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, 1998 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)
713-627-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
The Registrant meets the conditions set forth in General Instructions (H)(1)(a)
and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format. Part I, Item 2 has been reduced and Part II, Item 4 has been
omitted in accordance with such Instruction H.
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, 1998.........................1,000
<PAGE>
PANENERGY CORP
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
ITEM PAGE
- ---- ----
PART I. FINANCIAL INFORMATION
1. Financial Statements......................................................1
Consolidated Statements of Income for the Three and Six Months Ended
June 30, 1998 and 1997.........................................1
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1997..........................................2
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997..3
Notes to Consolidated Financial Statements.............................5
2. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................8
PART II. OTHER INFORMATION
1. Legal Proceedings.........................................................10
5. Other Information.........................................................10
6. Exhibits and Reports on Form 8-K..........................................11
Signatures................................................................12
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
PANENERGY CORP
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales, trading and marketing of natural gas
and petroleum products ............................ $1,884.6 $1,507.1 $3,860.6 $3,634.4
Transportation and storage of natural gas ............ 337.2 358.2 724.4 768.2
Trading and marketing of electricity ................. 417.3 112.5 954.7 195.0
Other ................................................ 209.1 120.7 374.6 226.1
-------- -------- -------- --------
Total operating revenues .......................... 2,848.2 2,098.5 5,914.3 4,823.7
-------- -------- -------- --------
OPERATING EXPENSES
Natural gas and petroleum products purchased ......... 1,795.8 1,416.6 3,664.5 3,385.5
Purchased power ...................................... 406.1 112.7 943.8 195.1
Other operation and maintenance ...................... 359.9 329.4 677.2 611.7
Depreciation and amortization ........................ 91.1 79.5 181.2 159.0
Property and other taxes ............................. 24.3 24.1 37.8 53.8
-------- -------- -------- --------
Total operating expenses .......................... 2,677.2 1,962.3 5,504.5 4,405.1
-------- -------- -------- --------
OPERATING INCOME ......................................... 171.0 136.2 409.8 418.6
-------- -------- -------- --------
OTHER INCOME AND EXPENSES ................................ 9.9 28.5 55.8 33.6
-------- -------- -------- --------
EARNINGS BEFORE INTEREST AND TAXES ....................... 180.9 164.7 465.6 452.2
INTEREST EXPENSE ......................................... 32.3 49.3 75.7 99.9
MINORITY INTERESTS ....................................... 8.9 1.8 18.0 12.3
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES ............................. 139.7 113.6 371.9 340.0
INCOME TAXES ............................................. 50.9 51.8 137.6 139.9
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM ......................... 88.8 61.8 234.3 200.1
EXTRAORDINARY ITEM (NET OF TAX) .......................... -- -- (8.0) --
-------- -------- -------- --------
NET INCOME ............................................... $ 88.8 $ 61.8 $ 226.3 $ 200.1
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
PANENERGY CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................... $ 226.3 $ 200.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................................. 186.7 165.0
Deferred income taxes ......................................................... (12.8) 31.6
Decrease (Increase) in
Receivables ................................................................ 333.2 297.4
Inventory .................................................................. (32.7) 7.8
Other current assets ....................................................... 54.4 60.5
Increase (Decrease) in
Accounts payable ........................................................... (462.5) (210.2)
Taxes accrued .............................................................. 67.3 37.4
Interest accrued ........................................................... (0.7) (9.0)
Other current liabilities .................................................. (34.2) (127.9)
Other, net .................................................................... (36.1) (128.1)
-------- --------
Net cash provided by operating activities .................................. 288.9 324.6
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .......................................................... (241.4) (146.3)
Investment expenditures ....................................................... (133.9) (66.9)
Proceeds from sales and other ................................................. 34.1 71.6
-------- --------
Net cash used in investing activities ...................................... (341.2) (141.6)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for the redemption of long-term debt ................................. (50.5) (128.3)
Net change in notes payable and commercial paper .............................. -- 28.6
Net change in advances - parent ............................................... (9.1) --
Capital infusions from parent ................................................. 71.5 27.5
Dividends paid ................................................................ -- (117.5)
Other, net .................................................................... 2.7 (40.8)
-------- --------
Net cash provided by (used in) financing activities ........................ 14.6 (230.5)
-------- --------
