) Panhandle Eastern Pipe Line Company (Delaware)
(j) PTMSI Management, Inc. (Colorado)
(k) Texas Eastern Arabian, Ltd. (Bermuda)
(l) Texas Eastern (Bermuda), Ltd. (Bermuda)
(m) Texas Eastern Transmission Corporation (Delaware)
(n) Trunkline Gas Company (Delaware)
*23 Consent of KPMG Peat Marwick LLP
*24 Powers of Attorney
*27 Financial Data Schedule for December 31, 1996
*99 Pages 106-123 of the Definitive Joint Proxy Statement/
Prospectus, dated March 13, 1997 of Duke Power Company
and PanEnergy Corp
</TABLE>
The total amount of securities of the Registrant or its subsidiaries
authorized under any instrument with respect to long-term debt not filed as an
Exhibit does not exceed 10% of the total assets of the Registrant and its
subsidiaries on a consolidated basis. The Registrant agrees, upon request of the
Securities and Exchange Commission, to furnish copies of any or all of such
instruments.
(b) Reports on Form 8-K. A Current Report on Form 8-K dated October 10,
1996, was filed to report a public offering of 7% Notes Due 2006. A Current
Report on Form 8-K dated December 10, 1996, was filed to report the Merger
Agreement with Duke Power.
20
<PAGE> 23
PANENERGY CORP AND SUBSIDIARIES
INDEX
FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ 36*
Consolidated Statement of Income............................ 37*
Consolidated Balance Sheet.................................. 38-39*
Consolidated Statement of Common Stockholders' Equity....... 40*
Consolidated Statement of Cash Flows........................ 41*
Notes to Consolidated Financial Statements.................. 42-54*
</TABLE>
- ---------------
* Refers to the pages in the PanEnergy Corp 1996 Annual Report to Stockholders,
which are incorporated herein by reference.
All Schedules are omitted because they are not applicable, not required or
the information is included in the Consolidated Financial Statements or the
Notes thereto.
21
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ ROBERT W. REED
-----------------------------------
(Robert W. Reed, Secretary)
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 1997.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
------------------ -----
<C> <S>
(i) Principal executive officer:*
/s/ PAUL M. ANDERSON President and Chief Executive Officer
- -----------------------------------------------------
(Paul M. Anderson)
(ii) Principal financial officer:*
/s/ PAUL F. FERGUSON, JR. Senior Vice President and Chief Financial Officer
- -----------------------------------------------------
(Paul F. Ferguson, Jr.)
(iii) Principal accounting officer:*
/s/ SANDRA P. MEYER Vice President, Treasurer and Controller
- -----------------------------------------------------
(Sandra P. Meyer)
(iv) Directors:*
PAUL M. ANDERSON
MILTON CARROLL
ROBERT CIZIK
CHARLES W. DUNCAN, JR.
HARRY E. EKBLOM
WILLIAM T. ESREY
ANN MAYNARD GRAY
DENNIS R. HENDRIX
HAROLD S. HOOK
LEO E. LINBECK, JR.
RALPH S. O'CONNER
MATTHEW R. SIMMONS
* Signed on behalf of each of these persons:
By /s/ ROBERT W. REED
- -----------------------------------------------------
(Robert W. Reed, Attorney-in-Fact)
</TABLE>
22
<PAGE> 25
EXHIBIT INDEX
(a) The following documents are filed as a part of this report or
incorporated herein by reference:
(1) The Consolidated Financial Statements of PanEnergy Corp and
Subsidiaries are listed on the Index, page 21.
(2) Exhibits filed herewith are designated by an asterisk (*); all
exhibits not so designated are incorporated herein by reference to a prior
filing, as indicated. Items constituting management contracts or
compensatory plans or arrangements are designated by a double asterisk
(**).
<TABLE>
<CAPTION>
EXHIBIT FILE
NUMBER DESCRIPTION ORIGINALLY FILED AS EXHIBIT NUMBER
------- ----------- --------------------------- --------
<C> <S> <C> <C>
2.01 Amended and Restated Agreement and Plan of Merger dated 2(a) to Form 8-K of PEC dated March 1-8157
March 10, 1997, among Duke Power Company, Duke 20, 1997
Transaction Corporation and PanEnergy Corp
2.02 Formation Agreement between PanEnergy Trading and Market 2 to Form 10-Q of PEC for the 1-8157
Services, Inc. and Mobil Natural Gas Inc. dated May 29, quarter ended June 30, 1996
1996
3.01 Amended and Restated Certificate of Incorporation of 3.01 to Form 10-K of PEC for year 1-8157
Panhandle Eastern Corporation, including the Certificate ended December 31, 1995
of Elimination of the Participating Stock of Panhandle
Eastern Corporation
3.03 By-Laws of Panhandle Eastern Corporation, effective July 19(a) to Form 10-Q of PEC for 1-8157
8, 1986 quarter ended September 30, 1986
4.01 Indenture, dated as of November 1, 1994, between 4.03 to Form 10-K of PEC for year 1-8157
Panhandle Eastern Corporation and The First National ended December 31, 1994
Bank of Boston, as Trustee
4.02 Credit Agreement between Panhandle Eastern Corporation, 4.02 to Form 10-K of PEC for year 1-8157
d/b/a PanEnergy Corp, the financial institutions ended December 31, 1995
identified therein, and Chemical Bank, as Administrative
Agent, dated as of January 31, 1996
*4.03 First Amendment to the Credit Agreement, dated as of
September 18, 1996, between PanEnergy Corp and The Chase
Manhattan Bank
4.04 Credit Agreement (Five Year Facility) between Panhandle 4.03 to Form 10-K of PEC for year 1-8157
Eastern Corporation, d/b/a PanEnergy Corp, the financial ended December 31, 1995
institutions identified therein, and Chemical Bank, as
Administrative Agent, dated as of January 31, 1996
**10.01 1977 Non-Qualified Stock Option Plan of Panhandle 10(f) to Form 10-K of PEC for year 1-8157
Eastern Corporation, as amended through December 3, 1986 ended December 31, 1986
(and related Agreement)
**10.02 1982 Key Employee Stock Option Plan of Panhandle Eastern 10(g) to Form 10-K of PEC for year 1-8157
Corporation, as amended through December 3, 1986 (and ended December 31, 1986
related Agreement)
**10.03 Panhandle Eastern Corporation -- Nonemployee Directors 10(w) to Form 10-K of PEC for year 1-8157
Retirement Plan (As amended May 22, 1985) ended December 31, 1985
**10.04 Deferred Compensation Plan for the Board of Directors of 10.04 to Form 10-K of PEC for year 1-8157
Panhandle Eastern Corporation (Adopted May 26, 1982; as ended December 31, 1989
amended November 29, 1989)
**10.05 Amendment to Deferred Compensation Plan for the Board of 10.05 to Form 10-K of PEC for year 1-8157
Directors of Panhandle Eastern Corporation dated January ended December 31, 1994
25, 1995
**10.06 Panhandle Eastern Corporation -- Executive Benefit 10.05 to Form 10-K of PEC for year 1-8157
Equalization Plan (As amended November 29, 1989; ended December 31, 1989
effective January 1, 1990)
**10.07 Panhandle Eastern Corporation Retirement Benefit 10.06 to Form 10-K of PEC for year 1-8157
Equalization Plan (Adopted December 20, 1993; effective ended December 31, 1993
January 1, 1994; amends and restates Exhibit number
10.05)
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT FILE
NUMBER DESCRIPTION ORIGINALLY FILED AS EXHIBIT NUMBER
------- ----------- --------------------------- --------
<C> <S> <C> <C>
**10.08 Panhandle Eastern Corporation -- Executive Severance 19(a) to Form 10-Q of PEC for 1-8157
Agreement quarter ended September 30, 1988
10.09 Change in Control Severance Pay Plan of Panhandle 19(c) to Form 10-Q of PEC for 1-8157
Eastern Corporation and Affiliates (Adopted July 8, quarter ended September 30, 1986
1986)
**10.10 1989 Nonemployee Directors Stock Option Plan (Adopted 28(a) to Form S-8 Registration 33-28912
February 1, 1989) Statement of PEC
10.11 Employees Savings Plan of Panhandle Eastern Corporation 10.12 to Form 10-K of PEC for year 1-8157
and Participating Affiliates (Effective January 1, 1991) ended December 31, 1990
10.12 Retirement Income Plan of Panhandle Eastern Corporation 10.13 to Form 10-K of PEC for year 1-8157
and Participating Affiliates (Effective January 1, 1991) ended December 31, 1990
**10.13 Panhandle Eastern Corporation Key Executive Retirement 10.12 to Form 10-K of PEC for year 1-8157
Benefit Equalization Plan (Adopted December 20, 1993; ended December 31, 1993
effective January 1, 1994)
**10.14 Panhandle Eastern Corporation Key Executive Deferred 10.13 to Form 10-K of PEC for year 1-8157
Compensation Plan (Adopted December 20, 1993; effective ended December 31, 1993
January 1, 1994)
**10.15 1990 Long Term Incentive Plan (Adopted November 29, 10.14 to Form 10-K of PEC for year 1-8157
1989) ended December 31, 1990
10.16 Special Recognition Bonus Plan (Adopted November 29, 10.15 to Form 10-K of PEC for year 1-8157
1989) ended December 31, 1990
10.17 Annual Cash Bonus Plan of Panhandle Eastern Corporation 19.3 to Form 10-Q of PEC for 1-8157
(Adopted October 25, 1989; effective January 1, 1990) quarter ended September 30, 1989
10.18 Texas Eastern Deferred Income Program; First Amendment, 10.9 to Form 10-K of TEC for years 1-7587
dated December 5, 1985; and Second Amendment, dated ended December 31, 1984 and 1986; 8
August 15, 1988 to Schedule 14D-9 of TEC, dated
January 30, 1989
**10.19 Panhandle Eastern Corporation 1994 Long Term Incentive 10.18 to Form 10-K of PEC for year 1-8157
Plan ended December 31, 1993
**10.20 Agreement, dated November 1, 1989, between G. L. Mazanec 10.27 to Form 10-K of PEC for year 1-8157
and Panhandle Eastern Corporation ended December 31, 1990
**10.21 Amendment to Employment Agreement, effective November 1, 10.17 to Form 10-K of PEC for year 1-8157
1992, between G. L. Mazanec and Panhandle Eastern ended December 31, 1992
Corporation
**10.22 Agreement, dated November 12, 1990, between D. R. 10.28 to Form 10-K of PEC for year 1-8157
Hendrix and Panhandle Eastern Corporation ended December 31, 1990
**10.23 Amendment, dated March 12, 1993 to be effective as of 10.19 to Form 10-K of PEC for year 1-8157
February 24, 1993, to Agreement dated November 12, 1990, ended December 31, 1992
between D. R. Hendrix and Panhandle Eastern Corporation
**10.24 Second Amendment, dated December 20, 1993, to Agreement 10.23 to Form 10-K of PEC for year 1-8157
dated November 12, 1990, between Dennis Hendrix and ended December 31, 1993
Panhandle Eastern Corporation
**10.25 Agreement, dated November 12, 1990, between P. J. 10.31 to Form 10-K of PEC for year 1-8157
Burguieres and Panhandle Eastern Corporation ended December 31, 1990
**10.26 Agreement, effective January 1, 1991, between P. J. 10.32 to Form 10-K of PEC for year 1-8157
Burguieres and Panhandle Eastern Corporation ended December 31, 1990
**10.27 Agreement, effective March 1, 1991, between Paul M. 10.24 to Form 10-K of PEC for year 1-8157
Anderson and Panhandle Eastern Corporation ended December 31, 1991
