-----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, W4LpZL9ieVZBxSN86Z+3/rw5VYbIW1vpRXTEDD9rnVS1AQsW6FURsWqCgjf64V0o QM7JTpCPC8C/Avu4tPnhcg== 0000950129-94-000226.txt : 19940822 0000950129-94-000226.hdr.sgml : 19940822 ACCESSION NUMBER: 0000950129-94-000226 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08157 FILM NUMBER: 94518452 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-K 1 FORM 10-K 1 - - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 --------------------- For the Fiscal Year Ended December 31, 1993 Commission File No. 1-8157 PANHANDLE EASTERN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 74-2150460 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
5400 WESTHEIMER COURT P.O. BOX 1642 HOUSTON, TEXAS 77251-1642 (Address, including zip code, of principal executive offices) (713) 627-5400 (Telephone number, including area code) --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $1.00 par value The New York Stock Exchange, Inc. The Pacific Stock Exchange Inc. Preferred Stock Purchase Rights The New York Stock Exchange, Inc. The Pacific Stock Exchange Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN ANY DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. --- --------------------- State the aggregate market value of the voting stock held by non-affiliates of the Registrant. The aggregate market value is computed by reference to the last sale price of the Registrant's Common Stock, on the Composite Tape -- New York Stock Exchange Transactions, on February 28, 1994. $2,630,747,284
NUMBER OF SHARES OUTSTANDING TITLE OF EACH CLASS AS OF FEBRUARY 28, 1994 ------------------- ---------------------------- Common Stock, $1.00 par value 120,262,733
--------------------- DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K - - - --------- Part I Portions of the Annual Report to Stockholders of Panhandle Eastern Corporation for the year ended December 31, 1993 Part II Portions of the Annual Report to Stockholders of Panhandle Eastern Corporation for the year ended December 31, 1993 Part III Portions of the Definitive Proxy Statement, dated March 11, 1994, for the Annual Meeting of Stockholders of Panhandle Eastern Corporation, to be held April 27, 1994 Part IV Portions of the Annual Report to Stockholders of Panhandle Eastern Corporation for the year ended December 31, 1993
- - - -------------------------------------------------------------------------------- - - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE --- PART I Item 1. Business..................................................................... 1 General...................................................................... 1 Natural Gas Pipelines........................................................ 1 LNG Operations............................................................... 6 Regulation................................................................... 6 Rates and Regulatory Proceedings............................................. 7 Competition.................................................................. 7 Other Business Activities.................................................... 8 Environmental Matters........................................................ 9 General Matters.............................................................. 9 Item 2. Properties................................................................... 9 Item 3. Legal Proceedings............................................................ 12 Item 4. Submission of Matters to a Vote of Security Holders.......................... 12 Executive Officers of Registrant........................................................ 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........ 13 Item 6. Selected Financial Data...................................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 13 Item 8. Financial Statements and Supplementary Data.................................. 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 14 PART III Item 10. Directors and Executive Officers of the Registrant........................... 14 Item 11. Executive Compensation....................................................... 14 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 14 Item 13. Certain Relationships and Related Transactions............................... 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 14 Index to Financial Statements and Schedules............................................. 19
--------------------- All gas volumes used herein are stated at 14.73 pounds per square inch, on a dry basis, at 60 degrees Fahrenheit. i 3 PART I ITEM 1. BUSINESS GENERAL Panhandle Eastern Corporation ("PEC"), a Delaware corporation, is a holding company whose subsidiaries are engaged primarily in the transportation of natural gas in interstate commerce and related services. The principal operating subsidiaries of PEC are Texas Eastern Transmission Corporation ("TETCO"), Algonquin Gas Transmission Company ("Algonquin"), Panhandle Eastern Pipe Line Company ("PEPL") and Trunkline Gas Company ("Trunkline"). Subsidiaries 1 Source Corporation ("1 Source") and Centana Energy Corporation ("Centana") pursue emerging opportunities in the natural gas market and producing areas, respectively. 1 Source provides customized transportation management services. In addition to gathering and processing natural gas, Centana owns and operates an intrastate pipeline system, markets hydrocarbon liquids and is a leading producer of helium. PEC also owns subsidiaries engaged in the importation of liquefied natural gas ("LNG") from Algeria, as well as in the transportation, storage and regasification of LNG. In addition, PEC owns subsidiaries engaged in the non-regulated marketing of natural gas in the national market and in investment in a cogeneration venture. Through subsidiaries, PEC also owns interests in a joint venture that owns and operates a chemical-grade methanol plant in Saudi Arabia and in a master limited partnership engaged in the transportation and storage of petroleum products. PEC and its subsidiaries are treated for reporting purposes as being predominately involved in the interstate transportation and storage of natural gas. Information concerning components of consolidated operating revenues, including revenues attributable to transportation and sales of natural gas, for the years 1993, 1992 and 1991 is contained in the Consolidated Statement of Income on page 41 of the PEC 1993 Annual Report to Stockholders (the "Annual Report"), filed as Exhibit 13, which is incorporated herein by reference. PEC was organized in 1981 pursuant to the corporate restructuring of PEPL, which was incorporated in 1929. Executive offices of PEC are located at 5400 Westheimer Court, Houston, Texas 77056-5310, and the telephone number is (713) 627-5400. As used herein, and unless otherwise stated, "PEC" refers to Panhandle Eastern Corporation and "Company" refers to Panhandle Eastern Corporation and its subsidiaries. NATURAL GAS PIPELINES Together, TETCO, Algonquin, PEPL and Trunkline own and operate one of the nation's largest gas transmission networks. This fully interconnected 26,000-mile system can receive natural gas from most major North American producing regions for delivery to markets throughout the Mid-Atlantic, New England and Midwest states. Within these states, the Company's pipelines hold an approximate one-third market share. During 1993, the Company's pipelines delivered 2.39 trillion cubic feet of natural gas, equal to approximately 12% of U.S. consumption. Since the early 1980s, the business operations of interstate pipelines have undergone substantial transformation, reflecting both significant changes in the marketplace for natural gas and sweeping changes in regulatory policies. As a consequence of these changes, TETCO, Algonquin, PEPL, Trunkline and many other pipelines have significantly adjusted operations to respond more effectively to an evolving business environment. During 1993, all four of the Company's pipelines implemented restructured services under Order 636. See "Regulation." CERTAIN TERMS Certain terms used in the description of the Company's business are explained below. Demand or Reservation Charge: The amount paid by firm sales, transportation and storage customers to reserve pipeline and storage capacity. Federal Energy Regulatory Commission ("FERC"): The agency that regulates the transportation and sale of natural gas in interstate commerce under the Natural Gas Act of 1938 (the "NGA") and the Natural 1 4 Gas Policy Act of 1978 (the "NGPA"). FERC's jurisdiction includes rate-making, construction of facilities and authorization to provide service. Firm Service: Transportation, storage or sales of third-party gas, where customers pay a charge to reserve pipeline or storage capacity. Gathering Systems: Pipeline, processing and related facilities having the purpose of accessing production and other sources of natural gas supplies for delivery to a mainline transportation system. Interruptible Service: Transportation or storage of third-party gas provided on a capacity-available basis. Local Distribution Company ("LDC"): A municipal or investor-owned utility that sells or transports gas to local commercial, industrial and residential consumers. Merchant Sales Service: Volumes aggregated by pipelines, under purchase contracts with producers, that are transported and resold to LDCs and other customers at FERC-approved rates. Open-Access: Service provided on a non-discriminatory basis to any shipper pursuant to applicable FERC rules and regulations. Open Season: A specified period during which potential customers are asked to indicate interest in contracting for capacity in a new project. Expression of such interest is non-binding and generally followed by negotiations to establish firm commitments. Order 636: The FERC pipeline service restructuring rule that guided the industry's transition to unbundled, open-access pipeline services, creating a more market-responsive environment. Straight Fixed-Variable ("SFV") Method: A rate design method, provided for in Order 636, which assigns return on equity, related taxes and other fixed costs to the demand component of rates. Transition Costs: Those costs incurred as a result of the pipelines' transition to unbundled services under Order 636. The disposition of natural gas contracts tied to the former merchant sales function comprise the majority of such costs. Units of Measure: MMcf: One million cubic feet MMcf/d: One million cubic feet per day Bcf: One billion cubic feet Tcf: One trillion cubic feet
MARKET AND SUPPLY AREA DELIVERIES Market-area natural gas deliveries by the Company's four interstate pipelines were 2.08 Tcf in 1993, up from the 2.03 Tcf delivered in 1992. Consolidated pipeline deliveries totaled 2.39 Tcf, compared to 2.38 Tcf in 1992. Transportation volumes increased to 94% of market-area throughput in 1993, compared with 87% in 1992, as the Company's pipelines replaced merchant sales of gas with transportation service. As used herein, "market area" with respect to each pipeline refers to those portions of the pipeline that include primarily delivery points for natural gas leaving the pipeline, and "supply area" with respect to each pipeline refers to those portions of the pipeline that include primarily receipt points for gas entering the pipeline. Market-area transportation represents volumes of gas delivered to the market area under transportation service agreements, while supply-area transportation represents volumes of gas delivered to the supply area under transportation service agreements. Generally, rates for supply-area transportation have lower margins than rates for market-area transportation. Market-area throughput (deliveries) refers to combined market-area transportation volumes and merchant sales volumes. 2 5 Set forth below is information concerning volumes for PEC's pipeline subsidiaries for 1993, 1992 and 1991 (volumes in Bcf).
% % % 1993 TOTAL 1992 TOTAL 1991 TOTAL ----- --- ----- --- ----- --- Market-area Transports TETCO........................... 927 39 770 32 624 29 Algonquin....................... 236 10 237 10 181 9 PEPL............................ 538 23 584 24 477 22 Trunkline....................... 389 16 351 15 360 17 Eliminations(1)................. (134) (6) (174) (7) (188) (9) ----- --- ----- --- ----- --- 1,956 82 1,768 74 1,454 68 ----- --- ----- --- ----- --- Sales TETCO........................... 33 1 97 4 196 9 Algonquin....................... 2 -- 20 1 54 3 PEPL............................ 22 1 62 2 58 3 Trunkline....................... 66(2) 3 94 4 90 4 Eliminations(1)................. -- -- (10) -- (51) (2) ----- --- ----- --- ----- --- 123 5 263 11 347 17 ----- --- ----- --- ----- --- Total Market Area................. 2,079 87 2,031 85 1,801 85 ----- --- ----- --- ----- --- Supply-area Transports TETCO........................... 118 5 154 7 154 7 PEPL............................ 43 2 60 2 55 2 Trunkline....................... 147 6 136 6 124 6 Eliminations(1)................. (1) -- (3) -- (4) -- ----- --- ----- --- ----- --- Total Volumes........... 2,386 100 2,378 100 2,130 100 ----- --- ----- --- ----- --- ----- --- ----- --- ----- --- Summary by Pipeline (Total Volumes) TETCO........................... 1,078 45 1,021 43 974 46 Algonquin....................... 238 10 257 11 235 11 PEPL............................ 603 26 706 30 590 28 Trunkline....................... 602 25 581 24 574 27 Eliminations(1)................. (135) (6) (187) (8) (243) (12) ----- --- ----- --- ----- --- Total................... 2,386 100 2,378 100 2,130 100 ----- --- ----- --- ----- --- ----- --- ----- --- ----- ---
- - - --------------- (1) Represents intercompany transactions. (2) Excludes 41 Bcf which was both sold and transported, and was reported as transportation throughput in 1993. During 1993, total billings for sales and transportation services provided by the Company to Consumers Power Company ("Consumers") accounted for approximately 14% of the Company's consolidated revenues. Consumers was the only customer of the Company accounting for 10% or more of consolidated revenues in 1993. Demand for gas transmission on the Company's pipeline systems is seasonal, with the highest throughput occurring during the colder periods in the first and fourth quarters -- the winter heating season. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 31 of the Annual Report, which is incorporated herein by reference. 3 6 NORTHEAST AREA TETCO. TETCO's principal customers are located in Pennsylvania, New Jersey and New York, and include LDCs serving the Pittsburgh, Philadelphia, Newark and New York City metropolitan areas. On June 1, 1993, TETCO implemented restructured services pursuant to Order 636, terminating its firm merchant service in connection therewith. Customers converted existing sales contracts to firm transportation contracts, and began purchasing all gas supplies directly from producers and marketers. As a result, market-area transportation increased to 86% of 1993 total throughput, as compared with 75% in 1992. Total market-area throughput increased 11% in 1993 as a result of expanded marketing efforts, TETCO's early implementation of Order 636 and completion of several expansion projects in late 1992. TETCO continues to pursue a strategy of growing through fully subscribed customer-driven expansions of pipeline capacity. Market-expansion projects added 63 MMcf/d of transportation service to customers under long-term firm contracts during 1993, including the first 33 MMcf/d of service for the Integrated Transportation Program initiated on November 1, 1993. TETCO and Algonquin have agreed to add a total of approximately 200 MMcf/d of firm service to Northeast customers through 1995, utilizing capacity on all four of the Company's pipelines. Liberty Pipeline Company, 30% owned by the Company, proposes to construct a 38-mile, 500 MMcf/d pipeline from interconnections with TETCO and another system in New Jersey to a delivery point on Long Island, with service to be phased in during 1995 and 1996. TETCO's Liberty Upstream expansion project, pending FERC approvals, will provide 243 MMcf/d of firm service to Liberty Pipeline. PEPL will provide 60 MMcf/d of firm service to TETCO in connection with the project. On the supply area portion of its system, TETCO in 1993 continued to deliver gas to PEMEX Gas and Basic Petrochemicals, Mexico's national gas and petrochemical company, under a contract providing for interruptible transportation service. TETCO also transported Mexican gas from the U.S.-Mexico border into the United States during December under various shipping contracts. Algonquin. Algonquin's major customers include LDCs and electric power generators that utilize gas transportation services to the Boston, Providence, Hartford and New Haven areas. Algonquin's overall throughput for 1993 decreased by 7% compared to 1992. The 1993 market-area transportation volumes were virtually unchanged from the 1992 volumes. Sales volumes for 1993 decreased by 90% from 1992 due primarily to the implementation of Order 636 on June 1, 1993, which eliminated Algonquin's merchant sales function. Continued expansion efforts added 90 MMcf/d of incremental firm transportation service to Algonquin customers during 1993, including 80 MMcf/d of new capacity to LDCs and electric power generating customer pursuant to Algonquin's Open Season project. MIDWEST AREA PEPL. PEPL's market volumes are concentrated among approximately 20 utilities located in the Midwest market area that encompasses large portions of Michigan, Ohio, Indiana, Illinois and Missouri. PEPL's major customers serving this market include the utilities, producers and independent marketers. Market-area volumes in 1993 fell 13% to 560 Bcf and supply-area volumes fell 28% to 43 Bcf. The decline in market-area deliveries reflects one-time storage inventory sales in 1992, while the supply-area decline is related to the sale of a non-contiguous system during the first quarter of 1993. See Item 2. On May 1, 1993, PEPL implemented restructured services under Order 636, terminating its merchant sales service. In December 1993, PEPL filed with FERC to transfer its remaining gathering facilities located west of the Haven, Kansas compressor facility to Panhandle Field Services Company, a newly created Company subsidiary, to be operated on an open-access, non-regulated basis. If approved, this action is expected to reduce existing field zone rates while expanding supply-area service opportunities. 4 7 A PEPL subsidiary has entered into a joint venture with a subsidiary of Western Gas Resources, Inc. that will provide natural gas gathering, processing and marketing services for natural gas producers. Both companies will, subject to FERC approval, contribute to the venture certain pipeline and gas processing facilities in Oklahoma. The Company's interest in this venture will be managed by Centana. Trunkline. Trunkline's major customers include eight utilities located in portions of Tennessee, Missouri, Illinois, Indiana and Michigan. Trunkline's total throughput increased 4% in 1993 as a result of aggressive marketing efforts. More than 240 MMcf/d of new firm transportation contracts became effective in 1993, primarily replacing interruptible service on Trunkline. A new interconnection with an Electric Energy, Inc. power plant in Illinois has enabled a large-scale test to co-fire natural gas with coal. Trunkline also began providing 30 MMcf/d of firm upstream transportation to customers of the 300 MMcf/d Crossroads Pipeline, which is owned by NIPSCO Industries. In addition, Trunkline provides operating services to Crossroads, which extends into heavily industrialized areas of Indiana. In another initiative, Trunkline added 60 MMcf/d of firm transportation service to the Chicago market during 1993. Trunkline implemented restructured services under Order 636 effective September 1, 1993. Trunkline may end its remaining unbundled sales service in late 1994. OTHER SERVICE INITIATIVES Shortly after its formation in early 1993, 1 Source, the Company's primary marketing subsidiary, announced the Flex-X(TM) and Minuteman(TM) expansion programs. The Flex-X(TM) expansion program is expected to add up to 700 MMcf/d of firm transportation service utilizing all four of the Company's pipelines to provide service to the growing Northeast markets. Flex-X(TM) is designed to build capacity in increments tailored to customers' individual needs over a 10-year period and has current commitments to provide 18 MMcf/d of new firm service in November 1994. Requests were received from its first open season for another 135 MMcf/d to begin in November 1995 and 10 MMcf/d more to begin in 1996. The program's second open season will be conducted in the summer of 1994 to determine additional customer interest in service to begin in 1996. The Minuteman(TM) Project, involving a proposed 100-plus mile high-pressure delivery system, is designed to meet the highly variable service needs of electric power generators, natural gas utilities and other customers in the Company's Northeast markets by serving also as a short-term storage facility. This project, for which firm customer agreements are being sought, would be built primarily along existing Algonquin right-of-way and would be phased in by segments as the market requires. 