-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, XEINZNks78+9Zp3+/fbGRzVncEIs5Ejm/54tImtKRQMLMRFutw5bqzKG71ziNbEj nKfAYqRujpCEwARR9BZNGw== 0000351696-94-000014.txt : 19941116 0000351696-94-000014.hdr.sgml : 19941116 ACCESSION NUMBER: 0000351696-94-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PANHANDLE EASTERN CORP /DE/ CENTRAL INDEX KEY: 0000351696 STANDARD INDUSTRIAL CLASSIFICATION: 4922 IRS NUMBER: 742150460 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08157 FILM NUMBER: 94559075 BUSINESS ADDRESS: STREET 1: 5400 WESTHEIMER CT STREET 2: P O BOX 1642 CITY: HOUSTON STATE: TX ZIP: 77251 BUSINESS PHONE: 7136275400 MAIL ADDRESS: STREET 1: P.O. BOX 1642 CITY: HOUSTON STATE: TX ZIP: 77251-1642 10-Q 1 =========================================================================== 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 the Quarter Ended September 30, 1994 Commission File No. 1-8157 ------------------ PANHANDLE EASTERN CORPORATION (Exact name of registrant as specified in its charter) A Delaware Corporation (State of Incorporation or Organization) 74-2150460 (IRS Employer Identification No.) 5400 Westheimer Court, P.O. Box 1642, Houston, Texas 77251-1642 (Address of principal executive offices, including 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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Class Outstanding at October 31, 1994 -------------------------- ------------------------------- Common Stock, $1 par value =========================================================================== PART I. FINANCIAL INFORMATION Item 1. Financial Statements - Unaudited Panhandle Eastern Corporation and Subsidiaries CONSOLIDATED STATEMENT OF INCOME
Periods Ended September 30 Three Months Nine Months ---------------- ------------------- Millions, except per share amounts 1994 1993 1994 1993 - ---------------------------------- ------ ------ -------- -------- Operating Revenues Transportation of natural gas$314.3 $283.2 $ 950.5 $ 728.7 Sales of natural gas and liquids 215.2 247.0 689.0 1,059.3 Natural gas storage and other 49.8 37.5 165.1 137.9 ------ ------- -------- -------- Total (Note 4) 579.3 567.7 1,804.6 1,925.9 ------ ------- -------- -------- Costs and Expenses Gas purchased 189.5 216.8 615.7 718.2 Operating and maintenance 130.5 113.0 379.7 401.7 General and administrative 57.7 54.7 173.1 167.6 Depreciation and amortization 51.8 57.1 167.3 169.6 Miscellaneous taxes 20.9 20.1 60.1 61.6 ------ ------ -------- -------- Total 450.4 461.7 1,395.9 1,518.7 ------ ------ -------- -------- Operating Income 128.9 106.0 408.7 407.2 ------ ------ -------- -------- Other Income and Deductions Equity in earnings of unconsolidated affiliates 11.8 5.1 24.2 14.2 Other income, net of deductions(2.8) 4.8 (0.9) 13.9 ------ ------ -------- -------- Total 9.0 9.9 23.3 28.1 ------ ------ -------- -------- Gross Income 137.9 115.9 432.0 435.3 Interest Expense 56.0 65.6 166.7 212.7 ------ ------ -------- -------- Income before Income Tax 81.9 50.3 265.3 222.6 Income Tax 32.4 24.7 108.1 93.1 ------ ------ -------- -------- NET INCOME $ 49.5 $ 25.6 $ 157.2 $ 129.5 ====== ====== ======== ======== Average Common Shares Outstanding 120.7 119.3 120.4 113.4 ====== ====== ======== ======== Earnings per Common Share $ 0.41 $ 0.21 $ 1.31 $ 1.14 ====== ====== ======== ======== Dividends per Common Share $ 0.21 $ 0.20 $ 0.63 $ 0.60 ====== ====== ======== ========
See accompanying notes to consolidated financial statements 2 Item 1. Financial Statements - Unaudited (Continued) Panhandle Eastern Corporation and Subsidiaries CONSOLIDATED BALANCE SHEET ASSETS
September 30, December 31, Millions 1994 1993 - -------- ------------- ------------ Current Assets Cash and cash equivalents $ 53.2 $ 18.4 Accounts and notes receivable 200.3 294.2 Materials and supplies 113.7 114.0 Other (Notes 4, 6 and 9) 296.3 328.5 --------- --------- Total 663.5 755.1 --------- --------- Investments Affiliates 146.7 129.2 Other 75.5 90.2 --------- --------- Total 222.2 219.4 --------- --------- Plant, Property and Equipment Original cost 7,355.6 7,076.2 Accumulated depreciation and amortization (2,859.3) (2,732.9) --------- --------- Net plant, property and equipment 4,496.3 4,343.3 --------- --------- Deferred Charges Goodwill, net (Note 5) 317.8 520.5 Prepaid pension 235.5 222.8 Other (Notes 4 and 9) 841.5 866.2 --------- --------- Total 1,394.8 1,609.5 --------- --------- TOTAL ASSETS $ 6,776.8 $ 6,927.3 ========= =========
See accompanying notes to consolidated financial statements 3 Item 1. Financial Statements - Unaudited (Continued) Panhandle Eastern Corporation and Subsidiaries CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31, Millions 1994 1993 - -------- ------------- ------------ Current Liabilities Long-term debt due within one year $ 125.0 $ 62.5 Notes payable - 18.4 Rate refund provisions (Note 4) 194.5 67.8 Accounts payable 80.6 67.2 Accrued interest 57.9 60.6 Taxes payable 57.3 70.9 Other (Notes 4, 6 and 9) 458.2 564.4 -------- -------- Total 973.5 911.8 -------- -------- Deferred Liabilities and Credits Deferred income tax (Note 5) 1,168.9 1,308.6 Deferred revenue - liquefied natural gas project 71.8 78.1 Other (Notes 4 and 9) 872.6 1,040.7 -------- -------- Total 2,113.3 2,427.4 -------- -------- Long-term Debt 1,926.0 1,922.5 -------- -------- Commitments and Contingent Liabilities (Notes 4, 5, 7, 9 and 10) Common Stockholders' Equity Common stock, 120.7 million (1994) and 120 million (1993) shares issued and outstanding, $1 par value per share 120.7 120.0 Paid-in capital 2,056.8 2,040.4 Retained earnings (deficit) (413.5) (494.8) -------- -------- Total (Note 8) 1,764.0 1,665.6 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,776.8 $6,927.3 ======== ========