10.28 Settlement Agreement, dated July 21, 1986, among 19.4 to Form 10-Q of PEC for 1-8157
Sonatrach, Panhandle Eastern Corporation, Panhandle quarter ended June 30, 1986
Eastern Pipe Line Company and Trunkline LNG Company
10.29 Amendment, dated August 11, 1986, to Settlement 19.5 to Form 10-Q of PEC for 1-8157
Agreement, dated July 21, 1986, among Sonatrach, quarter ended June 30, 1986
Panhandle Eastern Corporation, Panhandle Eastern Pipe
Line Company and Trunkline LNG Company
</TABLE>
<PAGE> 27
<TABLE>
<C> <S> <C> <C>
10.30 Amendment No. 2, dated August 1, 1988, to Settlement 19(e) to Form 10-Q of PEC for 1-8157
Agreement, dated July 21, 1986, among Sonatrach, quarter ended June 30, 1988
International Petroleum Investment Partnership,
Panhandle Eastern Corporation, Panhandle Eastern Pipe
Line Company and Trunkline LNG Company
10.31 Purchase Agreement, dated April 26, 1987, between 19(a) to Form 10-Q of PEC for 1-8157
Sonatrading Amsterdam B.V. and Trunkline LNG Company quarter ended March 31, 1987
10.32 Mutual Assurances Agreement, dated April 26, 1987, among 19(b) to Form 10-Q of PEC for 1-8157
Sonatrach, Sonatrading Amsterdam B.V., Panhandle Eastern quarter ended March 31, 1987
Corporation and Trunkline LNG Company
10.33 Tanker Utilization Agreement, dated April 26, 1987, 19(c) to Form 10-Q of PEC for 1-8157
between Sonatrading Amsterdam B.V. and Trunkline LNG quarter ended March 31, 1987
Company
10.34 Transportation Agreement, dated April 26, 1987, between 19(d) to Form 10-Q of PEC for 1-8157
Sonatrach and Trunkline LNG Company quarter ended March 31, 1987
**10.35 Letter Agreement constituting a Contract of Employment 10.35 to Form 10-K of PEC for 1-8157
between James T. Hackett and Panhandle Eastern year ended December 31, 1995
Corporation, dated December 19, 1995
**10.36 Retirement Income Plan of Panhandle Eastern Corporation 10.36 to Form 10-K of PEC for 1-8157
and Participating Affiliates, as amended and restated year ended December 31, 1995
effective January 1, 1995
**10.37 Amendment No. 1 to the Retirement Income Plan of 10.37 to Form 10-K of PEC for 1-8157
Panhandle Eastern Corporation and Participating year ended December 31, 1995
Affiliates, effective January 1, 1996
**10.38 Amendment No. 2 to the Retirement Income Plan of 10.38 to Form 10-K of PEC for 1-8157
Panhandle Eastern Corporation and Participating year ended December 31, 1995
Affiliates, effective January 1, 1996
10.39 Agreement between PanEnergy Corp and Verner, Liipfert, 10.1 to Form 10-Q of PEC for 1-8157
Bernhard, McPherson and Hand, Chartered, dated April 2, quarter ended June 30, 1996
1996
**10.40 Amendment to the 1994 Long Term Incentive Plan 10.2 to Form 10-Q of PEC for 1-8157
quarter ended June 30, 1996
**10.41 Agreement between George L. Mazanec and PanEnergy Corp, 10 to Form 10-Q of PEC for 1-8157
dated July 19, 1996 quarter ended September 30, 1996
**10.42 Employment Agreement for Paul M. Anderson 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.43 Employment Agreement for James T. Hackett 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.44 Employment Agreement for Fred J. Fowler 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.45 Employment Agreement for L.B. Gatewood 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.46 Employment Agreement for Jim W. Mogg 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
**10.47 Employment Agreement for Bruce Williamson 2(a) to Form 8-K of PEC dated 1-8157
March 20, 1997
*13 PanEnergy Corp 1996 Annual Report to Stockholders
</TABLE>
<PAGE> 28
<TABLE>
<C> <S> <C> <C>
21 List of Certain Subsidiaries of the Registrant and state
of incorporation (100% owned except as indicated):
(a) Algonquin Energy, Inc. (Delaware)
(b) Algonquin Gas Transmission Company (Delaware)
(c) National Helium Corporation (Delaware)
(d) PanEnergy Field Services, Inc. (Colorado)
(e) PanEnergy Natural Gas Corporation (Delaware)
(f) PanEnergy Services, Inc. (Delaware)
(g) PanEnergy Trading and Market Services, L.L.C.
(Delaware) -- 60% owned
(h) PanEnergy Transport and Trading Company (Colorado)
(i) Panhandle Eastern Pipe Line Company (Delaware)
(j) PTMSI Management, Inc. (Colorado)
(k) Texas Eastern Arabian, Ltd. (Bermuda)
(l) Texas Eastern (Bermuda), Ltd. (Bermuda)
(m) Texas Eastern Transmission Corporation (Delaware)
(n) Trunkline Gas Company (Delaware)
*23 Consent of KPMG Peat Marwick LLP
*24 Powers of Attorney
*27 Financial Data Schedule for December 31, 1996
*99 Pages 106-123 of the Definitive Joint Proxy
Statement/Prospectus, dated March 13, 1997 of Duke Power
Company and PanEnergy Corp
</TABLE>
<PAGE> 1
EXHIBIT 4.03
CONFORMED COPY
FIRST AMENDMENT, dated as of September 18, 1996 (this "Amendment"), to
the Credit Agreement dated as of January 31, 1996 (as the same may be further
amended, supplemented, waived or otherwise modified from time to time, the
"Credit Agreement"), among PANENERGY CORP (formerly known as Panhandle Eastern
Corporation), a Delaware corporation (the "Company"), the several financial
institutions from time to time parties thereto (collectively, the "Lenders" and
individually, a "Lender") and THE CHASE MANHATTAN BANK, a New York banking
corporation formerly known as Chemical Bank, as Administrative Agent.
W I T N E S S E T H :
WHEREAS, the Company, the Lenders and the Administrative Agent are
parties to the Credit Agreement;
WHEREAS, the Company has requested that the Lenders amend the Credit
Agreement in order to extend the Revolving Credit Termination Date to August
30, 1997; and
WHEREAS, the Administrative Agent and the Lenders are willing to agree
to the requested amendment notwithstanding the provisions of Section 2.19 of
the Credit Agreement, but only upon the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the premises contained herein, the
parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms which
are defined in the Credit Agreement and used herein are so used as so defined.
2. Amendment to Subsection 1.1. Subsection 1.1 of the Credit
Agreement is hereby amended by deleting the definitions of Chemical, Company
and Revolving Credit Termination Date and adding the following new definitions
in correct alphabetical order:
"'Chase' : The Chase Manhattan Bank.
'Company' : PanEnergy Corp, a Delaware corporation.
'Revolving Credit Termination Date' : August 30, 1997 (or the
extension of such date pursuant to subsection 2.19)."
3. Amendment. All references to "Chemical" in the Credit
Agreement shall hereby be deleted and the term "Chase" shall be inserted in
lieu thereof.
<PAGE> 2
4. Representations and Warranties. On and as of the date hereof
and after giving effect to this Amendment, the Company hereby confirms,
reaffirms and restates the representations and warranties set forth in Section
5 of the Credit Agreement mutatis mutandis, except to the extent that such
representations and warranties expressly relate to a specific earlier date in
which case the Company hereby confirms, reaffirms and restates such
representations and warranties as of such earlier date, provided that the
references to the Credit Agreement in such representations and warranties shall
be deemed to refer to the Credit Agreement as amended prior to the date hereof
and pursuant to this Amendment.
5. Effectiveness. This Amendment shall become effective as of
the date hereof upon receipt by the Administrative Agent of counterparts of
this Amendment duly executed and delivered by the Company and all the Lenders.
6. Continuing Effect; No Other Amendments. Except as expressly
amended hereby, all of the terms and provisions of the Credit Agreement are and
shall remain in full force and effect. The amendment provided for herein is
limited to the specific subsections of the Credit Agreement specified herein
and shall not constitute an amendment of, or an indication of the
Administrative Agent's or the Lenders' willingness to amend, any other
provisions of the Credit Agreement or the same subsections for any other date
or time period (whether or not such other provisions or compliance with such
subsections for another date or time period are affected by the circumstances
addressed in this Amendment).
7. Expenses. The Company agrees to pay and reimburse the
Administrative Agent for all its reasonable costs and out-of-pocket expenses
incurred in connection with the preparation and delivery of this Amendment,
including, without limitation, the reasonable fees and disbursements of counsel
to the Administrative Agent.
8. Counterparts. This Amendment may be executed by one or more
of the parties to this Amendment on any number of separate counterparts
(including by telecopy), and all of said counterparts taken together shall be
deemed to constitute one and the same instrument. A set of the copies of this
Amendment signed by all the parties shall be delivered to the Company and the
Administrative Agent.
9. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES UNDER THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed and delivered by their respective duly authorized officers as of
the date first above written.
PANENERGY CORP (formerly known as
Panhandle Eastern Corporation)
By: /s/ Bruce A. Williamson
------------------------------------
Title: Vice President, Finance
THE CHASE MANHATTAN BANK (formerly
known as Chemical Bank), as
Administrative Agent, as an Issuing
Lender and as a Lender
By: /s/ Peter M. Ling
------------------------------------
Title: Vice President
BANK OF AMERICA ILLINOIS
By: /s/ Ronald McKaig
------------------------------------
Title: Vice President
BANK OF MONTREAL
By: /s/ Natasha Glossop
------------------------------------
Title: Director
U.S. Corporate Banking
THE BANK OF NEW YORK
By: /s/ Raymond J. Palmer
------------------------------------
Title: Vice President
<PAGE> 4
THE BANK OF NOVA SCOTIA
By: /s/ A. S. Norsworthy
------------------------------------
Title: Sr. Team Leader-Loan
Operations
BARCLAYS BANK PLC
By: /s/ Les Bek
------------------------------------
Title: Director
CIBC, INC.
By: /s/ Gary C. Gaskill
------------------------------------
Title: Authorized Signatory
THE FIRST NATIONAL BANK OF BOSTON
By: /s/ George W. Passela
------------------------------------
Title: Managing Director
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Ronald L. Dreihe
------------------------------------
Title: Authorized Agent
MELLON BANK, N.A.
By: /s/ E. Marc Cuenod Jr.
------------------------------------
Title: First Vice President
<PAGE> 5
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ John Kowalczuk
------------------------------------
Title: Vice President
NATIONSBANK OF TEXAS, N.A.