Net decrease in cash and cash equivalents ........................................... (37.7) (47.5)
Cash received from business acquisitions ............................................ 34.5 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 47.1 118.1
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................................... $ 43.9 $ 70.6
======== ========
SUPPLEMENTAL DISCLOSURES
Cash paid for interest (net of amount capitalized) ............................. $ 72.7 $ 111.3
Cash paid for income taxes ..................................................... $ 43.0 $ 67.0
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
PANENERGY CORP
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ......................................... $ 43.9 $ 47.1
Receivables ....................................................... 1,278.3 1,598.7
Inventory ......................................................... 186.9 145.6
Current portion of natural gas transition costs ................... 66.0 66.9
Unrealized gains on mark to market transactions ................... 1,833.3 551.3
Other ............................................................. 102.9 140.0
--------- ---------
Total current assets ........................................... 3,511.3 2,549.6
--------- ---------
INVESTMENTS AND OTHER ASSETS
Investments in affiliates ......................................... 716.2 636.8
Pre-funded pension costs .......................................... 312.7 302.6
Goodwill, net ..................................................... 506.1 503.6
Notes receivable .................................................. 169.8 173.4
Unrealized gains on mark to market transactions ................... 246.7 65.5
Other ............................................................. 111.2 80.0
--------- ---------
Total investments and other assets ............................. 2,062.7 1,761.9
--------- ---------
PROPERTY, PLANT AND EQUIPMENT
Cost .............................................................. 9,495.9 9,194.4
Less accumulated depreciation and amortization .................... 3,763.1 3,609.2
--------- ---------
Net property, plant and equipment .............................. 5,732.8 5,585.2
--------- ---------
REGULATORY ASSETS AND DEFERRED DEBITS
Debt expense ...................................................... 61.6 65.6
Regulatory asset related to income taxes .......................... 15.9 16.9
Natural gas transition costs ...................................... 167.4 193.7
Environmental clean-up costs ...................................... 95.2 103.6
Other ............................................................. 94.9 108.8
--------- ---------
Total regulatory assets and deferred debits .................... 435.0 488.6
--------- ---------
TOTAL ASSETS ...................................................... $11,741.8 $10,385.3
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
PANENERGY CORP
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited)
--------- ---------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................... $ 970.7 $ 1,428.0
Advances - Parent .......................................................... 667.7 450.5
Taxes accrued .............................................................. 174.6 107.2
Interest accrued ........................................................... 49.6 50.3
Current portion of natural gas transition liabilities ...................... 21.1 35.0
Current portion of environmental clean-up liabilities ...................... 28.2 26.4
Current maturities of long-term debt ....................................... 13.8 13.8
Unrealized losses on mark to market transactions ........................... 1,861.2 537.8
Other ...................................................................... 302.0 324.3
--------- ---------
Total current liabilities ............................................... 4,088.9 2,973.3
--------- ---------
LONG-TERM DEBT .................................................................. 1,946.0 1,936.5
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes ...................................................... 1,305.0 1,312.9
Natural gas transition liabilities ......................................... 65.6 78.4
Environmental clean-up liabilities ......................................... 146.5 157.6
Unrealized losses on mark to market transactions ........................... 214.7 50.3
Other ...................................................................... 361.7 378.1
--------- ---------
Total deferred credits and other liabilities ............................ 2,093.5 1,977.3
--------- ---------
MINORITY Interests .............................................................. 209.4 167.2
--------- ---------
COMMON STOCKHOLDER'S EQUITY
Common stock, 1,000 shares issued and outstanding at June 30, 1998
and December 31, 1997, respectively, $1 par value per share ............. 151.8 151.8
Paid-in capital ............................................................ 3,080.2 3,006.2
Retained earnings .......................................................... 172.0 173.0
--------- ---------
Total common stockholder's equity ....................................... 3,404.0 3,331.0
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ................................. $11,741.8 $10,385.3
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
PANENERGY CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
PanEnergy Corp (the Company) is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). In October 1997, Duke Capital Corporation
(Duke Capital), a wholly owned subsidiary of Duke Energy and parent company of
PanEnergy Corp, contributed the common stock of several wholly owned
subsidiaries to the Company. These subsidiaries included Duke Engineering &
Services, Inc., DukeSolutions, Inc., and Duke Energy Global Asset Development,
Inc. The consolidated financial statements for periods prior to the combination
of the Company and these entities were restated to include the operations of
these subsidiaries.