See accompanying notes to consolidated financial statements 4 Item 1. Financial Statements - Unaudited (Continued) Panhandle Eastern Corporation and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30 -------------------- Millions 1994 1993 - -------- ------- -------- Operating Activities Net income $ 157.2 $ 129.5 Adjustments to reconcile net income to operating cash flows: Depreciation and amortization 167.3 169.6 Deferred income tax expense 59.2 29.3 LNG project settlement 0.4 193.8 Net pension benefit (15.0) (11.1) Other non-cash items in net income (40.1) (5.1) Net change in other operating assets and liabilities 90.3 88.8 ------- ------- Net Cash Flows Provided by Operating Activities 419.3 594.8 ------- ------- Investing Activities Additions to plant, property and equipment (329.7) (207.3) Net investment proceeds (purchases) (1.8) 21.4 Property sales, retirements and other (23.7) 49.1 ------- ------- Net Cash Flows Used in Investing Activities (355.2) (136.8) ------- ------- Financing Activities Retirement of debt (50.0) (864.3) Issuance of debt 99.9 253.8 Net increase (decrease) in notes payable (18.4) 30.3 Common stock issuance 15.9 225.9 Dividends paid (75.9) (67.4) Other (0.8) (8.8) ------- ------- Net Cash Flows Used in Financing Activities (29.3) (430.5) ------- ------- Net Change in Cash Increase in cash and cash equivalents 34.8 27.5 Cash and cash equivalents, beginning of period 18.4 3.0 ------- ------- Cash and Cash Equivalents, End of Period $ 53.2 $ 30.5 ======= ======= Supplemental Disclosures Cash paid for interest (net of amount capitalized) $ $ 196.3 Cash paid for income tax 29.6
See accompanying notes to consolidated financial statements 5 PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. References Panhandle Eastern Corporation (PEC) and its subsidiaries (the Company) are predominantly involved in the interstate transportation and storage of natural gas. The interstate gas transmission operations of Texas Eastern Transmission Corporation (TETCO), Algonquin Gas Transmission Company (Algonquin), Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline), and the liquefied natural gas (LNG) facilities of Trunkline LNG Company (Trunkline LNG), are subject to the rules, regulations and accounting procedures of the Federal Energy Regulatory Commission (FERC). Certain amounts for the prior periods have been reclassified in the consolidated financial statements to conform to the current presentation. 2. Accounting Policy Change The Company adopted Statement of Financial Accounting Standards (Accounting Standard) No. 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. This standard requires accruals for benefits provided by the Company to certain former or inactive employees. As a result of implementation of Accounting Standard No. 112, the Company recorded additional liabilities and regulatory assets of approximately $17 million. The Company's pipelines have received permission from FERC to defer such costs, pending future rate filings requesting recovery. The earnings impact of this change in accounting policy is not significant. 3. Merger Agreement with Associated Natural Gas Corporation (ANGC) On October 9, 1994, PEC, a wholly-owned subsidiary of PEC and ANGC entered into an agreement to merge on a tax-free, stock-for-stock basis. ANGC is a holding company whose subsidiaries purchase, gather, process, transport and market natural gas, natural gas liquids (NGLs) and crude oil. Pursuant to the proposed merger, each share of ANGC common stock outstanding immediately prior to the effective date of the merger will be converted into the right to receive between 1.5725 and 1.8750 shares of PEC common stock. The exact exchange ratio within this range will be determined based on the average PEC stock closing prices in a specified 15-day period. Completion of the merger is expected by year-end, subject to certain conditions, including approval by various regulatory agencies and the stockholders of PEC and ANGC. The merger is expected to be accounted for under the pooling of interests method of accounting for a business combination and ANGC will become a wholly-owned PEC subsidiary. Nonrecurring expenses incurred as a direct result of the merger are expected to total approximately $10 million and will be included in the Company's and ANGC's results of operations, as appropriate, in the periods incurred. 6 The table below sets forth unaudited proforma operating revenues, net income and earnings per common share for the three and nine months ended September 30, 1994 and 1993 assuming the merger occurred as of January 1, 1993 and assuming an exchange ratio of 1.7105 (the ratio resulting from an average daily price of PEC common stock of $22.80, which is the midpoint of the price range of $20.80 and $24.80 for PEC common stock used to determine the maximum and minimum exchange ratios, respectively). ANGC's consolidated financial statements are based on a fiscal year end of September 30, as compared to PEC's fiscal year end of December 31. As a result, the following proforma information combines the Company's consolidated results of operations for the three and nine months ended September 30, 1994 and 1993 with ANGC's consolidated results of operations for the three and nine months ended June 30, 1994 and 1993. This unaudited proforma financial information is not necessarily indicative of the results of operations that would have occurred had the merger occurred as of January 1, 1993, nor is it necessarily indicative of future operating results of the combined companies.