1 Source has also begun providing non-regulated services that help customers assemble natural gas transportation and supply options utilizing available resources on numerous pipeline systems, including the Company's. In conjunction with this effort, 1 Source has helped broaden the use of the Company's LINK(R) pipeline information system through licensing agreements with CNG Transmission Corporation ("CNG") and British Gas plc. NATURAL GAS STORAGE TETCO provides firm and interruptible open-access storage services. Since the implementation of Order 636 restructuring, storage is offered as a stand-alone unbundled service or as part of no-notice bundled service. TETCO's storage services utilize two joint venture storage projects in Pennsylvania and one wholly-owned and operated storage field in Maryland. On December 31, 1993, TETCO customers' actual combined inventory in these three fields was 54 Bcf. TETCO also leases storage capacity. Algonquin owns no storage fields. PEPL owns and operates three underground storage fields located in Illinois, Michigan and Oklahoma. Trunkline owns and operates one storage field in Louisiana. The combined working capacity was 31 Bcf as of December 31, 1993. In addition to owning storage fields, PEPL also leases storage capacity. Additionally, 5 8 PEPL's Pan Gas Storage Company ("Pan Gas") subsidiary is the owner of a storage field in Kansas with an estimated maximum capacity of 26 Bcf. PEPL is the operator of the field. Since the implementation of Order 636 restructuring, PEPL and Trunkline offer firm and interruptible storage on an open-access basis. PEPL and Trunkline have retained the right to use up to 15 Bcf and 10 Bcf, respectively, of storage capacity for system needs. RECENT DEVELOPMENT A rupture and fire occurred on TETCO's 36-inch natural gas pipeline on March 24, 1994, in Edison Township, New Jersey. The Company is working with the appropriate federal officials and other agencies to determine the cause of the incident and assess the extent of the damage. Service has been restored to customers to meet immediate demands. The Company is working with authorities to return the pipeline to full service and continues to evaluate any long term effects of the incident. The Company maintains insurance for events of this type. LNG OPERATIONS Subsidiaries of PEC entered into LNG import agreements with Sonatrach, the national oil and gas company of Algeria, in April 1987. The agreements provide for the importation of up to 3.3 Tcf of LNG over a period of up to 20 years. The agreements impose no take-or-pay or ship-or-pay obligations upon the Company and do not establish any minimum annual purchase volumes. In November 1989, FERC authorized Trunkline LNG Company ("Trunkline LNG") to provide receiving, storing and regasification services at its Lake Charles, Louisiana, facility. Activation of the LNG program was based primarily on the agreements with Sonatrach, as well as a long-term contract with Citrus Trading Corp. ("Citrus") that provides for the sale of up to 110 MMcf/d of gas. Citrus can elect not to purchase gas in any month if residual fuel oil prices during the previous month fall below a certain level. However, in the event of such election, the Company has the option to require Citrus to purchase nominated volumes at a contractually determined reduced price. Therefore, volumes and prices under the Citrus contract are not certain. Deliveries of gas to Citrus were made during ten months of 1993, averaging 90 MMcf per day. In 1993, the Company imported 30.8 Bcf of LNG and sold 31.1 Bcf of regasified LNG. An Algonquin subsidiary owns and operates an LNG facility in Providence, Rhode Island. The facility provides LNG handling services, including receipt, storage and redelivery. REGULATION TETCO, Algonquin, PEPL, Trunkline, Trunkline LNG and Pan Gas are "natural gas companies" under the NGA and NGPA and, as such, are subject to the jurisdiction of FERC. The NGA grants to FERC authority over the construction and operation of pipeline and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement or abandonment of such facilities. The Company's subsidiaries hold required certificates of public convenience and necessity issued by FERC, authorizing them to construct and operate the pipelines, facilities and properties now in operation for which certificates are required, and to transport and sell natural gas in interstate commerce. FERC also has authority to regulate rates and charges for natural gas transported in interstate commerce or sold by a natural gas company in interstate commerce for resale. The price at which gas is directly sold to industrial customers is not subject to FERC's jurisdiction. The Company's subsidiaries file with FERC applications for changes in transportation, sales and storage rates and charges. These changes are normally allowed to become effective after a suspension period, subject to refund, until such time as FERC authorizes the actual level of rates and charges. TETCO, Algonquin, PEPL and Trunkline operate as open-access transporters of natural gas. In 1992, FERC issued Order 636, which requires open-access pipelines to provide firm and interruptible transportation services on an equal basis for all gas supplies, whether purchased from the pipeline or from another gas 6 9 supplier. To implement this requirement, Order 636 provides, among other things, for mandatory unbundling of services that have historically been provided by pipelines into separate transportation, sales and storage services and mandatory open-access storage service. Order 636, which is on appeal to the courts, provides for the use of the SFV rate design, which assigns return on equity, related taxes and other fixed costs to the demand component of rates. In addition, Order 636, among other things, allows pipelines to recover 100% of prudently incurred eligible costs resulting from implementation of Order 636 ("transition costs"). Recoverable transition costs include gas supply realignment costs, unrecovered deferred gas purchase costs, other existing costs incurred in connection with bundled sales services that cannot be assigned to customers of unbundled services, and capital costs attributable to the restructuring. Order 636 requires 10% of gas supply realignment costs to be allocated for recovery from interruptible transportation services. FERC encourages pipelines to settle transition cost issues with customers through a negotiated process. During the second and third quarters of 1993, all four of the Company's interstate natural gas pipelines began providing restructured services under Order 636. The Company currently estimates that transition costs will range from $600 million to $725 million, including amounts incurred to date. Certain challenges to transition cost recoveries of the Company's pipelines are pending further FERC action. Included in these FERC proceedings are issues related to eligibility of costs under Order 636 and the prudence of such costs. On January 31, 1994, TETCO filed for FERC approval of a proposed comprehensive customer settlement. The settlement, supported by a broad base of customers and other parties, will resolve TETCO's regulatory issues regarding Order 636 implementation, including transition cost recovery, as well as FERC proceedings dating back to 1985 related to bundled merchant services provided prior to FERC Order 636. As of December 31, 1993, the Company established an additional provision of $100 million ($60.2 million after tax) to reflect the impact of TETCO's proposed settlement, including certain amounts collected that would be refunded to customers. Regulation of the importation and exportation of natural gas is vested in the Secretary of Energy, who has delegated various aspects of this jurisdiction to FERC and the Office of Fossil Fuels of the Department of Energy. The Company's subsidiaries are subject to the Natural Gas Pipeline Safety Act of 1968, which regulates pipeline and LNG plant safety requirements, and to the National Environmental Policy Act and other environmental and safety legislation. RATES AND REGULATORY PROCEEDINGS When rate cases are pending final FERC approval, a portion of the revenues collected by the Company's natural gas pipelines is subject to possible refunds. A summary of the status of pending rate cases and related regulatory matters involving TETCO, Algonquin, PEPL and Trunkline is contained in Note 2 of the Notes to Consolidated Financial Statements on pages 47 and 48 of the Annual Report, which are incorporated herein by reference. COMPETITION The Company's pipeline subsidiaries compete with other interstate and intrastate pipeline companies in the transportation and storage of natural gas. In recent years, FERC has adopted regulations designed to introduce more competition into the natural gas industry, requiring pipelines to provide open-access transportation. As a result, the volume of natural gas sales by pipelines has decreased dramatically and transportation volumes have increased significantly. The principal elements of competition among pipelines are rates, terms of service, and flexibility and reliability of service. Natural gas competes with other forms of energy available to the pipelines' customers and end users, including electricity, coal and fuel oils. The primary competitive factor is price. Changes in the availability or price of natural gas and other forms of energy, the level of business activity, conservation, legislation and governmental regulations, the capability to convert to alternative fuels, and other factors, including weather, affect the demand for natural gas in the areas served by the Company's pipelines. 7 10 TETCO competes directly with Transcontinental Gas Pipe Line Corporation, Tennessee Gas Pipeline Company ("TGPC"), Iroquois Gas Transmission System ("Iroquois"), CNG and Columbia Gas Transmission Corporation. Algonquin competes directly in certain market areas with TGPC and Iroquois. PEPL and Trunkline compete directly with ANR Pipeline Company, Natural Gas Pipeline Company of America and Texas Gas Transmission Corporation in the Midwest market area. OTHER BUSINESS ACTIVITIES CENTANA AND NATIONAL HELIUM Centana owns and operates the Cimarron River Pipeline System ("CRS"), a small intrastate pipeline system located in southwest Kansas. Gas is sold by CRS to a utility serving Liberal, Kansas, and sold to or transported for other customers. Century Refining, a division of Centana, is engaged in the wholesale marketing of natural gas liquids. Century Refining also owns and operates a small gas processing plant in western Oklahoma. Centana has recently expanded its organization and responsibilities to include natural gas gathering and aggregation functions. Centana is managing the Company's portion of the Westana joint venture. See "Natural Gas Pipelines -- Midwest Area". National Helium Corporation ("National Helium"), a subsidiary of Centana, processes gas from the PEPL system at its plant near Liberal, Kansas and markets the extracted hydrocarbons and helium. National Helium recommenced helium extraction in February 1991, after completion of facility modifications. The investment for such modifications was made by Air Products and Chemicals, Inc. ("Air Products") pursuant to a contract whereby Air Products has agreed to lease to National Helium the modified and updated equipment that was added to the facility and to purchase a large percentage of the helium production for the next 20 years. MIDLAND COGENERATION VENTURE A Company subsidiary owns an approximate 14.3% equity interest in Midland Cogeneration Venture Limited Partnership ("MCV"), which became operational in 1990. MCV converted an incomplete nuclear power plant to a dual-purpose energy unit that uses natural gas to generate electricity and produce industrial process steam. PEPL and Trunkline provide 95 MMcf/d of firm transportation to MCV. PANHANDLE TRADING COMPANY Panhandle Trading Company, a PEC subsidiary, functions as an independent purchaser and reseller of natural gas in the national market, serving gas producers, interstate and intrastate pipelines, LDCs and end users. This unit contracted for the sale of 250 Bcf of gas in 1993, compared with 202 Bcf in 1992. Approximately 80% of the 1993 volumes were transported on the Company's pipeline systems. TEPPCO PARTNERS TEPPCO Partners, L.P. ("TEPPCO Partners") was formed in March 1990 to own and operate the refined petroleum products and liquefied petroleum gases ("LPGs") pipeline business of Texas Eastern Products Pipeline Company ("TEPPCO"). TEPPCO, a PEC subsidiary, owns a 2% general partner interest, and a deferred participation interest representing an effective 8.45% limited partner interest in TEPPCO Partners. The remaining 89.55% limited partnership interest was sold to the public in 1990. Additional information concerning TEPPCO Partners is set forth under "TEPPCO Partners Facilities" in Item 2 and in Note 6 of the Notes to Consolidated Financial Statements on page 51 of the Annual Report, which are incorporated herein by reference. NATIONAL METHANOL COMPANY The Company owns a 25% interest in National Methanol Company ("National Methanol"), a joint venture which owns and operates a chemical-grade methanol plant located in Jubail, Saudi Arabia. The other partners are Hoechst Celanese Corporation, with a 25% interest, and majority state-owned Saudi Basic Industries Corporation, with a 50% interest. National Methanol is constructing a 700,000 metric ton-per-year MTBE (methyl tertiary butyl ether) unit, which is expected to be completed in 1994. 8 11 ENVIRONMENTAL MATTERS The Company continues to study the potential impact of the Clean Air Act Amendments of 1990 (the "Amendments") and 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 ranging from $60 million to $80 million may be necessary to comply with the requirements of the Amendments and the regulations. The Company's estimated 1994 capital expenditures include approximately $20 million related to these requirements. Management believes that any expenditures necessary will be eligible for recovery in rates. For a discussion of other environmental matters involving the Company, see Note 11 of the Notes to Consolidated Financial Statements on pages 54 and 55 of the Annual Report, which are incorporated herein by reference. GENERAL MATTERS While the Company does engage in some research and development activities, no such activities conducted during the past three years have been material to the Company's business, nor have there been any material customer-sponsored research activities during that period relating to the Company's business activities. TETCO, Algonquin, PEPL and Trunkline are members of and provide support to the Gas Research Institute ("GRI"), which plans and manages research and development efforts for the gas industry. The funds used to support GRI are derived from a surcharge on the pipelines' rates pursuant to FERC authorization. Payments amounted to approximately $20.8 million, $25 million and $27.9 million in 1993, 1992 and 1991, respectively, for the four companies combined. GRI's current funding mechanism for 1994-1995 was approved by FERC in an order issued March 22, 1993. Foreign operations and export sales are not material to the Company's business as a whole. As of January 1, 1994, the Company had approximately 4,900 employees. ITEM 2. PROPERTIES TRANSMISSION AND STORAGE FACILITIES The combined transmission systems of TETCO, Algonquin, PEPL and Trunkline consist of approximately 26,000 miles of pipeline and 108 mainline compressor stations having an aggregate of 2,227,000 installed horsepower. TETCO's gas transmission system extends approximately 1,700 miles from producing fields in the Gulf Coast region of Texas and Louisiana to Ohio, Pennsylvania, New Jersey and New York. It consists of two parallel systems, one comprised of three large-diameter parallel pipelines and the other comprised of from one to three large-diameter pipelines over its length. TETCO's system, including the gathering systems, has 73 compressor stations having a total of 1,345,000 installed horsepower. The Lebanon Lateral is located between Grant County, Indiana, and Lebanon, Ohio. TETCO owns the Indiana portion and a small segment of the Ohio portion of this pipeline, while the rest of this pipeline in Ohio is jointly owned by TETCO and another interstate gas pipeline company. The Indiana portion of the Lebanon Lateral extends approximately 53 miles, while the Ohio portion of this pipeline is 61 miles long. Algonquin's transmission system connects with TETCO's facilities in Lambertville and Hanover, New Jersey, and extends through New Jersey, New York, Connecticut, Rhode Island and Massachusetts to the Boston area. The system consists of approximately 1,000 miles of pipeline with five compressor stations having a total of approximately 99,000 installed horsepower. PEPL's transmission system, which consists of four large-diameter parallel pipelines, gathering systems and 13 mainline compressor stations having an aggregate of 403,000 installed horsepower, extends a distance of approximately 1,300 miles from producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio into Michigan. 9 12 On March 31, 1993, PEPL completed the sale of the Wattenberg system, a natural gas supply system in Colorado. Trunkline's transmission system extends approximately 1,400 miles from the Gulf Coast areas of Texas and Louisiana through the states of Arkansas, Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the Indiana-Michigan border near Elkhart, Indiana. The system consists principally of three large-diameter parallel pipelines and 18 mainline compressor stations having an aggregate of 335,000 installed horsepower. Trunkline also owns and operates two offshore Louisiana gas supply systems consisting of 337 miles of pipeline extending approximately 81 miles into the Gulf of Mexico. TETCO owns and operates two offshore Louisiana gas supply systems, which extend as far as 103 miles into the Gulf of Mexico and consist of 477 miles of pipeline. Northern Border Pipeline Company ("Northern Border"), in which a PEPL subsidiary has an approximate 6% effective ownership interest, owns a transmission system consisting of 969 miles of pipeline extending from the Canadian border through Montana to Iowa. Northern Border transports gas both under traditional long-term contracts and on an open-access basis. It has a certificated transport capacity of 975 MMcf/d. In 1992, PEPL terminated its gas supply arrangements with respect to Canadian gas. The agreement calls for an affiliate of Pan Alberta Gas Limited ("Pan Alberta") to assume PEPL's 150 MMcf/d of transportation capacity on Northern Border. PEPL has guaranteed payments to Northern Border by Pan Alberta's affiliate. For information regarding this guarantee and the sale of a portion of the Company's interest in Northern Border, see Note 6 of the Notes to Consolidated Financial Statements on page 51 of the Annual Report, which is incorporated herein by reference. For information concerning natural gas storage properties, see "Natural Gas Pipelines -- Natural Gas Storage" under Item 1, which is incorporated herein by reference. LNG FACILITIES Algonquin LNG, Inc., a subsidiary of Algonquin, owns and operates an LNG storage facility in Providence, Rhode Island. This facility has a storage capacity of 600,000 barrels, which approximates 2 Bcf, and a design output capacity of 100 MMcf/d. Trunkline LNG owns a marine terminal, storage and regasification facility for LNG located near Lake Charles, Louisiana. The Trunkline LNG facilities have a design output capacity of approximately 700 MMcf/d and a storage capacity of approximately 1.8 million barrels, which approximates 6 Bcf. Lachmar, a partnership in which subsidiaries of PEC own all of the partnership interests, owns two LNG ships, each with a transportation capacity of 125,000 cubic meters of LNG. Both ships are currently under charter to Indonesia's national oil and gas company. The Company continues to examine opportunities to better utilize its LNG assets, including the ships. TEPPCO PARTNERS FACILITIES TEPPCO Partners owns and operates an approximate 4,200-mile refined petroleum products and LPG pipeline system extending from southeast Texas through the midwestern and central United States to the northeastern United States. The pipeline system includes delivery terminals along the pipeline for outloading product to tank trucks, rail cars or barges, as well as storage capacity at Mont Belvieu, Texas, the largest LPG storage complex in the United States, and at other locations. TEPPCO Partners also owns two marine receiving terminals at Beaumont, Texas, and Providence, Rhode Island. The TEPPCO Partners pipeline system is the only pipeline that transports LPGs to the Northeast. OTHER None of the other properties used in connection with the Company's other business activities, which are described under "Other Business Activities" under Item 1, is considered material to the Company's operations as a whole. 10 13 [MAP] 11 14 ITEM 3. LEGAL PROCEEDINGS For information concerning material legal proceedings, see Notes 2, 3, 9 and 11, on pages 47 through 50, 53, 54 and 55 of the Annual Report, which are incorporated herein by reference. In connection with the incident on March 24, 1994 in Edison, New Jersey (see "Recent Development" under Item 1), a lawsuit was filed by Nancy Kemps, et al. in the Superior Court of New Jersey for Middlesex county naming TETCO as one of the defendants. The plaintiffs seek unspecified damages for personal injury and property damage and request the court to grant class certification. Other lawsuits have been reported but the Company has not been served. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year. EXECUTIVE OFFICERS OF REGISTRANT
BECAME AGE AN IN EXECUTIVE NAME OFFICE 1994 OFFICER - - - ---------------------------- ---------------------------------------------- --- ---- Dennis R. Hendrix(1)........ Chairman of the Board and Chief Executive 54 1990 Officer Paul M. Anderson(2)......... President 49 1991 G. L. Mazanec(3)............ Vice Chairman of the Board 58 1989 James B. Hipple(4).......... Senior Vice President and Chief Financial 60 1989 Officer Carl B. King(5)............. Senior Vice President and General Counsel 51 1990 Paul F. Ferguson, Jr.(6).... Vice President, Finance and Accounting 45 1989 James W. Hart, Jr.(7)....... Vice President, Public Affairs 59 1988 Vernell P. Ludwig(8)........ Vice President, Corporate Development 50 1993 Sandra P. Meyer(9).......... Controller 40 1993 John D. Thomas(10).......... Treasurer 38 1992 H. D. Church(11)............ Senior Vice President, TETCO 57 1994 Fred J. Fowler(12).......... President, TETCO 48 1992 Richard A. Perkins(13)...... President, 1 Source 53 1994
- - - --------------- (1) Mr. Hendrix was elected Chairman of the Board, President and Chief Executive Officer in 1990 and relinquished the title of President to Mr. Anderson in December 1993. Mr. Hendrix was President, TEC, 1985-1989; and Chief Executive Officer, TEC, 1987-1989. (2) Mr. Anderson was Executive Vice President from March 1991 until December 1993, when he was elected President. Prior to joining PEC, Mr. Anderson was Vice President, Finance and Chief Financial Officer, Inland Steel Industries, Inc., 1990-1991. He was Senior Vice President, TEC, 1987-1989. (3) Mr. Mazanec was Executive Vice President from April 1991 until December 1993, when he was elected Vice Chairman of the Board. Prior thereto, he was Group Vice President from November 1989 until April 1991, and Senior Vice President, TEC and TETCO, 1987-1989. (4) Mr. Hipple was elected Senior Vice President and Chief Financial Officer in July 1990. Prior to his election as Senior Vice President and Chief Financial Officer, Mr. Hipple served as Senior Vice President-Finance from July 1989. (5) Mr. King was elected Senior Vice President and General Counsel in 1990. Prior to joining PEC, Mr. King was President, Oil Tool Division, Cooper Industries, 1989-1990; and Senior Vice President, Cameron Iron Works (oil field equipment manufacturer), 1984-1989. (6) Mr. Ferguson was elected Vice President, Finance and Accounting, in 1992. Prior thereto, Mr. Ferguson was Vice President and Treasurer from 1990, after having served as Treasurer. Mr. Ferguson was Treasurer, TEC, 1988-1989. (7) Mr. Hart has been an officer or employee of PEC, or a subsidiary of PEC, for at least five years. 12 15 (8) Mr. Ludwig was elected Vice President, Corporate Development, in January 1993. He was President of Algonquin Energy Corporation and Algonquin from April 1991 and January 1991, respectively, until January 1993. Prior thereto, Mr. Ludwig was Executive Vice President of those companies from July 1986. (9) Ms. Meyer has been an officer or employee of PEC, or a subsidiary of PEC, for at least five years. She was elected Controller of PEC in 1993. (10) Mr. Thomas was elected Treasurer of the Company, PEPL, TEC and TETCO in April 1992. He was Assistant Treasurer of those companies from January 1991 to April 1992, and held various financial management positions at PEC and TEC for more than five years prior thereto. (11) Mr. Church was elected Senior Vice President of TETCO in January 1994. Prior thereto, he was Vice President of TETCO since January 1991. He was an Executive Vice President of Texas Eastern Gas Pipeline Company ("TEGP"), a division of TETCO, 1987-1989, and Senior Vice President, TEGP, 1985-1987. In January 1994, Mr. Church was appointed to the Company's Executive Management Committee. (12) Mr. Fowler was elected President of TETCO in January 1994. Prior thereto, he was the Company's Vice President of Marketing from December 1992 until January 1994; President and Director of 1 Source from March 1993 until January 1994; President of Trunkline from January 1991 to December 1992; Vice President of PEPL and Trunkline from January 1988 to January 1991, and of TETCO from July 1989 to January 1991. In December 1992, Mr. Fowler was appointed to the Company's Executive Management Committee. (13) Mr. Perkins was elected President of 1 Source in January 1994. Prior thereto, he was Senior Vice President, TETCO, from May 1992 until January 1994; Vice President of TETCO from January 1991 to May 1992; and an officer or employee of PEC, or a subsidiary of PEC, for more than five years. In January 1994, Mr. Perkins was appointed to the Company's Executive Management Committee. All officers of PEC are elected in April of each year at the organizational meeting of the Board of Directors. There are no family relationships among any directors or executive officers of PEC. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See "Stockholders' Information -- Common Stock" on page 59 and Note 10 of the Notes to Consolidated Financial Statements on page 54 of the Annual Report, which are incorporated herein by reference. The Common Stock is listed on the New York and Pacific Stock Exchanges. At February 28, 1994, there were 30,195 holders of record of the Common Stock. ITEM 6. SELECTED FINANCIAL DATA See page 58 of the Annual Report, which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See pages 31 through 39 of the Annual Report, which are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to "Index -- Financial Statements" under Item 14(a)(1). See the consolidated quarterly financial data on page 57 of the Annual Report, which is incorporated herein by reference. 13 16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See pages 2 through 4 and page 6 of the Panhandle Eastern Corporation Definitive Proxy Statement, dated March 11, 1994 ("Proxy Statement"), which are incorporated herein by reference. See list of "Executive Officers of Registrant" on pages 15 and 16, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION See pages 8 through 16 of the Proxy Statement, which are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See pages 7 and 8 of the Proxy Statement, which are incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See pages 2 through 4, 7 and 8 of the Proxy Statement, which are incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report or incorporated herein by reference: (1) The Consolidated Financial Statements and Financial Statement Schedules of Panhandle Eastern Corporation and Subsidiaries are listed on the Index, page 19. (2) Exhibits not incorporated by reference to a prior filing are designated by an asterisk (*) and are filed herewith; all exhibits not so designated are incorporated herein by reference to a prior filing as indicated. Items constituting management contracts or compensatory plans or arrangements are designated by a double asterisk (**).
