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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission File Number 1-2921
PANHANDLE EASTERN PIPE LINE COMPANY
(Exact name of Registrant as Specified in its Charter)
Delaware 44-0382470
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation)
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 April 30, 1998................................1,000
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i
PANHANDLE EASTERN PIPE LINE COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
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Item Page
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PART I. FINANCIAL INFORMATION
<S> <C>
1. Financial Statements....................................................................................1
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and 1997................1
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997............2
Consolidated Balance Sheets as of March 31, 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...................7
PART II. OTHER INFORMATION
1. Legal Proceedings.......................................................................................8
5. Other Information.......................................................................................8
6. Exhibits and Reports on Form 8-K........................................................................8
Signatures..............................................................................................9
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In millions)
Three Months Ended
March 31
-------------------
1998 1997
------- -------
Operating Revenues
Transportation and storage of natural gas $ 131.7 $ 154.1
Other 6.9 12.3
------- -------
Total operating revenues 138.6 166.4
------- -------
Operating Expenses
Operation and maintenance 47.5 56.2
Depreciation and amortization 14.5 14.7
Property and other taxes 6.9 7.3
------- -------
Total operating expenses 68.9 78.2
------- -------
Operating Income 69.7 88.2
------- -------
Other Income and Expenses 6.5 7.7
------- -------
Earnings Before Interest and Taxes 76.2 95.9
Interest Expense 19.2 18.6
------- -------
Earnings Before Income Taxes 57.0 77.3
Income Taxes 21.6 29.6
------- -------
Net Income $ 35.4 $ 47.7
======= =======
See Notes to Consolidated Financial Statements.
1
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
<TABLE>
<CAPTION>
Three Months Ended
March 31
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1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 35.4 $ 47.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15.0 14.7
Deferred income taxes (1.3) 5.1
Rate settlement -- (27.7)
Net change in current assets and liabilites (31.1) (24.7)
Other, net 0.6 4.2
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Net cash provided by operating activities 18.6 19.3
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (17.4) (10.8)
Net decrease (increase) in advances receivable - parent 0.8 (8.6)
Retirements and other (2.0) --
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Net cash used in investing activities (18.6) (19.4)
------- -------
Net decrease in cash and cash equivalents -- (0.1)
Cash and cash equivalents at beginning of period -- 0.1
------- -------
Cash and cash equivalents at end of period $ -- $ --
======= =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 24.9 $ 23.9
Cash paid for income taxes $ 55.0 $ 63.4
</TABLE>
See Notes to Consolidated Financial Statements.
2
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions)
March 31, December 31,
1998 1997
(Unaudited)
-------- --------
ASSETS
Current Assets
Receivables $ 93.7 $ 106.0
Inventory and supplies 36.9 38.2
Current deferred income tax 5.2 4.3
Current portion of regulatory assets 6.1 6.5
Other 33.0 37.3
-------- --------
Total current assets 174.9 192.3
-------- --------
Investments and Other Assets
Advances and note receivable - parent 661.3 662.1
Investment in affiliates 46.9 47.0
Other 7.1 7.1
-------- --------
Total investments and other assets 715.3 716.2
-------- --------
Property, Plant and Equipment
Cost 2,745.1 2,733.9
Less accumulated depreciation and amortization 1,784.8 1,776.0
-------- --------
Net property, plant and equipment 960.3 957.9
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Regulatory Assets
Debt expense 12.2 12.7
Other 27.0 27.0
-------- --------
Total regulatory assets 39.2 39.7
-------- --------
Total Assets $1,889.7 $1,906.1
======== ========
See Notes to Consolidated Financial Statements.
3
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PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited)
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<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 37.8 $ 45.5
Notes payable - parent 675.0 675.0
Taxes accrued 44.4 76.7
Interest accrued 2.2 8.0
Other 110.9 114.1
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Total current liabilities 870.3 919.3
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Long-term Debt 299.2 299.2
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Deferred Credits and Other Liabilities
Deferred income taxes 81.9 82.1
Other 103.9 104.5
-------- --------
Total deferred credits and other liabilities 185.8 186.6
-------- --------
Common Stockholder's Equity
Common stock, no par, 1,000 shares authorized, issued and outstanding 1.0 1.0
Paid-in capital 465.9 465.9
Retained earnings 67.5 34.1
-------- --------
Total common stockholder's equity 534.4 501.0
-------- --------
Total Liabilities and Stockholder's Equity $1,889.7 $1,906.1
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
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PANHANDLE EASTERN PIPE LINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Panhandle Eastern Pipe Line Company (PEPL) is a wholly owned subsidiary of
PanEnergy Corp, which is an indirect wholly owned subsidiary of Duke Energy
Corporation. PEPL and its subsidiaries (the Company) are primarily engaged in
the interstate transportation and storage of natural gas. The interstate natural
gas transmission operations of the Company are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC).
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.
Certain amounts for the prior periods have been reclassified in the consolidated
financial statements to conform to the current presentation.