Periods Ended September 30 Three Months Nine Months --------------- ------------------ Millions, except per share amounts 1994 1993 1994 1993 ----------------- ------ ------ -------- -------- Operating revenues PEC $314.3 $283.2 $ 950.5 $ 728.7 ANGC 545.0 1,612.1 1,316.4 ------ ------ -------- -------- Proforma operating revenues $859.3 $ $2,562.6 $2,045.1 ====== ====== ======== ======== Net income PEC $ 49.5 $ 25.6 $ 157.2 $ 129.5 ANGC 1.6 4.7 14.8 18.7 ------ ------ -------- -------- Proforma net income $ 51.1 $ 30.3 $ 172.0 $ 148.2 ====== ====== ======== ======== Proforma earnings per common share $ 0.35 $ 0.21 $ 1.18 $ 1.07 ====== ====== ======== ========
4. Natural Gas Revenues and Regulatory Matters When rate cases are pending final FERC approval, a portion of revenues collected by each natural gas pipeline is subject to possible refunds. The Company has established adequate reserves where required for such cases. The following is a summary of pending rate cases before FERC and related regulatory matters. 7 FERC Order 636 During the second and third quarters of 1993, the Company's interstate natural gas pipelines began providing restructured services pursuant to FERC Order 636. This order, which is on appeal to the courts, requires pipeline service restructuring that "unbundles" sales, transportation and storage services. Order 636 provides for the use of the straight fixed-variable (SFV) rate design, which assigns return on equity, related taxes and other fixed costs to the demand component of rates. In addition, Order 636 allows pipelines to recover eligible costs resulting from implementation of the order (transition costs). On August 1, 1994, TETCO implemented a FERC-approved comprehensive settlement that resolves issues related primarily to Order 636 transition costs and a number of other issues related to services prior to Order 636. At September 30, 1994 and December 31, 1993, the Company's pipelines had recorded approximately $40 million and $310 million (1994), and $25 million and $365 million (1993) of current and long-term regulatory assets, respectively, representing transition costs incurred or estimated to be incurred that will be recovered from customers. TETCO's settlement provides for the recovery of transition costs through volumetric and reservation charges through the year 2002. PEPL's and Trunkline's transition cost recoveries, which are subject to certain challenges that are pending further FERC action, will occur over the next three years. At September 30, 1994 and December 31, 1993, the Company had recorded estimated current and long-term liabilities related to Order 636 transition costs of approximately $130 million and $135 million (1994), and $100 million and $290 million (1993), respectively. In addition, the Company had recorded current liabilities of approximately $85 million and $60 million at September 30, 1994 and December 31, 1993, respectively, for estimated refunds pursuant to certain provisions of TETCO's settlement. The Company believes the exposure associated with gas purchase contract commitments and the significant reduction of the Company's pipeline merchant services will be substantially mitigated by transition cost recoveries pursuant to TETCO's settlement, Order 636 and other mechanisms, including assignments of certain gas purchase contracts to third parties. As a result, the Company believes that transition cost issues related to Order 636 will not have a material adverse effect on future consolidated results of operations or financial position. 8 Take-or-Pay In the past, during the normal course of business, the Company's pipelines entered into certain gas purchase contracts containing take- or-pay provisions, which may expose the Company to financial risk. Based on market and regulatory conditions, including Order 636 provisions that provide for the recovery of prudently incurred transition costs, the Company believes such risk was not material to the Company's consolidated results of operations or financial position as of September 30, 1994. PEPL and Trunkline are currently collecting certain take-or-pay settlement costs through a combination of direct billings and volumetric surcharges. The volumetric surcharges are being collected with interest over a period extending through 1997. The U.S. Department of the Interior has 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, 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. If the pipelines ultimately have to reimburse or indemnify the producers, the potential exists for some recovery from pipeline customers. The potential liability of the producers to the government and of the pipelines to the producers involves complex issues of law and fact which are likely to take a substantial period of time to resolve. Management believes this matter will not have a material adverse effect on the Company's consolidated financial position. Jurisdictional Transportation and Sales Rates PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into effect, subject to refund, general rate increases incorporating the SFV rate design. Hearings in these rate proceedings were completed in the first half of 1994, and a favorable initial decision by the FERC Administrative Law Judge (ALJ) was received in the earlier rate case on August 4, 1994. An initial ALJ decision in the other proceeding is expected later in 1994. Effective April 1, 1989, PEPL placed into effect, subject to refund, sales and transportation rates reflecting a redesign of rates, including seasonal rate structures. PEPL and others are appealing various FERC orders related to these rates. On September 26, 1994, PEPL and certain other parties filed a settlement agreement with FERC. If adopted by FERC and other parties to the proceeding, this settlement would resolve refund matters and terminate other actions for the period these rates were effective. Trunkline - On September 1, 1994, Trunkline placed into effect, subject to refund, a general rate increase in accordance with terms of a rate case settlement in 1993. FERC has set the rate case for hearing to begin in June 1995. 9 Other - The Company's pipelines, pursuant to FERC requirements, requested FERC approval to record the impact of adopting Accounting Standard No. 109, "Accounting for Income Taxes," including the recognition of a portion of the impact as an increase to stockholders' equity. FERC has denied approval of certain of these requests, pending rate case review, and the Company's pipelines, where approval has been denied, have filed for rehearing. The Company believes the ultimate resolution of this matter will not have a material adverse effect on consolidated financial position. 5. Income Tax The Company's investment tax credit carryforward of $72.1 million at December 31, 1993 will begin to expire in 1996 and will be extinguished in 2002 if not utilized sooner. The alternative minimum tax credit carryforward of $57.3 million at December 31, 1993 can be carried forward indefinitely. In 1990, the Internal Revenue Service (IRS) issued regulations which disallow for tax purposes losses incurred in the Company's 1989 sales of certain Texas Eastern Corporation (TEC) assets. During the third quarter of 1994, the Company resolved this matter, and as a result, reduced deferred income tax liabilities and goodwill by approximately $200 million. 