EXHIBIT ORIGINALLY FILED AS FILE NUMBER DESCRIPTION EXHIBIT NUMBER - - - --------------------------------------------------------- -------------------------- --------- 3.01 Restated Certificate of Incorporation of 3.1 to Form S-3 33-34886 Panhandle Eastern Corporation Registration Statement of PEC, dated May 14, 1990 3.02 By-Laws of Panhandle Eastern Corporation, 19(a) to Form 10-Q of PEC 1-8157 effective July 8, 1986 for quarter ended September 30, 1986 4.01 Rights Agreement, dated March 11, 1986, 1 to Form 8-A Registration 1-8157 between Panhandle Eastern Corporation and Statement of PEC, dated First City National Bank of Houston March 12, 1986
14 17
EXHIBIT ORIGINALLY FILED AS FILE NUMBER DESCRIPTION EXHIBIT NUMBER - - - --------------------------------------------------------- -------------------------- --------- 4.02 Amendment to Rights Agreement, dated May 6, 4.1 to Form 8-K of PEC 1-8157 1993, among Panhandle Eastern Corporation, dated May 28, 1993 Texas Commerce Bank National Association (as successor to First City National Bank of Houston), and Continental Stock Transfer & Trust Company 4.03 Credit Agreement, dated as of August 1, 1992, 4.2 to Form 8-K of TETCO, 1-4456 among Panhandle Eastern Pipe Line Company, dated October 5, 1992 the lenders named therein and Chemical Bank, as Agent (including Guarantee of Panhandle Eastern Corporation) 4.04 Credit Agreement, dated as of August 1, 1992, 4.1 to Form 8-K of TETCO, 1-4456 among Texas Eastern Transmission dated October 5, 1992 Corporation, the lenders named therein and Chemical Bank, as Agent (including Guarantee of Panhandle Eastern Corporation) 4.05 First Amendment, dated as of August 1, 1993, 4.1 to Form 10-Q of PEC, 1-8157 to the Guarantees by Panhandle Eastern dated September 30, 1993 Corporation in favor of Chemical Bank, included as parts of Exhibits 4.03 and 4.04 **10.01 1977 Non-Qualified Stock Option Plan of 10(f) to Form 10-K of PEC 1-8157 Panhandle Eastern Corporation, as amended for year ended December through December 3, 1986 (and related 31, 1986 Agreement) **10.02 1982 Key Employee Stock Option Plan of 10(g) to Form 10-K of PEC 1-8157 Panhandle Eastern Corporation, as amended for year ended December through December 3, 1986 (and related 31, 1986 Agreement) **10.03 Panhandle Eastern Corporation -- Nonemployee 10(w) to Form 10-K of PEC 1-8157 Directors Retirement Plan (As amended May for year ended December 22, 1985) 31, 1985 **10.04 Deferred Compensation Plan for the Board of 10.04 to Form 10-K of PEC 1-8157 Directors of Panhandle Eastern Corporation for year ended December (Adopted May 26, 1982; as amended November 31, 1989 29, 1989) **10.05 Panhandle Eastern Corporation -- Executive 10.05 to Form 10-K of PEC 1-8157 Benefit Equalization Plan (As amended for year ended December November 29, 1989; effective January 1, 31, 1989 1990) * **10.06 Panhandle Eastern Corporation Retirement Benefit Equalization Plan (Adopted December 20, 1993; effective January 1, 1994; amends and restates Exhibit number 10.05) **10.07 Panhandle Eastern Corporation -- Executive 19(a) to Form 10-Q of PEC 1-8157 Severance Agreement for quarter ended September 30, 1988 10.08 Change in Control Severance Pay Plan of 19(c) to Form 10-Q of PEC 1-8157 Panhandle Eastern Corporation and for quarter ended Affiliates (Adopted July 8, 1986) September 30, 1986
15 18
EXHIBIT ORIGINALLY FILED AS FILE NUMBER DESCRIPTION EXHIBIT NUMBER - - - --------------------------------------------------------- -------------------------- --------- **10.09 1989 Nonemployee Directors Stock Option Plan 28(a) to Form S-8 33-28912 (Adopted February 1, 1989) Registration Statement of PEC 10.10 Employees Savings Plan of Panhandle Eastern 10.12 to Form 10-K of PEC 1-8157 Corporation and Participating Affiliates for year ended December (Effective January 1, 1991) 31, 1990 10.11 Retirement Income Plan of Panhandle Eastern 10.13 to Form 10-K of PEC 1-8157 Corporation and Participating Affiliates for year ended December (Effective January 1, 1991) 31, 1990 * **10.12 Panhandle Eastern Corporation Key Executive Retirement Benefit Equalization Plan (Adopted December 20, 1993; effective January 1, 1994) * **10.13 Panhandle Eastern Corporation Key Executive Deferred Compensation Plan (Adopted December 20, 1993; effective January 1, 1994) **10.14 1990 Long Term Incentive Plan (Adopted 10.14 to Form 10-K of PEC 1-8157 November 29, 1989) for year ended December 31, 1990 10.15 Special Recognition Bonus Plan (Adopted 10.15 to Form 10-K of PEC 1-8157 November 29, 1989) for year ended December 31, 1990 10.16 Annual Cash Bonus Plan of Panhandle Eastern 19.3 to Form 10-Q of PEC 1-8157 Corporation (Adopted October 25, 1989; for quarter ended effective January 1, 1990) September 30, 1989 10.17 Texas Eastern Deferred Income Program; First 10.9 to Form 10-K of TEC 1-7587 Amendment, dated December 5, 1985; and for years ended December Second Amendment, dated August 15, 1988 31, 1984 and 1986; 8 to Schedule 14D-9 of TEC, dated January 30, 1989 * **10.18 Panhandle Eastern Corporation 1994 Long Term Incentive Plan **10.19 Agreement, dated November 1, 1989, between G. 10.27 to Form 10-K of PEC 1-8157 L. Mazanec and Panhandle Eastern for year ended December Corporation 31, 1990 **10.20 Amendment to Employment Agreement, effective 10.17 to Form 10-K of PEC 1-8157 November 1, 1992, between G. L. Mazanec and for year ended December Panhandle Eastern Corporation 31, 1992 **10.21 Agreement, dated November 12, 1990, between 10.28 to Form 10-K of PEC 1-8157 D. R. Hendrix and Panhandle Eastern for year ended December Corporation 31, 1990 **10.22 Amendment, dated March 12, 1993 to be 10.19 to Form 10-K of PEC 1-8157 effective as of February 24, 1993, to for year ended December Agreement dated November 12, 1990, between 31, 1992 D. R. Hendrix and Panhandle Eastern Corporation
16 19
EXHIBIT ORIGINALLY FILED AS FILE NUMBER DESCRIPTION EXHIBIT NUMBER - - - --------------------------------------------------------- -------------------------- --------- * **10.23 Second Amendment, dated December 20, 1993, to Agreement dated November 12, 1990, between Dennis Hendrix and Panhandle Eastern Corporation **10.24 Agreement, dated July 28, 1989, between James 10.29 to Form 10-K of PEC 1-8157 B. Hipple, Panhandle Eastern Corporation for year ended December and Texas Eastern Transmission Corporation 31, 1990 **10.25 Letter, dated May 4, 1992, from Panhandle 10.21 to Form 10-K of PEC 1-8157 Eastern Corporation to James B. Hipple, for year ended December amending Agreement dated July 28, 1989 31, 1992 **10.26 Agreement, dated November 12, 1990, between 10.31 to Form 10-K of PEC 1-8157 P. J. Burguieres and Panhandle Eastern for year ended December Corporation 31, 1990 **10.27 Agreement, effective January 1, 1991, between 10.32 to Form 10-K of PEC 1-8157 P. J. Burguieres and Panhandle Eastern for year ended December Corporation 31, 1990 **10.28 Agreement, effective March 1, 1991, between 10.24 to Form 10-K of PEC 1-8157 Paul M. Anderson and Panhandle Eastern for year ended December Corporation 31, 1991 10.29 Settlement Agreement, dated July 21, 1986, 19.4 to Form 10-Q of PEC 1-8157 among Sonatrach, Panhandle Eastern for quarter ended June Corporation, Panhandle Eastern Pipe Line 30, 1986 Company and Trunkline LNG Company 10.30 Amendment, dated August 11, 1986, to 19.5 to Form 10-Q of PEC 1-8157 Settlement Agreement, dated July 21, 1986, for quarter ended June among Sonatrach, Panhandle Eastern 30, 1986 Corporation, Panhandle Eastern Pipe Line Company and Trunkline LNG Company 10.31 Amendment No. 2, dated August 1, 1988, to 19(e) to Form 10-Q of PEC 1-8157 Settlement Agreement, dated July 21, 1986, for quarter ended June among Sonatrach, International Petroleum 30, 1988 Investment Partnership, Panhandle Eastern Corporation, Panhandle Eastern Pipe Line Company and Trunkline LNG Company 10.32 Purchase Agreement, dated April 26, 1987, 19(a) to Form 10-Q of PEC 1-8157 between Sonatrading Amsterdam B.V. and for quarter ended March Trunkline LNG Company 31, 1987 10.33 Mutual Assurances Agreement, dated April 26, 19(b) to Form 10-Q of PEC 1-8157 1987, among Sonatrach, Sonatrading for quarter ended March Amsterdam B.V., Panhandle Eastern 31, 1987 Corporation and Trunkline LNG Company 10.34 Tanker Utilization Agreement, dated April 26, 19(c) to Form 10-Q of PEC 1-8157 1987, between Sonatrading Amsterdam B.V. for quarter ended March and Trunkline LNG Company 31, 1987 10.35 Transportation Agreement, dated April 26, 19(d) to Form 10-Q of PEC 1-8157 1987, between Sonatrach and Trunkline LNG for quarter ended March Company 31, 1987
17 20
EXHIBIT ORIGINALLY FILED AS FILE NUMBER DESCRIPTION EXHIBIT NUMBER - - - --------------------------------------------------------- -------------------------- --------- *13 Panhandle Eastern Corporation 1993 Annual Report to Stockholders 21 List of Significant Subsidiaries of the Registrant (each a Delaware corporation): (a) Algonquin Gas Transmission Company (b) Centana Energy Corporation (c) 1 Source Corporation (d) Panhandle Eastern Pipe Line Company (e) Texas Eastern Corporation (f) Texas Eastern Transmission Corporation (g) Trunkline Gas Company (h) Trunkline LNG Company *23 Consent of KPMG Peat Marwick *24 Powers of Attorney *99 Definitive Proxy Statement, dated March 11, 1994, for the Annual Meeting of Stockholders of Panhandle Eastern Corporation
The total amount of securities of the Registrant or its subsidiaries authorized under any instrument with respect to long-term debt not filed as an Exhibit does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees, upon request of the Securities and Exchange Commission, to furnish copies of any or all of such instruments. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the three months ended December 31, 1993. 18 21 PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES INDEX FINANCIAL STATEMENTS AND SCHEDULES --------------------- FINANCIAL STATEMENTS
PAGE ----- Independent Auditors' Report......................................................... 40 * Consolidated Statement of Income..................................................... 41 * Consolidated Balance Sheet........................................................... 42-43* Consolidated Statement of Common Stockholders' Equity................................ 44 * Consolidated Statement of Cash Flows................................................. 45 * Notes to Consolidated Financial Statements........................................... 46-56*
- - - --------------- * Refers to the pages in the Panhandle Eastern Corporation 1993 Annual Report to Stockholders, which are incorporated herein by reference. --------------------- SCHEDULES Schedule V -- Plant, Property and Equipment....................................... S-1 Schedule VI -- Accumulated Depreciation and Amortization of Plant, Property and Equipment........................................................... S-2 Schedule IX -- Short-Term Borrowings............................................... S-3 Schedule X -- Supplementary Income Statement Information.......................... S-4 Independent Auditors' Report.......................................................... S-5
All other Schedules are omitted because they are not applicable, not required or the information is included in the Consolidated Financial Statements or the Notes thereto. 19 22 SCHEDULE V PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES PLANT, PROPERTY AND EQUIPMENT THREE YEARS ENDED DECEMBER 31, 1993
TRANSMISSION LNG Millions PLANT(1) PROJECT OTHER TOTAL - - - ------------------------------------------------ ------- ------ ----- ------- Balance January 1, 1991......................... $5,884.0 $750.4 $52.0 $6,686.4 Additions, at cost(2)......................... 226.3 0.4 3.0 229.7 Retirements or sales.......................... 82.6 -- 2.9 85.5 Other changes................................. (24.0)(3) -- (0.6) (24.6) ------- ------ ----- ------- Balance December 31, 1991....................... 6,003.7 750.8 51.5 6,806.0 Additions, at cost(2)......................... 257.1 0.3 2.3 259.7 Retirements or sales.......................... 64.7 0.4 0.7 65.8 Other changes................................. (15.6) (0.2) (0.3) (16.1) ------- ------ ----- ------- Balance December 31, 1992....................... 6,180.5 750.5 52.8 6,983.8 Additions, at cost(2)......................... 289.8 3.5 8.3 301.6 Retirements or sales.......................... 200.1(4) 6.2 0.1 206.4 Other changes................................. (3.0) (3.0) 3.2 (2.8) ------- ------ ----- ------- Balance December 31, 1993....................... $6,267.2 $744.8 $64.2 $7,076.2 ------- ------ ----- ------- ------- ------ ----- -------
- - - --------------- (1) Includes gathering, underground storage and certain general plant and construction work in progress amounts. (2) Includes allowance for equity funds and interest on borrowed funds charged to construction of $4.2 million for 1991, $4.4 million for 1992 and $6.4 million for 1993. (3) Includes reclassification of costs related to TETCO's PCB (polychlorinated biphenyl) cleanup program. (4) Includes the sale of the Wattenberg system, a natural gas supply system in Colorado. See Note 7 of the Notes to Consolidated Financial Statements for depreciation rates. S-1 23 SCHEDULE VI PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES ACCUMULATED DEPRECIATION AND AMORTIZATION OF PLANT, PROPERTY AND EQUIPMENT THREE YEARS ENDED DECEMBER 31, 1993
TRANSMISSION LNG Millions PLANT PROJECT OTHER TOTAL -------- ------------ ------- ----- -------- Balance January 1, 1991........................... $1,999.4 $407.7 $42.5 $2,449.6 Additions charged to income(1).................. 229.6 5.6 1.5 236.7 Retirements or sales............................ 72.8 -- 2.3 75.1 Other changes................................... (8.0) -- -- (8.0) -------- ------ ----- -------- Balance December 31, 1991......................... 2,148.2 413.3 41.7 2,603.2 Additions charged to income(1).................. 216.2 5.7 1.2 223.1 Retirements or sales............................ 66.8 0.4 0.7 67.9 Other changes................................... (78.5)(2) (0.2) 0.4 (78.3) -------- ------ ----- -------- Balance December 31, 1992......................... 2,219.1 418.4 42.6 2,680.1 Additions charged to income(1).................. 204.5 5.7 1.2 211.4 Retirements or sales............................ 170.7(3) 4.1 -- 174.8 Other changes................................... 16.6 (0.4) -- 16.2 -------- ------ ----- -------- Balance December 31, 1993......................... $2,269.5 $419.6 $43.8 $2,732.9 -------- ------ ----- -------- -------- ------ ----- --------
- - - --------------- (1) Excludes amortization of goodwill and includes amounts charged to other operating expenses. (2) Includes a reclassification from rate refund provisions related to settlement of a PEPL rate case. (3) Includes the sale of the Wattenberg system, a natural gas supply system in Colorado. S-2 24 SCHEDULE IX PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES SHORT-TERM BORROWINGS THREE YEARS ENDED DECEMBER 31, 1993
BALANCE AT WEIGHTED MAXIMUM WEIGHTED END AVERAGE BORROWINGS AVERAGE AVERAGE TYPE OF OF INTEREST AT ANY AMOUNT INTEREST Millions, except % BORROWING YEAR RATE MONTH-END OUTSTANDING(1) RATE(2) ------------------ --------- ------ -------- ---------- ------------- ------- YEARS ENDED: December 31, 1991.......... Bank(3) -- -- $179.4 $140.1 6.7% December 31, 1992.......... Bank(3) -- -- 75.9 50.8 4.1 Bank(4) $39.5 4.4% 39.5 38.7 3.9 December 31, 1993.......... Bank(4) 18.4 3.8 105.0 60.7 3.7
- - - --------------- (1) Average of daily balances for period outstanding. (2) Total interest (discounted basis) divided by average net balance for the period outstanding. (3) Secured by future demand charges. (4) Uncommitted bid facilities. S-3 25 SCHEDULE X PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED DECEMBER 31 ------------------------- Millions 1993 1992 1991 - - - -------------------------------------------------------------------- ----- ----- ----- Miscellaneous Taxes (Other than payroll and income) Ad valorem........................................................ $47.9 $47.7 $45.2 Franchise and other............................................... 14.1 9.6 13.2 ----- ----- ----- Total..................................................... $62.0 $57.3 $58.4 ----- ----- ----- ----- ----- -----
S-4 26 INDEPENDENT AUDITORS' REPORT The Board of Directors Panhandle Eastern Corporation: Under date of January 26, 1994, we reported on the consolidated balance sheet of Panhandle Eastern Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993 as contained in the 1993 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1993. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK Houston, Texas January 26, 1994 S-5 27 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. PANHANDLE EASTERN CORPORATION* By ROBERT W. REED ------------------------------------ (Robert W. Reed, Secretary) Date: March 28, 1994 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED ON MARCH 28, 1994.
NAME AND SIGNATURE TITLE - - - --------------------------------------------- --------------------------------- (i) Principal executive officer:* DENNIS R. HENDRIX Chairman and Chief Executive - - - --------------------------------------------- Officer (Dennis R. Hendrix) (ii) Principal financial officer:* JAMES B. HIPPLE Senior Vice President and Chief - - - --------------------------------------------- Financial Officer (James B. Hipple) (iii) Principal accounting officer:* SANDRA P. MEYER Controller - - - --------------------------------------------- (Sandra P. Meyer) (iv) Directors:* PAUL M. ANDERSON MILTON CARROLL ROBERT CIZIK CHARLES W. DUNCAN, JR. HARRY E. EKBLOM WILLIAM T. ESREY DENNIS R. HENDRIX HAROLD S. HOOK CHRISTOPHER C. KRAFT, JR. LEO E. LINBECK, JR. GEORGE L. MAZANEC RALPH S. O'CONNER GEORGE E. RUPP
- - - --------------- * Signed on behalf of the registrant and each of these persons: By ROBERT W. REED ---------------------------------- (Robert W. Reed, Attorney-in-Fact) EX-10.06 2 P.E.CORP. RETIREMENT EQUALIZATION PLAN 1 EXHIBIT 10.06 PANHANDLE EASTERN CORPORATION RETIREMENT BENEFIT EQUALIZATION PLAN (amended and restated effective January 1, 1994) 1. Purpose. Panhandle Eastern Corporation ("Company") has previously established the Executive Equalization Plan of Panhandle Eastern Corporation and Participating Subsidiaries, which the Company hereby amends and restates, effective January 1, 1994, as the Panhandle Eastern Corporation Retirement Benefit Equalization Plan ("Plan"). The purpose of the Plan is to provide with respect to eligible employees, benefits in excess of those provided under Retirement Income Plan of Panhandle Eastern Corporation and Participating Affiliates ("RIP"). The Plan shall be an excess benefit plan within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that is unfunded. As used in the Plan, the term "Change in Control" shall mean a Change in Control of the Company. A Change in Control of the Company shall have occurred if: (1) a third party becomes the beneficial owner of shares of the Company having 30 percent or more of the total number of votes that may be cast for the election of directors of the Company; or (2) as a result of, or in connection with, any cash tender or exchange offer, merger or their business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who are directors of the Company before the transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; or (3) all or substantially all of the assets and business of the Company are sold, transferred or assigned to, or otherwise acquired by, any other entity or entities. In no event shall the distribution by the Company to its shareholders of stock in a subsidiary be deemed a Change in Control. 2. Administration. The Company's Director, Compensation & Benefits is designated the Plan Administrator of the Plan. The Plan Administrator shall have full discretionary power and authority to administer and interpret the Plan, subject to the provisions of the Plan and as to such matters as are reserved to the Company, its Board of Directors, and its Chief Executive Officer. The Plan Administrator may adopt such procedures as he deems necessary or helpful in administering the Plan and may designate one or more employees of the Company to maintain the records of the Plan and to perform such other duties as are 2 assigned by the Plan Administrator. Notwithstanding the foregoing, the Plan Administrator shall not act upon any matter which relates solely to his individual participation in the Plan, but shall refer such matter to the Chief Executive Officer of the Company. 3. Eligibility. Any employee of the Company or of any of its participating affiliated companies who is a participant in the RIP shall be eligible to participate in the Plan. Notwithstanding the foregoing, no individual who is eligible to participate in the Panhandle Eastern Corporation Key Executive Retirement Benefit Equalization Plan shall be eligible to participate in the Plan. 4. Participating Affiliates. Each of the Company's affiliated companies that has adopted the Plan shall be a participating affiliated company and shall be liable to the Company for Plan benefits attributable to the participating affiliated company's own employees and the Plan Administrator's determination as to the amount of any such liability shall be conclusive. 5. Company's Obligation. Any Plan benefit shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither a Plan participant nor his beneficiary(ies) or estate shall have any interest in any assets of the Company by virtue of the Plan. Nothing in this Section 5 shall be construed to prevent the Company from implementing or setting aside funds in a grantor trust subject to the claims of the Company's creditors. This Section 5 shall not require the Company to set aside any funds, but the Company may set aside such funds if it chooses to do so. The establishment of the Plan and any setting aside of funds by the Company with which to discharge its obligations under the Plan shall not be deemed to create a trust. Legal and equitable title to any funds so set aside, other than any grantor trust subject to the claims of the Company's creditors, shall remain in the Company and any funds so set aside shall remain subject to the general creditors of the Company, present and future, and no payment shall be made under this Plan unless the Company is then solvent. -2- 3 6. Benefit and Form of Payment. The Plan benefit payable with respect to a Plan participant shall be the excess, if any, of: (a) the RIP benefit which would have become payable with respect to the Plan participant employee, if the benefit accrual provisions of the RIP were administered without regard to the maximum amount of retirement income limitations imposed by Section 415 of the Internal Revenue Code of 1986, as amended ("Code"); over (b) the RIP benefit which, in fact, becomes payable, with respect to the Plan participant. Notwithstanding the foregoing, no Plan benefit shall be payable with respect to a Plan eligible employee prior to the termination of his employment with the Company and all its affiliated companies and any Plan benefit that becomes payable shall be subject to the same terms and conditions as the corresponding RIP benefit, including, but not limited to, where the RIP benefit becomes payable on account of the Plan eligible employee's death, the identification of the eligible surviving spouse to whom the Plan benefit payable is to be paid. The benefit payment form and/or commencement date that applies to any Plan benefit payable, shall be the benefit payment form and/or commencement date that would apply to the corresponding RIP benefit in the absence of an election/designation/selection of an optional payment form and/or commencement date under the RIP. Prior to a "Change in Control", in the event that a Plan benefit is payable with respect to a Plan participant and if at such time the Plan participant has outstanding any debt, obligation or other liability representing an amount owing to the Company or any of its affiliated companies, then the Company may offset such amount owed by the Plan participant against the Plan benefit to be paid. To the extent required by applicable law, the Company shall make appropriate withholdings from the Plan benefit payments. -3- 4 7. Amendment and Termination. The Company by written instrument, authorized by action of its Board of Directors, may amend or terminate the Plan in any manner and at any time, provided, that no such change shall apply to any Plan benefit accrued, whether or not payable, on account of the corresponding RIP benefit having accrued, prior to the date written notice of the change has been provided to the respective Plan participant and that no such change shall adversely affect such Plan benefit becoming payable and being paid. 8. Nonassignability. Neither a Plan participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable under the Plan, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No Plan benefit payable shall, prior to actual Plan benefit payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Plan participant or any other person, nor be transferable by operation of law in the event of the Plan participant's or any other person's bankruptcy or insolvency. 9. Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of the Company or any of its affiliated companies. 10. Procedures for Claims for Benefits and for Review of Denied Claim. Any claim for Plan benefits must be in writing and directed to the Plan Administrator and must be made no later than ninety (90) days after the Plan benefit is claimed to have become payable on account of a Plan eligible employee's termination of employment. If a claimant has made a claim for Plan benefits and any portion of the claim is denied, the claimant will receive a written notice from the Plan Administrator. The notice will state the specific reasons for the denial and specific reference to pertinent Plan provisions upon which the denial was based. Also, it -4- 5 will give a description of any additional information or material necessary to complete your claim and an explanation of why such information or material is necessary. Finally, the notice will provide appropriate information on the steps to take if the claimant wishes to submit the claim for review. A claim will be deemed denied if the claimant does not receive notification within 90 days after the Plan Administrator's receipt of the claim, plus any extension of time for processing the claim, not to exceed 90 additional days, as special circumstances require. Prior to the expiration of the initial 90 days, the claimant must be given a written notice that an extension is necessary, and the claimant must be informed of the special circumstances requiring the extension and date by which the claimant can expect a decision regarding the claim. Within 60 days after the date of written notice denying any benefits or the date the claim is deemed denied, the claimant or the claimant's authorized representative may write to the Plan Administrator requesting a review of that decision. The request for review must contain an explanation of why the claimant believes the decision regarding the claim is incorrect, and must include such issues, comments, documents and other evidence the claimant wishes considered in the review. The claimant may also review pertinent documents in the Plan Administrator's possession. The Plan Administrator will make a final determination with respect to the request for review as soon as practicable. The Plan Administrator will advise the claimant of the determination in writing and will set forth the specific reasons for the determination and the specific references to any pertinent Plan provision upon which the determination is based. A request will be deemed denied on review if the Plan Administrator fails to give the claimant a written notice of final determination within 60 days after receipt of the request for review, plus any extension of time for completing the review, not to exceed 60 additional days, as special circumstances require. Prior to the expiration of the initial 60 days, the Plan Administrator must advise the claimant in writing if any extension is necessary, stating the special circumstances requiring the extension and the date by which the claimant can expect a decision regarding the review of the claim. -5- 6 11. Successors, Mergers or Consolidation: The Plan shall inure to the benefit of and be binding upon: (i) the Company, and its successors and assigns, including without limitation, any person, organization or corporation which may acquire all or substantially all of the assets and business of the Company, or any corporation into which the Company may be merged or consolidated; and (ii) Plan participants and their heirs, executors, administrators and legal representatives. 