- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997 Commission File Number 1-8157
PANENERGY CORP
(Exact name of Registrant as Specified in its Charter)
Delaware 74-2150460
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
5400 Westheimer Court
P.O. Box 1642
Houston, TX 77251-1642
(Address of Principal Executive Offices)
(Zip code)
Registrant's telephone number, including area code: 713-627-5400
No Change
(Former name, former address and former fiscal year,
if changed since last report)
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 __
All of the Registrant's common shares are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date:
Number of shares of Common Stock, no par value, outstanding at July 31,
1997: 1,000 shares
<PAGE>
PANENERGY CORP
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Statements of Income for the Three Months Ended and Year To Date
June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for Year To Date June 30, 1997 and 1996 3
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 4
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Results of Operations and Financial Condition 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PANENERGY CORP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Year To Date
June 30 June 30
------------------------------------ ------------------------------------
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Natural gas and petroleum products
Sales of natural gas and petroleum products 1,507.1 1,047.6 3,634.4 2,317.8
Transportation and storage of natural gas 358.2 359.7 768.2 760.6
Trading and marketing of electricity 112.5 7.8 195.0 8.8
Other 40.2 24.4 72.9 49.3
---------------- ---------------- ---------------- ----------------
Total operating revenues 2,018.0 1,439.5 4,670.5 3,136.5
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Natural gas and petroleum products purchased 1,416.6 976.9 3,385.5 2,132.6
Net interchange and purchased power 112.7 8.0 195.1 8.9
Other operation and maintenance 238.9 185.2 453.2 412.6
Depreciation and amortization 78.2 72.1 156.4 144.2
Property and other taxes 24.1 19.5 53.8 42.1
---------------- ---------------- ---------------- ----------------
Total operating expenses 1,870.5 1,261.7 4,244.0 2,740.4
---------------- ---------------- ---------------- ----------------
OPERATING INCOME 147.5 177.8 426.5 396.1
---------------- ---------------- ---------------- ----------------
OTHER INCOME AND EXPENSES
Deferred returns and allowance for funds used
during construction 0.7 0.7 1.0 1.1
Other, net 18.3 5.6 23.0 8.9
---------------- ---------------- ---------------- ----------------
Total other income and expense 19.0 6.3 24.0 10.0
---------------- ---------------- ---------------- ----------------
EARNINGS BEFORE INTEREST AND TAXES 166.5 184.1 450.5 406.1
INTEREST EXPENSE 49.1 55.8 99.6 114.1
MINORITY INTEREST 1.8 - 12.3 -
---------------- ---------------- ---------------- ----------------
EARNINGS BEFORE INCOME TAXES 115.6 128.3 338.6 292.0
INCOME TAXES 52.0 48.5 138.7 110.4
---------------- ---------------- ---------------- ----------------
NET INCOME $ 63.6 $ 79.8 $ 199.9 $ 181.6
================ ================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
PANENERGY CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Year To Date
June 30
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $199.9 $ 181.6
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 161.4 144.2
Deferred income taxes 36.5 32.9
(Increase) Decrease in
Receivables 310.0 (104.3)
Inventory 9.2 7.4
Other Current Assets (172.9) (21.5)
Increase (Decrease) in
Accounts payable (257.0) 41.3
Taxes accrued 37.9 8.4
Interest accrued (9.0) 0.5
Other current liabilities 76.9 (4.8)
Other, net (84.5) (32.8)
--------------- ---------------
Net cash provided by operating activities 308.4 252.9
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (142.4) (107.4)
Investment expenditures (50.2) (11.4)
Retirements and other investing 54.2 18.2
--------------- ---------------
Net cash used in investing activities (138.4) (100.6)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the issuance of common stock - 7.6
Payments for the redemption of long-term debt (128.3) (53.9)
Net change in notes payable and commercial paper 28.6 (60.4)
Dividends paid (72.7) (70.0)
Other (40.8) (1.2)
--------------- ---------------
Net cash used in financing activities (213.2) (177.9)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (43.2) (25.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57.2 50.8
=============== ===============