6. Gas Imbalances The consolidated balance sheet includes in-kind balances as a result of differences in gas volumes received and delivered. At September 30, 1994 and December 31, 1993, other current assets and other current liabilities included $10.4 million and $11 million (1994), and $64.8 million and $67.9 million (1993), respectively, for these imbalances. 7. Other Contingencies TEPPCO Partners, L.P. - TEPPCO Partners, L.P. is a master limited partnership (MLP) that owns and operates a petroleum products pipeline. The Company has a 10.45% ownership interest in the MLP. Prior to April 1, 1994, 8.45% of the Company's ownership interest was nonparticipating in allocations of income and cash distributions. To support the MLP's ability to make the minimum quarterly distributions on all MLP units, PEC has agreed, under certain circumstances and subject to certain limitations, to contribute cash to the MLP in return for additional limited partner interests (APIs). Subject to certain exceptions, the support period will extend through December 31, 1994. PEC's obligation to purchase APIs is limited to an aggregate of $50 million (maximum outstanding at any time) during this support period. No API purchases have been required since inception through the date of this report. Furthermore, a subsidiary partnership of the MLP has $356.5 million in First Mortgage Notes outstanding with recourse to the general partner, a subsidiary of TEC. These notes have annual principal payments due through 2010. 10 Petrolane Incorporated (Petrolane) - In connection with the sale of Petrolane in 1989, TEC agreed to indemnify Petrolane against certain obligations for guaranteed leases and environmental matters. Certain of the lease obligations relate to Petrolane's divestiture of supermarket operations prior to its acquisition by TEC and, as of December 31, 1993, totaled approximately $95.7 million over the remaining terms of the leases, which expire in 2006. In the opinion of management, the probability that TEC will be required to perform under this indemnity provision is remote. Petrolane was named in a suit filed by the city of Fresno, California (the City) in the U.S. District Court for the Eastern District of California on February 18, 1993 seeking contribution from 22 parties for characterization and remediation costs related to the Fresno Sanitary Landfill (the Landfill). The City, under a mandate from the U.S. Environmental Protection Agency (EPA), is obligated to characterize and remediate environmental contamination at the Landfill, which is on the National Priorities List. One of Petrolane's former subsidiaries is alleged to have disposed of hazardous substances at the Landfill. Since characterization of the Landfill has not been completed, the Company is unable at this time to estimate its share of cleanup costs or the timing of such costs, but expects that this matter will not have a material adverse effect on the Company's consolidated financial position. 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 by an affiliate of Pan-Alberta Gas Limited. The transportation agreement requires estimated total payments of $212.8 million for the years 1994 through 2001. In the opinion of management, the probability that performance will be required under this guarantee is remote. 8. Stockholders' Equity Under the most restrictive covenants contained in the Company's debt agreements, $721.4 million of PEC's common stockholders' equity was available for the payment of dividends at September 30, 1994. 11 9. Environmental Matters TETCO - TETCO is currently conducting a PCB (polychlorinated biphenyl) characterization and cleanup program at certain of its compressor station sites under conditions stipulated by a U.S. Consent Decree. The program includes on- and off-site characterization, installation of on- site source control equipment and groundwater monitoring wells, and on- site cleanup work. TETCO expects to complete the program at up to 89 sites in as many as 14 states over an approximate 10-year period that began in 1990. TETCO also has ongoing cleanup and remediation programs in Pennsylvania and New Jersey, implemented pursuant to settlement agreements with those states. In 1991, TETCO entered into an Interim Agreed Order with the state of Kentucky concerning characterization of TETCO's three compressor station sites in that state and TETCO has substantially completed work under the Interim Agreed Order. The Company is negotiating an Agreed Order with the state of Kentucky for remediation of those sites and is currently remediating one of those sites. The state of Kentucky is currently considering the imposition of a fine. The Company previously established a reserve for potential fines and penalties. Additionally, under a consent order with the state of Mississippi, TETCO is conducting site assessment and characterization in that state. The cleanup programs are not expected to interrupt or diminish TETCO's operational ability to deliver natural gas to customers. At September 30, 1994 and December 31, 1993, TETCO had recorded current and long-term liabilities of $58.6 million and $306.5 million (1994), and $93 million and $298.7 million (1993), respectively, for remaining estimated cleanup costs. These cost estimates represent gross cleanup costs expected to be incurred by TETCO, have not been reduced by customer or insurance recoveries and do not include fines, penalties or third-party claims. TETCO is recovering 57.5% of cleanup costs in rates pursuant to a stipulation and agreement approved by FERC in 1992. At September 30, 1994 and December 31, 1993, TETCO had recorded current and long-term regulatory assets of $20.4 million and $182.7 million (1994), and $31.1 million and $196.3 million (1993), respectively, representing costs to be recovered from customers. TETCO's litigation with its insurance carriers to recover cleanup and other costs and to enforce the carriers' duty to defend and indemnify TETCO has concluded. TETCO's petition for a writ of certiorari with the U.S. Supreme Court was denied on October 3, 1994 allowing judgment in favor of the insurance carriers to stand. TETCO, as well as certain other PEC subsidiaries in some of the cases, are defendants in several private plaintiff suits in various courts. These suits seek relief for actual and punitive damages that allegedly resulted from the release of PCBs and other hazardous substances in violation of federal and state laws. The Company is continuing to defend itself vigorously in these suits. The Company believes the ultimate resolution of these matters relating to the PCB cleanup programs will not have a material adverse effect on consolidated results of operations or financial position. 12 PEPL and Trunkline - The Company has notified the EPA of PCB contamination at up to 41 sites on the PEPL and Trunkline systems, and is undertaking a remediation program at these sites, while continuing to discuss with and provide information to the EPA on these matters. Localized contamination of these sites resulted from the past use of lubricants containing PCBs in auxiliary equipment. Soil and sediment testing, to date, has detected no significant off-site contamination. The Company is also involved in the cleanup and removal of wastewater collection facilities at 14 PEPL and Trunkline sites. The PCB and wastewater cleanup programs are expected to extend over a 10-year period that began in 1992. In addition to these ongoing assessments, PEPL and Trunkline are evaluating the prior use of disposal areas to determine if those areas potentially contain hazardous substances. The Company is unable at this time to estimate remediation costs that will result from these evaluations. The Company recorded $33 million for liabilities relating to PEPL and Trunkline existing cleanup programs and recorded regulatory assets for the same amount, representing costs to be recovered from customers. The Company does not expect the resolution of the PEPL and Trunkline environmental matters to have a material adverse effect on consolidated financial position. 