12. Construction: The Plan shall be governed by, and interpreted and enforced in accordance with, the laws of the State of Texas. IN WITNESS WHEREOF, Panhandle Eastern Corporation has caused its duly authorized officer to execute this document on its behalf, this 22nd day of December 1993. PANHANDLE EASTERN CORPORATION By: /s/ ----------------------------- Its: Senior Vice President -6- EX-10.12 3 P.E.CORP. KEY EXECUTIVE RETIREMENT BENEFIT 1 EXHIBIT 10.12 PANHANDLE EASTERN CORPORATION KEY EXECUTIVE RETIREMENT BENEFIT EQUALIZATION PLAN (established effective January 1, 1994) 1. Purpose. Panhandle Eastern Corporation ("Company") hereby establishes, effective January 1, 1994, the Panhandle Eastern Corporation Key Executive Retirement Benefit Equalization Plan ("Plan"). The purpose of the Plan is to provide with respect to eligible employees, benefits ("Equalization Benefits") in excess of those provided under Retirement Income Plan of Panhandle Eastern Corporation and Participating Affiliates ("RIP"). The Plan shall be an unfunded arrangement maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). As used in the Plan, the term "Change in Control" shall mean a Change in Control of the Company. A Change in Control of the Company shall have occurred if: (1) a third party becomes the beneficial owner of shares of the Company having 30 percent or more of the total number of votes that may be cast for the election of directors of the Company; or (2) as a result of, or in connection with, any cash tender or exchange offer, merger or their business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who are directors of the Company before the transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; or (3) all or substantially all of the assets and business of the Company are sold, transferred or assigned to, or otherwise acquired by, any other entity or entities. In no event shall the distribution by the Company to its shareholders of stock in a subsidiary be deemed a Change in Control. 2. Administration. The Company's Director, Compensation & Benefits is designated the Plan Administrator of the Plan. The Plan Administrator shall have full discretionary power and authority to administer and interpret the Plan, subject to the provisions of the Plan and as to such matters as are reserved to the Company, its Board of Directors, and its Chief Executive Officer. The Plan Administrator may adopt such procedures as he deems necessary or helpful in administering the Plan and may designate one or more 2 employees of the Company to maintain the records of the Plan and to perform such other duties as are assigned by the Plan Administrator. Notwithstanding the foregoing, the Plan Administrator shall not act upon any matter which relates solely to his individual participation in the Plan, but shall refer such matter to the Chief Executive Officer of the Company. 3. Eligibility. Any officer of the Company who is eligible to participate in the Plan shall be designated as such by the Compensation/Successor/Nominating Committee of the Board of Directors of the Company. Any other employee of the Company or of any of its participating affiliated companies who is eligible to participate in the Plan shall be designated as such by the Chief Executive Officer of the Company. 4. Participating Affiliates. Each of the Company's affiliated companies that has adopted the Plan shall be a participating affiliated company and shall be liable to the Company for Plan benefits attributable to the participating affiliated company's own employees and the Plan Administrator's determination as to the amount of any such liability shall be conclusive. 5. Company's Obligation. Any Plan benefit shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither a Plan eligible employee nor his beneficiary(ies) or estate shall have any interest in any assets of the Company by virtue of the Plan. Nothing in this Section 5 shall be construed to prevent the Company from implementing or setting aside funds in a grantor trust subject to the claims of the Company's creditors. This Section 5 shall not require the Company to set aside any funds, but the Company may set aside such funds if it chooses to do so. The establishment of the Plan and any setting aside of funds by the Company with which to discharge its obligations under the Plan shall not be deemed to create a trust. Legal and equitable title to any funds so set aside, other than any grantor trust subject to the claims of the Company's creditors, shall remain in the Company and any funds so set aside shall remain subject to the general creditors of the Company, present and future, and no payment shall be made under this Plan unless the Company is then solvent. -2- 3 6. Benefit and Form of Payment. The Plan benefit payable with respect to a Plan eligible employee shall be the excess, if any, of: (a) the RIP benefit which would have become payable with respect to the Plan eligible employee, if the benefit accrual provisions of the RIP were administered without regard to the maximum amount of retirement income limitations imposed by Section 415 of the Internal Revenue Code of 1986, as amended ("Code") and the limitation upon considered compensation imposed by Code Section 401(a)(17), and without regard to deferral of compensation under Code Sections 125 and 401(k) or pursuant to the Panhandle Eastern Corporation Key Executive Deferred Compensation Plan; over (b) the RIP benefit which, in fact, becomes payable, with respect to the Plan eligible employee. Notwithstanding the foregoing, no Plan benefit shall be payable with respect to a Plan eligible employee prior to the termination of his employment with the Company and all its affiliated companies and any Plan benefit that becomes payable shall be subject to the same terms and conditions as the corresponding RIP benefit, including, but not limited to, where the RIP benefit becomes payable on account of the Plan eligible employee's death, the identification of the eligible surviving spouse to whom the Plan benefit payable is to be paid. Prior to being designated eligible to participate in the Plan, a Plan eligible employee may irrevocably elect from any optional benefit payment form and/or commencement date available by election under the RIP for a particular RIP benefit, the benefit payment form and/or commencement date that is to apply to the corresponding Plan benefit that becomes payable. Such election shall be made in such manner as the Plan Administrator shall prescribe. In the absence of such an election, the benefit payment form and/or commencement date that applies to any Plan benefit payable, shall be the benefit payment form and/or commencement date that would apply to the corresponding RIP benefit in the absence of an election/designation/selection of an optional payment form and/or commencement date under the RIP. In the event that the benefit payment form applicable to a Plan benefit that becomes payable may result, in the event -3- 4 of the respective Plan eligible employee's death, in payment to his beneficiary, the Plan eligible employee may from time to time, in such manner as the Plan Administrator shall prescribe, designate his beneficiary. In the absence of an effective designation of beneficiary, the beneficiary of a Plan eligible employee shall be his surviving spouse or, if there is no surviving spouse, the estate. Prior to a "Change in Control", in the event that a Plan benefit is payable with respect to a Plan eligible employee and if at such time the Plan eligible employee has outstanding any debt, obligation or other liability representing an amount owing to the Company or any of its affiliated companies, then the Company may offset such amount owed by the Plan eligible employee against the Plan benefit to be paid. To the extent required by applicable law, the Company shall make appropriate withholdings from the Plan benefit payments. 7. Amendment and Termination. The Company by written instrument, authorized by action of its Board of Directors, may amend or terminate the Plan in any manner and at any time, provided, that no such change shall apply to any Plan benefit accrued, whether or not payable, on account of the corresponding RIP benefit having accrued, prior to the date written notice of the change has been provided to the respective Plan eligible employee and that no such change shall adversely affect such Plan benefit becoming payable and being paid. 8. Nonassignability. Neither a Plan eligible employee nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable under the Plan, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No Plan benefit payable shall, prior to actual Plan benefit payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Plan eligible employee or any other person, nor be transferable by operation of law in the event of the Plan eligible employee's or any other person's bankruptcy or insolvency. -4- 5 9. Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of the Company or any of its affiliated companies. 10. Procedures for Claims for Benefits and for Review of Denied Claim. Any claim for Plan benefits must be in writing and directed to the Plan Administrator and must be made no later than ninety (90) days after the Plan benefit is claimed to have become payable on account of a Plan eligible employee's termination of employment. If a claimant has made a claim for Plan benefits and any portion of the claim is denied, the claimant will receive a written notice from the Plan Administrator. The notice will state the specific reasons for the denial and specific reference to pertinent Plan provisions upon which the denial was based. Also, it will give a description of any additional information or material necessary to complete your claim and an explanation of why such information or material is necessary. Finally, the notice will provide appropriate information on the steps to take if the claimant wishes to submit the claim for review. A claim will be deemed denied if the claimant does not receive notification within 90 days after the Plan Administrator's receipt of the claim, plus any extension of time for processing the claim, not to exceed 90 additional days, as special circumstances require. Prior to the expiration of the initial 90 days, the claimant must be given a written notice that an extension is necessary, and the claimant must be informed of the special circumstances requiring the extension and date by which the claimant can expect a decision regarding the claim. Within 60 days after the date of written notice denying any benefits or the date the claim is deemed denied, the claimant or the claimant's authorized representative may write to the Plan Administrator requesting a review of that decision. The request for review must contain an explanation of why the claimant believes the decision regarding the claim is incorrect, and must include such issues, comments, documents and other evidence the claimant wishes considered in the review. The claimant may also review pertinent documents in the Plan Administrator's possession. The Plan Administrator will make a final determination with respect to the request for review as soon as practicable. The Plan Administrator will advise the claimant -5- 6 of the determination in writing and will set forth the specific reasons for the determination and the specific references to any pertinent Plan provision upon which the determination is based. A request will be deemed denied on review if the Plan Administrator fails to give the claimant a written notice of final determination within 60 days after receipt of the request for review, plus any extension of time for completing the review, not to exceed 60 additional days, as special circumstances require. Prior to the expiration of the initial 60 days, the Plan Administrator must advise the claimant in writing if any extension is necessary, stating the special circumstances requiring the extension and the date by which the claimant can expect a decision regarding the review of the claim. 11. Successors, Mergers or Consolidation: The Plan shall inure to the benefit of and be binding upon: (i) the Company, and its successors and assigns, including without limitation, any person, organization or corporation which may acquire all or substantially all of the assets and business of the Company, or any corporation into which the Company may be merged or consolidated; and (ii) Plan eligible employees and their heirs, executors, administrators and legal representatives. 12. Construction: Except to the extent preempted by ERISA, the Plan shall be governed by, and interpreted and enforced in accordance with, the laws of the State of Texas. IN WITNESS WHEREOF, Panhandle Eastern Corporation has caused its duly authorized officer to execute this document on its behalf, this 22nd day of December 1993. PANHANDLE EASTERN CORPORATION By: /s/ --------------------------- Its: Senior Vice President -6- EX-10.13 4 P.E.CORP. KEY EXECUTIVE DEFERRED 1 EXHIBIT 10.13 PANHANDLE EASTERN CORPORATION KEY EXECUTIVE DEFERRED COMPENSATION PLAN (established effective January 1, 1994) 1. Purpose. Panhandle Eastern Corporation ("Company") currently maintains the Employees' Savings Plan of Panhandle Eastern Corporation and Participating Affiliates ("ESP") which is an employee defined contribution/individual account plan under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") that is intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended ("Code"). The Company recognizes that limitations imposed by Code Sections 401(a)(17), 401(k), 402(g) and 415 ("Code Limitations") may restrict the ability of key executives to fully participate in the benefits otherwise available under the ESP. According, the Company hereby establishes, effective January 1, 1994, the Panhandle Eastern Corporation Key Executive Deferred Compensation Plan ("Plan"), pursuant to which eligible employees may elect deferral of otherwise payable Base Salary and Annual Cash Bonus, whenever further deferrals under the ESP are prohibited by any of the Code Limitations, and, thereby, may become entitled to deferred Matching Company Contributions, and shall be credited with interest on deferred amounts, and shall subsequently become entitled to payment of all or part of the deferred amounts and credited interest. The Plan shall be an unfunded arrangement maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. As used in the Plan, the term "Change in Control" shall mean a Change in Control of the Company. A Change in Control of the Company shall have occurred if: (1) a third party becomes the beneficial owner of shares of the Company having 30 percent or more of the total number of votes that may be cast for the election of directors of the Company; or (2) as a result of, or in connection with, any cash tender or exchange offer, merger or their business combination, sale of assets or contested election, or any combination of the foregoing transactions, the persons who are directors of the Company before the transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company; or (3) all or substantially all of the assets and business of the Company are sold, transferred or assigned to, or otherwise 2 acquired by, any other entity or entities. In no event shall the distribution by the Company to its shareholders of stock in a subsidiary be deemed a Change in Control. 2. Administration. The Company's Director, Compensation & Benefits is designated the Plan Administrator of the Plan. The Plan Administrator shall have full discretionary power and authority to administer and interpret the Plan, subject to the provisions of the Plan and as to such matters as are reserved to the Company, its Board of Directors, and its Chief Executive Officer. The Plan Administrator may adopt such procedures as he deems necessary or helpful in administering the Plan and may designate one or more employees of the Company to maintain the records of the Plan and to perform such other duties as are assigned by the Plan Administrator. Notwithstanding the foregoing, the Plan Administrator shall not act upon any matter which relates solely to his individual participation in the Plan, but shall refer such matter to the Chief Executive Officer of the Company. 3. Eligibility. Any officer of the Company who is eligible to participate in the Plan shall be designated as such by the Compensation/Succession/Nominating Committee of the Board of Directors of the Company. Any other employee of the Company or of any of its participating affiliated companies who is eligible to participate in the Plan shall be designated as such by the Chief Executive Officer of the Company. As a condition for participation in the Plan, the Plan Administrator shall require that any Plan eligible employee refrain from making after-tax contributions to the ESP whenever his Plan deferral election is effective to the ESP. 4. Participating Affiliates. Each of the Company's affiliated companies that has adopted the Plan shall be a participating affiliated company and shall be liable to the Company for Plan benefits attributable to its own employees and the Plan Administrator's determination as to the amount of any such liability shall be conclusive. -2- 3 5. Company's Obligation. Any Plan benefit shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither a Plan eligible employee nor his beneficiary(ies) or estate shall have any interest in any assets of the Company by virtue of the Plan. Nothing in this Section 5 shall be construed to prevent the Company from implementing or setting aside funds in a grantor trust subject to the claims of the Company's creditors. This Section 5 shall not require the Company to set aside any funds, but the Company may set aside such funds if it chooses to do so. The establishment of the Plan and any setting aside of funds by the Company with which to discharge its obligations under the Plan shall not be deemed to create a trust. Legal and equitable title to any funds so set aside, other than any grantor trust subject to the claims of the Company's creditors, shall remain in the Company and any funds so set aside shall remain subject to the general creditors of the Company, present and future, and no payment shall be made under this Plan unless the Company is then solvent. 6. Accounts. At such time as a Plan eligible employee makes a Plan distribution election, the Plan Administrator shall establish, with respect to the Plan distribution election, a separate Plan Deferral Account in such employee's name and a separate Plan Matching Contribution Account in such employee's name. The Plan Administrator shall maintain any such account until the balance thereof has been adjusted to zero. A Plan Deferral Account shall be adjusted for any deferrals of Base Salary or Annual Cash Bonus credited to such account, interest credited to the balance of such account, and distributions of Plan benefits made from such account. A Plan Matching Contribution Account shall be adjusted for Plan matching contributions credited to such account, interest credited to the balance of such account, and distributions of Plan benefits made from (or the forfeiture of the balance of) such account. 7. Distribution Election. A Plan eligible employee may make a Plan distribution election at any time, by completing such form as the Plan Administrator has prescribed for such purpose and filing the completed form with the Plan Administrator. A Plan distribution election shall be irrevocable as to the Plan Deferral Account and the Plan Matching Account established with respect to such election. Until a subsequent Plan -3- 4 distribution election becomes applicable, a Plan distribution election shall apply to any Plan deferral of Base Salary otherwise payable on account of a period of employment beginning on or after, of Annual Cash Bonus otherwise payable on account of a period of performance beginning on or after, the first day of the month coinciding with or next following the later of (A) the date the completed Distribution Election form is received by the Plan Administrator, or (B) the effective date specified in the completed Distribution Election form, and shall apply to any Matching Contributions credited with respect to such Plan deferral. By a Plan distribution election, a Plan eligible employee may designate the manner in which all or any part of the balance of his respective Plan Deferral Account is to be distributed as Plan benefits during his employment, and shall designate the manner in the balances of his respective Plan Deferral Account and, unless forfeited, Plan Matching Contribution Account are to be distributed as Plan benefits following the termination, whether by death or otherwise, of his employment by the Company and all of its affiliated companies. 8. Deferral Election. A Plan eligible employee may from time to time elect, by completing such form as the Plan Administrator has prescribed for such purpose and filing the completed form with the Plan Administrator, to irrevocably defer to his respective Plan Deferral Account a designated whole percentage of from 1% to 15% of his future Base Salary and Annual Cash Bonus otherwise payable and determined without regard to deferrals to the Panhandle Eastern Corporation SelectPlan pursuant to Code Section 125, to the ESP pursuant to Code Section 401(k), and to this Plan. Until a subsequent Plan deferral election becomes applicable, or the eligible employee ceases to be designated as eligible to participate in the Plan, a Plan deferral election (A) shall apply to Base Salary otherwise payable on account of a calendar year of employment (or that part of the calendar year during which employed) beginning on or after, and with respect to Annual Cash Bonus otherwise payable on account of a period of performance beginning on or after, the first day of the month coinciding with or next following the later of (i) the date the completed Deferral Election form is -4- 5 received by the Plan Administrator, or (ii) the effective date specified in the completed Deferral Election form, and (B) shall be effective whenever the eligible employee is precluded by any of the Code Limitations from making deferrals to the ESP pursuant to Code Section 401(k). The Plan eligible employee's respective Plan Deferral Account shall be credited as of the last day of a month with any amounts which but for the Plan deferral election would have been paid to the Plan eligible employee during the month. 9. Matching Contributions. At any time during a particular calendar year that a Plan eligible employee is precluded from receiving matching contributions under the ESP and his respective Plan Deferral Account is credited with a deferral, his corresponding Plan Matching Contribution Account shall be credited with a Matching Contribution in an amount equal to 110% of the amount of such deferral or, if less, the maximum portion thereof, which when added to the sum of his accumulated matched deferrals under the Plan during the calendar year plus his accumulated deferrals and after-tax contributions that have been matched (determined on the basis that matching under the ESP takes priority over matching under the Plan) under the ESP during the calendar year, does not exceed the product obtained by multiplying his Base-Salary and Annual Cash Bonus (determined without regard to deferrals pursuant to ESP, the Panhandle Eastern Corporation SelectPlan and the Plan) payable for the completed portion of the calendar year by the following percentage:
Plan eligible employee's full years of vesting service under the Retirement Income Plan of Panhandle Eastern Corporation and Participating Affiliates. Less than 5 4% 5 - 9 5% 10 or more 6%