By: Paul C. Squires
------------------------------------
Title: Senior Vice President
NATIONAL WESTMINSTER BANK PLC
NEW YORK BRANCH
By: /s/ David L. Smith
------------------------------------
Title: Senior Vice President
Head of Branch Operations
NATIONAL WESTMINSTER BANK PLC
NASSAU BRANCH
By: /s/ David L. Smith
------------------------------------
Title: Senior Vice President
Head of Branch Operations
BANK OF TOKYO-MITSUBISHI, LTD.,
HOUSTON AGENCY
By: /s/ Michael Meiss
------------------------------------
Title: Vice President
<PAGE> 6
THE FUJI BANK, LIMITED (HOUSTON
AGENCY)
By: /s/ Yoshiaki Inoue
------------------------------------
Title: Vice President & Manager
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
By: /s/ Satoru Otsubo
------------------------------------
Title: Joint General Manager
ROYAL BANK OF CANADA
By: /s/ J. D. Frost
------------------------------------
Title: Senior Manager
THE SANWA BANK, LIMITED, DALLAS
AGENCY
By: /s/ L. J. Perenyi
------------------------------------
Title: Vice President
SOCIETE GENERALE, SOUTHWEST
AGENCY
By: /s/ Paul E. Cornell
------------------------------------
Title: First Vice President
<PAGE> 7
THE TORONTO-DOMINION BANK,
HOUSTON AGENCY
By: /s/ Jimmy Simien
------------------------------------
Title: Asst. Manager
Credit Administration
UNION BANK OF SWITZERLAND,
HOUSTON AGENCY
By: /s/ Dan O. Boyle
------------------------------------
Title: Managing Director
By: /s/ J. Finley Biggerstaff
------------------------------------
Title: Assistant Treasurer
ARAB BANKING CORPORATION
By: /s/ Stephen A. Plauche'
------------------------------------
Title: Vice President
BANK OF SCOTLAND
By: /s/ Catherine M. Oniffrey
------------------------------------
Title: Vice President
CHRISTIANIA BANK
By: /s/ Jahn O. Roising
------------------------------------
Title: First Vice President
By: /s/ Peter M. Dodge
------------------------------------
Title: Vice President
<PAGE> 8
WELLS FARGO BANK (TEXAS), N.A.
By: /s/ Ann M. Rhoads
------------------------------------
Title: Vice President
THE BANK OF YOKOHAMA, LTD., NEW
YORK BRANCH
By: /s/ Takeshi Suzuki
------------------------------------
Title: Vice President and
Senior Manager
THE INDUSTRIAL BANK OF JAPAN TRUST
COMPANY
By: /s/ Akijiro Yoshino
------------------------------------
Title: Executive Vice President
The Industrial Bank of
Japan, Limited, Houston Office
(Authorized Representative)
THE NORTHERN TRUST COMPANY
By: /s/ Martin Alston
------------------------------------
Title: Vice President
THE SUMITOMO BANK, LIMITED,
HOUSTON AGENCY
By: /s/ Harumitsu Seki
------------------------------------
Title: General Manager
<PAGE> 1
EXHIBIT 13
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
REPORT OF MANAGEMENT
The management of PanEnergy Corp and subsidiary companies (the Company)
acknowledges its responsibility for the integrity of the financial statements
and related information contained in this Annual Report. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles appropriate to our business activities.
The management of the Company also acknowledges its responsibility for
maintaining adequate internal controls. Accordingly, accounting systems and
related internal controls are maintained to provide reasonable assurance that
assets are protected from loss or unauthorized use, that transactions and
events are recorded properly and that adequate accounting records are
maintained. The Corporate Auditing Department, which is independent of
operational management, monitors the design and implementation of internal
control systems and compliance with Company policies.
The Company's independent auditors, KPMG Peat Marwick LLP, have audited the
consolidated financial statements. Their audit was conducted in accordance with
generally accepted auditing standards, which includes the consideration of the
Company's internal controls to the extent necessary to form an independent
opinion on the consolidated financial statements prepared by management.
The Company has established statements of corporate policy relating to
conflict of interest and conduct of business and receives from appropriate
employees confirmation of compliance with these policies.
The Audit Committee of the Board of Directors, which is composed of
Directors who are not officers or employees, meets at least three times
annually to review the work of the independent auditors, management and the
Corporate Auditing Department, and to consider management's performance of its
financial reporting responsibility. The independent auditors, as well as the
director of the Corporate Auditing Department, are afforded an opportunity to
present to the Audit Committee their opinions in the absence of management
personnel. The Audit Committee reports regularly to the Board of Directors the
results of its meetings and its recommendations, including that for the
selection of the independent auditors.
/s/ PAUL ANDERSON
- -------------------------------------
Paul Anderson
President and Chief Executive Officer
/s/ PAUL F. FERGUSON, JR.
- -------------------------------------
Paul F. Ferguson, Jr.
Senior Vice President and
Chief Financial Officer
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
36
<PAGE> 13
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
37
<PAGE> 14
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
38
<PAGE> 15
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
39
<PAGE> 16
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
40
<PAGE> 17
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
41
<PAGE> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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> 29
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> 30
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> 31
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> 32
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.
55
<PAGE> 33
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
56
<PAGE> 34
PANENERGY CORP. COMMON STOCK DATA BY QUARTERS
<TABLE>
<CAPTION>
Dividends Paid
1996 Quarters High Low Per Share
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
First $31 5/8 $26 3/4 $0.225
- -------------------------------------------------------------------------------
Second 33 1/2 30 5/8 0.240
- -------------------------------------------------------------------------------
Third 35 1/4 31 0.240
- -------------------------------------------------------------------------------
Fourth 46 1/4 34 5/8 0.240
===============================================================================
1996 Quarters
- -------------------------------------------------------------------------------
First $23 1/4 $18 3/4 $0.210
- -------------------------------------------------------------------------------
Second 25 7/8 22 7/8 0.225
- -------------------------------------------------------------------------------
Third 27 1/2 23 3/8 0.225
- -------------------------------------------------------------------------------
Fourth 28 7/8 24 3/8 0.225
===============================================================================
</TABLE>
o PanEnergy's common stock is listed for trading under the
symbol PEL on the New York and Pacific Stock Exchanges.
o There were 24,981 stockholder accounts at December 31, 1996.
o See Page 35 for an explanation of the dividend policy and Note 10 of the Notes
to Consolidated Financial Statements on Page 50 for a discussion of
restrictions on dividends.
Debt Ratings
<TABLE>
<CAPTION>
Moody's Standard Duff Fitch
Investors & & Investors
Service Poor's Phelps Service
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
TETCO Baa1 BBB+ BBB+ BBB+
PEPL Baa1 BBB+ BBB+ BBB+
PanEnergy Baa2 BBB BBB BBB
</TABLE>
57
<PAGE> 35
APPENDIX TO EXHIBIT 13
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 23
INDEPENDENT AUDITORS' 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 appears in the
December 31, 1996 annual report on Form 10-K of PanEnergy Corp.
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
March 26, 1997
<PAGE> 1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign their names as Officers and/or Directors of
the Company to the Form 10-K Report, and to any instrument or document filed as
a part of, or in connection with, said Form 10-K Report or Amendment thereto;
and the undersigned does hereby ratify and confirm all that said attorney and
agent shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ DENNIS HENDRIX /s/ PAUL M. ANDERSON
- ------------------------ -------------------------------------
Dennis Hendrix Paul M. Anderson
Chairman of the Board President and Chief Executive Officer
/s/ PAUL F. FERGUSON, JR. /s/ SANDRA P. MEYER
- ------------------------ -------------------------------------
Paul F. Ferguson, Jr. Sandra P. Meyer
Senior Vice President and Vice President, Controller
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ MATTHEW R. SIMMONS
- ------------------------
Matthew R. Simmons
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ LEO E. LINBECK, JR.
- ------------------------
Leo E. Linbeck, Jr.
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ WILLIAM T. ESREY
- ------------------------
William T. Esrey
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ CHARLES W. DUNCAN, JR.
- --------------------------
Charles W. Duncan, Jr.
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ HAROLD S. HOOK
- ------------------------
Harold S. Hook
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ HARRY E. EKBLOM
- ------------------------
Harry E. EKBLOM
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ MILTON CARROLL
- ------------------------
Milton Carroll
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ ANN MAYNARD GRAY
- ------------------------
Ann Maynard Gray
<PAGE> 10
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ RALPH S. O'CONNOR
- ------------------------
Ralph S. O'Connor
<PAGE> 11
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Officer
and/or Director of PANENERGY CORP (the "Company"), a Delaware corporation, does
hereby constitute and appoint PAUL F. FERGUSON, JR., CARL B. KING, and ROBERT
W. REED, and each of them, his true and lawful attorney and agent to do any and
all acts and things, and execute any and all instruments which, with the advice
of Counsel, said attorney and agent may deem necessary or advisable to enable
the Company to comply with the Securities Act of 1934, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the filing under said Act of the Form 10-K Annual Report
with the Securities and Exchange Commission, including specifically, but
without limitation thereof, to sign his name as Officer and/or Director of the
Company to the Form 10-K Report, and to any instrument or document filed as a
part of, or in connection with, said Form 10-K Report or Amendment thereto; and
the undersigned does hereby ratify and confirm all that said attorney and agent
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed these presents
this 26th day of March, 1997.
/s/ ROBERT CIZIK
- ------------------------
Robert Cizik
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Annual Report on Form 10-K for the year 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
THE PANENERGY MEETING-ADDITIONAL MATTERS
ELECTION OF DIRECTORS
(Proposal 2)
The PanEnergy Board consists of twelve directors, ten of whom are nonemployee
directors, and two advisory directors, neither of whom is employed by
PanEnergy. In accordance with the PanEnergy By-Laws, the directors have been
divided into three Classes of approximately equal size, with staggered terms in
office. At each PanEnergy Annual Meeting, directors constituting one Class are
elected for three-year terms. Each Class is designated by the year in which its
current term ends. The members of the 1997 Class of Directors, Paul M.
Anderson, William T. Esrey, Ann Maynard Gray and Matthew R. Simmons, have been
nominated for re-election at this year's PanEnergy Meeting. If re-elected, they
will hold office until the earlier to occur of the Effective Time, the Annual
Meeting in the year 2000 or until successors shall have been elected and shall
have qualified. The terms of the directors constituting the other two Classes
will continue until the earlier of the Effective Time or the terms indicated
below.
The proxy holders named on the proxy card will vote FOR the election of the
nominees listed below, unless otherwise instructed on proxy cards that have
been signed and returned. If you do not wish your shares to be voted for
particular nominees, please identify the exceptions on the proxy card. If any
of these nominees should be unable to serve, the proxies will be voted by the
proxy holders for the election of such other person as they shall determine, in
accordance with their judgment.
Information Regarding Nominees for Election as Directors
1997 Class
<TABLE>
<CAPTION>
Name Business Experience and Age in 1997
- ---- -----------------------------------
<S> <C>
Paul M. Anderson... Age 52. Chief Executive Officer of PanEnergy since April 1995, President
of PanEnergy since December 1993 and director since December 1992. Executive
Vice President of PanEnergy from March 1991 to December 1993. President and
Chief Executive Officer of Panhandle Eastern Pipe Line Company ("PEPL") from
April 1991 to January 1994, a director of PEPL since 1991, and Chairman of the
Board since January 1994. Director of Texas Eastern Transmission Corporation
("TETCO") since April 1991 and Chairman of the Board since January 1994. Vice
President, Finance and Chief Financial Officer, Inland Steel Industries, Inc.,
1990-91. Director of Temple-Inland, Inc., Kerr-McGee Corporation and of Texas
Eastern Products Pipeline Company ("TEPPCO"), a wholly-owned subsidiary of PanEnergy
and the general partner of TEPPCO Partners, L.P., a publicly traded master limited
partnership.
William T. Esrey... Age 57. Chairman since April 1990 and Chief Executive Officer since April 1985
of Sprint Corporation ("Sprint"), Westwood, Kansas, a diversified telecommunications
holding company. President of Sprint from April 1985 to April 1996. Director of
PanEnergy since 1985. Director of Sprint, Equitable Life Assurance Society of the
United States, General Mills, Inc. and Everen Capital Corporation.