10. Litigation In connection with a rupture and fire that occurred on TETCO's 36-inch natural gas pipeline on March 23, 1994 in Edison, New Jersey, numerous lawsuits were filed against the Company and other defendants in the Superior Court of New Jersey, Middlesex County, on behalf of hundreds of individuals seeking unspecified compensatory damages for personal injuries and property losses, as well as punitive damages. The Court ordered a moratorium on the filing of new suits until procedures for the handling of the suits were determined. The moratorium was lifted on October 1, 1994. Previously filed suits must be re-filed in accordance with case management procedures. Requests by some plaintiffs for class action certification have been denied by the trial and appellate courts. The cases are expected to be consolidated for trial on the issue of liability. The Company has also received numerous letters from attorneys claiming to represent hundreds of additional individuals with unspecified claims against the Company. In addition, Quality Materials, Inc., the owner of the asphalt plant located at the site of the rupture, has filed suit in the U.S. District Court for the District of New Jersey against TETCO seeking to recover unspecified property damages, lost income and punitive damages. TETCO has filed a counterclaim against Quality Materials, Inc. The cause of the rupture is under investigation by the National Transportation Safety Board. The Company has recorded a $5 million after-tax charge for costs related to this incident that are not recoverable under the Company's insurance policies. The Company does not expect the resolution of these matters to have a material adverse effect on consolidated results of operations or financial position. 13 The Company is also involved in various other legal actions and claims arising in the normal course of business. Based upon its current assessment of the facts and the law, management does not believe that the outcome of any such action or claim will have a material adverse effect upon the consolidated financial position of the Company. However, these actions and claims in the aggregate seek substantial damages against the Company and are subject to the uncertainties inherent in any litigation. 11. Fair Presentation The information as furnished reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the Company's financial position as of September 30, 1994, results of operations for the three and nine months ended September 30, 1994 and 1993, and cash flows for the nine months ended September 30, 1994 and 1993. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information is provided to facilitate increased understanding of the 1994 and 1993 interim consolidated financial statements and accompanying notes presented in Item 1. The discussion of the Company's "Operating Environment and Outlook" addresses key trends and future plans. The "Capital Resources, Liquidity and Financial Position" section analyzes cash flows and financial position. Material period-to-period variances in the consolidated statement of income are discussed under "Results of Operations." Throughout these discussions, management has addressed items that are reasonably likely to materially affect future liquidity or earnings. OPERATING ENVIRONMENT AND OUTLOOK Proposed Merger - On October 9, 1994, PEC, a wholly-owned subsidiary of PEC and ANGC entered into an agreement to merge on a tax-free, stock-for-stock basis. ANGC is a holding company whose subsidiaries purchase, gather, process, transport and market natural gas, NGLs and crude oil. Pursuant to the proposed merger, each share of ANGC common stock outstanding immediately prior to the effective date of the merger will be converted into the right to receive between 1.5725 and 1.8750 shares of PEC common stock. The exact exchange ratio within this range will be determined based on the average PEC stock closing prices in a specified 15-day period. Completion of the merger is expected by year-end, subject to certain conditions, including approval by various regulatory agencies and the stockholders of PEC and ANGC. The merger is expected to be accounted for under pooling of interests method of accounting for a business combination and ANGC will become a wholly-owned PEC subsidiary. Nonrecurring expenses incurred as a direct result of the merger are expected to total approximately $10 million and will be included in the Company's and ANGC's results of operations, as appropriate, in the periods incurred. The merger will make the Company the third-largest independent natural gas marketing company, fourth-largest gas gathering company and one of the top 15 NGL producers in the nation. Post-Order 636 - As discussed in Note 4 of the Notes to Consolidated Financial Statements, all four of the Company's interstate pipelines implemented restructured services in the second and third quarters of 1993 pursuant to FERC Order 636. On August 1, 1994, TETCO implemented a FERC-approved comprehensive settlement that resolves issues related primarily to Order 636 transition costs and a number of other issues related to services prior to Order 636. This settlement and other Order 636 transition issues are further discussed under "Operating Cash Flow." As a result of the SFV rate design required by Order 636 and the elimination by PEPL of seasonal rates, historical seasonal variations in revenues and receivables have diminished. Generally, the Company's pipeline earnings have become more evenly distributed throughout the year. 15 Transportation and storage services form the core of the Company's pipeline business in the Order 636 environment. Upon implementation of Order 636, operating revenues and gas purchase costs decreased primarily as a result of the elimination of natural gas sales by TETCO, Algonquin and PEPL in 1993, while operating income generated by firm transportation and storage services increased. Trunkline's unbundled sales service continued through October 31, 1994. Earnings from interruptible transportation revenues have been significantly reduced as a result of Order 636 rate design changes and capacity release mechanisms that allow firm customers to sell unused customer capacity. The Company's pipelines continue to offer selective discounting to utilize available capacity. The Company expects to benefit from the environment created by the regulatory changes of Order 636 by developing innovative services for customers and also plans to continue expanding the natural gas pipeline network via major capital projects. The Company's four interstate pipelines and the Market and Supply Services group, which includes 1 Source Corporation and Centana Energy Corporation, are involved in responding to new markets created, in part, by Order 636, and to increased demand for natural gas as both a sound economic and environmental solution to the nation's energy needs. The proposed merger with ANGC would significantly expand the activities of the Market and Supply Services group. See further discussion of capital expenditures in "Investing Cash Flow." CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION Operating Cash Flow