-5- 6 10. Interest. Each Plan Deferral Account and Plan Matching Contributions Account shall be credited with interest as of the last day of each month. For purposes of interest compounding, interest credited during a calendar year will not be considered part of an account balance until the first day of the succeeding calendar year. Otherwise, interest shall be computed on the amount by which the account's opening balance for the month exceeds the sum of any distributions paid during the month with respect to the account. The annual interest rate in effect for a particular calendar year shall be Moody's Seasoned Baa Corporate Bond Yield Index for the "Week Ending" with the final Friday of the preceding November, as reported in the Federal Reserve statistical release H.15, and shall be applied monthly at 1/12 of that rate. 11. Forfeiture. In the event that a Plan eligible employee's employment with the Company and all its affiliated companies terminates before such individual has become eligible to elect an immediately payable Normal Retirement Benefit or Early Retirement Benefit under the Retirement Income Plan of Panhandle Eastern Corporation and Participating Affiliates and, irrespective of whether such employment was actually terminated by such individual, the Company notifies the Plan Administrator in writing that the Company, in its sole discretion, has determined that the Plan eligible employee has acted in a manner contrary to the Company's best interests, all balances in the individual's Plan Matching Contribution Accounts shall immediately be forfeited. No such forfeiture may be imposed following a Change in Control. 12. Distributions. Distributions from the balance of a Plan Deferral Account or unforfeited Plan Matching Contribution Account shall be made in accordance with the respective Plan distribution election and shall be referred to as Plan benefits. In the event that at that time any Plan benefit, including any Plan benefit installment, is to be paid, the Plan eligible employee is deceased, the Plan benefit or Plan benefit installment shall be paid to the Plan eligible employee's beneficiary or beneficiaries. A Plan eligible employee may, at any time, designate any person(s) as his beneficiary(ies) to whom any Plan benefit or benefit installment that becomes payable after the Plan eligible employee's death shall be paid. The Plan eligible employee shall make such designation, or any superseding designation, by completing -6- 7 such form as may be prescribed by the Plan Administration for such purpose and filing the completed form with the Plan Administrator prior to the Plan eligible employee's death. In the absence of an effective beneficiary designation, the beneficiary of a Plan eligible employee shall be his surviving spouse or, if there is no surviving spouse, the Plan eligible employee's estate. In the event that a Plan benefit is to be paid to a Plan eligible employee or to the beneficiary of a deceased Plan eligible employee and if at such time the Plan eligible employee has outstanding any debt, obligation or other liability representing an amount owing to the Company or any of its affiliated companies, then the Company may offset such amount owed by the Plan eligible employee against the Plan benefit to be paid. No such offset may be imposed following a Change in Control. To the extent required by applicable law, the Company shall make appropriate withholdings from Plan benefit payments. 13. Amendment and Termination. The Company by written instrument, authorized by action of its Board of Directors, may amend or terminate the Plan in any manner and at any time, provided, that no such change shall adversely apply to any amounts to be credited to a Plan Deferral Account or Plan Matching Contribution Account prior to the date written notice of the change has been provided to the respective Plan eligible employee and that no such change shall adversely affect the continued crediting of interest pursuant to Section 10 upon accounts balances attributable to such amounts. 14. Nonassignability. Neither a Plan eligible employee nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable under the Plan, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and nontransferable. No balance of Plan Deferral Account or Plan Matching Contribution Account payable shall, prior to actual Plan benefit payment, -7- 8 be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Plan eligible employee or any other person, nor be transferable by operation of law in the event of the Plan eligible employee's or any other person's bankruptcy or insolvency. 15. Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed as a contract of employment or as giving any employee any right to be retained in the employ of the Company or any of its affiliated companies. 16. Procedures for Claims for Benefits and for Review of Denied Claim. Any claim for Plan benefits must be in writing and directed to the Plan Administrator and must be made no later than ninety (90) days after the Plan benefit is claimed to be payable on account of the Plan eligible employee's termination of employment with the Company and all of its affiliates companies. If a claimant has made a claim for Plan benefits and any portion of the claim is denied, the claimant will receive a written notice from the Plan Administrator. The notice will state the specific reasons for the denial and specific reference to pertinent Plan provisions upon which the denial was based. Also, it will give a description of any additional information or material necessary to complete your claim and an explanation of why such information or material is necessary. Finally, the notice will provide appropriate information on the steps to take if the claimant wishes to submit the claim for review. A claim will be deemed denied if the claimant does not receive notification within 90 days after the Plan Administrator's receipt of the claim, plus any extension of time for processing the claim, not to exceed 90 additional days, as special circumstances require. Prior to the expiration of the initial 90 days, the claimant must be given a written notice that an extension is necessary, and the claimant must be informed of the special circumstances requiring the extension and date by which the claimant can expect a decision regarding the claim. -8- 9 Within 60 days after the date of written notice denying any benefits or the date the claim is deemed denied, the claimant or the claimant's authorized representative may write to the Plan Administrator requesting a review of that decision. The request for review must contain an explanation of why the claimant believes the decision regarding the claim is incorrect, and must include such issues, comments, documents and other evidence the claimant wishes considered in the review. The claimant may also review pertinent documents in the Plan Administrator's possession. The Plan Administrator will make a final determination with respect to the request for review as soon as practicable. The Plan Administrator will advise the claimant of the determination in writing and will set forth the specific reasons for the determination and the specific references to any pertinent Plan provision upon which the determination is based. A request will be deemed denied on review if the Plan Administrator fails to give the claimant a written notice of final determination within 60 days after receipt of the request for review, plus any extension of time for completing the review, not to exceed 60 additional days, as special circumstances require. Prior to the expiration of the initial 60 days, the Plan Administrator must advise the claimant in writing if any extension is necessary, stating the special circumstances requiring the extension and the date by which the claimant can expect a decision regarding the review of the claim. 17. Successors, Mergers or Consolidation: The Plan shall inure to the benefit of and be binding upon: (i) the Company, and its successor and assigns, including without limitation, any person, organization or corporation which may acquire all or substantially all of the assets and business of the Company, or any corporation into which the Company may be merged or consolidated; and (ii) the Plan eligible employee and his heirs, executors, administrators and legal representative. 18. Construction: Except to the extent preempted by ERISA, the Plan shall be governed by, and interpreted and enforced in accordance with, the laws of the State of Texas. -9- 10 IN WITNESS WHEREOF, Panhandle Eastern Corporation has caused its duly authorized officer to execute this document on its behalf, this 22nd day of December 1993. PANHANDLE EASTERN CORPORATION By: /s/ ------------------------- Its: Senior Vice President -10- EX-10.18 5 P.E.CORP LONG TERM INCENTIVE PLAN 1 EXHIBIT 10.18 PANHANDLE EASTERN CORPORATION 1994 LONG TERM INCENTIVE PLAN Panhandle Eastern Corporation (the "Company") hereby establishes this Plan for key employees of the Company and its Affiliates, as follows: 1. PURPOSE The purpose of this Plan is to aid the Company and its Affiliates in recruiting, motivating and retaining highly qualified and competent individuals as key employees. It is believed that this purpose will be furthered through the granting of Awards under this Plan to key employees as an incentive for the diligent application of their personal efforts to the continued success of the Company and its Affiliates. This Plan shall be effective January 1, 1994, subject to approval by the Company's stockholders at the 1994 Annual Meeting of Stockholders to be held April 27, 1994, and shall terminate on December 31, 2003, except with respect to any Award then outstanding. 2. DEFINITIONS "Administrative Guidelines" means the interpretative guidelines adopted by the Committee, as amended from time to time by the Committee, which guidelines shall be treated as a part of this Plan and shall be valid and binding upon the Participants. "Affiliate" means any subsidiary corporation (as defined in Section 424 of the Code) of the Company. "Award" means an Award described in Section 4 of this Plan. "Award Agreement" means an agreement entered into between the Company and a Participant, setting forth the terms and conditions applicable to the Award granted to the Participant. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. "Committee" means the Compensation/Organization/Nominating Committee of the Board; provided that to the extent required by Rule 16b-3 under the Exchange Act or any successor provision, such committee shall be comprised only of members who shall qualify as "disinterested persons" under such rule. "Common Stock" means the common stock, $1.00 per share par value, of the Company and shall include both treasury shares and authorized but unissued shares and shall also include any security of the Company issued in substitution, in exchange for, or in lieu of the Common Stock. "Covered Employee" means, for any Plan Year, the Company's Chief Executive Officer (or any individual acting in such capacity) and any employee of the Company or its Affiliates who, in the discretion of the Committee for purposes of determining those employees who are "covered employees" under Section 162(m) of the Code, is likely to be among the four other highest compensated officers of the Company for such Plan Year. "ERISA" means the Employee Retirement Income Security Act of 1974 and the regulations thereunder, as amended from time to time. "Exchange Act" means the Securities Exchange Act of 1934 and the regulations thereunder, as amended from time to time. "Fair Market Value" means the average of the high and low sales prices of a share of Common Stock, or other security for which Fair Market Value is being determined, as quoted on The New York Stock Exchange, Inc. Composite Transactions Reporting System (or such other reporting system as shall be selected by the Committee from time to time) on the relevant date, or if no sale of Common Stock or such other security is reported for such date, the immediately preceding day for which there is a reported sale. The Committee shall I-1 2 determine the Fair Market Value of any security that is not publicly traded, using such criteria as it shall determine, in its sole discretion, to be appropriate for the purposes of such valuation. "Participant" means an individual who has been granted an Award pursuant to this Plan. "Plan" means this Panhandle Eastern Corporation 1994 Long Term Incentive Plan, as set forth herein and as it may be amended from time to time. "Plan Year" means the calendar year. 3. ELIGIBILITY Key employees (including officers and employee directors) of the Company and its Affiliates selected by the Committee from time to time shall be eligible to participate in this Plan. An Award may not be granted to a member of the Board who is not also an employee of the Company or an Affiliate. 4. AWARDS An Award is the right to receive compensation under this Plan, payable in cash, Common Stock or other securities of the Company or an Affiliate, or any combination thereof, determined in accordance with the Administrative Guidelines. All Awards made pursuant to this Plan are in consideration of services performed or to be performed for the Company or its Affiliates. No Awards under this Plan shall be granted after December 31, 2003. The Committee may establish minimum performance targets with respect to each Award. Performance targets may be based on financial criteria, such as the Fair Market Value of Common Stock or other measures of financial performance of the Company, or may be based on the performance of a division, subsidiary or Affiliate of the Company, or the performance of an individual Participant. Notwithstanding anything in this Plan to the contrary, any Awards of stock options or similar rights, stock appreciation rights, performance units, or performance shares shall contain the restrictions on assignability in Section 7(a) of this Plan to the extent required by Rule 16b-3 under the Exchange Act or any successor provision. The following types of Awards may be granted under this Plan, singly or in combination or in tandem with other Awards, as the Committee may determine: (a) Non-Qualified Stock Options. A non-qualified stock option is a right to purchase, during such period of time as the Committee may determine, a specified number of shares of Common Stock or other security, which does not qualify as an incentive stock option under Section 422 of the Code, at a fixed option price equal to no less than 100 percent of the Fair Market Value of the Common Stock or other security on the date the Award is granted. The option price may be payable in the following form(s) as determined in accordance with the Administrative Guidelines: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Company, wire transfer, or direct account debit; (ii) through the delivery (together with a blank stock power or other instrument of assignment) or assignment of the ownership of shares of Common Stock or other securities of the Company with a Fair Market Value equal to all or a portion of the option price for the total number of options being exercised. If the Fair Market Value of the shares of Common Stock or other securities delivered is less than the total option price of the options to be exercised, a sequential exercise of the remaining options to be exercised with the proceeds credited from the initial exercise and subsequent exercises shall be permitted, pursuant to a brokerage or similar arrangement, until all requested exercises have been accomplished; provided that, in the case of the last exercise in any such sequence, the optionee must pay in cash any fractional shares required to effect such sequential exercise; or (iii) by a combination of the methods described in clauses (i) and (ii) above. (b) Incentive Stock Options. An incentive stock option is a right to purchase, during such period of time as the Committee may determine, a specified number of shares of Common Stock or other I-2 3 security, that shall comply with the requirements of Section 422 of the Code or any successor provision, at a fixed option price equal to no less than 100 percent of the Fair Market Value of the Common Stock or other security on the date the Award is granted. Notwithstanding any other provision of this Plan, the aggregate number of shares that may be subject to incentive stock options under this Plan shall not exceed 3,000,000 shares of Common Stock, subject to the limitation imposed by Section 6 of this Plan and subject to the adjustment provisions set forth in Section 11 of this Plan. The aggregate Fair Market Value (determined at the time of grant of the Award) of the shares with respect to which incentive stock options are exercisable for the first time by an optionee during a calendar year shall not exceed $100,000 (or such other limit as may be required by the Code). The Committee may provide that the option price under an incentive stock option may be paid by one or more of the methods described with respect to nonqualified stock options in Sections 4(a)(i), (ii) and (iii) above. (c) Stock Appreciation Rights. A stock appreciation right is a right to receive, without payment, an amount not in excess of (i) the Fair Market Value on the exercise date of the number of shares of Common Stock for which the stock appreciation right is exercised less (ii) the exercise price of such stock appreciation right, which price shall equal the Fair Market Value of such shares on the date the stock appreciation right was granted (or, in the case of an option with a tandem stock appreciation right, the option price that the optionee would otherwise have been required to pay for such shares). The right to receive such amount shall be conditioned upon the surrender of the stock appreciation right (or of both the option and the stock appreciation right in the case of a tandem stock appreciation right, or a portion of either). Stock appreciation rights shall be payable in Common Stock, cash or a combination thereof as determined by the Committee. (d) Restricted Stock. Restricted stock is Common Stock or other security of the Company or an Affiliate that is subject to restrictions on transfer and such other restrictions on the incidents of ownership as the Committee may determine at the time of the Award. Restricted stock Awards may be made without cash payment by, or other out-of-pocket consideration from, the Participant, either on the date of grant or the date the restriction(s) lapse or are removed. (e) Performance Units. A performance unit is a promise by the Company to make a payment to, or on behalf of, the Participant, which may be contingent upon the achievement of one or more performance targets specified by the Committee. A performance unit is a right to receive or be credited with an amount that may be determined by reference to Common Stock, other securities of the Company or an Affiliate, or by reference to dollar amounts. Performance units shall be subject to such conditions with respect to vesting, timing, amount and payment as the Committee shall determine at the time of the Award. Performance units shall be payable in cash. Performance unit Awards may be made without cash payment by, or other out-of- pocket consideration from, the Participant, either on the date of grant or the date of payment. By way of example, but not limitation, performance units, called "EPS Units", may be granted in tandem with Awards of stock options and the credited amount with respect to an EPS Unit shall be determined with reference to the difference between (i) the Company's annual earnings per share of Common Stock, as adjusted to exclude items that the Committee determines to be inappropriate for purposes of the Award, and (ii) an amount specified by the Committee that reflects the level of such earnings at the time of the Award and the principal manner of payment shall be by application toward the option price upon the Participant's exercise of the stock option. (f) Performance Shares. A performance share is a promise by the Company to make a payment to the Participant, which may be contingent upon the achievement of one or more performance targets specified by the Committee at the time of the Award. A performance share is a right to receive an amount that may be determined by reference to Common Stock, other securities of the Company or an Affiliate, or by reference to dollar amounts. Performance shares shall be subject to such conditions with respect to vesting, timing, and amount of payments as the Committee shall determine at the time of the Award. Performance shares shall be payable in Common Stock, or other securities of the Company or an Affiliate. Performance share Awards may be made without cash payment by, or other out-of-pocket consideration from, the Participant, either on the date of grant or the date of payment. (g) Dividend Equivalents. A dividend equivalent is the right to receive an amount equal to the dividends paid on a specified number of shares of Common Stock. A dividend equivalent shall be payable in cash. I-3 4 (h) Other Awards. The Committee may, from time to time, grant such other Awards as the Committee may determine, provided that no such Award shall be inconsistent with the terms of this Plan. Amounts received pursuant to cash-only Awards granted under Sections 4(c) and 4(e) through 4(h) of this Plan, or any combination thereof, if intending to comply with Rule 16a-1(c)(3)(i) under the Exchange Act or any successor provision, for each Plan Year to any Participant who is subject to Section 16 of the Exchange Act shall be limited to a maximum value of 500% of the Participant's annual salary at the rate in effect on the first day of such Plan Year. For purposes of the preceding sentence, if a Participant who is not a Covered Employee, but is subject to Section 16 of the Exchange Act, does not receive a salary, the Participant shall be deemed to have an annual salary of $250,000. 5. AWARDS TO COVERED EMPLOYEES The Committee may determine that any Award granted hereunder for any Plan Year to a Participant who is a Covered Employee shall be made and administered by a subcommittee consisting solely of two or more "outside directors" (as defined in Treasury regulations promulgated under Section 162(m) of the Code) appointed by the Committee (the "Subcommittee"). Any such Award may be determined solely on the basis of (a) the achievement by the Company of a specified target earnings per share, return on equity or net income, all as adjusted to exclude items that the Subcommittee determines to be inappropriate for purposes of the Award, (b) the Company's stock price, (c) the achievement by a business unit of the Company of a specified target net income, as adjusted to exclude items that the Subcommittee determines to be inappropriate for purposes of the Award, or market share, or (d) any combination of the goals set forth in (a) through (c) above. If an Award is made on such basis, the Subcommittee shall establish such goals prior to the beginning of the Plan Year (or such later date as may be prescribed by the Internal Revenue Service for purposes of Section 162(m) of the Code). Amounts received for each Plan Year pursuant to Awards granted under Sections 4(d) through 4(h) of this Plan, or any combination thereof, to each Covered Employee shall be limited to a maximum value of 500% of the Covered Employee's annual salary at the rate in effect on the first day of such Plan Year. In no event may the cumulative amounts paid pursuant to Awards granted in any Plan Year under Sections 4(d) through 4(h) of this Plan, or any combination thereof, to any Covered Employee exceed 500% of the Covered Employee's annual salary at the rate in effect on the first day of such Plan Year. For purposes of the two preceding sentences, if a Covered Employee does not receive a salary, the Covered Employee shall be deemed to have an annual salary of $500,000. Any payment of an Award granted under this Section 5, other than Awards referred to in Sections 4(a), 4(b) or 4(c) of this Plan or any combination thereof, shall be conditioned on the written certification of the Subcommittee that the goals used as the basis for any such Award, and any other material terms, were in fact satisfied. 6. SHARES SUBJECT TO THIS PLAN Subject to adjustment as provided in Section 11 of this Plan, the total number of shares of Common Stock available for the grant of Awards under this Plan for the 1994 calendar year shall be 3,000,000 shares of Common Stock and for each succeeding calendar year prior to 2004 shall be the lesser of (a) 3,000,000 shares of Common Stock, or (b) the sum of (i) the number of shares available for the grant of Awards under this Plan for the prior year or years but not covered by Awards granted for such prior year or years, plus (ii) fifty-five one hundredths of one percent (0.55%) of the total outstanding shares of Common Stock (not including treasury shares) as of the first day of such succeeding calendar year; provided that no more than one million (1,000,000) shares of Common Stock shall be cumulatively available for the grant of Awards under Sections 4(a), 4(b) or 4(c) of this Plan or any combination thereof pursuant to this Plan to any Participant, and, further provided, that no Award shall be granted if the number of shares of Common Stock subject to the Award, which, when added to the cumulative shares of Common Stock previously granted under this Plan, would exceed five and five tenths of one percent (5.5%) of the average of the number of outstanding shares of Common Stock (not including treasury shares) as of the first day of each calendar year during which this Plan then has been in effect. In addition, any shares of Common Stock issued by the Company through the assumption or substitution of outstanding grants of an acquired entity shall not reduce the shares of Common Stock available for the grant of Awards under this Plan. Other than for purposes of the per Participant limitation referred to above, if any shares of Common Stock subject to any Award under this Plan are forfeited I-4 5 or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such shares, the shares of Common Stock subject to such Award, to the extent of any such forfeiture or termination, shall again be available for the grant of Awards under this Plan. 7. AWARD AGREEMENTS Each Award under this Plan shall be evidenced by an Award Agreement setting forth the terms and conditions, as determined by the Administrative Guidelines or pursuant to Section 5 hereof, applicable to the Award. Award Agreements may include: (a) Non-Assignability. A provision to the effect that no Award shall be assignable or transferable except by will or by the laws of descent and distribution or, to the extent permitted by the Committee, except pursuant to a qualified domestic relations order as defined under the Code or Title I of ERISA, and that during the lifetime of a Participant, the Award shall be exercised only by such Participant or by his guardian or legal representative. (b) Termination of Employment. Provisions governing the disposition of an Award in the event of the retirement, disability, death, or other termination of a Participant's employment by or relationship to the Company or an Affiliate. (c) Rights as a Stockholder. A provision concerning what rights, if any, a Participant shall have as a stockholder with respect to any shares of Common Stock covered by an Award until the date the Participant or his nominee becomes the holder of record. Except as provided in Section 11 hereof, no adjustment shall be made for dividends or other rights for which the record date is prior to such date, unless the Award Agreement specifically requires such adjustment. (d) Withholding. A provision requiring the withholding of all taxes as required by law. In the case of payments of Awards in shares of Common Stock or other securities, withholding shall be as required by law and the Administrative Guidelines. The Committee may permit Participants to elect to satisfy withholding requirements by having the Company withhold shares of Common Stock or other securities having a Fair Market Value equal to the amount required to be withheld. In the case of a Participant subject to Section 16 of the Exchange Act, the Committee may require that the election be made on or before the date that the amount of tax to be withheld is determined (the "Tax Date") and be subject to the following restrictions: (i) the election must be irrevocable; (ii) if required by the Committee, the election must be subject to the disapproval of the Committee; and (iii) the election must (A) if permitted by the Committee, be made six months or more prior to the Tax Date, (B) be made during a "window period" beginning on the third business day after release of the Company's quarterly or annual earnings release and ending on the twelfth business day following such release date, or (C) if made outside of such a window period, take effect during such a window period. (e) Holding Period. A provision that the Award, and any shares of Common Stock received upon exercise of the Award, be held at least six months from the date of grant. (f) Miscellaneous. Such other terms and conditions, including, without limitation, the criteria for determining vesting of Awards, the amount or value of Awards, termination of Awards for cause, the exercise of Awards pursuant to a brokerage or similar arrangement, or adjustments for nonrecurring or extraordinary items, as are necessary and appropriate to effect the purposes of this Plan. 8. CHANGE IN CONTROL Award Agreements may include, as set forth in the Administrative Guidelines, that any or all of the following actions may occur as a result of, or in anticipation of, any such Change in Control to assure fair and equitable treatment of Participants: (a) acceleration of time periods for purposes of vesting in, or realizing gain from, any outstanding Award made pursuant to this Plan; I-5 6 (b) purchase of any outstanding Award made pursuant to this Plan from the holder for its equivalent cash value, as determined by the Committee, as of the effective date of the Change in Control; and (c) adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants. For purposes of this Section, a "Change in Control" shall mean the occurrence of any of the following events: (i) a third person, including a syndicate or group deemed to be a person under Section 13(d)(3) of the Exchange Act, becomes the beneficial owner (as so determined) of Common Stock having thirty percent (30%) or more of the total number of votes that may be cast for the election of members of the Board; (ii) all or substantially all of the assets and business of the Company are sold, transferred or assigned to, or otherwise acquired by, any other entity or entities; or (iii) as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who are members of the Board before the Transaction shall cease to constitute a majority of the Board of the Company or any successor to the Company. Notwithstanding the foregoing, in no event shall the distribution by the Company to its stockholders of stock in a subsidiary be deemed a Change in Control. 