Ann Maynard Gray... Age 52. Since 1991, President, Diversified Publishing Group of ABC, Inc. (until October 1,
1996 known as "Capital Cities/ABC, Inc."), New York, New York, involved in television,
radio and publishing, and Corporate Vice President since 1986. Senior Vice President-Finance,
ABC Television Network from 1988 to 1991. Director of PanEnergy since 1994. Director of Cyprus
Amax Minerals Company.
</TABLE>
106
<PAGE> 2
<TABLE>
<CAPTION>
Name Business Experience and Age in 1997
- ---- -----------------------------------
<S> <C>
Matthew R. Simmons... Age 54. President since 1974, and founder of Simmons & Company
International, Houston, Texas, a specialized investment banking firm
focusing exclusively on the oil and gas services and equipment industry.
Director of PanEnergy since October 1996. Director of United Meridian
Corporation.
</TABLE>
Information Regarding Directors Continuing in Office
1998 Class
<TABLE>
<CAPTION>
Name Business Experience and Age in 1997
- ---- -----------------------------------
<S> <C>
Charles W. Duncan, Jr. ... Age 71. Engaged in private investments in Houston, Texas, since 1981.
Deputy Secretary of the United States Department of Defense, January 1977
to August 1979, Secretary of the United States Department of Energy, August
1979 until January 1981. Director of PanEnergy since 1990. Director of
American Express Company, The Coca-Cola Company, Newfield Exploration
Company and United Technologies Corporation.
Harry E. Ekblom........... Age 69. Vice Chairman of A. T. Hudson & Co., Inc., Oradell, New Jersey,
a management consulting firm, since 1985, and President of Harry E. Ekblom
& Co., Inc., Osterville, Massachusetts, a financial consulting firm, since
January 1984. Director of PanEnergy since 1971. Director of Harris & Harris
Group, Inc. and The Commercial Bank of New York.
Dennis R. Hendrix......... Age 57. Chairman of the Board of PanEnergy since November 1990 and
Chief Executive Officer from November 1990 to April 1995. President of
PanEnergy from November 1990 to December 1993. Director of PEPL and
TETCO since November 1990, Chairman of the Board from November 1990
to January 1994 and Chief Executive Officer from November 1990 to April
1991 of PEPL and TETCO, and President of TETCO from November 1990 to
January 1994. Director of TECO Energy, Inc. and TEPPCO.
Ralph S. O'Connor......... Age 71. For more than five years, principally engaged in investments as
Chairman and Chief Executive Officer of Ralph S. O'Connor & Associates,
Houston, Texas. Director of PanEnergy since 1991.
</TABLE>
1999 Class
<TABLE>
<CAPTION>
Name Business Experience and Age in 1997
- ---- -----------------------------------
<S> <C>
Milton Carroll... Age 47. Chairman, President and Chief Executive Officer of Instrument
Products, Inc., Houston, Texas, a manufacturer of oilfield equipment, since
1977. Director of PanEnergy since 1993. Director of the Federal Reserve
Bank of Dallas, Houston Industries, Inc., Seagull Energy Corporation and
Blue Cross Blue Shield of Texas, Inc.
Robert Cizik..... Age 66. Former Chairman, Chief Executive Officer and a Director of
Cooper Industries, Inc. ("Cooper"), Houston, Texas, a diversified
international manufacturing company, where he served from 1975 to 1996.
Director of PanEnergy since 1991. Currently serves as Non-executive
Chairman of EASCO, Inc., Gerard, Ohio, which is in the business of
aluminum extraction. Director of Temple-Inland, Inc., Harris Corporation,
and Air Products and Chemicals, Inc.
</TABLE>
107
<PAGE> 3
<TABLE>
<CAPTION>
Name Business Experience and Age in 1997
- ---- -----------------------------------
<S> <C>
Harold S. Hook......... Age 66. Chairman of American General Corporation ("American
General"), Houston, Texas, a diversified financial services organization, for
more than five years. Director of PanEnergy since 1978. Director of
American General, American General Finance, Inc., Chase Manhattan
Corporation, Chase Manhattan Bank, Cooper and Sprint.
Leo E. Linbeck, Jr. ... Age 63. Since 1990, Chairman, President and Chief Executive Officer of
Linbeck Corporation, Houston, Texas, a holding company of five
construction-related firms, and, since 1975, Chairman, President and Chief
Executive Officer of Linbeck Construction Corporation, Houston, Texas, a
client-focused organization whose expertise is the planning and building of
facilities. Director of PanEnergy since 1986. Director of Daniel Industries,
Inc., and a Director and Trustee of thirty-three investment companies
managed by John Hancock Advisors, Inc.
</TABLE>
ADDITIONAL INFORMATION
Board of Directors Retirement Policy
In January 1996, the PanEnergy Board amended its policy regarding the
retirement of nonemployee directors to provide for the retirement of a
nonemployee director at the PanEnergy Annual Meeting next following the
nonemployee director's seventy-second birthday. Previously, the policy provided
that the nonemployee director would retire at the next meeting of the PanEnergy
Board following the nonemployee director's seventieth birthday.
Information Regarding Advisory Directors
In January 1997, the PanEnergy Board elected two advisory directors, Senator
Lloyd M. Bentsen and Cortlandt S. Dietler, to their third terms to serve until
the earlier to occur of the Effective Time or January 31, 1998. An advisory
director has no voting rights but attends meetings of the PanEnergy Board and
certain PanEnergy Board committees in an advisory capacity. Information
regarding the advisory directors is as follows:
<TABLE>
<CAPTION>
Name Business Experience and Age in 1997
- ---- -----------------------------------
<S> <C>
Lloyd M. Bentsen....... Age 76. Shareholder of the law firm of Verner, Liipfert, Bernhard,
McPherson and Hand, Houston, Texas. United States Senator from Texas
from 1971 to 1993. Secretary of the Treasury of the United States from
January 1993 to December 1994. Advisory director of PanEnergy since
January 1995. Director of Continental Airlines, Inc., IVAX Corporation and
American International Group, Inc., and Chairman of the Board of New
Holland, Ltd., a Dutch company, and a director of Fomento Economico
Mexicano SA de CV, a Mexican corporation. As of December 31, 1996,
Senator Bentsen owned 8,930 shares of PanEnergy Common Stock.
Cortlandt S. Dietler... Age 76. Chairman, President and Chief Executive Officer since April 1995,
of TransMontaigne Oil Corporation, Denver, Colorado, a wholesale marketer,
transporter and terminaler of petroleum-derived commodities. Until the
December 1994 merger with PanEnergy, Chairman of the Board and Chief
Executive Officer of Associated Natural Gas Corporation, Denver, Colorado,
a marketer, gatherer and processor of natural gas, for more than five years.
Advisory director of PanEnergy since January 1995. Director of Forrest Oil
Corporation, Hallador Petroleum Company, Key Production Company, Inc.
and Grease Monkey International, Inc. As of December 31, 1996, Mr. Dietler
owned 1,322,404 shares of PanEnergy Common Stock, including 6,000 shares
owned by Mrs. Dietler, and 3,500 limited partnership units of TEPPCO
Partners, L.P.
</TABLE>
108
<PAGE> 4
Meetings of the PanEnergy Board and its Committees
During 1996, the PanEnergy Board met twelve times. Each director
attended at least 75% of the aggregate number of the PanEnergy Board meetings
and the meetings of PanEnergy Board committees on which he or she served.
The PanEnergy Board has six committees, which are the Audit Committee,
the Compensation & Organization Committee ("Compensation Committee"), the
Committee on Directors, the Executive Committee, the Finance Committee and the
Public Responsibilities Committee. With the exception of the Executive
Committee, all committees are composed solely of nonemployee directors.
Mr. Cizik is Chairman, and Ms. Gray and Messrs. Carroll, Hook, O'Connor
and Dietler are members, of the Audit Committee. The Audit Committee recommends
the appointment of independent auditors and reviews the plan, scope and results
of the audit and monitors the fees for audit and other services; reviews the
recommendations resulting from such audit and management responses thereto; and
reviews PanEnergy's accounting principles, policies, internal accounting
controls, and the internal auditing department plans and procedures. The Audit
Committee also reviews PanEnergy's annual financial statements and recommends
accounting and internal auditing policies which, in the Audit Committee's
judgment, should receive the attention of the PanEnergy Board. The Audit
Committee met three times in 1996.
Mr. Duncan is Chairman of the Compensation Committee and Messrs. Cizik,
Ekblom, Esrey, Linbeck and O'Connor are members. The Compensation Committee
establishes the compensation policies for the Chief Executive Officer and other
senior officers; approves the salaries and certain remuneration arrangements of
senior officers; recommends the adoption of compensation plans in which officers
and certain key employees are eligible to participate; and approves, appoints a
subcommittee which approves, or recommends awards pursuant thereto, including
bonuses, stock option grants, and other awards. The Compensation Committee acts
on management recommendations for the election of officers, recommends the
election of a Chief Executive Officer when appropriate, and reviews management
succession plans. The Compensation Committee met five times in 1996.
Mr. Esrey is Chairman of the Committee on Directors and Messrs. Carroll,
Cizik, Dietler, Duncan, Ekblom and Hook are members. The Committee on Directors
identifies and recommends candidates to fill PanEnergy Board vacancies and
considers nominees for election as directors at the Annual Meeting; considers
the removal of directors; reviews the PanEnergy Board's retirement policy and
policies pertaining to PanEnergy Board membership; advises the PanEnergy Board
on matters pertaining to PanEnergy Board tenure and compensation; and considers
and makes recommendations pertaining to corporate governance matters. In
addition, the Committee on Directors will consider stockholders' suggestions of
nominees for director that are submitted in writing to it, in care of the
Secretary of PanEnergy. The Committee on Directors met three times in 1995.
Mr. Hook is Chairman of the Finance Committee and the members are Ms.
Gray, Senator Bentsen and Messrs. Duncan, Ekblom and Linbeck. The Finance
Committee reviews PanEnergy's financial needs and approves PanEnergy's financing
plans, represents the PanEnergy Board in discharging administrative
responsibilities with respect to employee benefit plans, reviews the performance
of the investment managers of the Retirement Income Plan of Panhandle Eastern
Corporation and Participating Affiliates ("Retirement Income Plan"), monitors
PanEnergy's risk management activities, and reviews the PanEnergy Board's
dividend policy. The Finance Committee met three times in 1996.
Mr. Linbeck is Chairman, and Senator Bentsen, Messrs. Carroll, Esrey and
O'Connor and Ms. Gray are members, of the Public Responsibilities Committee.
This committee reviews and considers PanEnergy's policies and practices related
to public issues important to PanEnergy and the industry, including: safety;
environmental affairs; governmental relations; community relations; employee
participation in civic and charitable affairs; civic, charitable, and
philanthropic contributions; and equal opportunity policies and programs. The
Public Responsibilities Committee met once in 1996.
109
<PAGE> 5
Mr. Hendrix is Chairman, and Senator Bentsen and Messrs. Anderson,
Carroll, Cizik, Duncan, Hook, Linbeck, O'Connor and Simmons are members, of the
Executive Committee, which reviews and, where appropriate, authorizes corporate
action with respect to the conduct of the business of PanEnergy between
PanEnergy Board meetings. Actions taken by the Executive Committee are regularly
submitted to the PanEnergy Board for review and ratification at the next
meeting. The Executive Committee did not meet in 1996.
Security Ownership of Management
As of December 31, 1996, all directors and executive officers of
PanEnergy as a group owned beneficially, or had the right to acquire within 60
days of December 31, 1996, under one or more of the 1982 Key Employee Stock
Option Plan, as amended (the "1982 Plan"), the 1989 Nonemployee Directors Stock
Option Plan (the "1989 Plan"), the 1990 Long Term Incentive Plan (the "1990
LTIP"), and the 1994 Long Term Incentive Plan (the "1994 LTIP"), less than 1% of
the presently issued and outstanding PanEnergy Common Stock.