Nine Months Ended September 30 ------------------- Millions 1994 1993 - -------- ------ ------ Net Cash Flows Provided by Operating Activities $419.3 $594.8 ------ ------
Historical Analysis - Operating cash flows decreased $175.5 million comparing the nine-month period in 1994 to the same period in 1993. This decrease between the periods reflects the sale of $173.5 million of LNG project settlement receivables in 1993 and lower operating cash activity caused by the elimination of interstate pipeline sales services. These decreases were partially offset by 1994 collections of purchased gas costs incurred in prior years and lower interest costs. [UPDATE] 16 Order 636 Transition Costs - With implementation of Order 636 and the significant reduction in pipeline merchant services that has resulted, the Company's pipelines are incurring certain costs for the transition, primarily related to TETCO's gas purchase contract commitments. TETCO, Algonquin and PEPL no longer offer merchant sales of natural gas, thereby substantially eliminating the need for gas purchase contracts. Trunkline's gas purchase commitments primarily related to unbundled sales contracts that expired October 31, 1994. At September 30, 1994, the Company's gross commitments under gas purchase contracts that do not contain market-sensitive pricing provisions were approximately $225 million, $175 million, $90 million, $50 million and $35 million for the years 1994 through 1998, respectively, and a total of $25 million thereafter. These estimates reflect significant assumptions regarding deliverability and escalation clauses. TETCO's Order 636 settlement provides for the recovery of transition costs, including interest, through volumetric and reservation charges through the year 2002. PEPL's and Trunkline's recoveries, which are subject to further FERC action, will occur over the next three years. For the remainder of 1994 and during the following one to two years, above-market gas purchase contract payments by the pipelines are expected to exceed transition cost collections from customers. Cash requirements related to transition costs will be funded by cash from operations and/or available credit facilities and are not expected to have a material adverse effect on liquidity. Net cash receipts related to transition costs are expected to occur in periods beyond 1995 or 1996. The Company believes the exposure associated with gas purchase contract commitments and the elimination of the Company's merchant services will be substantially mitigated by transition cost recovery pursuant to TETCO's settlement, Order 636 and other mechanisms, including assignments of certain gas purchase contracts to third parties. As a result, the Company believes that transition cost issues related to Order 636 will not have a material adverse effect on consolidated financial position. Environmental Matters - The Company believes it will be able to fund the TETCO, PEPL and Trunkline PCB and other existing cleanup program costs from customer recoveries and other cash flows and, therefore, the ultimate resolution of these matters will not have a material adverse effect on consolidated financial position or liquidity. See Note 9 of the Notes to Consolidated Financial Statements. In addition, PEPL and Trunkline are evaluating the prior use of disposal areas to determine if those areas potentially contain hazardous substances. The Company is unable at this time to estimate remediation costs that will result from these evaluations. As discussed in Note 7 of the Notes to Consolidated Financial Statements, the Company is also unable at this time to estimate its share or the timing of cleanup costs related to the Fresno Sanitary Landfill, but expects that this matter will not have a material adverse effect on the Company's consolidated financial position or liquidity. 17 Litigation - In connection with a rupture and fire that occurred on TETCO's 36-inch natural gas pipeline on March 23, 1994 in Edison, New Jersey, numerous lawsuits were filed against the Company and other defendants in the Superior Court of New Jersey, Middlesex County, on behalf of hundreds of individuals seeking unspecified compensatory damages for personal injuries and property losses, as well as punitive damages. The Court ordered a moratorium on the filing of new suits until procedures for the handling of the suits were determined. The moratorium was lifted on October 1, 1994. Previously filed suits must be re-filed in accordance with case management procedures. Requests by some plaintiffs for class action certification have been denied by the trial and appellate courts. The cases are expected to be consolidated for trial on the issue of liability. The Company has also received numerous letters from attorneys claiming to represent hundreds of additional individuals with unspecified claims against the Company. In addition, Quality Materials, Inc., the owner of the asphalt plant located at the site of the rupture, has filed suit in the U.S. District Court for the District of New Jersey against TETCO seeking to recover unspecified property damages, lost income and punitive damages. TETCO has filed a counterclaim against Quality Materials, Inc. The cause of the rupture is under investigation by the National Transportation Safety Board. The Company has recorded a $5 million after-tax charge for costs related to this incident that are not recoverable under the Company's insurance policies. The Company does not expect the resolution of these matters to have a material adverse effect on consolidated financial position or liquidity. Other - The Company expects to generate sufficient future taxable income from operations to fully utilize deferred tax assets, net of valuation allowance, including the investment tax credit carryforward. However, if needed, the Company could implement tax-planning strategies to accelerate approximately $300 million of taxable income, prior to expiration of the carryforward. See Note 4 of the Notes to Consolidated Financial Statements for a discussion of other regulatory proceedings. On September 1, 1994, Trunkline placed into effect, subject to refund, a general rate increase in accordance with terms of a rate case settlement in 1993. FERC set the rate case for hearing to begin in June 1995. Other operating cash needs for the next 12 months are expected to include rate refunds. These and any other operating requirements are expected to be funded by cash from operations, debt issuances and/or available credit facilities. The Company continues to make periodic sales of trade receivables, with limited recourse. 18 Investing Cash Flow
Nine Months Ended September 30 -- --------------------- Millions 1994 1993 - -------- ------ ------ Net Cash Flows Used in Investing Activities $355.2 $136.8 ------ ------