9. AMENDMENT AND TERMINATION The Committee may at any time amend, suspend, or discontinue this Plan or alter or amend any or all Award Agreements under this Plan; provided, however, that, no amendment, suspension, or termination of this Plan shall, without the consent of the Participant, adversely alter or change any of the rights or obligations under any Awards or other rights previously granted the Participant under this Plan; provided, further, however, that the Committee may not take any such action without approval of the Company's stockholders if such approval is required by law, Rule 16b-3 under the Exchange Act or any successor provision, or the rules of any stock exchange on which the Common Stock or any other security of the Company is listed. 10. ADMINISTRATION (a) Except as provided in Section 5 of this Plan, this Plan and all Awards granted pursuant thereto shall be administered by the Committee. The Committee shall periodically make determinations with respect to eligible individuals who shall participate in this Plan and receive Awards pursuant thereto. All questions of interpretation and administration with respect to this Plan and Award Agreements shall be determined by the Committee, or the Subcommittee if applicable, in its absolute discretion, and its determination shall be final and conclusive upon all parties in interest. (b) The Committee may authorize persons other than its members to carry out its policies and directives, including the authority to grant Awards, subject to the limitations and guidelines set by the Committee, except that any such delegation shall satisfy any applicable requirements of Rule 16b-3 under the Exchange Act or any successor provision. Any person to whom such authority is granted shall continue to be eligible to receive Awards under this Plan, provided that such Awards are granted directly by the Committee without delegation. 11. ADJUSTMENT PROVISIONS If the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities or property of the Company or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split up, combination of shares, or otherwise), or if the number of such shares of Common Stock shall be increased by a stock dividend or stock split, I-6 7 there shall be substituted for or added to each share of Common Stock theretofore available for purposes of this Plan, whether or not such shares are at the time subject to outstanding Awards, the number and kind of shares of stock or other securities or property into which each outstanding share of Common Stock shall be so changed or for which it shall be so exchanged, or to which each such share shall be entitled, as the case may be. Outstanding Awards may be amended as to price and other terms as the Committee, or the Subcommittee if applicable, may deem necessary or appropriate to reflect the foregoing events. If there shall be any other change in the number or kind of the outstanding shares of Common Stock, or of any stock or other securities or property into which such Common Stock shall have been changed, or for which it shall have been exchanged, or any other event affecting the capitalization of the Company (such as an extraordinary dividend), the Committee, or the Subcommittee if applicable, may, in its sole discretion, make such adjustment or adjustments in the number or kind or price or other terms of the shares then available for purposes of this Plan, or in any Award theretofore granted or which may be granted under this Plan, as the Committee, or the Subcommittee if applicable, may deem necessary or appropriate. Any such adjustment shall be effective and binding for all purposes of this Plan. In making any substitution or adjustment pursuant to this Section 11, fractional shares may be ignored. The Committee shall have the power, in the event of any merger or consolidation of the Company with or into any other corporation, or the merger or consolidation of any other corporation with or into the Company, to amend all outstanding Awards to permit the exercise thereof in whole or in part at any time, or from time to time, prior to the effective date of any such merger or consolidation (but not more than ten (10) years after the date of grant of any incentive stock option) and to terminate each such Award as of such effective date. 12. UNFUNDED PLAN The adoption of this Plan and any setting aside of amounts by the Company with which to discharge its obligations hereunder shall not be deemed to create a trust. The benefits provided under this Plan shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither a Participant nor the Participant's beneficiaries or estate shall have any interest in any assets of the Company by virtue of this Plan. Nothing in this Section 12 shall be construed to prevent the Company from implementing or setting aside funds in a grantor trust subject to the claims of the Company's creditors. Legal and equitable title to any funds set aside, other than in any grantor trust subject to the claims of the Company's creditors, shall remain in the Company and any funds so set aside shall remain subject to the general creditors of the Company, present and future. Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan, the Administrative Guidelines the Award Agreement. 13. RIGHT OF DISCHARGE RESERVED Nothing in this Plan or in any Award shall confer upon any employee or other individual the right to continue in the employment or service of the Company or any Affiliate or affect any right that the Company or any Affiliate may have to terminate the employment or service of any such employee or other individual at any time for any reason. 14. RULE 16B-3. This Plan is intended to comply with the applicable provisions of Rule 16b-3 under the Exchange Act or any successor provision and to the extent any provision of this Plan or any action by the Board or the Committee, or the Subcommittee if applicable, fails to so comply, the provision or action shall be deemed to be amended in order to cause the provision or action to so comply. 15. GOVERNING LAW This Plan shall be governed by, construed and enforced in accordance with the laws of the State of Texas applicable to transactions that take place entirely within the State of Texas and, where applicable, the laws of the United States. I-7 EX-10.23 6 SECOND AMENDMENT DATED 12/20/93 1 PANHANDLE EASTERN CORPORATION 1990 LONG TERM INCENTIVE PLAN AMENDMENT TO RESTRICTED STOCK AWARD AGREEMENT THIS AGREEMENT, dated December 20, 1993, by and between MR. DENNIS HENDRIX, a resident of Houston, Harris County, Texas and PANHANDLE EASTERN CORPORATION ("PEC"), a Delaware Corporation, amends a "PANHANDLE EASTERN CORPORATION 1990 LONG TERM INCENTIVE PLAN RESTRICTED STOCK AWARD AGREEMENT", dated March 12, 1993 ("Award Agreement") by and between HENDRIX and PEC. W I T N E S S E T H : WHEREAS, HENDRIX and PEC desire to amend the Award Agreement to revise the vesting schedule for the shares of Restricted Stock granted under the Award Agreement; NOW, THEREFORE, HENDRIX and PEC agree to amend the Award Agreement in the following respects only: Section 2 of the Award Agreement is hereby amended and restated, effective December 20, 1993, in its entirety to read as follows -- "2. Restrictions on Transfer. The shares of Restricted Stock granted hereunder to the Participant may not be sold, assigned, transferred, pledged or otherwise encumbered from the Date of Grant until said shares shall have become vested in the Participant (and restrictions terminated thereon) in accordance with the provisions of this Section 2 or as otherwise provided in Section 4 below (the "Restriction Period"). The Participant shall become vested as to the following specified number of shares of the total number of shares of Restricted Stock award hereunder on each of the following specified dates (or, in the event that any such day is a Saturday, Sunday or holiday, the business day immediately preceding such date):
Date Number of Shares ---- ---------------- December 20, 1993 200,000 February 11, 1994 9,000 May 11, 1994 9,000 August 11, 1994 9,000 November 11, 1994 9,000 February 11, 1995 8,500 May 11, 1995 8,500 August 11, 1995 8,500 November 11, 1995 8,500 2 February 11, 1996 7,500 May 11, 1996 7,500 August 11, 1996 7,500 November 11, 1996 7,500 provided, however that the Participant shall not be vested in shares of Restricted Stock which would be vested as of a given date if the Participant has not been continuously employed by the Company and its Affiliates from the date of this Agreement through such date. Such Restricted Period shall be subject to an earlier termination with respect to all or a portion of the Restricted Stock in accordance with the provisions of Section 4 below." IN WITNESS WHEREOF, HENDRIX has set his hand hereto and PEC has caused this Agreement to be signed in its coporate name and behalf by one of its officers thereunto duly authorized, all as of the day and year first above written. ATTEST: PANHANDLE EASTERN CORPORATION /s/ ROBERT W. REED By: /s/ J. B. HIPPLE - - - ------------------------------- --------------------------------- Secretary DENNIS R. HENDRIX /s/ DENNIS HENDRIX ------------------------------------- Address: 3027 Inwood Houston, Texas 77019 State of Texas, County of Harris, Before me, Diane Nesrsta, as notary public, on this day appeared Dennis R. Hendrix, known to me as the person whose name is subscribed to the foregoing instrument and acknowledged to me that he executed the same for the purpose and consideration therein expressed. Given under my hand and seal of office this 20th day of December, A.D., 1993. DIANE NESRSTA Notary Public State of Texas My Commission Expires 7/2/94
EX-13 7 ANNUAL REPORT 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information is provided to facilitate increased understanding of the 1993, 1992 and 1991 consolidated financial statements and accompanying notes of Panhandle Eastern Corporation (PEC) and subsidiaries (the Company). 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 income statement 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 During the second and third quarters of 1993, all four of the Company's interstate natural gas pipelines -- Texas Eastern Transmission Corporation (TETCO), Algonquin Gas Transmission Company (Algonquin), Panhandle Eastern Pipe Line Company (PEPL) and Trunkline Gas Company (Trunkline) -- began providing restructured services pursuant to FERC (Federal Energy Regulatory Commission) Order 636. Order 636, which is on appeal to the courts, requires pipeline service restructuring that "unbundles" each of the services -- sales, transportation and storage -- that have historically been provided by pipelines. This order 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 100% of prudently incurred eligible costs resulting from implementation of the order (transition costs). FERC, however, is encouraging pipelines to settle such issues with customers through a negotiated process. TETCO has filed a proposed comprehensive settlement resolving regulatory issues regarding Order 636 implementation, including the recovery of transition costs, and the bundled merchant service prior to Order 636. A pretax provision of $100 million was added to existing reserves in 1993 to reflect the impact of the pending TETCO settlement. This settlement and other Order 636 transition issues are further discussed under "Capital Resources, Liquidity and Financial Position." As a result of the SFV rate design required by Order 636 and the resulting elimination of seasonal rates, the historical seasonal variations in revenues and receivables continue to diminish. Generally, pipeline earnings should become more evenly distributed throughout the year. The Company's pipelines continue to offer selective discounting and short-term firm transportation contracts to utilize available capacity. Transportation and storage services form the core of the Company's business in the Order 636 environment. Trunkline, however, will maintain a certain level of unbundled sales service through most of 1994. During 1993, operating revenues and gas purchase costs decreased as a result of elimination of natural gas sales by TETCO, Algonquin and PEPL, while operating income generated by firm transportation and storage services increased. These trends will continue until all traditional pipeline sales services cease in late 1994. {GRAPH} Significant progress was made during 1993 in providing firm transportation service to new customers, including power plant conversion projects. The Company expects to benefit from the environment created by the regulatory changes of Order 636 by expanding the natural gas pipeline network via major capital projects and by developing innovative services for customers. See further discussion of capital expenditures in the Investing Cash Flow section. Natural gas storage, gathering and marketing are among the areas of opportunity that the Company is examining for potential growth. 1 Source Corporation, Centana Energy Corporation and Panhandle Trading Company (all subsidiaries of PEC), as well as each of the four natural gas pipelines, 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 for the nation's energy needs. 31 2 CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL POSITION OPERATING CASH FLOW
YEARS ENDED DECEMBER 31 1993 1992 1991 MILLIONS (AS RESTATED)(1) (AS RESTATED)(1) - - - ---------------------------------------------------------------------------------------------- Net Cash Flows Provided by Operating Activities $706.5 $103.7 $322.0
(1) Restated to reflect implementation of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Operating cash flows increased $602.8 million from 1992 to 1993. This increase reflects the 1993 sales of $173.5 million of receivables resulting from the 1992 liquefied natural gas (LNG) project settlement and, as a result of implementation of Order 636, the sales of natural gas inventory and collections of purchased gas costs. Also contributing to the year-to-year increase were 1992 payments for a TETCO rate refund of $170 million and a PEPL natural gas supply contract settlement of $60 million, partially offset by Trunkline rate refunds in 1993 of $47.9 million. The decrease in operating cash flows from 1991 to 1992 primarily resulted from the 1992 rate refund payment by TETCO and the contract settlement by PEPL. {GRAPH} {GRAPH} ORDER 636 TRANSITION COSTS. With implementation of Order 636 and the significant reduction in merchant services that has resulted, the Company is incurring certain costs for the transition, primarily related to TETCO's gas purchase contracts. On January 31, 1994, TETCO filed for FERC approval of a proposed comprehensive settlement, supported by a broad base of customers and other parties, that will resolve TETCO's regulatory issues regarding Order 636 implementation and FERC proceedings dating back to 1985 related to bundled merchant services prior to Order 636. With implementation of Order 636, 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 relate to unbundled sales contracts that continue through most of 1994. At December 31, 1993, the Company's gross commitments under gas purchase contracts that do not contain market-sensitive pricing provisions were approximately $210 million, $135 million, $100 million, $85 million and $50 million for the years 1994 through 1998, respectively, and a total of $70 million thereafter. These estimates reflect significant assumptions regarding deliverability and escalation clauses. The Company currently estimates transition costs to range from $600 million to $725 million, including amounts incurred to date. As of December 31, 1993, the Company's pipelines were recovering approximately $225 million in transition costs from customers, pursuant to FERC filings, and had collected approximately $135 million of such costs, subject to refund. Certain challenges to transition cost recoveries of the Company's pipelines are pending further FERC action. Included in these FERC proceedings are issues related to eligibility under Order 636 and the prudence of such costs. Additional transition cost filings and billings will be made by the Company's pipelines in the future, including quarterly filings by TETCO to recover gas supply realignment (GSR) costs pending resolution of the filed settlement. Any GSR costs otherwise determined to be ineligible for recovery under Order 636 may be recoverable through a FERC Order 528 mechanism that provides for recovery of up to 75% of certain contract costs, or may be recoverable via alternate mechanisms. TETCO's proposed settlement resolves a broad range of issues, primarily related to TETCO's Order 636 transition costs discussed above, as well as purchased gas adjustment and gas inventory charge collections that are the subject of an evidentiary hearing before a FERC Administrative Law Judge. As of December 31, 1993, the Company established an additional provision of $100 million ($60.2 million after tax) to reflect the impact of TETCO's proposed settlement, including certain amounts collected that would be refunded to customers. The consolidated balance sheet at December 31, 1993 included estimated current and long-term regulatory assets of approximately $25 million and $325 million, respectively, for estimated amounts to be recovered from customers pursuant to this settlement, and current and long-term liabilities related to these issues of approximately $160 million and $290 million, respectively. The settlement would provide for the recovery of these amounts through volumetric and reservation surcharges through the year 2002. The Company believes the exposure associated with gas purchase contract commitments and the termination 32 3 of the pipelines' merchant services during 1993 and 1994 will be substantially mitigated by transition cost recovery under TETCO's filed settlement, Order 636 and other mechanisms, including assignments of certain gas purchase contracts to third parties. As a result, the Company believes that implementation issues related to Order 636 will not have a material adverse effect on future consolidated results of operations or financial position. ENVIRONMENTAL MATTERS. 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 and agreements reached with certain states. Work provided for by the Consent Decree and state agency agreements will be performed over an approximate 10-year period that began in 1990. The cleanup programs are not expected to interrupt or diminish TETCO's operational ability to deliver natural gas to customers. At December 31, 1993 and 1992, TETCO had current and long-term liabilities recorded of $93 million and $298.7 million (1993) and $87.8 million and $341.1 million (1992), respectively, for remaining estimated cleanup costs. These cost estimates represent gross cleanup costs expected to be incurred by TETCO, and have not been reduced by customer or insurance recoveries. TETCO is recovering 57.5% of cleanup costs in rates pursuant to a stipulation and agreement approved by FERC in 1992. At December 31, 1993 and 1992, TETCO had recorded current and long-term regulatory assets of $31.1 million and $196.3 million (1993) and $12.9 million and $236.1 million (1992), respectively, representing costs to be recovered from customers. In addition, the Company has notified the U.S. Environmental Protection Agency (EPA) of PCB contamination at up to 41 sites on the PEPL and Trunkline systems, and is undertaking a remediation program at these sites. 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 these areas potentially contain hazardous substances. The Company has recorded $33 million for liabilities related to the existing cleanup programs and regulatory assets for the same amount, representing costs to be recovered from customers. The Company believes it will be able to fund the TETCO, PEPL and Trunkline PCB and other cleanup 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. CERTAIN OTHER CONTINGENCIES. 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 that resolution of this matter will not have a material adverse effect on the Company's consolidated financial position or liquidity. In connection with the sale of Petrolane Incorporated (Petrolane) in 1989, Texas Eastern Corporation (TEC), a subsidiary of PEC, agreed to indemnify Petrolane against certain liabilities. Petrolane has been named in a suit filed by the city of Fresno, California (the City) 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 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 or liquidity. OTHER. The Company generated sufficient 1993 taxable income to fully utilize the federal income tax net operating loss carryforward. 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 (ITC). However, if needed, the Company could implement tax-planning strategies to accelerate approximately $300 million of taxable income, prior to expiration of the ITC. The ITC accumulated as of December 31, 1993, if not otherwise utilized, will expire as follows: 1996-$9.7 million; 1997-$46.8 million; thereafter-$15.6 million. 33 4 The consolidated balance sheet included net in-kind balances as a result of differences in gas volumes received and delivered. At December 31, 1993 and 1992, other current liabilities included $3.1 million and other current assets included $73.1 million, respectively, for these net imbalances. Operating cash requirements in 1994 are expected to include rate refunds and certain Order 636 transition costs. 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. INVESTING CASH FLOW
YEARS ENDED DECEMBER 31 ----------------------- 1993 1992 1991 MILLIONS (AS RESTATED) (AS RESTATED) - - - -------------------------------------------------------------------------------------- Net Cash Flows Used in Investing Activities $82.4 $242.1 $192.0
Although capital expenditures have been increasing over the last three years, cash used by investing activities decreased in 1993 as a result of proceeds received from the sale of a partial interest in Northern Border Pipeline Company (Northern Border) and the sale of the Wattenberg system, a non-contiguous natural gas supply system in Colorado. Investing activities in 1991 included proceeds from the sale of the Company's interest in Stingray Pipeline Company (Stingray). CAPITAL EXPENDITURES-1993. Capital expenditures totaled $298.7 million in 1993, compared with $263.2 million for 1992. TETCO and Algonquin customer-supported market expansion projects included a portion of the Integrated Transportation Program (ITP) and Algonquin's Open Season program, both of which were placed in service in November 1993. CAPITAL EXPENDITURES-1994 AND BEYOND. During 1993, 1 Source Corporation announced two new capacity expansion programs -- Flex-X(TM) and Minuteman(TM) -- that significantly increased the Company's expected level of capital expenditures over the next several years. Flex-X, representing 10 years of expansion projects, would be supported by long-term firm transportation contracts. This program will utilize all four of the Company's pipelines and build on already-planned Northeast market expansion projects. Minuteman is planned as a 100-plus-mile high-pressure natural gas delivery system designed to meet the needs of New England power generators and local distribution companies. The addition of these two programs to existing pipeline projects brings the Company's anticipated investments in new market projects during the next 10 years to approximately $1.7 billion. Capital expenditures for 1994 are expected to approximate $425 million. Capital expenditures in 1994 will include a portion of the Flex-X program and will also include costs to place in service additional ITP firm transportation. Total market expansion projects for the natural gas pipelines are expected to approximate $250 million during 1994, almost 60% of the total 1994 capital budget. Remaining capital expenditures will primarily relate to replacement of existing facilities. TETCO also has filed to expand its system to deliver natural gas to Liberty Pipeline, discussed below, at a cost of approximately $300 million. Most of the capital expenditures related to this expansion are expected to be incurred in 1995 and 1996, and service is expected to commence in 1995. {GRAPH} 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 ranging from $60 million to $80 million may be necessary to comply with the requirements of the Amendments and the regulations. The Company's estimated 1994 capital expenditures include approximately $20 million related to these requirements. Management believes that any expenditures necessary will be eligible for recovery in rates. INVESTMENT PROJECTS. The Liberty Pipeline Company, in which a TETCO subsidiary owns a 30% interest, expects the proposed $162 million Liberty pipeline to begin providing service in late 1995. This project, subject to FERC approval, will provide firm transportation service from interconnections with TETCO and another pipeline system in New Jersey to Long Island. During the fourth quarter of 1993, the Company transferred its 22.75% interest in Northern Border to Northern Border Partners, L.P., a newly formed master limited partnership (MLP), in exchange for general partner interests as well as subordinated and common limited partner units. The Company then sold 74% of its MLP limited partner 34 5 units, resulting in net proceeds of approximately $147 million that were used for the repayment of debt and for general corporate purposes. After the sale, the Company retains an approximate 6% effective ownership interest in Northern Border. A PEPL subsidiary has formed a joint venture with a subsidiary of Western Gas Resources, Inc. that will provide gathering, processing and marketing services for natural gas producers. The companies will each contribute to the venture certain pipeline and gas processing facilities within Oklahoma, subject to FERC approval. In 1991, the Company, through a trustee, completed the sale of its 50% interest in Stingray for $32.5 million, including $9.2 million in dividends received (net after-tax proceeds of $25.4 million). The sale of the ownership interest was required by the Federal Trade Commission in order to resolve certain matters relating to the purchase of TEC in 1989. TAX ON ASSET SALES. In 1990, the Internal Revenue Service (IRS) adopted regulations that, if not amended or held to be invalid, would result in the disallowance for tax purposes of losses incurred in the Company's 1989 sales of certain TEC assets. The Company established a provision in 1990 for this issue, resulting in an increase in goodwill and the deferred income tax liability. In discussions with the U.S. Treasury Department and the IRS, the Company's position has been that no prior notice was given of the regulations' retroactive application to the sales and that such application would be both unfair and contrary to law. The Company continues to vigorously contest any additional tax payable pursuant to such regulations. FINANCING CASH FLOW