CASH AND CASH EQUIVALENTS AT END OF PERIOD $14.0 $ 25.2
=============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PANENERGY CORP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14.0 $ 57.2
Receivables 868.0 1,178.0
Inventory 122.9 132.1
Current portion of natural gas transition costs 66.4 67.9
Other 306.1 133.2
---------------- ----------------
Total current assets 1,377.4 1,568.4
---------------- ----------------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates 319.3 313.9
Pre-funded pension costs 292.3 280.6
Goodwill, net 186.8 191.4
Other 72.0 58.4
---------------- ----------------
Total investments and other assets 870.4 844.3
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Cost 8,935.3 8,822.5
Less accumulated depreciation and amortization 3,490.2 3,365.8
---------------- ----------------
Net property, plant and equipment 5,445.1 5,456.7
---------------- ----------------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense 69.7 74.2
Regulatory asset related to income taxes 11.8 4.5
Natural gas transition costs 220.7 250.0
Environmental clean-up costs 111.4 153.2
Other 110.6 133.9
---------------- ----------------
Total regulatory assets 524.2 615.8
---------------- ----------------
TOTAL ASSETS $ 8,217.1 $ 8,485.2
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
PANENERGY CORP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 702.2 $ 959.2
Notes payable and commercial paper 382.7 354.1
Taxes accrued 111.7 73.8
Interest accrued 50.7 59.7
Current portion of natural gas transition liabilities 102.1 84.4
Current portion of environmental clean-up liabilities 31.1 32.4
Current maturities of long-term debt 13.8 138.3
Other 433.0 356.1
---------------- ----------------
Total current liabilities 1,827.3 2,058.0
---------------- ----------------
LONG-TERM DEBT 1,933.8 1,947.0
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,227.3 1,192.5
Natural gas transition liabilities 52.2 121.9
Environmental clean-up liabilities 177.5 188.9
Other 355.4 442.1
---------------- ----------------
Total deferred credits and other liabilities 1,812.4 1,945.4
---------------- ----------------
MINORITY INTEREST 66.3 82.3
---------------- ----------------
COMMON STOCKHOLDER'S EQUITY
Common stock 151.5 151.1
Paid-in-capital 2,252.6 2,242.1
Retained earnings 173.2 59.3
---------------- ----------------
Total common stockholder's equity 2,577.3 2,452.5
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 8,217.1 $ 8,485.2
================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
PANENERGY CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Operations and Business Combinations
PanEnergy Corp (PanEnergy) and its subsidiaries (the Company) are involved in
the transportation, storage, gathering and processing of natural gas, the
production of natural gas liquids (NGLs). Also, the Company is a marketer of
natural gas, electricity, liquefied petroleum gases and related energy services.
The Company is a wholly owned subsidiary of Duke Energy Corporation (Duke
Energy). On June 18, 1997, PanEnergy was merged with a wholly owned
subsidiary of Duke Energy, with PanEnergy as the surviving corporation.
Pursuant to the merger, each share of the Company's outstanding common
stock was converted into the right to receive 1.0444 shares of Duke
Energy common stock. In addition, each option to purchase PanEnergy common
stock became an option to purchase common stock of Duke Energy. The
merger was accounted for as a pooling of interests.
The Company's natural gas transmission operations include interstate
transportation and storage of natural gas to customers in the Mid-Atlantic, New
England, Midwest and Gulf Coast states. The interstate natural gas transmission
and storage operations of the Company's wholly owned subsidiaries Texas Eastern
Transmission Corporation (TETCO), Algonquin Gas Transmission Company
(Algonquin), Panhandle Eastern Pipe Line Company (PEPL), and Trunkline Gas
Company (Trunkline), are subject to the rules and regulations of the Federal
Energy Regulatory Commission (FERC).
2. Accounting Policies
General - The consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. These quarterly financial
statements reflect all normal recurring adjustments that are, in the opinion of
management, necessary to present fairly the financial position and results of
operations for the respective periods. Amounts reported in the Consolidated
Statements of Income are not necessarily indicative of amounts expected for the
respective years due to the effects of seasonal temperature variations on energy
consumption.