The Company conducts its operating activities primarily through two business
segments: Natural Gas Transmission and Energy Services.
The Natural Gas Transmission segment is engaged in interstate transportation and
storage of natural gas for customers primarily in the Mid-Atlantic, New England
and Midwest states. The interstate natural gas transmission and storage
operations are subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business units:
Field Services gathers and processes natural gas, produces and markets natural
gas liquids and transports and trades crude oil; Trading and Marketing markets
natural gas, electricity and other energy-related products; Global Asset
Development develops, owns and operates energy-related facilities worldwide; and
Other Energy Services provides engineering consulting, construction and
integrated energy solutions.
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. These consolidated 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.
Certain amounts for the prior periods have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. RELATED PARTY TRANSACTIONS
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows :
--------------------------------------------------
December 31,
IN MILLIONS June 30, 1998 1997
--------------------------------------------------
Receivables $ 13.5 $ 14.9
Accounts payable 60.4 132.6
Taxes accrued 103.0 27.9
--------------------------------------------------
Advances-Parent are carried as open accounts and are not segregated between
current and non-current amounts. Increases and decreases in advances result from
the movement of funds to provide for operations, capital expenditures and debt
payments of the Company.
5
<PAGE>
3. COMMITMENTS AND CONTINGENCIES
LITIGATION. On February 18, 1997, Amerada Hess Corporation (Amerada Hess)
notified Texas Eastern Transmission Corporation (TETCO), a subsidiary of the
Company, 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 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.
On September 26, 1997, the judge presiding over the Amerada Hess contract matter
issued a summary judgment in favor of TETCO. Amerada Hess subsequently filed a
notice of appeal of the summary judgment. On July 7, 1998, the Fifth Circuit
Court of Appeals affirmed the lower court's judgment in favor of TETCO. In
August 1998, Amerada Hess and TETCO entered into an agreement terminating the
Amerada Hess Contract effective June 30, 1998. Management is of the opinion that
this matter was resolved on terms favorable to the Company.
On April 25, 1997, a group of affiliated plaintiffs that own and/or operate
various pipeline and marketing companies and partnerships primarily in Kansas
filed suit against Panhandle Eastern Pipe Line Company (PEPL), a subsidiary of
the Company, in the U.S. 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 the plaintiffs' contracts with third
parties, the plaintiffs seek compensatory and punitive damages. Based on
information currently available to the Company, the Company believes the
resolution of this matter will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
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 Duke Energy LNG
Sales, Inc. (formerly PanEnergy LNG Sales, Inc. and Pan National Gas Sales,
Inc.), a subsidiary of the Company, alleging breach of a gas purchase contract
(the Contract) for regasified LNG entered into between Citrus and Pan National
Gas Sales, Inc. Plaintiffs allege that Duke Energy 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 Duke Energy
LNG Sales, Inc.'s assertions of force majeure due to the interruption in the
supply of LNG to Duke Energy LNG Sales, Inc. do not constitute force majeure
under the Contract. Based on information currently available to the Company, the
Company believes the resolution of this matter will not have a material adverse
effect on the consolidated 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. The suit has
been stayed pending resolution by the FERC of ad-valorem tax issues. Based on
information currently available to the Company, the Company believes the
resolution of this matter will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
The Company and its subsidiaries are also involved in other legal, tax and
regulatory proceedings before various courts, regulatory commissions and
governmental agencies regarding matters arising in the ordinary course of
business, some of which involve substantial amounts. Where appropriate for all
of these matters, 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 matters will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
6
<PAGE>
OTHER COMMITMENTS AND CONTINGENCIES. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, the Company's pipelines will file with the FERC to recover a portion
of these costs from pipeline customers.
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.