Capital Expenditures - Capital expenditures totaled $329.7 million in the first nine months of 1994, compared with $207.3 million for the same period in 1993. Capital expenditures for 1994 are expected to approximate $500 million and are being funded by cash from operations, debt issuances and/or available credit facilities. These capital expenditures include significant amounts for TETCO and Algonquin customer-supported market expansion projects. Capital expenditures for 1994 also reflect completion by the Company in June 1994 of the purchase of certain intrastate natural gas pipeline, storage and processing facilities in south Texas for more than $100 million. Additional related purchases are expected to be completed during the next nine months. These transactions will enable the Company to provide expanded services for natural gas producers and other customers in the Gulf Coast region. Liberty Pipeline Company (Liberty), in which a TETCO subsidiary owns a 30% interest, has postponed indefinitely the proposed $162 million Liberty pipeline as a result of two customers withdrawing from the project. TETCO's planned expansion to deliver natural gas to Liberty also has been postponed pending redefinition of the project. No material amounts for the Liberty pipeline have been expended by the Company to date. The Company's 1995 capital expenditures include plans for significant market projects by the natural gas pipelines and the Market and Supply Services group. The Company's current estimate for 1995 capital expenditures is approximately $425 million. This estimates does not include the capital projects of ANGC that will be included in the Company's 1995 capital expenditures if the merger is consummated. The Company continues to study the potential impact of the Clean Air Act Amendments of 1990 (the Amendments) and the related federal and state regulations on the Company. While many of the regulations have not yet been finalized, the Company currently estimates that capital expenditures necessary to comply with the requirements of the Amendments and the regulations will not exceed $60 million. The Company's estimated 1994 and 1995 capital expenditures include approximately $15 million and $20 million, respectively, related to these requirements. Management believes any expenditures necessary will be eligible for recovery in rates. 19 Tax on Asset Sales - In 1990, the IRS issued regulations which disallow for tax purposes losses incurred in the Company's 1989 sales of certain TEC assets. During the third quarter of 1994, the Company resolved this matter, and as a result, reduced deferred income tax liabilities and goodwill by approximately $200 million. Investing cash flows for the nine months ended September 30, 1994 includes the Company's $41 million payment with respect to prior year tax liabilities. Financing Cash Flow
Nine Months Ended September 30 - -------------------- Millions 1994 1993 - -------- ----- ------ Net Cash Flows Used in Financing Activities $29.3 $430.5 ----- ------
Cash flows used in financing activities decreased $401.2 million comparing the first nine months of 1994 to the same period of 1993. During the nine months ended September 30, 1993, significant debt retirements were made, including early redemptions of long-term debt and retirement of amounts outstanding under the revolving credit agreements. These debt payments were partially offset by proceeds from a 10-million-share common stock offering during the 1993 period. Debt and Credit Facilities - In August and October 1994, respectively, PEPL and TETCO each issued $100 million, 10-year Notes bearing interest at 7.875% and 8.25%, respectively. TETCO and PEPL have variable-rate, revolving credit agreements that permit these subsidiaries to borrow up to $700 million on a combined basis, utilizing revolving credit borrowings and letter of credit facilities. At September 30, 1994, there were no amounts outstanding under these agreements. Financing Requirements - Dividends and debt repayments for the next 12 months, along with operating and investing requirements, are expected to be funded by cash from operations, debt issuances and/or available credit facilities. As of the date of this report, TETCO and PEPL have effective shelf registration statements with the Securities and Exchange Commission (SEC) for the issuance of $100 million each of unsecured debt securities. PEC filed a shelf registration statement with the SEC on November ___, 1994 for the issuance of up to $200 million in unsecured debt securities. Pursuant to the proposed merger with ANGC discussed in "Operating Environment," the outstanding shares of common stock of PEC will increase by approximately 24 million to 28 million shares upon effectiveness of the merger, depending upon the final exchange ratio. 20 RESULTS OF OPERATIONS Consolidated net income for the nine months ended September 30, 1994 was $157.2 million, or $1.31 per share on 120.4 million average common shares outstanding, compared with $129.5 million, or $1.14 per share on 113.4 million average common shares outstanding, for the same period in 1993. Operating Income Analysis While gas transmission operations are seasonal, with the highest throughput occurring during the first and fourth quarters, the historical seasonal variances in financial results began to diminish in the second quarter of 1993 as a result of the SFV rate design required by Order 636 and the termination of seasonal rates by PEPL. Consolidated operating income increased slightly in the first nine months of 1994 compared with the same period in 1993. These results include a net increase by the Natural Gas Transmission group, reflecting benefits recorded in 1994 as a result of favorable regulatory decisions and increased revenues from new firm contracts and projects, mostly offset by reduced earnings on interruptible transportation revenues. Reduced margins during early 1994 on NGLs sales by the Market and Supply Services group largely offset the net improvement by the pipelines. These margins on NGLs sales started improving late in the second quarter of 1994. Total natural gas volumes were up 5% comparing these same periods, due to an exceptionally cold winter in the market areas in the first quarter of 1994 and incremental services initiated by TETCO and Algonquin subsequent to the 1993 third quarter. With implementation of the SFV rate design, which assigns return on equity, related taxes and other fixed costs to the demand component of rates, earnings fluctuations related to throughput volumes have been minimized. Consolidated Operating Income by Business Group
Nine Months Ended September 30 ------------------------------ Millions 1994 1993 % Change -------- ------ ------ -------- Natural Gas Transmission TETCO $195.8 $211.2 (7) Algonquin 50.5 42.2 20 PEPL 109.1 91.1 20 Trunkline 33.3 37.3 (11) Other 4.0 4.1 (2) ------ ------ ---- Total 392.7 385.9 2 Market and Supply Services 14.4 18.9 (24) LNG Project (3.1) (1.3) (138) Parent, Other and Eliminations 4.7 3.7 27 ------ ------ ---- Consolidated Operating Income$408.7 $407.2 - ====== ====== ====
21 Natural Gas Pipeline Volumes
Nine Months Ended September 30 ------------------------------ Billion cubic feet (Bcf) 1994 1993(A) % Change ------------------------ ------ ------- -------- Market-area Transports TETCO 761 668 14 Algonquin 198 169 17 PEPL 430 395 9 Trunkline 335 277 21 Eliminations (69) (93) (26) ----- ----- ---- 1,655 1,416 17 ----- ----- ---- Sales TETCO - 33 (100) Algonquin - 2 (100) PEPL - 22 (100) Trunkline - (B) 66 (B) (100) ----- ----- ---- - 123 (100) ----- ----- ---- Total Market Area 1,655 1,539 8 ----- ----- ---- Supply-area Transports TETCO 107 86 24 PEPL 29 37 (22) Trunkline 77 119 (35) Eliminations - (1) (100) ----- ----- ---- 213 241 (12) ----- ----- ---- Total Volumes 1,868 1,780 5 ===== ===== ==== ---------- (A) Certain volumes for the prior period have been restated to conform to the current reporting presentation. (B) Trunkline's unbundled sales volumes, which are both sold and transported, are included in transportation throughput. These volumes total 82 Bcf and 10 Bcf for the nine month periods ended September 30, 1994 and 1993, respectively.