Derivative Instruments - The Company holds and issues instruments that reduce
the Company's exposure to market fluctuations in the price and transportation
costs of natural gas, petroleum products and electric power marketed. The
Company uses futures, swaps and options to manage and hedge price and location
risk related to market exposures. In order to qualify as a hedge, the price
movements in the commodity derivatives must be highly correlated with the
underlying 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 (the deferral method) and are
included in natural gas and petroleum products purchased or net interchange
and purchased power in the Consolidated Statements of Income. Gains and losses
related to such instruments, to the extent settled in cash, are reported as
other
6
<PAGE>
current assets or liabilities, as appropriate, in the Consolidated Balance
Sheets until recognized in income. If the derivative instrument is no longer
sufficiently correlated to the underlying commodity, or if the derivative
transaction closes earlier than anticipated, the deferred gains or losses
are recognized in income. 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. Gains and losses on derivatives utilized for trading are recognized in
income on a current basis (the mark to market method) and are also included in
natural gas and petroleum products purchased or net interchange and purchased
power. At June 30, 1997, the Company had unrealized gains of $219.2 million and
unrealized losses of $201.6 million recorded as other current assets and other
current liabilities, respectively, related to derivatives utilized for hedging
and trading purposes.
Supplemental Cash Flow Information - Total income taxes paid for the year to
date June 30, 1997 and 1996 were $61.9 million and $64.7 million, respectively.
Interest paid, net of amounts capitalized, for the six months ended June 30,
1997 and 1996 was $111 million and $104.9 million, respectively.
Reclassification - Certain amounts for the prior periods have been reclassified
in the consolidated financial statements to conform to the current presentation.
3. Rate Matters
On April 1, 1992 and November 1, 1992, PEPL placed into effect, subject to
refund, general rate increases. On February 26, 1997, FERC approved PEPL's
settlement agreement which provides final resolution of refund matters and
establishes prospective rates. The agreement terminates other actions relating
to these proceedings as well as PEPL's restructuring of rates and transition
cost recoveries related to Order 636. As a result of the resolution of this and
other matters, PEPL recorded pre-tax earnings of $32.7 million year to date June
30, 1997 and refunded $37.8 million to customers. The settlement will not have a
material impact on future operating revenues.
4. Commitments and Contingencies
Litigation
A lawsuit filed in the United States District Court for the District of Columbia
by a natural gas producer was served in July 1996 naming TETCO, PEPL, Trunkline
and PanEnergy Services, Inc. (a subsidiary of PanEnergy) as defendants, among
others. The action was brought under the federal False Claims Act against 70
defendants, including every major natural gas pipeline, asserting that the
defendants intentionally underreported volumes and heating content of gas
purchased from producers on federal and Indian lands, with the result that the
United States was underpaid royalties. The plaintiff seeks recovery of the
royalty amounts due the United States, treble damages and civil penalties. The
Company's named affiliates and many of the other defendants were dismissed from
the lawsuit on March 27, 1997. The plaintiff retains the right to refile the
claims against the various defendants under certain conditions. The Company
believes the resolution of the this matter will not have a material adverse
effect on the Company's results of operations or financial position.
On August 31, 1995, Midwest Gas Storage, Inc. (Midwest) filed suit against PEPL
and PanEnergy in the 58th Judicial District Court, Jefferson County, Texas,
alleging that PEPL
7
<PAGE>
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 and 1997 further
allege that PEPL and PanEnergy, through economic coercion, have attempted to
drive Midwest out of business. This matter was disposed of by the parties in
July 1997 and will not have a material adverse effect on the financial position
of the Company.
On December 16, 1996, TETCO received notification that Marathon Oil Company
(Marathon) intended to commence substitution of other gas reserves,
deliverability and leases for those dedicated to a certain natural gas purchase
contract (the Marathon Contract) with TETCO. In TETCO's view, the tendered
substitute gas reserves, deliverability and leases are not subject to the
Marathon Contract and TETCO filed a declaratory judgment action on December 17,
1996 in the U.S. District Court for the Eastern District of Louisiana seeking a
ruling that Marathon's interpretation of the Marathon Contract is incorrect. On
January 7, 1997, Marathon filed an answer and a counterclaim to TETCO's
complaint seeking a declaratory judgment enforcing its interpretation of the
Marathon Contract.
On February 18, 1997, Amerada Hess Corporation (Amerada Hess) notified TETCO
that it intended to commence substitution of other gas reserves, deliverability
and leases for those dedicated to its natural gas purchase contract (the Amerada
Hess Contract) with TETCO. On the same date, Amerada Hess also filed a petition
in the District Court of Harris County, Texas, 157th Judicial District, seeking
a declaratory judgment that its interpretation of the Amerada Hess Contract,
which covers the same leases and reserves as the Marathon Contract, is correct.
TETCO 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 two actions have been transferred to the judge presiding
over the Marathon Contract matter.