The following table shows the number of shares of PanEnergy Common Stock
beneficially owned as of December 31, 1996, or as to which there was a right to
acquire beneficial ownership within 60 days of such date, by each director
(other than advisory directors) or nominee for director, each executive officer
of PanEnergy named in the Summary Compensation Table ("Named Executive
Officers"), and all directors (other than advisory directors) and executive
officers of PanEnergy as a group.
<TABLE>
<CAPTION>
Number of Number of
Shares Shares Which
Beneficially May Be
Name Owned(1) Acquired(2)
---- ------------ -------------
<S> <C> <C>
Paul M. Anderson...................................................................... 45,177 290,400
D.H. Anderson......................................................................... 63,910 17,076
Milton Carroll........................................................................ 431 7,000
Robert Cizik.......................................................................... 1,322 9,000
Charles W. Duncan, Jr. ............................................................... 7,767(3) 10,000
Harry E. Ekblom....................................................................... 4,276(4) 11,000
William T. Esrey...................................................................... 2,500 11,000
Ann Maynard Gray...................................................................... 500 6,000
James T. Hackett...................................................................... 70,582 16,666
Dennis R. Hendrix..................................................................... 341,600 -
Harold S. Hook........................................................................ 5,600 11,000
Carl B. King.......................................................................... 57,603 17,076
Leo E. Linbeck, Jr.................................................................... 1,223 11,000
George L. Mazanec..................................................................... 27,887 276,886
Ralph S. O'Connor..................................................................... 35,908 9,000
Matthew R. Simmons.................................................................... 5,000 -
All directors (other than advisory directors), nominees for director, and 12 executive
officers as a group, including those named above...................................... 741,769 895,401
- ------
</TABLE>
(1) Included are beneficially owned and undistributed shares of PanEnergy
Common Stock held as of December 31, 1996, in the PanEnergy Corp Dividend
Reinvestment and Stock Purchase Plan, the Tax Credit Employee Stock
Ownership Plan of PanEnergy Corp and Participating Affiliates, shares held
as of December 31, 1996, in, and allocable to the individual under, the
Employees' Savings Plan of PanEnergy Corp and Participating Affiliates,
and, in the case of D.H. Anderson, shares held as of December 31, 1996, in,
and allocable to him under, the Retirement Savings Plan of PanEnergy
Natural Gas Corporation (formerly known as Associated Natural Gas
Corporation).
(2) Shares of PanEnergy Common Stock which the directors or executive officers
of PanEnergy have the right to acquire within 60 days of December 31, 1996,
pursuant to options outstanding under one or more of the 1982 Plan, the
1989 Plan, the 1990 LTIP and the 1994 LTIP. Nonemployee directors do not
participate in the 1982 Plan, the 1990 LTIP or the 1994 LTIP, and employee
directors do not participate in the 1989 Plan.
(3) Includes 4,531 shares held by Duncan Investors, Ltd., a partnership in
which Mr. Duncan is a general partner.
(4) Includes 2,000 shares held by Mrs. Ekblom.
110
<PAGE> 6
Texas Eastern Products Pipeline Company, a wholly-owned subsidiary of
PanEnergy, is the general partner of TEPPCO Partners, L.P. ("TEPPCO"), a
publicly traded master limited partnership. The following table shows the number
of units of limited partnership interests in TEPPCO beneficially owned as of
December 31, 1996, or as to which there was a right to acquire beneficial
ownership within 60 days of such date, by each director (other than advisory
directors) or nominee for director, each of the Named Executive Officers, and
all directors and executive officers of PanEnergy as a group. As of December 31,
1996, the percentage of units beneficially owned by all directors (other than
advisory directors) and executive officers of PanEnergy as a group did not
exceed 1% of the presently issued and outstanding units.
<TABLE>
<CAPTION>
Number of Number of
Units Units Which
Beneficially May Be
Name Owned Acquired
---- ------------ -----------
<S> <C> <C>
Paul M. Anderson......................................................... 2,000 -
D.H. Anderson............................................................ - -
Milton Carroll........................................................... - -
Robert Cizik............................................................. - -
Charles W. Duncan, Jr. .................................................. - -
Harry E. Ekblom.......................................................... - -
William T. Esrey......................................................... - -
Ann Maynard Gray......................................................... - -
James T. Hackett......................................................... - -
Dennis R. Hendrix........................................................ 14,500 -
Harold S. Hook........................................................... 2,000 -
Carl B. King............................................................. - -
Leo E. Linbeck, Jr. ..................................................... - -
George L. Mazanec........................................................ 2,000 -
Ralph S. O'Connor........................................................ 1,000 -
Matthew R. Simmons....................................................... - -
All directors (other than advisory directors), nominees for director, and
12 executive officers as a group, including those named above............ 19,500 -
</TABLE>
Security Ownership of Certain Beneficial Owners
The following table shows the number of shares of PanEnergy Common Stock held
by beneficial owners of more than 5% of the PanEnergy Common Stock as of
December 31, 1996, and the percentage of the total outstanding shares of
PanEnergy Common Stock as of that date.
<TABLE>
<CAPTION>
Number of Percent of
Shares Outstanding
Name and Address Beneficially Shares
of Beneficial Owner Owned Owned
- ------------------- ------------ -----------
<S> <C> <C>
Sonatrach Petroleum Investment Corp., B.V.
Sloterkade 138D
1058 HM Amsterdam, The Netherlands......... 7,700,000 5.09
Employees' Savings Plan of
PanEnergy Corp and Participating Affiliates
5400 Westheimer Court
Houston, Texas 77056....................... 9,465,386 6.30
</TABLE>
Sonatrach Petroleum Investment Corp., B.V., is a Dutch corporation owned
by two stockholders: Sonatrach (the national oil and gas company of Algeria),
which owns a 99.9% interest, and Banque Algerienne du Commerce Exterieur
("BACE"), a Swiss bank, which owns a 0.1% interest. The principal executive
offices of Sonatrach are located at 10, Rue du Sahara, Hydra, Algiers, Algeria,
and the principal executive offices of BACE are located at Schutzengasse 4,
Postfach, 8023 Zurich, Switzerland. Sonatrach and BACE are wholly owned by the
government of Algeria.
111
<PAGE> 7
PanEnergy and Sonatrach, directly and through subsidiaries, are parties
to agreements entered into in 1987 providing for the importation of liquefied
natural gas ("LNG") over a period of up to 20 years at volumes and prices and
upon other terms to be agreed upon from time to time. The agreements provide
that if LNG is purchased by PanEnergy from Sonatrach, Sonatrach will receive an
f.o.b. payment equal to approximately 63% of the average gross selling price of
an equivalent quantity of regasified LNG, with PanEnergy receiving the balance.
For the year ended December 31, 1996, payments to Sonatrach under this program
for LNG and shipping were approximately $10.8 million.
Through its Trustee, Northern Trust Company, the Employees' Savings Plan of
PanEnergy Corp and Participating Affiliates ("ESP") holds shares of PanEnergy
Common Stock for the account of participants, who are employees of PanEnergy and
participating affiliates. Generally, the ESP passes through to participants the
right to direct the voting of shares of PanEnergy Common Stock allocable to
their accounts and to direct the tender of such shares in response to a tender
or exchange offer for PanEnergy Common Stock. The ESP is administered by an
administrative committee whose members are H. D. Church, Senior Vice President
of TETCO; Paul F. Ferguson, Jr., Senior Vice President and Chief Financial
Officer of PanEnergy; D. R. Hennig, Vice President of PEPL, TETCO and Trunkline
Gas Company ("Trunkline"); Bruce A. Williamson, Vice President of PanEnergy;
Theopolis Holeman, Vice President of PEPL; Sandra P. Meyer, Vice President,
Treasurer and Controller of PanEnergy; Erik B. Carlson, Senior Vice President
and General Counsel of PanEnergy Field Services, Inc.; and P. J. Hester, Vice
President and General Counsel of Algonquin Gas Transmission Company. According
to its Schedule 13G under the Securities Exchange Act of 1934, dated February
14, 1997, Northern Trust Corporation, the parent holding company of Northern
Trust Company and other affiliates, beneficially owned a total of 10,029,449
shares, including those attributable to the ESP. Northern Trust Corporation is
located at 50 South LaSalle Street, Chicago, Illinois 60675.
Compensation of Directors
As employees of PanEnergy, Messrs. Anderson and Hendrix receive no fees
for their service as directors, for attendance at PanEnergy Board and committee
meetings, or for chairing PanEnergy Board committees. Nonemployee directors and
advisory directors receive an annual retainer fee of $30,000, and $1,000 for
each PanEnergy Board meeting and each Committee meeting attended. Nonemployee
Committee Chairmen receive an additional annual retainer of $4,000. Nonemployee
directors and advisory directors are reimbursed for expenses incurred in
attending PanEnergy Board and committee meetings.
In addition to the foregoing, PanEnergy maintains, or formerly
maintained, the following plans for nonemployee directors:
(1) The 1982 Directors' Deferred Compensation Plan permits nonemployee
directors to elect, on a year-to-year basis, to defer either 50% or 100% of
their directors' fees. As amended in January 1995, the annual interest rate
applicable to deferred amounts is equal to Moody's seasoned Baa Corporate Bond
Yield Index for the week ending with the final Friday of the previous November,
as reported in the Federal Reserve Statistical Release No. 15 or its successor.
Amounts accrued are payable either in a lump sum or over a period of 5 or 10
years, as elected by the nonemployee director, commencing on January 15 of the
year next succeeding the year in which the nonemployee director either ceases to
be a director or upon the attainment of the age the nonemployee director
previously elected. For the year ended December 31, 1996, amounts deferred under
this Plan and interest accrued relative to such deferrals were $335,880 for the
five participating nonemployee directors as a group.
(2) The 1989 Nonemployee Directors' Stock Option Plan ("1989 Plan")
provides for the granting of non-qualified options for the purchase of shares of
PanEnergy Common Stock to each nonemployee director. Stock appreciation rights
("SARs") are not permitted. All options are granted at the fair market value of
the PanEnergy Common Stock on the date of grant. On May 1, 1989, each
nonemployee director was granted an option to purchase 5,000 shares of PanEnergy
Common Stock effective on the May 1 next following election to the PanEnergy
Board. Additional options to purchase 1,000 shares of PanEnergy Common Stock are
granted to each nonemployee director on May 1 of each year, through and
including
112
<PAGE> 8
May 1, 1998. On May 1, 1996, options to purchase a total of 9,000 shares of
PanEnergy Common Stock were granted under the 1989 Plan at an exercise price of
$32.25 per share. Options granted under the 1989 Plan become exercisable one
year from the date of grant and expire on the tenth anniversary of the date of
grant. Accordingly, the options granted on May 1, 1996, are not reflected in
the first table under the heading "Security Ownership of Management." None of
the ten nonemployee directors currently participating in the 1989 Plan
exercised options during 1996.
(3) The Nonemployee Directors' Retirement Plan provides an annual
unfunded retirement benefit for each nonemployee director of PanEnergy upon the
later to occur of the director's retirement date or the attainment of age 65. A
retired nonemployee director with 10 years or more of service on the PanEnergy
Board will receive annually for life (a guaranteed minimum of 10 years) an
amount equal to 60% of the annual retainer fee in effect on the director's
retirement date. For a nonemployee director retiring with less than 10 years of
service, the annual benefit accrues at a rate of 6% of the annual retainer fee
in effect on the director's retirement date for each year of service, not to
exceed a total of 60% of such annual retainer fee. In the event of a "change of
control," a nonemployee director will be deemed to have served as such until the
earlier of the tenth anniversary of the director's service on the PanEnergy
Board or attainment of retirement age. There are also certain pre-retirement
supplemental death benefits provided under this plan.