YEARS ENDED DECEMBER 31 ----------------------- 1993 1992 1991 MILLIONS (AS RESTATED) (AS RESTATED) - - - ------------------------------------------------------------------------------------------ Net Cash Flows Provided by (Used in) Financing Activities $(608.7) $130.5 $(167.2)
DEBT AND CREDIT FACILITIES. 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 December 31, 1993, there were no amounts outstanding under these agreements. During 1993, the Company retired four issues of high interest rate debt, totaling $500 million, in advance of scheduled retirement dates. Proceeds from the sales of a partial interest in Northern Border, the Wattenberg system and LNG project settlement receivables, along with proceeds from the issuance of common stock, discussed below, and other cash available were used to retire this debt. The weighted average interest rate of this retired debt was 10.8%. Financing activities in 1992 included issuances, excluding revolving credit facilities, of $628 million of long-term debt at favorable interest rates, of which $328 million was used to redeem outstanding revenue bonds. STOCKHOLDERS' EQUITY. In 1993, PEC completed the sale of 10 million shares of common stock priced at $21.25 per share, resulting in net proceeds to the Company of $204.5 million. As mentioned above, these proceeds were applied toward the early redemption of certain high interest rate debt. {GRAPH} During 1991, PEC issued 13.8 million shares of common stock, netting proceeds of $141.7 million that were applied toward repayment of long-term debt. In the determination of the amount of dividends to be paid to common stockholders, management and the board of directors regularly review, among other factors, the Company's projected operating results, cash flows and financial position. The board of directors increased the quarterly dividend from $0.20 to $0.21 effective with the 1994 first quarter. Under the most restrictive covenants contained in the Company's debt agreements, $768.2 million of PEC's consolidated common stockholders' equity was available for the payment of dividends at December 31, 1993. 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, available credit facilities and/or debt issuances. TETCO and PEPL have effective shelf registration statements with the Securities and Exchange Commission for the issuance of $200 million each of unsecured debt securities. 35 6 RESULTS OF OPERATIONS The Company reported consolidated net income for 1993 of $148.1 million, or $1.29 per share. This compares with consolidated net income in 1992 of $187.1 million, or $1.73 per share, and $85.8 million, or $0.87 per share, in 1991. OPERATING INCOME ANALYSIS CONSOLIDATED OPERATING INCOME BY BUSINESS GROUP
1993 1992 1991 MILLIONS (AS RESTATED) (AS RESTATED) - - - ----------------------------------------------------------------------------------------------- Gas Transmission TETCO $182.0(1) $277.8 $241.4 Algonquin 56.0 47.9 38.9 PEPL 119.8 101.3 38.9 Trunkline 53.3 49.7(2) 42.9 Other 4.9 5.9 5.4 ------- ------ ------ Total 416.0 482.6 367.5 LNG Project (0.8) 97.5(2) 20.9 Centana Energy Corporation 15.8 16.8 34.9 Parent, Other and Eliminations 8.9 15.6 9.3 ------- ------ ------ Total Operating Income $439.9(1) $612.5(2) $432.6 ====== ====== ======
(1) Includes a $100 million charge reflecting TETCO's proposed settlement of Order 636 implementation and other issues. (2) Includes benefits for the LNG project settlement of $88.6 million ($19.9 million -- Trunkline, $68.7 million -- LNG project). Gas transmission operations are seasonal, with the highest throughput occurring during the first and fourth quarters -- the winter heating season. As discussed under Operating Environment and Outlook, however, the historical seasonal variances in financial results began to diminish in 1993 as a result of the SFV rate design required by Order 636 and the resulting termination of seasonal rates, and will continue to do so in 1994. In addition to reduced seasonal variances, the SFV rate design and the Order 636 environment are expected to mitigate revenue fluctuations such as those caused by interruptible transportation services. The gas transmission industry has been characterized by trends toward increased transportation and storage services, reduced merchant sales and a need for flexibility in providing services. Transportation and storage services form the core of the Company's business in the Order 636 environment. Although the rate of inflation in the United States has been relatively low in 1993 and recent years, its potential impact should be considered when analyzing historical financial information. Under the ratemaking process applicable to regulated portions of the Company's business, recovery of plant costs through depreciation and the allowed return on plant investment is limited to historical cost, which is significantly less than current replacement cost. Federal regulations, as well as competition and other market factors, limit the Company's ability to price services or products based upon inflation's effect on costs. TEXAS EASTERN TRANSMISSION CORPORATION
1993 1992 1991 $ MILLIONS (AS RESTATED) (AS RESTATED) - - - ------------------------------------------------------------------------------------------------ Transportation Revenue $574.3 $391.2 $305.0 ------ ------ ------ Sales Revenue 225.8 559.8 824.9 Gas Purchased 96.2 214.5 440.4 ------ ------ ------ Net Sales Revenue 129.6 345.3 384.5 ------ ------ ------ Other Revenue 105.5 132.5 135.7 ------ ------ ------ TOTAL NET REVENUES 809.4 869.0 825.2 Operating Expenses 627.4 591.2 583.8 ------ ------ ------ OPERATING INCOME $182.0 $277.8 $241.4 ------ ------ ------ VOLUMES (BCF)(1) Market-area Transports 927 770 624 Sales 33 97 196 ------ ------ ------ Total Market Area 960 867 820 Supply-area Transports 118 154 154 ------ ------ ------ Total Deliveries 1,078 1,021 974 ====== ====== ======
(1) Billion cubic feet {GRAPH} TETCO 1993/1992. Operating income for TETCO increased $4.2 million comparing 1993 with 1992, excluding a $100 million charge in 1993 related to the proposed settlement resolving regulatory issues regarding Order 636 implementation and the bundled merchant service prior to Order 636. Transportation revenue increased 47% in 1993 compared to 1992, reflecting the shift by sales customers to firm transportation. TETCO's 1993 net sales revenue declined $215.7 million, or 62%, as sales volumes decreased 66%. TETCO's traditional merchant function was eliminated and replaced with transportation service effective June 1, 1993 as a result of implementation of Order 636. Sales demand revenue, which was not affected by sales volumes, continued to be collected through May 31, 1993. Operating expenses decreased $63.8 million in 1993 compared to 1992, excluding the $100 million charge related to the proposed settlement. The decrease in operating expenses was primarily related to the reduction in sales services and partially offset the reduction in net sales revenue. TETCO 1992/1991. TETCO's operating income increased $36.4 million in 1992 compared to 1991 as a result of an improvement in margins and a 5% increase in 36 7 total deliveries that reflected expanded marketing efforts. The improved margins resulted from a shift from sales to interruptible transportation services. The volume shift away from sales resulted in a decline in both sales revenue and related gas costs, causing a net sales revenue reduction of $39.2 million. Net sales revenue in 1992 continued to benefit from demand revenue that was not affected by sales volumes. Operating expenses increased during 1992, including depreciation on increased plant, property and equipment balances. ALGONQUIN GAS TRANSMISSION COMPANY
1993 1992 1991 $ MILLIONS (AS RESTATED) (AS RESTATED) - - - ------------------------------------------------------------------------------------------------- Transportation Revenue $109.9 $ 80.5 $ 67.1 ------ ------ ------ Sales Revenue 59.6 205.9 305.1 Gas Purchased 46.8 170.6 273.0 ------ ------ ------ Net Sales Revenue 12.8 35.3 32.1 ------ ------ ------ Other Revenue 13.0 20.8 22.2 ------ ------ ------ TOTAL NET REVENUES 135.7 136.6 121.4 Operating Expenses 79.7 88.7 82.5 ------ ------ ------ OPERATING INCOME $ 56.0 $ 47.9 $ 38.9 ------ ------ ------ VOLUMES (BCF) Market-area Transports 236 237 181 Sales 2 20 54 ------ ------ ------ Total Deliveries 238 257 235 ====== ====== ======
{GRAPH} ALGONQUIN 1993/1992. Algonquin's operating income increased $8.1 million, or 17%, comparing 1993 with 1992. The increase was primarily a result of higher transportation revenue related to incremental market projects and increased demand revenue. Transportation revenue increased $29.4 million, offsetting the decline in net sales revenue, which declined 64% comparing 1993 with 1992. The decrease in net sales revenue reflects the elimination of Algonquin's traditional merchant function, effective June 1, 1993 when Order 636 was implemented. Sales revenue in 1993 was primarily demand revenue that was not affected by the reduced sales volumes. Operating expenses decreased $9 million as a result of reduced sales services. ALGONQUIN 1992/1991. Algonquin's operating income increased $9 million, or 23%, comparing 1992 to 1991. Transportation revenue and volumes increased 20% and 31%, respectively, as a result of significant demand growth from expansion projects and an increase in interruptible transportation volumes to dual-fuel customers that displaced competing fuels. Decreased rates on interruptible transportation partially offset the benefit from increased volumes. Algonquin's operating expenses increased in 1992, partially as the result of increased depreciation expense on projects completed in 1992 and 1991. PANHANDLE EASTERN PIPE LINE COMPANY
1993 1992 1991 $ MILLIONS (AS RESTATED) (AS RESTATED) - - - ------------------------------------------------------------------------------------------------- Transportation Revenue $276.8 $252.8 $205.7 ------ ------ ------ Sales Revenue 98.7 273.7 276.9 Gas Purchased 42.7 172.8 156.3 ------ ------ ------ Net Sales Revenue 56.0 100.9 120.6 ------ ------ ------ Other Revenue 54.9 15.1 8.9 ------ ------ ------ TOTAL NET REVENUES 387.7 368.8 335.2 Operating Expenses 267.9 267.5 296.3 ------ ------ ------ OPERATING INCOME $119.8 $101.3 $ 38.9 ------ ------ ------ VOLUMES (BCF) Market-area Transports 538 584 477 Sales 22 62 58 ------ ------ ------ Total Market Area 560 646 535 Supply-area Transports 43 60 55 ------ ------ ------ Total Deliveries 603 706 590 ====== ====== ======
{GRAPH} PEPL 1993/1992. This pipeline's operating income increased $37.3 million comparing 1993 with 1992, excluding an $18.8 million benefit in 1992 for the settlement of a 1987 rate case. The increase resulted from the timing of elimination of seasonal sales rates as part of PEPL's restructured services under Order 636, a better alignment of rates with services and aggressive marketing programs. Revenues from unbundled transportation and storage services increased as net sales revenue declined. Depreciation expense was lower in 1993 due to lower depreciation rates and the sale of the Wattenberg system in the first quarter of 1993. Total throughput for PEPL declined in 1993 reflecting the sale of Wattenberg and the sales of natural gas storage inventories in late 1992 in preparation for implementation of Order 636. Effective May 1, 1993, PEPL has no merchant sales function under Order 636. PEPL 1992/1991. PEPL's operating income increased $62.4 million in 1992 compared to 1991. This increase primarily resulted from increased transportation volumes 37 8 resulting from a new rate design implemented April 1, 1992 and aggressive marketing efforts. Net revenues in 1992 included an $18.8 million benefit related to a 1987 rate case and natural gas storage inventory sales of $10 million occurring in late 1992. The decreased sales activity, excluding the rate case benefit and the storage sales, reflects the continued decline of the merchant sales function. Operating expenses decreased significantly for PEPL in 1992 resulting from reduced transportation and compression costs, as well as the lower depreciation rates provided for in PEPL's current tariff. TRUNKLINE GAS COMPANY
1993 1992 1991 $ MILLIONS (AS RESTATED) (AS RESTATED) - - - ------------------------------------------------------------------------------------------------ Transportation Revenue $138.7 $114.8 $122.9 ------ ------ ------ Sales Revenue 293.4 318.8 336.0 Gas Purchased 238.6 211.8 208.8 ------ ------ ------ Net Sales Revenue 54.8 107.0 127.2 ------ ------ ------ Other Revenue 10.0 34.7 10.1 ------ ------ ------ TOTAL NET REVENUES 203.5 256.5 260.2 Operating Expenses 150.2 206.8 217.3 ------ ------ ------ OPERATING INCOME $ 53.3 $ 49.7 $ 42.9 ------ ------ ------ VOLUMES (BCF) Market-area Transports 389 351 360 Sales 66 94 90 ------ ------ ------ Total Market Area 455 445 450 Supply-area Transports 147 136 124 ------ ------ ------ Total Deliveries 602 581 574 ====== ====== ======
{GRAPH} TRUNKLINE 1993/1992. Operating income for Trunkline increased $23.5 million comparing 1993 with 1992, excluding a $19.9 million benefit in 1992 resulting from the LNG project settlement. Transportation revenue and volumes increased 21% and 10%, respectively, comparing the periods, reflecting a new rate structure that became effective November 1, 1992 and aggressive marketing efforts. Excluding a 1993 rate refund benefit of $15.5 million, net sales revenue decreased 63%, resulting from reduced demand revenue, primarily from PEPL, and the elimination of LNG minimum bill revenues resulting from the 1992 LNG project settlement. Sales volumes exclude 41 Bcf of volumes that were both sold and transported in the unbundled environment and were reported as transportation throughput in 1993. Trunkline's unbundled sales are expected to end in late 1994 but Trunkline does not expect this to significantly impact operating income. Operating expenses decreased $56.6 million due to the elimination of LNG minimum bill expense resulting from the 1992 LNG project settlement and lower depreciation rates. This decrease was partially offset by a $13 million charge in 1993 related to the estimated cost of hedging gas purchase contracts. TRUNKLINE 1992/1991. Operating income for Trunkline increased $6.8 million in 1992 compared to 1991. Excluding the $19.9 million impact of the LNG project settlement in 1992 and positive adjustments in 1991 of $5.5 million, operating income decreased 20%. This decrease primarily resulted from lower demand revenue reflecting contract terminations. LNG PROJECT The LNG Project's operating income decreased $98.3 million in 1993 compared to 1992, primarily resulting from the favorable LNG project settlement in 1992. As a result of this settlement, a one-time positive adjustment of $68.7 million was recorded in 1992 and minimum bill revenue from Trunkline was eliminated effective in the fourth quarter of 1992. Beginning in October 1993, results benefited from the chartering of the Company's second LNG tanker. Operating income for the LNG project increased $76.6 million in 1992 compared to 1991. Excluding the positive impact of $68.7 million from the LNG project settlement in 1992, operating income increased $7.9 million. Increased revenue from the chartering of one of the LNG tankers was partially offset by reduced minimum bill revenue as a result of the LNG project settlement. CENTANA ENERGY CORPORATION Operating income for Centana Energy Corporation (Centana) decreased $1 million in 1993 compared to 1992. This decrease reflected reduced natural gas liquids (NGL) margins, partially offset by increased NGL volumes and helium sales. Centana's operating income decreased $18.1 million to $16.8 million in 1992 compared to 1991. The decrease is attributable to a decrease in NGL prices and increased gas purchase expense, primarily resulting from increased replacement gas costs. National Helium Corporation, a subsidiary of Centana, experienced a decrease in NGL sales margins, partially offset by an increase in helium and NGL sales volumes. 38 9 ELIMINATIONS. Included in the amounts outlined above are several intercompany transactions that do not impact consolidated operating income. TETCO's sales to Algonquin decreased $74.1 million in 1993 compared to 1992 and decreased $120.2 million in 1992 compared to 1991. Trunkline's sales to PEPL decreased $25.6 million in 1993 compared to 1992. Other variations in intercompany activity were not significant. OTHER INCOME AND DEDUCTIONS. The increase of $85.3 million in net other income in 1993 compared to 1992 was primarily the result of a $48.2 million gain on the sale of a partial interest in Northern Border in 1993 and nonrecurring charges in 1992 related to the sale or write-down of certain assets. Also contributing to the increase were higher earnings from investments in affiliates and interest income earned on the LNG project settlement receivables prior to the sale of these receivables in the second and third quarters of 1993. The decrease of $56.7 million in net other income in 1992 compared to 1991 primarily resulted from a 1992 charge for the disposition of real estate properties, decreased equity income from investments in affiliates, decreased interest income on cash investments and an $11.4 million gain on the sale of the Company's 50% interest in Stingray in 1991. INTEREST EXPENSE. Consolidated interest expense decreased $43 million during 1993, excluding a $17.5 million benefit recognized in 1992 due to the LNG project settlement. The decrease reflects reduced interest and other expenses related to lower average debt balances between 1993 and 1992, primarily resulting from the Company's early retirement in 1993 of four issues of relatively high-interest debt. {GRAPH} Consolidated interest expense decreased $41.2 million during 1992 compared to 1991. This decrease included the effects of lower interest rates and a reduction in average debt balances between 1992 and 1991, primarily resulting from the redemption of PEPL's 11-5/8% debentures in August 1991. The interest expense reduction also included benefits recognized in 1992 for the LNG project settlement interest impact of $17.5 million and PEPL's rate case adjustment. See also the Financing Cash Flow discussion. INCOME TAX. The effective tax rates for 1993, 1992 and 1991 differed from the statutory federal income tax rates primarily because of the effect of state income taxes. ACCOUNTING STANDARDS Statement of Financial Accounting Standards (Accounting Standard) No. 112, "Employers' Accounting for Postemployment Benefits," will be implemented by the Company in the first quarter of 1994. This standard requires accruals for benefits provided by the Company to certain former or inactive employees. The Company expects to record an additional liability of approximately $11 million, net of related taxes, upon implementation of Accounting Standard No. 112. The Company's pipelines have received permission from FERC to defer such costs, pending future rate filings requesting recovery. The earnings impact of Accounting Standard No. 112 is not expected to be significant. 39 10 REPORT OF MANAGEMENT PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES The management of Panhandle Eastern Corporation and subsidiary companies (the Company) acknowledges its responsibility for the integrity of the financial statements and related information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate to our business activities. The management of the Company also acknowledges its responsibility for maintaining adequate internal controls. Accordingly, accounting systems and related internal controls are maintained to provide reasonable assurance that assets are protected from loss or unauthorized use, that transactions and events are recorded properly and that adequate accounting records are maintained. The Corporate Auditing Department, which is independent of operational management, monitors the design and implementation of internal control systems and compliance with Company policies. The Company's independent auditors, KPMG Peat Marwick, have audited the consolidated financial statements. Their audit was conducted in accordance with generally accepted auditing standards, which includes the consideration of the Company's internal controls to the extent necessary to form an independent opinion on the consolidated financial statements prepared by management. The Company has established statements of corporate policy relating to conflict of interest and conduct of business and annually receives from appropriate employees confirmation of compliance with these policies. The Audit Committee of the Board of Directors, which is composed of Directors who are not officers or employees, meets at least twice annually with the independent auditors, management and the director of the Corporate Auditing Department to review the work of each, and to consider management's performance of its financial reporting responsibility. The independent auditors, as well as the director of the Corporate Auditing Department, are afforded an opportunity to present to the Audit Committee their opinions in the absence of management personnel. The Audit Committee reports regularly to the Board of Directors the results of its meetings and its recommendations, including that for the selection of the independent auditors. /s/ DENNIS HENDRIX Dennis Hendrix Chairman /s/ JAMES B. HIPPLE James B. Hipple Senior Vice President and Chief Financial Officer INDEPENDENT AUDITORS' REPORT KPMG PEAT MARWICK, CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Panhandle Eastern Corporation: We have audited the accompanying consolidated balance sheet of Panhandle Eastern Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, common stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1993. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Panhandle Eastern Corporation and Subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3 to the consolidated financial statements, the Company changed its method of accounting for income taxes to adopt the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," retroactive to January 1, 1990. As discussed in Note 13 to the consolidated financial statements, the Company also adopted the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," in 1993. /s/ KPMG PEAT MARWICK Houston, Texas January 26, 1994 40 11 CONSOLIDATED STATEMENT OF INCOME PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- MILLIONS, EXCEPT PER SHARE AMOUNTS 1993 1992 1991 - - - ------------------------------------------------------------------------------------------------------------ Operating Transportation of natural gas (Note 2) $ 1,063.4 $ 780.6 $ 631.5 Revenues Sales of natural gas (Note 2) 714.0 1,249.3 1,550.4 Sales of natural gas liquids 145.5 119.9 94.8 Natural gas storage 124.4 100.7 101.0 Other (Note 2) 73.6 183.9 81.7 ---------- ---------- ----------- OPERATING REVENUES 2,120.9 2,434.4 2,459.4 ---------- ---------- ----------- Costs and Gas purchased 527.7 712.0 903.8 Expenses Operating 527.0 475.2 462.1 Maintenance 92.8 76.1 76.6 General and administrative 227.7 246.1 258.1 Depreciation and amortization (Notes 1 and 7) 227.2 237.0 251.3 Miscellaneous taxes 78.6 75.5 74.9 ---------- ---------- ----------- Total 1,681.0 1,821.9 2,026.8 ---------- ---------- ----------- OPERATING INCOME 439.9 612.5 432.6 ---------- ---------- ----------- Other Income Equity in earnings of unconsolidated affiliates and Deductions (Note 6) 16.1 5.8 21.6 Gains (losses) on sales of assets, net (Notes 4 and 6) 42.5 (20.5) 4.7 Interest and miscellaneous income 25.7 15.3 28.5 Miscellaneous deductions (4.2) (5.8) (3.3) ---------- ---------- ----------- Total 80.1 (5.2) 51.5 ---------- ---------- ----------- GROSS INCOME 520.0 607.3 484.1 ---------- ---------- ----------- Interest Expense Interest on long-term debt (Note 8) 239.3 268.9 280.7 and Income Tax Interest on rate refund provisions (Note 2) 7.9 (5.4) 22.8 Other interest (Note 8) 22.1 31.3 32.5 ---------- ---------- ----------- Total 269.3 294.8 336.0 ---------- ---------- ----------- INCOME BEFORE INCOME TAX 250.7 312.5 148.1 Income Tax (Note 3) 102.6 125.4 62.3 ---------- ---------- ----------- NET INCOME $ 148.1 $ 187.1 $ 85.8 ========== ========== =========== Common Shares Average common shares outstanding (Note 10) 115.0 108.2 98.9 Earnings per common share $ 1.29 $ 1.73 $ 0.87 ========== ========== ===========
See accompanying notes to consolidated financial statements, including Notes 1 and 3 for the restatement resulting from a change in accounting for income tax. 41 12 CONSOLIDATED BALANCE SHEET -- ASSETS PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