The potential liability of the Company associated with both the Marathon
Contract and the Amerada Hess Contract should TETCO be contractually obligated
to purchase natural gas based upon the substitute gas reserves, deliverability
and leases, and the effect of transition cost recoveries pursuant to TETCO's
Order 636 settlement involve numerous complex legal and factual matters which
will take a substantial period of time to resolve. Because these matters are in
the early stages of litigation, the Company cannot estimate the effects of these
matters on the results of operations or financial position of the Company.
On April 25, 1997, a group of affiliated plaintiffs that own and/or operate
various pipeline and marketing partnerships in Kansas and Missouri filed suit
against PEPL in the United States District Court for the Western District of
Missouri. The plaintiffs allege that PEPL has engaged in unlawful and
anti-competitive conduct with regard to requests for interconnects with the PEPL
system for service to the Kansas City area. Asserting that PEPL has violated the
antitrust laws and tortiously interfered with plaintiffs' contracts with third
parties, plaintiffs seek compensatory and punitive damages in unspecified
amounts. Because this matter is in the early stages of litigation, the Company
cannot estimate the effects of this matter on the results of operations or
financial position.
On May 1, 1997, Citrus Trading Corporation (Citrus) and Enron Capital and Trade
Resources Corporation, as successor to Enron Gas Marketing Corporation, filed
suit in the District Court of Harris County, Texas, against PanEnergy LNG Sales,
Inc. (formerly Pan National Gas Sales, Inc.), a subsidiary of the Company,
alleging breach of a gas purchase contract (the Contract) for
8
<PAGE>
regasified LNG entered into between Citrus and Pan National Gas Sales, Inc.
Plaintiffs allege that PanEnergy LNG Sales, Inc. failed to deliver LNG pursuant
to the terms of the Contract. The plaintiffs seek compensatory damages in
unspecified amounts for losses allegedly incurred as a result of the contract
breach as well as a declaratory judgment that PanEnergy LNG Sales Inc.'s
assertions of force majeure due to the interruption in the supply of LNG to
PanEnergy LNG Sales, Inc. do not constitute force majeure under the Contract.
Because this matter is in the early stages of litigation, the Company cannot
estimate the effects of this matter on the results of operations or financial
position of the Company.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits against
PEPL and other affiliates, as defendants, both in the United States District
Court for the Southern District of Texas and State District Court of Harris
County, Texas. Anadarko claims that it was effectively indemnified by the
defendants against any responsibility for refunds of Kansas ad-valorem taxes
which are due purchasers of gas from Anadarko, retroactive to 1983. Because this
matter is in the early stages of litigation, PEPL cannot estimate the effects of
this matter on the results of operations or financial position.
The Company is also involved in various other legal, tax and regulatory
proceedings before various courts, regulatory commissions and government
agencies arising in the ordinary course of business, some of which involve
substantial amounts. Where appropriate, the Company has made accruals in
accordance with Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," in order to provide for such matters. Management is of the
opinion that the final disposition of these proceedings will not have a material
adverse effect on the results of operations or financial position of the
Company.
Other Commitments and Contingencies
In 1993, the US Department of the Interior announced its intention to seek
additional royalties from gas producers as a result of payments received by such
producers in connection with past take-or-pay settlements, and buyouts and
buydowns of gas sales contracts with natural gas pipelines. The Company's
pipelines, with respect to certain producer contract settlements, may be
contractually required to reimburse or, in some instances, to indemnify
producers against such royalty claims. The potential liability of the producers
to the government and of the pipelines to the producers involves complex issues
of law and fact which are likely to take substantial time to resolve. If
required to reimburse or indemnify the producers, the Company's pipelines will
file with FERC to recover a portion of these costs from pipeline customers.
Management is of the opinion that this matter will not have a material adverse
effect on the financial position of the Company.
The Company has a 10% ownership interest in TEPPCO Partners, L.P., a master
limited partnership (MLP) that owns and operates a petroleum products pipeline.
A subsidiary partnership of the MLP has $309.5 million in First Mortgage Notes
outstanding at June 30, 1997 with recourse to the general partner, a subsidiary
of PanEnergy. In the opinion of management, the probability that the Company
will be required to perform under this recourse provision is remote.