(4) At the time it was acquired by PanEnergy in 1989, Texas Eastern
Corporation ("TEC") maintained an unfunded plan, the TEC Directors' Retirement
Plan, which provided an annual benefit payable for 10 years following a
nonemployee director's retirement from active service on the TEC Board of
directors. Upon the nonemployee director's death following retirement, any
unpaid installments will be paid to the named beneficiary. Under this plan,
Messrs. Duncan and O'Connor have vested rights to annual benefits for 10 years
of $18,000 commencing January 1, 1999.
(5) The Directors' Deferred Compensation Plan of Panhandle Eastern
Corporation ("Nonemployee Directors' Plan") was available until December 31,
1986, to nonemployee directors and permitted deferral of up to 100% of each
participating nonemployee director's annual retainer fee. Benefit payment
amounts related to retainer fees deferred, to interest accrued at
seniority-based rates, and to age at the time of deferral. For the year ended
December 31, 1996, interest accrued for the four participating nonemployee
directors relative to amounts deferred under the Nonemployee Directors' Plan was
$27,848.
113
<PAGE> 9
Executive Compensation and Other Information
The following table and notes present the cash and certain other
compensation paid or accrued by PanEnergy to or on behalf of PanEnergy's Chief
Executive Officer and the other Named Executive Officers as of December 31,
1996, for the years ended December 31, 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------ ------------------------------
Awards Payments
--------------------- --------
Securities
Restricted Underlying
Other Stock Options/ LTIP All Other
Name and Principal Salary Bonus Annual Amount SARs Payouts Compensation
Position (1) Year ($) ($) Comp.($) ($)(2) (#)(3) ($) ($)(4)
- -------------------- ---- ------- ------- -------- ---------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul M. Anderson........ 1996 600,000 615,000 - 806,250 75,000 - 241,233
1995 455,417 333,540 - - - - 105,725
1994 340,000 191,964 - - - - 69,424
James T. Hackett........ 1996 350,000 442,113 - 2,090,625 50,000 - 622
1995 - - - - - - -
1994 - - - - - - -
George L. Mazanec....... 1996 388,750 278,558 - - - 203,175 80,947
1995 372,083 215,259 - - - 149,231 126,227
1994 340,000 189,414 - - - 198,413 97,111
D. H. Anderson.......... 1996 303,500 203,497 - - - - 46,554
1995 - - - - - - -
1994 - - - - - - -
Carl B. King............ 1996 270,000 202,020 - 112,250 12,000 17,738 83,022
1995 261,875 115,689 - - 20,000 13,028 40,639
1994 255,000 135,333 - - 15,000 64,998 33,714
Fred J. Fowler.......... 1996 260,000 165,122 - 112,250 12,000 7,740 60,090
1995 - - - - - - -
1994 - - - - - - -
- ------
</TABLE>
(1) Paul M. Anderson is the President and Chief Executive Officer of PanEnergy.
Mr. Hackett was elected Executive Vice President of PanEnergy in January
1996. Mr. Mazanec was Vice Chairman of PanEnergy through October 1996, when
he resigned as an officer and director of PanEnergy. He remains an
employee. D. H. Anderson was elected Group Vice President in April 1996 and
is President of PanEnergy Services, Inc. Mr. King is Senior Vice President
and General Counsel. Mr. Fowler was elected Group Vice President of
PanEnergy in May 1996 and is President of TETCO.
(2) On January 2, 1996, Mr. Hackett was awarded 75,000 shares of restricted
stock, the restrictions on which will be removed on 15,000 shares on the
business day preceding each of five consecutive anniversaries of his
employment. However, restrictions will be removed upon a change in control,
which is expected to occur at the Effective Time of the Merger. The value
of the 75,000 restricted shares, based on the fair market value of
PanEnergy Common Stock as reported on the NYSE Composite Reporting System
on January 2, 1996, which was $27.875 per share, was $2,090,625. Based on
the December 31, 1996 fair market value of $45.8125 per share, the 75,000
restricted shares would be valued at $3,435,938. On January 24, 1996, 200
executives and management employees were granted 110,700 shares of
Performance Vesting Restricted Stock ("PVRS"), including Mr. King and Mr.
Fowler who each were granted 4,000 shares, and, in April 1996, Paul M.
Anderson was granted 25,000 shares of PVRS. These shares of PVRS vest upon
the achievement of certain total stockholder return targets, or, if
earlier, upon a change in control, which is expected to occur at the
Effective Time of the Merger. Recipients of the January 1996 and April 1996
grants
114
<PAGE> 10
receive dividends payable to holders of record of PanEnergy Common Stock on
the PVRS. Based on the fair market value of PanEnergy Common Stock as
reported on the NYSE Composite Reporting System on January 24 and April 24,
1996, which was $28.0625 per share and $32.25 per share, respectively, the
grant date values of these grants to Mr. King, Mr. Fowler and Paul M.
Anderson were $112,250, $112,250 and $806,250, respectively. Based on the
December 31, 1996 fair market value of $45.8125 per share, the PVRS would be
valued at $183,250, $183,250 and $1,145,313 for Messrs. King, Fowler and
Paul M. Anderson, respectively.
(3) In January 1994, 129 executive and management employees, including Mr. King
and Mr. Fowler, were granted options to purchase 324,300 shares, together
with an equivalent number of EPS Performance Units, and in January 1995,
847,000 options and EPS Performance Units were granted to 178 executives
and management employees, including Mr. King and Mr. Fowler. Each EPS
Performance Unit creates a credit to an employee's EPS Performance Unit
account when earnings per share exceed a threshold, which was $1.50 for the
awards made in January 1994 and $1.61 for awards made in January 1995. When
earnings for a calendar year (exclusive of certain special items) exceed
the threshold, the excess amount is credited to the employee's EPS
Performance Unit account. The balance in the account may be used to
exercise stock options granted in connection with the EPS Performance Units
or will be paid two years after the underlying options expire, usually 10
years from the date of grant. Under the agreements for such stock options,
the options may also be exercised by normal means once vesting requirements
are met. In January 1996, 147 executive and management employees, including
Messrs. Hackett, King and Fowler, were granted options to purchase a total
of 374,900 shares and, in April 1996, Paul M. Anderson was granted options
to purchase 75,000 shares. Each of these options, which did not include
grants of EPS Performance Units, become exercisable in equal installments
over three years from the date of grant. However, each will become fully
exercisable upon a "change in control," which is expected to occur at the
Effective Time of the Merger.
(4) Pursuant to rules on executive and director compensation disclosure adopted
by the SEC, all other compensation reported for the last completed fiscal
year is required to be identified and quantified in a footnote.
Accordingly, amounts reported for 1996 include (a) amounts credited by
PanEnergy for the Named Executive Officers under the ESP and under the
PanEnergy Corp Key Employees Deferred Compensation Plan ("KED"), an
unfunded, defined contribution plan that allows eligible employees,
including Messrs. Paul M. Anderson, Mazanec, D. H. Anderson, King and
Fowler, to elect deferral of base salary and bonus, and receive matching
PanEnergy contributions and interest credits whenever, and to the extent
that, their participation in the ESP is limited by provisions of the Code,
(b) that portion of interest credits on deferred compensation amounts that
are considered, pursuant to rules promulgated by the SEC, to be at
above-market rates, (c) the value of EPS Performance Units credited to EPS
Performance Unit accounts of the Named Executive Officers in 1996, and (d)
the imputed value of premiums paid by PanEnergy for insurance on the Named
Executive Officers' lives (none of the Named Executive Officers has any
cash value rights related to such insurance).
<TABLE>
<CAPTION>
Interest
at Value of
Above EPS Value of
Market Performance Insurance
ESP/KED Rates Units Premiums
Name ($) ($) ($) ($)
- -------------------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Paul M. Anderson.... 61,614 7,051 169,400 3,168
James T. Hackett.... - 10 - 612
George L. Mazanec... 34,871 30,404 - 15,672
D.H. Anderson....... 23,610 6 21,000 1,938
Carl B. King........ 21,179 228 58,800 2,815
Fred J. Fowler...... 23,747 75 30,566 5,702
</TABLE>
115
<PAGE> 11
Stock Option/SAR Grants in 1996
The following table shows all grants of stock options to the Named
Executive Officers in 1996. No SARs were granted to any Named Executive Officer
in 1996 nor were the exercise prices on stock options previously awarded to any
of them amended or adjusted.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
-------------------------------------------------- ----------
Number of Percent of
securities total options/ Grant date
underlying SARs granted Exercise or present
options/SARs to employees base price Expiration value(2)
Name granted(1) in fiscal year ($/Sh) date ($)
- -------------------- ------------ -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Paul M. Anderson.... 75,000 16 32.2500 4-24-06 636,161
James T. Hackett.... 50,000 11 27.8750 1-2-06 366,556
George L. Mazanec... - - - N/A -
D.H. Anderson....... - - - N/A -
Carl B. King........ 12,000 3 28.0625 1-24-05 88,565
Fred J. Fowler...... 12,000 3 28.0625 1-24-05 88,565
</TABLE>
- ------
(1) During 1996 the PanEnergy Board granted nonqualified stock options with ten
year terms to purchase 459,300 shares of PanEnergy Common Stock to 151
employees, including Messrs. Paul M. Anderson, Hackett, King and Fowler, at
exercise prices equal to the fair market value of PanEnergy Common Stock on
the dates of grant. The stock options, including those granted to Messrs.
Paul M. Anderson, Hackett, King and Fowler, vest in annual increments of
one-third commencing one year from the date of grant. However, all unvested
options will fully vest and become exercisable upon change in control which
is expected to occur at the Effective Time of the Merger.
(2) Grant date present values are based on the Black-Scholes option valuation
model. The key input variables used in valuing the options were: risk-free
interest rate - 6.28%; dividend yield - 3.48%; stock price volatility -
21.55%; option term - ten years. The Standard and Poor's Compustat Database
was used and the volatility variable reflected 36 months of stock price
trading data. No adjustments for non-transferability or risk of forfeiture
were made. The grant date value is set out for illustrative purposes and,
therefore, is not intended to forecast future financial performance or
possible future appreciation, if any, in the price of PanEnergy Common
Stock.