At June 30, 1998, a subsidiary partnership of the MLP had $389.7 million in
First Mortgage Notes outstanding with recourse to the general partner, a
subsidiary of the Company, up to $40 million.
PEPL owns an effective 5.3% ownership interest in Northern Border Pipeline
Company (Northern Border). Under the terms of a settlement related to a
transportation agreement between PEPL and Northern Border, PEPL guarantees
payment to Northern Border under a transportation agreement held by an affiliate
of Pan-Alberta Gas Limited. The transportation agreement requires estimated
total payments of $68.1 million for the remainder of 1998 through 2001.
In connection with the sale of Petrolane Incorporated (Petrolane) in 1989, Texas
Eastern Corporation (TEC), a subsidiary of the Company, agreed to indemnify
Petrolane against certain obligations for guaranteed leases and environmental
matters. Certain of these lease obligations related to Petrolane's divestiture
of supermarket operations prior to is acquisition by TEC and as of June 30, 1998
totaled approximately $45.2 million over the remaining terms of the leases,
which expire in 2006.
In January 1998, the Company acquired a 9.8% ownership in Alliance Pipeline.
This pipeline is designed to transport natural gas from western Canada to the
Chicago-area market center for distribution throughout North America. The
pipeline is scheduled to begin commercial operation in the second half of 2000,
provided the necessary U.S. and Canadian regulatory approvals are secured. In
addition to buying an ownership interest in the pipeline project, the Company
has a contractual commitment for 67.25 million cubic feet per day of capacity on
the line over 15 years for an estimated total of $315 million.
As of June 30, 1998, the Company had letters of credit and surety bonds of $44.7
million issued on its behalf related to natural gas transmission operations,
engineering services contracts, insurance contracts and various other items.
Periodically, the Company may become involved in contractual disputes with
natural gas transmission customers involving potential or threatened abrogation
of contracts by the customers. If the customers are successful, the Company may
not receive the full value of anticipated benefits under the contracts.
In the normal course of business, certain of the Company's affiliates enter into
various contracts, including agreements for debt, natural gas transmission
service and construction contracts, which contain certain schedule and
performance requirements. Such affiliates use risk management techniques to
mitigate their exposure associated with such contracts. Duke Capital or the
Company has guaranteed performance by such affiliates under some of these
contracts.
Management is of the opinion that these commitments and contingencies will not
have a material adverse effect on the consolidated results of operations or the
financial position of the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
PanEnergy Corp (PanEnergy) is an indirect wholly owned subsidiary of Duke Energy
Corporation. PanEnergy and its subsidiaries (the Company) conducts its operating
activities primarily through two business segments: Natural Gas Transmission and
Energy Services.
The Natural Gas Transmission segment is involved in interstate transportation
and storage of natural gas for customers in the Mid-Atlantic, New England and
Midwest states. The interstate natural gas transmission and storage operations
of the Company's wholly owned subsidiaries are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC).
The Energy Services segment is comprised of several separate business units:
Field Services gathers and processes natural gas, produces and markets natural
gas liquids (NGL) and transports and trades crude oil; Trading and Marketing
markets natural gas, electricity and other energy-related products; Global Asset
Development develops, owns and operates energy-related facilities worldwide; and
Other Energy Services provides engineering consulting, construction and
integrated energy solutions.
Management's Discussion and Analysis should be read in conjunction with the
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
For the six months ended June 30, 1998, revenues were $5,914.3 million, an
increase of 23% over the comparable period in 1997. This increase is primarily
due to Trading and Marketing's 38% increase in revenues due to volumes of both
electricity and natural gas marketed, primarily as a result of the June 1997
purchase of the remaining 50% ownership interest in the Duke/Louis Dreyfus,
L.L.C. joint venture. Partially offsetting the increase in revenues were lower
NGL prices at Field Services, the Natural Gas Transmission segment's decline in
throughput volumes in 1998 and a provision reversal in 1997 related to a
favorable resolution of certain regulatory matters.
Operating expenses increased 25% to $5,504.5 million in the six months ended
June 30, 1998 as compared to the same period in 1997. This increase is primarily
due to increased volumes of electricity and natural gas marketed by Trading and
Marketing, partially offset by decreased natural gas prices at Field Services,
and the absence of 1997 merger-related costs.