PEPL owns an effective 6% ownership interest in Northern Border Pipeline Company
(Northern Border) through a master limited partnership. Under the terms of a
settlement related to a
9
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transportation agreement between PEPL and Northern Border, PEPL guarantees
payment to Northern Border under a transportation agreement by an affiliate of
Pan-Alberta Gas Limited. The transportation agreement requires estimated total
payments of $94.4 million for 1997 through 2001. In the opinion of management,
the probability that PEPL will be required to perform under this guarantee is
remote.
In connection with the sale of Petrolane Incorporated (Petrolane) in 1989, a
subsidiary of the Company agreed to indemnify Petrolane against certain
obligations for guaranteed leases and environmental matters. The lease
obligations as of June 30, 1997 totaled approximately $56.4 million over the
remaining terms of the leases, which expire in 2006. Management is of the
opinion that the probability that it will have to perform under this indemnity
provision is remote.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
On June 18, 1997, PanEnergy and Duke Energy consummated a stock-for-stock
merger. This business combination was accounted for as a pooling of interests.
See Note 1 to the consolidated Financial Statements for further information.
OPERATIONS AND BUSINESS UNITS
The Company provides services primarily through four business segments: Natural
Gas Transmission, Field Services, Trading and Marketing, and Parent and Other
Operations. The Natural Gas Transmission segment is involved in interstate
transportation and storage of natural gas to customers in the Mid-Atlantic, New
England, Midwest and Gulf Coast states. Field Services gathers and processes
natural gas and produces natural gas liquids. The Trading and Marketing
operations focus on marketing natural gas, electricity and liquefied petroleum
gases. Parent and Other Operations include corporate costs, intersegment
eliminations and other operations.
RESULTS OF OPERATIONS
Overview:
Net income was $63.6 million for the three months ended June 30, 1997 compared
with $79.8 million for the same period in 1996. The decrease was primarily due
to non-recurring costs associated with the merger, offset by the gain on the
sale of an equity ownership interest investment in a cogeneration venture.
Net income was $199.9 million for the year to date June 30, 1997 compared with
$181.6 million for the same period in 1996. The increase was primarily due to
reversals of provisions in 1997 resulting from rate case resolutions and due to
market expansion projects, offset by non-recurring costs associated with the
merger.
Operating income for the three months ended June 30, 1997 decreased to $147.5
million compared to $177.8 million for the same period in 1996. The decrease for
the quarter was primarily due to the non-recurring merger-related costs recorded
during the period. The year to date increase in operating income of $30.3
million was primarily due to reversals of provisions related to the final
settlement of certain rate proceedings and the gain on the sale of an investment
in a cogeneration venture, offset by costs associated with the merger. Operating
income and earnings before interest and taxes are not materially different, and
are affected by the same fluctuations for the Company and each of its business
segments. Earnings before interest and taxes by business segment are summarized
below, and the explanation of these results by business segment are discussed
thereafter.
11
<PAGE>
Earnings Before Interest and Taxes (EBIT) by Business Segment:
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------------------ -- ------------------------------
Three Months Ended Year To Date
June 30, June 30, June 30, June 30,
In Millions 1997 1996 1997 1996
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Natural Gas Transmission $ 144.7 $ 142.5 $ 350.7 $ 300.5
Field Services 31.9 26.2 82.8 62.8
Trading and Marketing 4.2 10.4 34.3 36.0
Parent and Other Operations (14.3) 5.0 (17.3) 6.8
----------- ---------- -------- ----------
Consolidated EBIT $ 166.5 $ 184.1 $ 450.5 $ 406.1
============ =========== ========= ==========
- ------------------------------------------ -------------- --------------- -- --------------- --------------
Natural Gas Transmission
- ------------------------------------------ ------------------------------ -- -------------------------------
Three Months Ended Year To Date
June 30, June 30, June 30, June 30, 1996
In Millions 1997 1996 1997
-------------- --------------- -------------- ----------------
Operating Revenues $ 371.3 $ 368.5 $ 809.2 $ 785.7
Operating Expenses 233.5 229.5 475.5 490.2
---------- ---------- ----------- ----------
Operating Income 137.8 139.0 333.7 295.5
Other Income, Net 6.9 3.5 17.0 5.0
---------- ---------- ----------- ----------
EBIT $ 144.7 $ 142.5 $ 350.7 $ 300.5
========== =========== =========== ==========
Volumes, TBtu Throughput 644 631 1,486 1,556
- ------------------------------------------ -------------- --------------- -- -------------- ----------------
</TABLE>
Earnings before interest and taxes for Natural Gas Transmission and revenues
increased slightly for the three months ended June 30, 1997 compared to the same
period in 1996, due primarily to market-expansion projects.