116
<PAGE> 12
Exercises of Stock Options in 1996 and Year-End Option Values
The following table provides information concerning stock options
exercised by each of the Named Executive Officers during 1996 and the value of
unexercised stock options to the Named Executive Officers as of December 31,
1996. The value realized and the value assigned to each unexercised, "in the
money" stock option is based on the positive spread between the exercise price
of such stock option and the fair market value ("FMV") of the PanEnergy Common
Stock on December 31, 1996, which was $45.8125. The FMV is the average of the
high and low prices of a share of PanEnergy Common Stock on that date as
reported on the NYSE Composite Transactions Tape. In assessing the value, it
should be kept in mind that no matter what theoretical value is placed on a
stock option on a particular date, its ultimate value will be dependent on the
market value of the underlying stock at a future date. That future value will
depend in part on the efforts of the Named Executive Officers to foster the
future success of the corporation for the benefit of all stockholders.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
Value of
Unexercised
Number of Securities In-the-Money
Shares Underlying Unexercised Options/SARs
Acquired on Value Options/SARs at FY-end at FY-end ($)
Exercise Realized (#) Exercisable/ Exercisable/
Name (#) ($) Unexercisable* Unexercisable
- -------------------- ----------- --------- ---------------------- -------------------
<S> <C> <C> <C> <C>
Paul M. Anderson.... 8,600 222,056 265,400/75,000 6,515,863/1,017,188
James T. Hackett.... - - -/50,000 -/876,875
George L. Mazanec... - - 276,886/- 6,916,457/-
D.H. Anderson....... 103,125 3,286,602 66,145/16,667 1,343,505/831,267
Carl B. King........ 20,161 420,893 8,172/25,334 215,035/535,517
Fred J. Fowler...... 3,168 68,623 30,984/22,000 770,864/462,375
- ------
</TABLE>
* Future exercisability of currently unexercisable stock options depends on the
grantee remaining employed by PanEnergy throughout the vesting period of the
options, subject to provisions applicable at retirement, death or total
disability. The unexercisable options vest and become exercisable on the
following schedule, although all unvested options will fully vest and become
exercisable upon change in control which is expected to occur at the
Effective Time of the Merger:
<TABLE>
<CAPTION>
P.M. Anderson J.T. Hackett D.H. Anderson C.B. King F.J. Fowler
------------- ------------ ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
January 2, 1997.... 16,666
January 24, 1997... 16,667 4,000 4,000
January 25, 1997... 6,667 5,000
April 24, 1997..... 25,000
January 2, 1998.... 16,667
January 24, 1998... 4,000 4,000
January 25, 1998... 16,667 6,667 5,000
April 24, 1998..... 25,000
January 2, 1999.... 16,667
January 24, 1999... 4,000 4,000
April 24, 1999..... 25,000
</TABLE>
117
<PAGE> 13
Employment Contracts, Termination of Employment, and Change in Control
Arrangements
PanEnergy and Mr. Mazanec entered into a five-year employment agreement
in November 1989 which set a minimum base salary of $250,000 per year. In
addition to maintaining certain non-qualified retirement benefits to which Mr.
Mazanec was entitled as an executive of TEC, the agreement provides Mr. Mazanec
a supplemental lump sum cash benefit of $750,000 plus 8% interest compounded
semi-annually from November 1, 1989, payable within 30 days of his termination
from PanEnergy for any reason. Effective November 1, 1992, PanEnergy and Mr.
Mazanec entered into an amendment to the employment agreement, extending the
period of employment covered by the agreement through October 31, 1996. On July
19, 1996, Mr. Mazanec and PanEnergy entered into an employment/consulting
agreement which defines the terms of his transition to retirement in August
1997. The agreement provides that he will resign as an officer and director of
PanEnergy but that, commencing January 1, 1997, he will remain an employee of
PanEnergy through August 1997. The agreement further provides that the
aforementioned lump sum supplemental benefit of $750,000, plus accumulated
interest, calculated to be $558,031, would be paid to Mr. Mazanec on January 2,
1997.
On March 1, 1991, PanEnergy and Paul M. Anderson entered into an
employment agreement, the primary term of which originally was to expire on
December 31, 1993. Unless either party serves notice of termination, on December
31 of each year the term is automatically extended for an additional one-year
period. On December 31 of each year from 1991 through 1995, the primary term was
automatically extended and currently is extended through December 31, 1999.
PanEnergy may terminate the agreement for cause, death or disability. Under such
circumstances, or if Mr. Anderson terminates the agreement for other than good
reason, Mr. Anderson or his estate will be paid base pay and incentive
compensation earned for that fraction of the year which he was actually
employed. If the agreement is terminated by Mr. Anderson for good reason, or by
PanEnergy for reasons other than cause, death or disability, Mr. Anderson will
receive in a lump sum the present value of his base pay and incentive
compensation projected through the employment period, as well as an extension of
welfare plan benefits through the employment period.
Effective March 1, 1991, Mr. Anderson was awarded 40,000 shares of
restricted PanEnergy Common Stock under the terms of the 1990 LTIP. These shares
were initially restricted as to the transfer of ownership, with such restriction
being removed on 10,000 shares on March 1 of each year, beginning on March 1,
1992, and continuing through March 1, 1995, provided Mr. Anderson remained in
the employ of PanEnergy during that period. The restriction would have
terminated early as to all of the restricted shares in the event of death or
disability, involuntary termination by PanEnergy for any reason other than
cause, or change in control of PanEnergy. Mr. Anderson received dividends
payable to holders of record of PanEnergy Common Stock on the restricted shares.
On November 24, 1996, Duke, PanEnergy and Mr. Anderson entered into an
employment agreement, described under the heading "THE MERGER-Interests of
Certain Persons in the Merger," which will become effective at the Effective
Time.
The terms of Mr. Hackett's employment were defined in a letter agreement
effective January 2, 1996. The terms included a two-year base salary guarantee
of $350,000, a minimum annual bonus for the first year of employment of
$175,000, a restricted stock grant of 75,000 shares of PanEnergy Common Stock,
which vest in equal portions upon the completion of each of the first five years
of his employment, and a grant of 50,000 non-qualified stock options, which vest
in equal portions over a three-year period. However, upon "change in control"
which is expected to occur at the Effective Time, all of the unvested shares of
restricted stock and stock options will become fully vested. On November 24,
1996, PanEnergy and Mr. Hackett entered into a new employment agreement,
described under the heading "THE MERGER-Interests of Certain Persons in the
Merger," which will become effective at the Effective Time.
In December 1994, in connection with the merger of PanEnergy and
Associated Natural Gas Corporation ("ANGC"), PanEnergy assumed and adopted a
two-year employment agreement dated October 9, 1994, between D. H. Anderson and
ANGC that had been entered into in contemplation of the merger. The agreement
provided that D. H. Anderson would receive a minimum annual base salary of
$291,500 and a minimum annual bonus of $51,750. Further, the agreement provided
that if D. H. Anderson voluntarily terminated employment
118
<PAGE> 14
during the term for any reason or if PanEnergy terminated him for any reason
other than cause or if he died or became disabled, he would receive one-half of
the base salary and bonus he otherwise would have received through the term of
the agreement, but no more than one-half year's base salary and bonus.
PanEnergy's Executive Severance Program ("Program"), which during 1996
covered three executive officers of PanEnergy, including Mr. King and Mr.
Fowler, provides that in the event of a "change in control," as defined in the
agreements entered into between PanEnergy and the participants in the Program,
such participants will have certain benefits provided to them in the event of
the termination of their employment within three years of the effective date of
such change in control. Such benefits are provided unless such termination of
employment is (i) because of the death or retirement of the participant, (ii) by
PanEnergy or its subsidiaries for cause or disability, or (iii) by the
participant other than for good reason. Generally, benefits include a lump-sum
cash payment equal to two and one-half times the average of the participant's
annual compensation for the five years preceding the change in control
(including deferred amounts, bonuses and employer contributions to the ESP);
cash payment for the participant's account in the ESP; a continuation of various
medical, insurance and certain other benefits for a period of two and one-half
years, and a lump-sum cash payment, at termination, equal to the present value
of the additional retirement benefits the participant would have received as a
result of two and one-half years' additional service. The aggregate of each
participant's benefits, when combined, will not exceed three times the "base
amount" (as defined in the Code). In consideration of these benefits, the
participant agrees, in the event a person seeks to effect a change in control,
not to leave the employ of PanEnergy, and to continue to render services
commensurate with the participant's position, until such person has abandoned or
terminated efforts or the change in control has occurred. The participant also
agrees to retain in confidence all of the confidential business information of
PanEnergy or its subsidiaries known to the participant.
PanEnergy's Change in Control Severance Pay Plan ("Severance Plan") is
available for all employees of PanEnergy and certain of its subsidiaries, except
those employees who are covered by agreements under the Executive Severance
Program or whose terms and conditions of employment are subject to collective
bargaining where there is not in effect a collective bargaining agreement that
provides for their Severance Plan participation. The Severance Plan provides a
number of severance benefits for eligible employees, which would be triggered by
certain specific events occurring subsequent to a change in control of
PanEnergy. In addition to the variable cash payments provided for in the
Severance Plan, eligible employees and dependents would receive, at no cost to
the employee, six months' continuation of medical and dental benefits coverage.
As of December 31, 1996, no benefits had been provided under the Severance Plan.
Pension Plan
PanEnergy's qualified retirement plan provides, with respect to
participants employed by certain participating subsidiary companies, benefits,
expressed in the form of a single life annuity commencing at normal retirement
date (age 65, or, if later, the fifth anniversary of participation in the
retirement plan), based on a final average pay benefit formula that, in part,
uses final five-year average pay, which considers the regular compensation of
the participant, including overtime payments, bonus payments, and some forms of
deferred compensation. The retirement plan also provides, on and after January
1, 1996, with respect to participants employed by certain other participating
subsidiary companies, benefits, expressed in the form of a cash balance, based
on a benefit formula that uses annual regular compensation accruals and interest
accruals. In addition to providing certain death benefits, the retirement plan
permits participants who meet certain eligibility requirements, some of which
necessitate a change in control of PanEnergy, to commence final average pay
benefit formula benefit payments as early as age 55 and with less than full
actuarial reductions for early commencement.
Qualified retirement plan benefits may be subject to statutory
limitations if the participant receives compensation in excess of a maximum, is
covered by other qualified plans, if benefits are paid before Social Security
retirement age, if the participant has less than ten years of plan
participation, or if benefits are paid in a more valuable form than a single
life annuity. When qualified plan benefits are limited by statute, non-qualified
plans restore certain benefits for participants covered by the non-qualified
plans to a level which would have been available if such statutory limits did
not exist.
119
<PAGE> 15
The table below shows the estimated annual benefits payable at age 65
under the qualified and non-qualified retirement plans at various levels of
final average compensation and assuming various years of benefit accrual
service:
Pension Plan Table
(dollars in thousands)
<TABLE>
<CAPTION>
Years of Service
------------------------
Remuneration 15 20 25 30 35
- ------------ ---- ---- ---- ---- ----
<S> <C>
$ 200...... $ 46 $ 61 $ 77 $ 92 $108
300...... 70 93 117 140 164
400...... 94 125 157 188 220
500...... 118 157 197 236 276
600...... 142 189 237 284 332
800...... 190 253 317 380 444
1,000...... 238 317 397 476 556
1,200...... 286 381 477 572 668
</TABLE>
The years of benefit accrual service for each Named Executive Officer,
except Mr. Hendrix who does not participate in the plan, are as follows: Paul M.
Anderson, 18; James T. Hackett, 1; George L. Mazanec, 9; D.H. Anderson, 2; Carl
B. King, 6; and Fred J. Fowler, 11. The covered compensation is the sum of the
salary and bonus reported in the Summary Compensation Table.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee, which is composed exclusively of nonemployee
directors, is responsible for, among other things, PanEnergy's executive
compensation programs. The following is the report of the Compensation Committee
on compensation policies regarding executive officers and the basis of
compensation actions it has taken.
The objective of PanEnergy's executive compensation programs is to offer
compensation opportunities which attract and retain talented executive officers
and key employees and which motivate such employees to enhance stockholder
value. Base pay, annual incentives and long-term incentives are structured so as
to deliver competitive pay opportunities, reward individual performance and
encourage executives to manage from the perspective of owners with an equity
stake in PanEnergy. The executive compensation programs are intended to provide
total compensation (consisting of base salaries, annual cash incentive
opportunities and long-term incentive opportunities) that is competitive with
the average total compensation offered other executives employed by companies of
similar size, complexity and line of business. To determine competitive
compensation levels, the Compensation Committee considers data from surveys,
proxy statements, independent compensation consultants, and those peer group
companies listed in the Stockholder Return Comparison below. The achievement of
both corporate and individual annual performance goals determine the payouts
from the annual incentive compensation plans in which executive officers and key
employees participate. Long-term incentive compensation awards are designed to
make a significant portion of total pay directly linked to long-term financial
performance and the creation of stockholder value.