22 TETCO - Operating income for TETCO decreased $15.4 million comparing the first nine months of 1994 with the same period in 1993 primarily due to reduced interruptible transportation revenues. Net sales revenue decreased $129.6 million, reflecting the elimination of TETCO's traditional merchant function effective June 1, 1993. Transportation revenue increased $123.8 million, or 31%, as transportation volumes increased 15%, reflecting the SFV rate design, the conversion of sales contracts to firm transportation and incremental projects that began service in late 1993. Other revenues decreased primarily from the conversion of a portion of storage revenues to transportation revenues following the unbundling of services pursuant to Order 636. Operating expenses for TETCO increased in the third quarter of 1994 reflecting the amortization of costs that are recovered in transportation rates. Algonquin - Algonquin's operating income remained fairly constant in the first nine months of 1994 compared with the same period in 1993, excluding an $8 million benefit recorded in the second quarter of 1994 for the settlement of certain rate cases. Transportation revenue increased $21.1 million, offsetting declines in net sales and storage revenues. The decreases in net sales and storage revenues reflect the elimination of Algonquin's traditional merchant function and the conversion of storage revenues to transportation revenues upon implementation of Order 636. PEPL - This pipeline's operating income increased $18 million comparing the first nine months of 1994 and 1993. PEPL's operating income benefited in the second and third quarters of 1994 from increased firm transportation contracts, $11 million related to the favorable decision in a prior-year regulatory proceeding, as well as reduced expenses. This improvement offset the first quarter decrease that resulted from the elimination of seasonal rates that were in effect prior to PEPL's implementation of Order 636 on May 1, 1993. The increased revenues from unbundled transportation and storage services partially offset reduced net sales revenues resulting from the elimination of PEPL's merchant function. Operating expenses decreased as a result of lower expenses related to sales volumes, as well as the release in the first and second quarters of 1994 of $10.6 million in provisions established for gas supply matters that have been resolved. Trunkline - Operating income for Trunkline decreased $3.9 million comparing the first nine months of 1994 with the same period in 1993, primarily reflecting lower interruptible transportation revenues. Total transportation revenue increased and net sales revenue decreased for the periods, as a result of Order 636 unbundling. Sales revenue also declined as a result of a $15.5 million rate case benefit recorded in the second quarter of 1993. Trunkline's unbundled sales service expired on October 31, 1994. Transportation revenues in 1994 included a nonrecurring benefit of approximately $4 million that resulted from a contract settlement. Operating expenses decreased primarily as a result of a $13 million charge recorded in the second quarter of 1993 related to the estimated cost of gas purchase contracts. Other Operating Income - Operating income for Market and Supply Services decreased $4.5 million comparing the first nine months of 1994 and 1993. This decrease is primarily attributable to lower sales prices of NGLs in 1994, partially offset by revenues from new services provided by 1 Source Corporation, as well as revenues from the assets acquired in June 1994 in south Texas. 23 Other Income and Deductions - Other income and deductions decreased $4.8 million for the first nine months of 1994 compared with the same period in 1993. This decrease includes interest income earned in 1993 on the LNG project settlement receivables prior to the sale of these receivables in the second and third quarters of 1993, and miscellaneous reductions related to other assets. Partially offsetting these decreases was a net increase in equity in earnings from investments in affiliates that resulted from improvements primarily by National Methanol Company and a decrease in Northern Border resulting from the sale of a portion of the Company's interest in late 1993. Interest Expense - Interest expense in the first nine months of 1994 decreased $46 million, or 22%, compared to the same period in 1993. This reduction reflects reduced interest and other expenses related to lower average debt balances outstanding during the first nine months of 1994 compared with the same period in 1993, primarily resulting from the Company's early retirement of four issues of relatively high-interest debt in the last nine months of 1993. Also contributing to the decrease was interest in 1993 on refunds of production-related costs. PART II. OTHER INFORMATION Item 1. Legal Proceedings See Notes 4, 7, 9 and 10 of the Notes to Consolidated Financial Statements in Part I of this Report which are incorporated herein by reference. See also Item 3 of PEC's Annual Report on Form 10-K for the year ended December 31, 1993. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized officer and chief accounting officer. PANHANDLE EASTERN CORPORATION (Registrant) /s/ Sandra P. Meyer --------------------------------------- Sandra P. Meyer, Controller Date: November 11, 1994 25 EX-27 2
5 This schedule contains summary financial information extracted from the Panhandle Eastern Corporation Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 and is qualified in its entirety by reference to such financial statements. 0000351696 PANHANDLE EASTERN CORPORATION 1,000 9-MOS DEC-31-1994 SEP-30-1994 53,200 0 200,300 0 113,700 663,500 7,355,600 2,859,300 6,776,800 973,500 1,926,000 120,700 0 0 1,643,300 6,776,800 689,000 1,804,600 615,700 995,400 227,400 0 166,700 265,300 108,100 157,200 0 0 0 157,200 1.31 1.31
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