Earnings before interest and taxes for Natural Gas Transmission increased $50.2
million for the year to date June 30, 1997 compared to the same period in 1996,
primarily due to reversals of provisions of $32.7 million in 1997 resulting from
rate case resolutions and due to market expansion projects. The provision
reversals are reflected as additional revenue and other income.
12
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Field Services
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------------------ -- -------------------------------
Three Months Ended Year To Date
June 30, June 30, June 30, June 30, 1996
In Millions 1997 1996 1997
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Operating Revenues $ 697.9 $ 592.9 $1,470.1 $1,095.9
Operating Expenses 666.1 566.7 1,387.5 1,035.2
----------- ------------- --------------- ----------
Operating Income 31.8 26.2 82.6 60.7
Other Income, Net .1 - .2 2.1
----------- ------------- --------------- ----------
EBIT $ 31.9 $ 26.2 $ 82.8 $ 62.8
=========== ============= =============== ==========
Volumes TBtu/day Natural Gas
Gathered/Processed 3.4 2.5 3.4 2.5
- ------------------------------------------ -------------- --------------- -- -------------- ----------------
</TABLE>
Earnings before interest and taxes for Field Services increased $5.7 million for
the three months ended June 30, 1997 compared to the same period in 1996 due to
higher volumes resulting primarily from acquisitions, offset partially by lower
natural gas liquids prices.
Year to date earnings before interest and taxes increased $20 million compared
to the same period in 1996. Both operating revenues and operating expenses
increased as a result of increased gathering and processing volumes related to
acquisitions and expansion projects.
Trading and Marketing
<TABLE>
<CAPTION>
- ------------------------------------------ ------------------------------ -- -------------------------------
Three Months Ended Year To Date
June 30, June 30, June 30, June 30, 1996
In Millions 1997 1996 1997
-------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Operating Revenues $1,072.5 $ 555.2 $2,702.0 $1,449.0
Operating Expenses 1,068.4 545.1 2,668.3 1,413.5
------------- ---------- --------- -----------
Operating Income 4.1 10.1 33.7 35.5
Other Income, Net .1 .3 .6 .5
------------- ---------- --------- -----------
EBIT $ 4.2 $ 10.4 $ 34.3 $ 36.0
============= ========== ========= ===========
Volumes:
Natural Gas Marketed, TBtu/day 5.5 3.7 6.1 3.9
Electricity Marketed, GWh 5,560 526 9,353 697
- ------------------------------------------ -------------- --------------- -- -------------- ----------------
</TABLE>
Earnings before interest and taxes for Trading and Marketing decreased $6.2
million for the three months ended June 30, 1997 compared with the same period
in 1996. Lower margins were partially offset by higher natural gas and
electricity volumes. Natural gas and electricity volumes increased primarily as
a result of the formation of a joint venture with Mobil Corporation in the third
quarter of 1996.
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<PAGE>
Earnings before interest and taxes for Trading and Marketing decreased $1.7
million for the year to date ended June 30, 1997 compared with the same period
in 1996. Lower margins were partially offset by higher volumes. Natural gas and
electricity volumes marketed increased primarily as a result of the formation of
the joint venture with Mobil Corporation in the third quarter of 1996.
Parent and Other Operations
Results for the three months ended and year to date June 30, 1997 reflect merger
costs of $33.2 million, offset by the gain on the sale of an equity ownership
interest in a cogeneration venture. Non-recurring merger costs consist primarily
of advisory fees and workforce reduction costs.
LIQUIDITY AND CAPITAL RESOURCES
Operating Cash Flow
Operating cash flows increased $55.5 million comparing the year to date
June 30, 1997 with the same period in 1996. This increase reflects the
cash impact of the Company's trading and marketing activities, offset by
payments associated with the rate case settlements during 1997.
The Trading and Marketing operations of the Company were combined with those of
Duke/Louis Dreyfus LLC, a wholly owned subsidiary of Duke Energy, in June 1997.
This combination is expected to increase the Company's trading and marketing
activity.
Investing Cash Flow
Capital and investment expenditures totaled $192.6 million for year to
date June 30, 1997, compared with $118.8 million for the same period in
1996. Capital and investment expenditures during the period consisted
primarily of business expansion efforts of the Natural Gas Transmission
and Field Services segments. The Company continues its growth
strategy of expanding non-jurisdictional businesses, while also
continuing to develop interstate gas pipeline market-expansion projects and
new services for customers.