For the six months ended June 30, 1998, other income and expense increased $22.2
million over the prior year period primarily as a result of a gain on an asset
sale by Field Services in the first quarter of 1998, partially offset by the
absence of a 1997 gain on the sale of the Company's interest in the Midland
Cogeneration Venture.
Interest expense decreased 24% for the six months ended June 30, 1998 over the
comparable period in 1997 as a result of the termination of the Company's
commercial paper program in August 1997.
In January 1998, TEPPCO Partners, L.P. (TEPPCO), in which the Company has a 10%
ownership interest, redeemed certain First Mortgage Notes. The Company recorded
a non-cash extraordinary item of $8 million, net of income tax of $5.1 million,
related to its share of costs of the early retirement of debt.
The combined effect of the foregoing resulted in net income of $226.3 million
for the six months ended June 30, 1998 compared to $200.1 million for the same
period of 1997.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING CASH FLOW
On April 28, 1998, Texas Eastern Transmission Corporation (TETCO), a subsidiary
of the Company, filed with the FERC a proposed settlement to accelerate recovery
of natural gas transition costs and to reduce depreciation expense to more
appropriately reflect the estimated useful lives of its facilities, principally
interstate natural gas pipelines. TETCO reviewed the condition of its natural
gas pipeline facilities and current maintenance practices, and concluded that
extension of the useful lives was appropriate. The proposed settlement reduces
customer rates as a result of the reduced depreciation expense offset by the
accelerated recovery of natural gas transition costs. On June 26, 1998 the FERC
issued a procedural order on the settlement requesting certain additional
information which was subsequently provided by TETCO on July 13, 1998.
Currently, the settlement is unopposed and pending further Commission action.
TETCO anticipates implementation of the proposed settlement sometime in the
second half of 1998. The proposed settlement is not expected to have a material
effect on the net results of operations or financial position of the Company. As
a result of the proposed settlement, cash flows from operations are not expected
to change for the first two years after implementation due to the offsetting
effect on customer rates of the reduced depreciation expense and increased
recovery of natural gas transition costs. Once the natural gas transition costs
are fully recovered, cash flows from operations are expected to decrease during
2001 through 2003 by an estimated total of $270 million.
INVESTING CASH FLOW
Capital and investment expenditures totaled $375.3 million for the six months
ended June 30, 1998, compared with $213.2 million for the same period in 1997.
Increased capital and investment expenditures during the period were primarily
due to business expansion for the Natural Gas Transmission and the Energy
Services segments, specifically Field Services and Global Asset
Development.
On July 1, 1998, Global Asset Development completed the purchase of three
electric generating stations in California from Pacific Gas & Electric Company
for $501 million. The plants have a combined capacity of 2,645 megawatts. Also
on July 16, 1998, Global Asset Development purchased the Queensland Pipeline, a
389-mile pipeline in southeast Queensland, Australia, from PG&E Corporation for
$128 million.
Proceeds from the sales of two NGL fractionation facilities to TEPPCO were $40
million in 1998. Proceeds from the sales of the Company's ownership in
operations in the United Kingdom and its equity interests in certain affiliates
were $85 million in 1997.
FINANCING CASH FLOW
Dividends and debt repayments, along with operating and investing requirements,
are expected to be funded by cash from operations and borrowings from Duke
Capital Corporation (Duke Capital). The Company is seeking to significantly grow
its Energy Services businesses, which will likely require additional financing
to be issued by Duke Capital. The Company plans to fund Energy Services growth
opportunities through a combination of internally generated cash and external
debt. Debt financing will be obtained through Duke Capital's commercial paper
program and by accessing the capital markets.
In connection with its plans to access the capital markets, Duke Capital filed a
$1 billion shelf registration statement, which was declared effective by the
Securities and Exchange Commission on May 13, 1998. Subsequently, on June 1,
1998, a subsidiary of Duke Capital issued $250 million of trust preferred
securities and on July 20, 1998, Duke Capital issued $400 million of senior
indebtedness.