2. Regulatory Matters
Effective August 1, 1996, Trunkline Gas Company, a subsidiary of the Company,
placed into effect a general rate increase, subject to refund. Hearings were
completed in the third quarter of 1997. The case is pending decisions by the
administrative law judge and the FERC.
In conjunction with a FERC order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad-valorem taxes
to interstate natural gas pipelines. These pipelines were also ordered to refund
these amounts to their customers. All payments are to be made in compliance with
prescribed FERC requirements. At March 31, 1998 and December 31, 1997, Accounts
Receivable included $46.6 million and $53.6 million, respectively, due from
natural gas producers and Other Current Liabilities included $53.4 million and
$53.6 million, respectively, for related obligations. The Company refunded $6.8
Million to customers in April 1998.
3. Related Party Transactions
A summary of certain balances due to or due from related parties included in the
Consolidated Balance Sheets is as follows :
------------------------- ------------------ -----------------
March 31, December 31,
In Millions 1998 1997
------------------------- ------------------ -----------------
Receivables $ 7.2 $ 8.1
Accounts payable 30.2 36.6
Taxes accrued 20.1 54.8
------------------------- ------------------ -----------------
Advances and Note Receivable - Parent included a $30 million note at March 31,
1998 and December 31, 1997.
Interest expense included $13.9 million and $11.9 million for the three months
ended March 31, 1998 and 1997, respectively, of interest associated with notes
payable to parent.
5
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4. Gas Imbalances
The Consolidated Balance Sheets included in-kind balances as a result of
differences in gas volumes received and delivered. At March 31, 1998 and
December 31, 1997, other current assets included $22.2 million and $24.2
million, respectively, and other current liabilities included $19.3 million and
$22.0 million, respectively, related to gas imbalances.
5. Commitments and Contingencies
LITIGATION. 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 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 the plaintiffs'
contracts with third parties, the plaintiffs seek compensatory and punitive
damages in unspecified amounts. 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 is 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.
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 FERC to recover a portion of
these costs from pipeline customers. Management is of the opinion that the
resolution of this matter will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
PEPL owns an effective 5.3% ownership interest in Northern Border Pipeline
Company (Northern Border) through a master limited partnership. Under the terms
of a settlement related to a transportation agreement between PEPL and Northern
Border Pipeline Company (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 $73.2
million for 1998 through 2001. In the opinion of management, the probability
that PEPL will be required to perform under this guarantee is remote.
6
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
INTRODUCTION
Panhandle Eastern Pipe Line Company (PEPL) is a wholly owned subsidiary of
PanEnergy Corp, which is an indirect wholly owned subsidiary of Duke Energy
Corporation. PEPL and its subsidiaries (the Company), are primarily engaged in
the interstate transportation and storage of natural gas. The interstate natural
gas transmission and storage operations of the Company are subject to the rules
and regulations of the Federal Energy Regulatory Commission (FERC).
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, net income was $35.4 million, down
$12.3 million from the comparable period in 1997. Total natural gas
transportation volumes for the three months ended March 31, 1998 decreased 7%
from the same period in 1997, primarily due to warmer weather.
Revenues for the three months ended March 31, 1998 decreased $27.8 million from
the comparable period in 1997, due primarily to favorable resolution of
regulatory matters in 1997 and decreased transportation volumes in 1998.
Operating expenses for the three months ended March 31, 1998 decreased $9.3
million from the prior year comparable period, primarily as a result of lower
regulatory asset amortization expense and 1997 severance expenses.
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures totaled $17.4 million in the first three
months of 1998, compared with $10.8 million for the same period in 1997.
This increase is primarily due to the Terrebonne business expansion project.
Projected 1998 capital and investment expenditures, including allowance for
funds used during construction, are approximately $74.0 million. These
projections are subject to periodic review and revision. Expenditures for 1998
are expected to be funded by cash from operations and/or the collection of
intercompany advances and receivables.
7
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information concerning litigation and other contingencies, see Note 5 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 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
natural gas industry; 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 Corporation filed no reports on Form 8-K during the first quarter of
1998.
8
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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.
PANHANDLE EASTERN PIPE LINE COMPANY
May 13, 1998 /s/ Richard J. Osborne
------------------------------------
Richard J. Osborne
Senior Vice President and
Chief Financial Officer
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Panhandle Eastern Pipe Line Company Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000076063
<NAME> PANHANDLE EASTERN PIPE LINE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 93700
<ALLOWANCES> 0
<INVENTORY> 36900
<CURRENT-ASSETS> 174900
<PP&E> 2745100
<DEPRECIATION> 1784800
<TOTAL-ASSETS> 1889700
<CURRENT-LIABILITIES> 870300
<BONDS> 299200
0
0
<COMMON> 1000
<OTHER-SE> 533400
<TOTAL-LIABILITY-AND-EQUITY> 1889700
<SALES> 0
<TOTAL-REVENUES> 138600
<CGS> 0
<TOTAL-COSTS> 47500
<OTHER-EXPENSES> 21400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19200
<INCOME-PRETAX> 76200
<INCOME-TAX> 21600
<INCOME-CONTINUING> 35400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35400
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1>
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
</FN>
</TABLE>