In March 1997, the Natural Gas Transmission segment announced the Excelsior and
Spectrum projects, with proposed in-service dates of the year 2000, that would
increase delivery capability to New York and the East Coast, respectively, by
approximately 500 billion British thermal units per day for each project.
During 1997, the Company sold its ownership in operations in the United Kingdom
and an equity ownership interest in an affiliate. Proceeds from these sales were
$57 million.
14
<PAGE>
Financing Cash Flow
Subsequent to the merger, several rating agencies revised their ratings for the
Company and its subsidiaries. A summary of the corporate debt ratings for each
entity follows.
<TABLE>
<CAPTION>
Standard & Poor's Fitch Duff & Phelps Moody's
Current Prior Current Prior Current Prior Current Prior
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PanEnergy Corp A- BBB A BBB BBB+ BBB A3 Baa2
PEPL A BBB+ A+ BBB+ BBB+ BBB+ A2 Baa1
TETCO A BBB+ A+ BBB+ BBB+ BBB+ A2 Baa1
</TABLE>
The Company increased the size of its commercial paper facilities in the first
quarter 1997 for amounts up to $800 million, supported by its two variable-rate
bank credit agreements that permit the Company 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 facilities are
limited to $800 million in aggregate. At June 30, 1997, there was $362 million
of commercial paper outstanding and no amounts outstanding under the bank credit
agreements. The 364-day facility expires in late August 1997, and is not
expected to be replaced by the Company. The Company's commercial paper will be
supported subsequent to such expiration by credit facilities maintained by the
Company's parent, Duke Capital Corporation.
Dividends and debt repayments for the next year, along with operating and
investing requirements, are expected to be funded by cash from operations, debt
and commercial paper issuances and/or available credit facilities. The Company
is seeking to significantly grow its Field Services and Trading and Marketing
businesses, which will likely require additional financing to be issued by
subsidiaries of Duke Energy.
OTHER
Litigation and Contingencies
For information concerning litigation and other contingencies, see Note 4 to the
Consolidated Financial Statements.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders on April 24, 1997, the
shareholders voted to approve the merger of PanEnergy and Duke Power. In
addition, the shareholders elected Paul M. Anderson, William T. Esrey, Ann
Maynard Gray and Matthew R. Simmons to the 1997 Class to serve until the Annual
Meeting of Shareholders to be held in 2000, or until their successors are
elected and qualified, or until the effectiveness of the merger of the Company
and Duke Power. The merger was effective June 18, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
( 27) Financial Data Schedule (included in electronic filing only)
(b) Reports on Form 8-K
The Company filed two reports on Form 8-K during the second quarter of
1997.
The Form 8-K filed May 30, 1997 contained disclosures under Item 5, Other
Events, and Item 7, Financial Statements and Exhibits.
The Form 8-K filed June 18, 1997 contained disclosures under Item 5,
Other Events, and Item 7, Financial Statements and Exhibits.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANENERGY CORP
-----------------------------
Paul F. Ferguson, Jr.
Senior Vice President and
Chief Financial Officer
August 14, 1997
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Quarterly Report on From 10-Q for quarter ended
June 30, 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000351696
<NAME> PANENERGY CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 14,000
<SECURITIES> 0
<RECEIVABLES> 868,000
<ALLOWANCES> 0
<INVENTORY> 122,900
<CURRENT-ASSETS> 1,377,400
<PP&E> 8,935,300
<DEPRECIATION> 3,490,200
<TOTAL-ASSETS> 8,217,100
<CURRENT-LIABILITIES> 1,827,300
<BONDS> 1,933,800
0
0
<COMMON> 151,500
<OTHER-SE> 2,425,800
<TOTAL-LIABILITY-AND-EQUITY> 8,217,100
<SALES> 3,829,400
<TOTAL-REVENUES> 4,670,500
<CGS> 3,580,600
<TOTAL-COSTS> 4,033,800
<OTHER-EXPENSES> 210,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,600
<INCOME-PRETAX> 450,500
<INCOME-TAX> 138,700
<INCOME-CONTINUING> 199,900
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 199,900
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Not meaningful since PanEnergy Corp is a wholly-owned subsidiary.
</FN>
</TABLE>