In connection with Global Asset Development's purchase of the Queensland
Pipeline, a subsidiary of the Company entered into a $74.8 million bridge loan
denominated in Australian dollars due September 30, 1998. Due to the
9
<PAGE>
short-term nature of this loan, foreign currency risk associated with this loan
is not expected to be material to the Company's consolidated results of
operations and financial position.
CHANGES FOR THE YEAR 2000
In 1996, the Company initiated a program to address Year 2000 readiness issues
relating to computer and process control systems, equipment and devices. Many of
these systems, equipment and devices are now Year 2000 ready or have been
scheduled for replacement in the Company's ongoing systems plans. The Company is
continuing its assessment of Year 2000 impacts across its business and
operations, including its customer and vendor base, and continues to develop and
implement remediation plans using established processes to avoid adverse impacts
of Year 2000 on its business and operations. Management believes it is devoting
the resources necessary to achieve Year 2000 readiness in a timely manner. Total
cost of the program, including internal labor as well as incremental costs such
as consulting and contract costs, is expected to be approximately $8 million.
These costs exclude replacement systems that, in addition to being Year 2000
ready, provide significantly enhanced capabilities which will benefit operations
in future periods.
Based on assessments completed to date, compliance plans in process and
contingency planning efforts, management is of the opinion that the Year 2000
issue, including the cost of making its critical systems, equipment and devices
ready, will not have a material adverse effect on the Company's business
operations or consolidated results of operations or financial position.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 1998, a subsidiary of the Company received a Compliance Order and
Assessment of Civil Penalty from the Colorado Department of Public Health and
Environment related to air quality permit violations at the Greeley Fractionator
Plant. The Company was assessed a civil penalty of $137,000 and noncompliance
penalties in an amount yet to be determined but not expected to exceed $100,000.
On July 6, 1998, the Company filed an appeal of the Compliance Order and
Assessment of Civil Penalty, and a resolution of the matter has not been
reached.
Two environmental administrative proceedings are underway before the Missouri
Department of Natural Resources and the Illinois Environmental Protection
Agency, respectively, relating to two natural gas compressor stations that could
result in fines in excess of $100,000 each. Management is of the opinion that
the resolution of these matters will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
For information concerning litigation and other contingencies, see Note 3 to the
Consolidated Financial Statements.
ITEM 5. OTHER INFORMATION.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may make statements regarding its assumptions,
projections, expectations, intentions or beliefs about future events. These
statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that assumptions,
projections, expectations, intentions or beliefs about future events may and
often do vary from actual results and the differences between assumptions,
projections, expectations, intentions or beliefs and actual results can be
material. Accordingly, there can be no assurance that actual results will not
differ materially from those expressed or implied
10
<PAGE>
by the forward-looking statements. The following are some of the factors that
could cause actual achievements and events to differ materially from those
expressed or implied in such forward-looking statements: state and federal
legislative and regulatory initiatives that affect cost and investment recovery,
have an impact on rate structures, and affect the speed and degree to which
competition enters the electric and natural gas industries; industrial,
commercial and residential growth in the service territories of the Company and
its subsidiaries; the weather and other natural phenomena; the timing and extent
of changes in commodity prices and interest rates; changes in environmental and
other laws and regulations to which the Company and its subsidiaries are subject
or other external factors over which the Company has no control; the results of
financing efforts; growth in opportunities for the Company's subsidiaries; and
the effect of the Company's accounting policies, in each case during the periods
covered by the forward-looking statements.
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 no reports on Form 8-K during the second quarter of 1998.
11
<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
August 14, 1998 /s/ Richard J. Osborne
----------------------
Richard J. Osborne
Senior Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
PanEnergy Corp Quarterly Report on Form 10-Q for quarter ended
June 30, 1998 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-31-1998
<PERIOD-END> JUN-30-1998
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<INVENTORY> 186900
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<PP&E> 9495900
<DEPRECIATION> 3763100
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<CURRENT-LIABILITIES> 4088900
<BONDS> 1946000
0
0
<COMMON> 151800
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<FN>
<F1>Not meaningful since PanEnergy Corp is a wholly-owned subsidiary.
</FN>
</TABLE>