Description of the Current Executive Compensation Program
Base Salaries. Salaries are reviewed annually and established by the
Compensation Committee based upon the executive's job responsibilities, level of
experience, individual performance and contributions to the business, and
competitive data obtained from surveys. At the Compensation Committee's January
1996 and January 1997 meetings, base pay adjustments were approved for certain
key employees, including Messrs. Anderson, King, Mazanec and Fowler in 1996 and
Messrs. Anderson, King, Hackett and Fowler in 1997, in accordance with these
criteria.
120
<PAGE> 16
Annual Cash Incentive Opportunities. The Compensation Committee
administers the Annual Cash Bonus Plan ("ACBP") which permits the granting of
cash incentive compensation awards. The ACBP requires the Compensation Committee
annually to establish administrative guidelines to define employees who are
entitled to earn an incentive award, what performance is required to earn it,
and how much may be earned. Guidelines effective for 1996 called for the Chief
Executive Officer to recommend, and the Compensation Committee to approve, an
annual bonus opportunity for each participant. This bonus opportunity, or
"target," is expressed as a percentage of base salary and is determined by the
Compensation Committee's judgment of the direct or indirect impact each
individual could have on PanEnergy's performance, as measured by earnings before
interest and taxes ("EBIT") and earnings per share. Depending upon performance,
participants could receive up to 162.5% of the bonus target. Of the twelve
executive officers of PanEnergy in 1996, ten were participants in the ACBP.
Each of the executive officers, in consultation with the Chief Executive
Officer, established six to ten specific personal objectives, which were
primarily directed toward development of new services, market expansion, cost
control, increasing returns on capital employed and advancing PanEnergy's
nonjurisdictional business segments. Fifty percent of each executive officer's
1996 bonus was determined by the degree to which, in the opinion of the Chief
Executive Officer and the Compensation Committee, the executive officer achieved
his or her personal objectives. Further, PanEnergy and the jurisdictional and
nonjurisdictional business units established EBIT objectives. If either the
jurisdictional or nonjurisdictional business units failed to reach a minimum
level of earnings established in the guidelines or if PanEnergy failed to
achieve a threshold earnings per share level, the executive officer would
receive no compensation for the portion of the bonus contingent upon that
performance measure. In 1996, performance on all financial measures exceeded
target, and all but one participating executive officer scored in excess of 100%
on personal objectives.
Long-Term Incentive Opportunities. Through the 1990 LTIP and 1994 LTIP,
which were approved by the stockholders in April 1990 and 1994, respectively,
the Compensation Committee has the flexibility to structure long-term awards to
meet particular business needs. To date, four types of awards have been made
under the 1990 LTIP and three types of awards have been made under the 1994
LTIP.
1990 LTIP
Restricted Stock. Mr. Anderson received a grant of 40,000 shares of
stock in 1991, restricted as to transferability, which vested in four equal
installments on the first through fourth anniversaries of the grant date. In
January 1996, an award of 75,000 shares of restricted stock was granted to Mr.
Hackett. The terms of Mr. Hackett's award provide that transferability
restrictions will be removed on 15,000 shares on the business day preceding each
of five consecutive anniversaries of his employment. However, such restrictions
will be removed upon change in control which is expected to occur at the
Effective Time of the Merger.
Conditional Stock. This form of award was employed in November 1990 and
January and April 1991 when PanEnergy's management team was being assembled
following the merger of PanEnergy and Texas Eastern Corporation and in
conjunction with PanEnergy's reorganization into distinct business units. The
awards, made to grantees that included Messrs. Mazanec, King and Fowler as well
as other officers of PanEnergy, were for the purpose of focusing the recipients'
attention on long-term objectives by adding, through the ownership of PanEnergy
Common Stock, a meaningful long-term incentive opportunity. The November 1990
and January 1991 conditional stock awards vested and were distributed in four
scheduled annual installments ending in 1994. The April 1991 conditional stock
awards vest and are distributed in scheduled annual installments over a six-year
term. Recipients of conditional stock awards are paid dividend equivalents in
cash on unvested, undistributed shares. These awards were designed for a unique
purpose and time, and the Compensation Committee has no plans to make additional
conditional stock awards.
Stock Options. Stock options have been granted to executive officers and
others by the Compensation Committee at various times since the inception of the
1990 LTIP, as a vehicle for providing long-term incentive opportunities to
executive officers. The number of stock options granted was determined through a
process
121
<PAGE> 17
which, first, utilized survey data to determine the annualized value of
long-term incentive grants made to other executives and management employees in
PanEnergy's compensation data base ("target value"). Next, the Black-Scholes
stock option pricing model was used to calculate a ratio which, when multiplied
by the exercise price of an option, produced an expected present value of the
option. Finally, the number of options required to make a competitive long-term
grant was calculated by dividing the target value by the expected present value
of a single option plus the expected present value of an EPS Performance Unit
(described below), if an EPS Performance Unit was granted in connection with an
option. The result of this equation, expressed as a number of options, could be
adjusted by the Compensation Committee depending upon the recipient's
individual performance, the size of stock option grants awarded the recipient
in the past, and expectations of future contributions. No options have been
granted under the 1990 LTIP since January 1994, when 129 executive and
management employees, including Mr. King and Mr. Fowler, were granted options
to purchase 324,300 shares.
EPS Performance Units. The Compensation Committee granted EPS
Performance Units in conjunction with stock options to further encourage stock
ownership by executive officers and key employees and to strengthen the linkage
among financial performance, stockholder return and long-term incentives.
Beginning in 1991 and ending with grants made in 1995 under the 1994 LTIP, one
EPS Performance Unit was granted in conjunction with each option awarded. Each
EPS Performance Unit creates a credit to the grantee's EPS Performance Unit
account when PanEnergy's earnings per share have exceeded a threshold
established by the Compensation Committee based on earnings per share for the
year preceding the grant date. When earnings for a calendar year, exclusive of
certain special items, exceed the threshold, the excess amount is credited to
the grantee's EPS Performance Unit account. The balance in the account may be
used to exercise stock options granted in connection with the EPS Performance
Units or will be paid to the grantee, without interest, two years after the
underlying options expire, usually ten years from the date of grant. Options may
also be exercised by normal means once vesting requirements are met.
1994 LTIP
Stock Options. In January 1995, 178 executive and management employees
were granted options under the 1994 LTIP to purchase 847,000 shares. In June
1995, 36 executive and management employees were granted options to purchase
58,350 shares, and, in July 1995, one executive was granted an award of 5,000
shares. In January 1996, 146 executives and key employees were awarded options
to purchase 324,900 shares. In April 1996, Mr. Anderson was awarded an option to
purchase 75,000 shares. In January 1997, 240 executives and key employees,
including Messrs. Anderson, Hackett, King and Fowler, were awarded options to
purchase 340,500 shares. The method used to determine the number of stock
options granted and the present value of the options was the same as described
for stock option grants under the 1990 LTIP. All stock option award agreements,
except those related to the January 1997 awards, contain provisions that result
in vesting upon change in control, which is expected to occur at the Effective
Time of the Merger.
EPS Performance Units. The Compensation Committee granted to each
participant who received a 1995 stock option grant, a number of EPS Performance
Units equal to the number of stock options granted. The threshold for
calculating credit to the grantee's EPS Performance Unit account was $1.61 per
share for these grants. No EPS units were awarded in connection with the January
1996, April 1996 or January 1997 grants.
Performance-Vested Restricted Stock. At its January 1996 meeting, the
Compensation Committee elected to replace EPS Performance Units by awarding
grants of performance-vested restricted stock ("PVRS") totalling 110,700 shares
to 200 executive and key employees. In April 1996, the Compensation Committee
granted PVRS totalling 25,000 shares to Mr. Anderson and, in October 1996, the
Compensation Committee awarded two employees PVRS totalling 3,000 shares. In
January 1997, the Compensation Committee granted PVRS totalling 110,400 shares
to 172 executives and key employees, including Messrs. Anderson, Hackett, King
and Fowler. With the assistance of an outside compensation consultant, the
Compensation Committee determined how many shares of PVRS in addition to stock
options granted to any employee would have a combined value which approximates a
competitive long-term incentive grant. The Compensation Committee believes that
shares of PVRS establish an opportunity for increased share ownership and
dividend income by executive management and key employees and encourages
management decision making from the perspective of an investor in PanEnergy.
122
<PAGE> 18
With the exception of the October 1996 awards, the terms of the PVRS
awards granted in 1996 and 1997 provide that one-sixth of the shares awarded any
participant will vest when total stockholder return, measured from the grant
date, equals or exceeds 15%. Another one-third of the award will vest when total
stockholder return measured from the grant date equals or exceeds 30%, and the
final one-half of the award will vest when total stockholder return equals or
exceeds 45%. Total stockholder return is defined as accumulated dividends plus
market appreciation of PanEnergy Common Stock when measured over a ten
consecutive trading day period. No shares granted in 1996 may vest before the
first anniversary of the award unless there is a change in control. Shares
granted in 1997 contain no change-in-control vesting provisions. If the
stockholder return targets are not met and the PVRS awards do not vest within
five years, the awards will be forfeited. The October 1996 awards will vest only
upon the completion of an international project within certain parameters
relating to schedule and budget.
Compensation of the Chief Executive Officer
At its January 1997 meeting, the Compensation Committee received an
analysis by the compensation consultants of total compensation opportunities
available to CEO's in the competitive marketplace. The consultants advised that
the appropriate salary range for the CEO is $608,000 to $912,000 with a
mid-point of $760,000. After considering this, the Compensation Committee
adjusted Mr. Anderson's salary to $700,000 annually. The results of the
consultants' study also indicated that a target bonus opportunity for the CEO
should be 70% of base pay in 1997. Accordingly, the Compensation Committee
established Mr. Anderson's bonus opportunity at 70% of base pay.
The Compensation Committee also reviewed Mr. Anderson's personal
objectives, established in early 1996, and his performance on each, and
discussed the bonus to be paid to Mr. Anderson pursuant to the 1996 ACBP. His
objectives included: (1) achieving a management/Board of Directors consensus on
PanEnergy's strategic direction, (2) positioning the pipelines to achieve
maximum value and competitive position, (3) advancing interfuel opportunities,
(4) continuing to broaden the activity base of PanEnergy and (5) continuing to
advance a smooth transition to the next generation of management organization
structure. After thorough discussion, the Compensation Committee awarded Mr.
Anderson the bonus indicated in the Summary Compensation Table.
Section 162(m) of the Code imposes a limitation on the deductibility
from income tax by PanEnergy on annual compensation in excess of $1 million paid
to certain employees, generally, the Chief Executive Officer and the four other
highest compensated employees. The Compensation Committee intends to structure
compensation that rewards performance while preserving maximum deductibility of
all compensation awards. It is not anticipated that compensation realized by any
executive officer under programs now in effect will, in the immediate future,
result in a material loss of tax deductions.
The Compensation and Organization Committee
Charles W. Duncan, Jr., Chairman
William T. Esrey
Robert Cizik
Leo E. Linbeck, Jr.
Harry E. Ekblom
Ralph S. O'Connor
123