DECEMBER 31 ----------- MILLIONS 1993 1992 - - - --------------------------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents (Note 1) $ 18.4 $ 3.0 Accounts and notes receivable Customers -- Trade (Note 4) 252.1 204.1 Liquefied natural gas project settlement (Note 2) -- 38.7 Other (Note 4) 42.1 60.2 Inventory and supplies (Note 5) 67.4 215.4 Unrecovered purchased gas and related costs (Note 2) -- 147.2 Other (Notes 2, 5 and 11) 144.0 123.2 ------------ ----------- Total 524.0 791.8 ------------ ----------- Long-term Receivables Customers (Note 2) 3.8 167.7 ------------ ----------- Investments Affiliates 129.2 223.7 Other 86.4 103.3 ------------ ----------- Total (Note 6) 215.6 327.0 ------------ ----------- Plant, Property Original cost 7,076.2 6,983.8 and Equipment Accumulated depreciation and amortization (2,732.9) (2,680.1) ------------ ----------- Net plant, property and equipment (Note 7) 4,343.3 4,303.7 ------------ ----------- Deferred Charges Goodwill, net (Note 1) 520.5 537.6 Prepaid pension (Note 13) 222.8 208.9 Other (Notes 1, 2 and 11) 901.0 609.4 ------------ ----------- Total 1,644.3 1,355.9 ------------ ----------- TOTAL ASSETS $ 6,731.0 $ 6,946.1 ============ ===========
See accompanying notes to consolidated financial statements, including Notes 1 and 3 for the restatement resulting from a change in accounting for income tax. 42 13 CONSOLIDATED BALANCE SHEET -- LIABILITIES AND STOCKHOLDERS' EQUITY PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
DECEMBER 31 ----------- MILLIONS 1993 1992 - - - --------------------------------------------------------------------------------------------------------------- Current Liabilities Long-term debt due within one year (Note 8) $ 62.5 $ 191.5 Notes payable 18.4 39.5 Rate refund provisions (Note 2) 67.8 186.9 Accounts payable 67.2 146.9 Accrued interest (Note 8) 60.6 67.7 Taxes payable (Note 3) 70.9 31.5 Accrued wages and benefits 56.9 49.8 Other (Notes 2 and 11) 442.7 322.0 ------------ ----------- Total 847.0 1,035.8 ------------ ----------- Deferred Liabilities Deferred income tax (Note 3) 1,177.1 1,133.8 and Credits Deferred revenue-liquefied natural gas project (Note 2) 78.1 89.9 Other (Notes 2 and 11) 1,040.7 837.5 ------------ ----------- Total 2,295.9 2,061.2 ------------ ----------- Long-term Debt Notes payable 925.5 1,361.0 Debentures 669.0 778.8 Revenue bonds 328.0 328.0 Other -- 10.8 ------------ ----------- Total (Note 8) 1,922.5 2,478.6 ------------ ----------- Commitments and Contingent Liabilities (Notes 2, 3, 4, 6, 9, 11 and 12) Common Stockholders' Common stock, 120 million (1993) and 108.3 Equity million (1992) shares issued and outstanding, 300 million shares authorized, $1 par value 120.0 108.3 Paid-in capital 2,040.4 1,813.8 Retained earnings (deficit) (494.8) (551.6) ------------ ----------- Total (Note 10) 1,665.6 1,370.5 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,731.0 $ 6,946.1 ============ ===========
See accompanying notes to consolidated financial statements, including Notes 1 and 3 for the restatement resulting from a change in accounting for income tax. 43 14 CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- MILLIONS 1993 1992 1991 - - - ------------------------------------------------------------------------------------------------------------ Common Stock Balance at beginning of year $ 108.3 $ 108.2 $ 90.8 Sale of stock 10.0 -- 13.8 Dividend reinvestment and employee stock plans 1.3 0.1 3.5 Stock option plans and awards 0.4 -- 0.1 ---------- ---------- ----------- BALANCE AT END OF YEAR (NOTE 10) $ 120.0 $ 108.3 $ 108.2 ---------- ---------- ----------- Paid-in Capital Balance at beginning of year $ 1,813.8 $ 1,810.4 $ 1,638.1 Excess of proceeds over par value of common stock Sale of stock 194.5 -- 127.9 Dividend reinvestment and employee stock plans 28.6 2.1 41.9 Stock option plans and awards 5.0 0.6 0.9 Unearned compensation (1.5) 0.9 1.5 Other items -- (0.2) 0.1 ---------- ---------- ----------- BALANCE AT END OF YEAR (NOTE 10) $ 2,040.4 $ 1,813.8 $ 1,810.4 ---------- ---------- ----------- Retained Earnings Balance at beginning of year, as previously (Deficit) reported $ (483.5) $ (585.5) $ (591.1) Cumulative effect of change in accounting principle (Note 3) (68.1) (66.6) (67.3) ---------- ---------- ----------- Balance at beginning of year, as restated (551.6) (652.1) (658.4) Net income 148.1 187.1 85.8 Common stock dividends paid, $0.80 per share in 1993, 1992 and 1991 (91.3) (86.6) (79.5) ---------- ---------- ----------- BALANCE AT END OF YEAR (NOTE 10) $ (494.8) $ (551.6) $ (652.1) ---------- ---------- ----------- TOTAL COMMON STOCKHOLDERS' EQUITY $ 1,665.6 $ 1,370.5 $ 1,266.5 ========== ========== ===========
See accompanying notes to consolidated financial statements, including Notes 1 and 3 for the restatement resulting from a change in accounting for income tax. 44 15 CONSOLIDATED STATEMENT OF CASH FLOWS PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 ----------------------- MILLIONS 1993 1992 1991 - - - ------------------------------------------------------------------------------------------------------------ Operating Net income $ 148.1 $ 187.1 $ 85.8 Activities Adjustments to reconcile net income to operating cash flows -- Depreciation and amortization 227.2 237.0 251.3 Deferred income tax expense 8.0 79.4 29.2 Liquefied natural gas project settlement 194.7 (104.0) -- Order 636 settlement 100.0 -- -- Gain on sale of investments, net (49.8) (0.9) (13.9) Net pension benefit (17.2) (19.1) (13.1) Other non-cash items in net income 5.1 29.9 (6.0) Net change in other operating assets and liabilities (detail below) 90.4 (305.7) (11.3) ---------- ---------- ----------- NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 706.5 103.7 322.0 ---------- ---------- ----------- Investing Purchases of plant, property and equipment (298.7) (263.2) (236.7) Activities Net investment proceeds 161.6 25.1 33.1 Property sales, retirements and other 54.7 (4.0) 11.6 ---------- ---------- ----------- NET CASH FLOWS USED IN INVESTING ACTIVITIES (82.4) (242.1) (192.0) ---------- ---------- ----------- Financing Retirement of debt (969.2) (695.0) (512.1) Activities Issuance of debt 253.8 883.0 245.0 Net increase (decrease) in notes payable (21.1) 39.5 -- Common stock issuance 232.3 2.2 187.1 Dividends paid (91.3) (86.6) (79.5) Other (13.2) (12.6) (7.7) ---------- ---------- ----------- NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (608.7) 130.5 (167.2) ---------- ---------- ----------- Net Change Increase (decrease) in cash and cash in Cash equivalents 15.4 (7.9) (37.2) Cash and cash equivalents, beginning of year 3.0 10.9 48.1 ---------- ---------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 18.4 $ 3.0 $ 10.9 ========== ========== =========== Net Change in Accounts and notes receivable $ 70.0 $ 10.9 $ 47.2 Other Operating Inventory and supplies 99.9 33.2 8.0 Assets and Take-or-pay settlement/contract reformation 10.8 10.4 (107.6) Liabilities Unrecovered purchased gas and related costs 104.0 (55.8) 23.2 Other current assets 50.7 47.1 11.7 Rate refund provisions (18.8) (92.1) 168.6 Accounts payable (79.7) (55.0) (146.9) Other current liabilities (27.5) (180.8) (2.7) Deferred charges and liabilities, net (119.0) (23.6) (12.8) ---------- ---------- ----------- Total $ 90.4 $ (305.7) $ (11.3) ========== ========== =========== Supplemental Cash paid for interest (net of amount Disclosures capitalized) $ 255.4 $ 283.8 $ 308.2 Cash paid for income tax 43.0 12.5 42.3 ========== ========== ===========
See accompanying notes to consolidated financial statements, including Notes 1 and 3 for the restatement resulting from a change in accounting for income tax. 45 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES INDEX 1. Accounting Policies Summary . . . . . . . . . . . 46 2. Natural Gas Revenues and Regulatory Matters . . . 47 3. Income Tax . . . . . . . . . . . . . . . . . . . 49 4. Customers and Accounts Receivable . . . . . . . 50 5. Inventory and Other Current Assets . . . . . . . 50 6. Investments . . . . . . . . . . . . . . . . . . . 50 7. Plant, Property and Equipment . . . . . . . . . . 52 8. Debt and Credit Facilities . . . . . . . . . . . 52 9. Leases and Other Commitments . . . . . . . . . . 53 10. Common Stock . . . . . . . . . . . . . . . . . . 53 11. Environmental Matters . . . . . . . . . . . . . . 54 12. Litigation . . . . . . . . . . . . . . . . . . . 55 13. Pension and Other Benefits . . . . . . . . . . . 55
1. ACCOUNTING POLICIES SUMMARY The accounting policies are presented to assist the reader in evaluating the consolidated financial statements of Panhandle Eastern Corporation (PEC) and its subsidiaries (the Company). Certain amounts for prior years have been reclassified in the consolidated financial statements to conform to the current presentation. The Company is predominantly involved in the interstate transportation and storage of natural gas. The sale of natural gas by the Company's pipelines has decreased significantly over the last several years. Other activities of the Company include the extraction and sale of hydrocarbon liquids and the non-regulated marketing 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). TETCO, Algonquin, PEPL and Trunkline meet the criteria and, accordingly, follow the reporting and accounting requirements of Statement of Financial Accounting Standards (Accounting Standard) No. 71, "Accounting for the Effects of Certain Types of Regulation." PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of PEC and all significant subsidiaries. All significant intercompany items have been eliminated in consolidation. The equity method of accounting is used for investments in affiliates. See Note 6. REVENUE RECOGNITION. The Company recognizes revenues for the transportation and sale of natural gas in the period service is provided and in the period of delivery, respectively. When rate cases are pending final FERC approval, a portion of the revenues collected by each natural gas pipeline is subject to possible refunds. The Company has established adequate reserves where required for such cases. See Note 2 for a summary of pending rate cases before FERC and related regulatory matters. GAS SUPPLY COSTS. Provisions are made in the consolidated statement of income for all estimated future losses associated with maintaining gas supply, including take-or-pay payments, contract settlements, buyout and buydown costs and the costs of contractual pricing provisions in excess of market. See Note 2 for a discussion of gas supply and other costs related to the FERC Order 636 transition. CASH AND CASH EQUIVALENTS. All liquid investments with maturities at date of purchase of three months or less are considered cash equivalents. The carrying amount of such cash investments in the consolidated balance sheet is a reasonable estimate of fair value. PLANT, PROPERTY AND EQUIPMENT. Plant, property and equipment is stated at original cost, which does not purport to represent replacement or realizable values. At the time rate-regulated properties are retired, the original cost plus the cost of retirement, less salvage, is charged to accumulated depreciation and amortization. When entire rate-regulated operating units are sold or nonregulated properties are retired or sold, the plant accounts and related accumulated depreciation and amortization accounts are reduced, and any gain or loss is credited or charged to income. Depreciation of natural gas pipeline plant, property and equipment is computed using the straight-line method. The LNG facilities are depreciated over the life of the LNG purchase contract, using a modified unit-of-production method. See Note 7. AMORTIZATION OF GOODWILL. The Company is amortizing the excess of the 1989 purchase price of Texas Eastern Corporation (TEC) over the fair value of net assets acquired (goodwill) on a straight-line basis over 40 years. Accumulated amortization of goodwill at December 31, 1993 and 1992 was $69 million and $54.2 million, respectively. EARLY RETIREMENT OF DEBT. The Company defers certain costs and losses related to the early retirement of long-term 46 17 debt, and amortizes such amounts as they are recovered through rates. At December 31, 1993 and 1992, respectively, there was $70.3 million and $52 million of such costs included in deferred charges. INTEREST COST CAPITALIZATION. The Company capitalizes interest on major projects during construction. The rates used by regulated companies are calculated pursuant to FERC rules and include an allowance for equity funds. DEFERRED INCOME TAX. The Company adopted Accounting Standard No. 109, "Accounting for Income Taxes," effective January 1, 1993 and applied the provisions of the new standard retroactive to January 1, 1990. Accordingly, the consolidated financial statements for the years ended December 31, 1992 and 1991 have been restated to reflect application of the new standard. Implementation of Accounting Standard No. 109 resulted in a cumulative reduction to common stockholders' equity at December 31, 1992 of $68.1 million. This standard requires a change from the deferred method of accounting for income tax to the asset and liability method of accounting for income tax. Under this asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax effects of differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates in effect for the years in which those temporary differences are expected to be recovered or settled. Under Accounting Standard No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the rate change is enacted. See Note 3. EARNINGS PER COMMON SHARE. The computation of earnings per common share is based on the monthly weighted average number of shares of common stock outstanding. Unexercised stock options do not have a dilutive effect on the reported amount of earnings per common share. See Note 10. 2. NATURAL GAS REVENUES AND REGULATORY MATTERS FERC ORDER 636 During 1993, the Company's 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" each of the services -- sales, transportation and storage -- that have historically been provided by pipelines. 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 100% of prudently incurred eligible costs resulting from implementation of the order (transition costs). FERC, however, is encouraging pipelines to settle such issues with customers through a negotiated process. On January 31, 1994, TETCO filed for FERC approval of a proposed comprehensive settlement, supported by a broad base of customers and other parties, that will resolve TETCO's regulatory issues regarding Order 636 implementation, including the recovery of transition costs, and FERC proceedings dating back to 1985 related to bundled merchant services prior to Order 636. The Company currently estimates transition costs to range from $600 million to $725 million, including amounts incurred to date. As of December 31, 1993, the Company's pipelines were recovering approximately $225 million in transition costs from customers, pursuant to FERC filings, and had collected approximately $135 million of such costs, subject to refund. Certain challenges to transition cost recoveries of the Company's pipelines are pending further FERC action. Included in these FERC proceedings are issues related to eligibility under Order 636 and the prudence of such costs. Additional transition cost filings and billings will be made by the Company's pipelines in the future, including quarterly filings by TETCO to recover gas supply realignment (GSR) costs pending resolution of the filed settlement. Any GSR costs otherwise determined to be ineligible for recovery under Order 636 may be recoverable through a FERC Order 528 mechanism that provides for recovery of up to 75% of certain contract costs, or may be recoverable via alternate mechanisms. TETCO's proposed settlement resolves a broad range of issues, primarily related to TETCO's Order 636 transition costs discussed above, as well as purchased gas adjustment and gas inventory charge collections that are the subject of an evidentiary hearing before a FERC Administrative Law Judge (ALJ). As of December 31, 1993, the Company established an additional provision of $100 million ($60.2 million after tax) to reflect the impact of TETCO's proposed settlement, including certain amounts collected that would be refunded to customers. The consolidated balance sheet at December 31, 1993 included estimated current and long-term regulatory assets of approximately $25 million and $325 million, respectively, for estimated amounts to be recovered from customers pursuant to this settlement, and estimated current and long- term liabilities related to these issues of approximately $160 million and $290 million, respectively. The settlement would provide for the recovery of these amounts 47 18 through volumetric and reservation surcharges through the year 2002. The Company believes the exposure associated with gas purchase contract commitments and the termination of the pipelines' merchant services during 1993 and 1994 will be substantially mitigated by transition cost recovery under TETCO's filed settlement, Order 636 and other mechanisms, including assignments of certain gas purchase contracts to third parties. As a result, the Company believes that implementation issues related to Order 636 will not have a material adverse effect on future consolidated results of operations or financial position. JURISDICTIONAL TRANSPORTATION AND SALES RATES ALGONQUIN. Algonquin filed a general rate increase effective May 1, 1993, subject to refund, which reflected throughput changes due to contract restructuring and a return to incremental rates with SFV rate design. A hearing for this proceeding is currently scheduled for March 1994. Algonquin is engaged in settlement discussions with customers. PEPL. On April 1, 1992 and November 1, 1992, PEPL placed into effect, subject to refund, general rate increases which incorporate the SFV rate design. Settlement discussions with customers are in progress. A hearing on the earlier rate proceeding was completed in February 1994. Decisions by the ALJ and FERC are expected later in 1994. Hearings in the latter rate case are scheduled for 1994. Effective April 1, 1989, PEPL placed into effect, subject to refund, sales and transportation rates reflecting a restructuring of rates, including seasonal rate structures. PEPL and others are appealing various FERC orders related to these rates. On March 1, 1988, sales and transportation rates reflecting elimination of PEPL's minimum bill became effective, subject to refund. In 1992, as a result of a FERC-approved settlement, PEPL recorded benefits to operating income and interest expense of $18.8 million and $4 million, respectively ($15 million after tax). TRUNKLINE. In 1993, Trunkline recorded a $15.5 million benefit to revenues ($10.2 million after tax), resulting from the reversal of a depreciation provision accumulated during the period from late 1988 through October 1992. OTHER. The Company's pipelines have, 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. The Company believes the ultimate resolution of this matter will not have a material adverse effect on consolidated financial position. TAKE-OR-PAY SETTLEMENT 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 that such risk was not material to the Company's consolidated results of operations or financial position as of December 31, 1993. 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. TETCO is currently flowing through to customers its pipeline suppliers' take-or-pay costs pursuant to FERC-approved filings, subject to refund. 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 that this matter will not have a material adverse effect on the Company's consolidated financial position. LNG PROJECT SETTLEMENT In 1992, settlement agreements that resolved certain outstanding LNG project regulatory issues became effective. As a result of the settlement, revenues and interest expense in 1992 included benefits of $88.6 million and $17.5 million, respectively ($57.7 million after tax), and the consolidated balance sheet at December 31, 1992 included long- and short-term receivables from Midwest area customers totaling $196.1 million. The income statement impact was net of related provisions for service restructuring and deferred revenues related to recovery of LNG project operating costs. To capitalize on its LNG assets, the Company continues to examine several strategic opportunities. 48 19 In 1993, the Company sold substantially all of the remaining balance of the LNG project settlement receivables, with limited recourse. At December 31, 1993, $144.7 million remained outstanding on the receivables sold. The fair value of the recourse provisions related to the receivables sold is not readily determinable as there are no quoted market prices available for these provisions. In the opinion of management, the probability that the Company will be required to perform under the recourse provisions is remote. 3. INCOME TAX As discussed in Note 1, the Company adopted Accounting Standard No. 109 effective January 1, 1993 and applied the provisions of the new standard retroactive to January 1, 1990. Accordingly, the consolidated financial statements for the years ended December 31, 1992 and 1991 have been restated to reflect the application of Accounting Standard No. 109 during those periods. There was no material impact to the Company's net income for 1992 or 1991 as a result of this restatement. Income tax recognized in the consolidated statement of income is summarized as follows:
YEARS ENDED DECEMBER 31 ----------------------- 1993 1992 1991 MILLIONS (AS RESTATED) (AS RESTATED) - - - ------------------------------------------------------------------------------------------ Current Federal $ 77.8 $ 39.7 $11.1 State 16.8 6.3 22.0 ------ ------ ----- Total current 94.6 46.0 33.1 ------ ------ ----- Deferred Federal 8.3 64.7 33.0 State (0.3) 14.7 (3.8) ------ ------ ----- Total deferred 8.0 79.4 29.2 ------ ------ ----- Total income tax $102.6 $125.4 $62.3 ====== ====== =====
Deferred income tax in 1993 and 1991 included charges of $8.3 million and $7 million, respectively, for enacted changes in federal and state tax laws and rates. The 1993 deferred income tax also included a benefit of $4.8 million for changes in the beginning of the year valuation allowance. Total income tax differs from the amount computed by applying the federal income tax rate to income before income tax. The reasons for this difference are as follows:
YEARS ENDED DECEMBER 31 ----------------------- 1993 1992 1991 MILLIONS, EXCEPT % (AS RESTATED) (AS RESTATED) - - - -------------------------------------------------------------------------------------------- Federal income tax rate 35% 34% 34% ====== ====== ===== Income tax, computed at the statutory rate $ 87.7 $106.3 $50.4 Adjustments resulting from -- State income tax, net of federal income tax effect 10.7 13.8 12.0 Cumulative effect of federal rate change 8.9 -- -- Goodwill amortization 5.2 5.0 5.1 Changes in valuation allowance (4.8) 1.5 (0.2) Insurance premiums (4.4) (1.5) (4.9) Other items (0.7) 0.3 (0.1) ------ ------ ----- Total income tax $102.6 $125.4 $62.3 ====== ====== ===== Effective tax rate 40.9% 40.1% 42.1% ====== ====== =====
The tax effects of temporary differences that resulted in significant portions of the deferred income tax assets and liabilities and a description of the financial statement items that created these differences are as follows:
DECEMBER 31 1993 1992 MILLIONS (AS RESTATED) - - - ------------------------------------------------------------------------------------------------ Deferred liabilities and credits $ 336.7 $ 272.1 Investment tax credit carryforward 72.1 125.2 Alternative minimum tax credit carryforward 57.3 64.6 Other accrued liabilities 116.6 54.8 Rate refund provisions 28.4 49.8 Net operating loss carryforward -- 33.5 Deferred revenue - LNG project 27.3 30.6 State deferred income tax, net of federal tax effect 16.6 16.8 Other 17.8 21.0 --------- --------- Total deferred income tax assets 672.8 668.4 Valuation allowance and other tax reserves (459.9) (458.6) --------- --------- Net deferred income tax assets 212.9 209.8 --------- --------- Plant, property and equipment (824.7) (818.0) Deferred charges (284.3) (150.8) Investments (77.9) (129.4) State deferred income tax, net of federal tax effect (83.8) (85.5) Prepaid pension (78.1) (71.0) Unrecovered purchased gas and related costs -- (59.3) Other (41.2) (29.6) --------- --------- Total deferred income tax liabilities (1,390.0) (1,343.6) --------- --------- Net deferred income tax liability $(1,177.1) $(1,133.8) ========= =========
49 20 If tax benefits relating to the valuation allowance for deferred income tax assets and other tax reserves are recognized subsequent to December 31, 1993, approximately $399.7 million will be allocated to goodwill. The investment tax credit carryforward will begin to expire in 1996 and will be extinguished in 2002 if not utilized sooner. The alternative minimum tax credit carryforward can be carried forward indefinitely. In 1990, the Internal Revenue Service (IRS) adopted regulations that, if not amended or held to be invalid, would result in the disallowance for tax purposes of losses incurred in the Company's 1989 sales of certain TEC assets. The Company established a provision in 1990 for this issue, resulting in an increase in goodwill and the deferred income tax liability. In discussions with the U.S. Treasury Department and the IRS, the Company's position has been that no prior notice was given of the regulations' retroactive application to the sales and that such application would be both unfair and contrary to law. The Company continues to vigorously contest any additional tax payable pursuant to such regulations. 4. CUSTOMERS AND ACCOUNTS RECEIVABLE SIGNIFICANT CUSTOMERS AND CONCENTRATIONS. Customer billings that exceeded 10% of consolidated revenues during the years ended December 31, 1993, 1992 and 1991 were those to Consumers Power Company of $290.4 million, $295.7 millon and $299 million, respectively. The Company's primary market areas are located in the Midwest and Northeast regions of the United States. At December 31, 1993, 51% and 47% of the trade receivable balances were for the Midwest and Northeast markets, respectively. The Company has a concentration of receivables due from public utilities in each of these areas. These concentrations of customers may affect the Company's overall credit risk in that the customers may be similarly affected by changes in economic, regulatory or other factors. Trade receivables are generally not collateralized; however, the Company analyzes customers' historical and future credit positions prior to extending credit. ACCOUNTS RECEIVABLE SALES. The Company has implemented an agreement to sell with limited recourse, on a continuing basis, current accounts receivable at a discount. The Company received $60 million for accounts receivable sold that remained outstanding at December 31, 1993. The fair value of the recourse provisions related to the receivables sold is not readily determinable as there are no quoted market prices available for these provisions. In the opinion of management, the probability that the Company will be required to perform under the recourse provisions is remote. For further disclosure of items with market and credit risk see Notes 2, 6, 8 and 9. OTHER RECEIVABLES. Other receivables in the consolidated balance sheet at December 31, 1993 and 1992 include taxes receivable and reimbursements due from others for capital projects. The carrying amount of these receivables approximates fair value. 5. INVENTORY AND OTHER CURRENT ASSETS A summary of inventory and supplies by category follows:
DECEMBER 31 ----------- 1993 1992 MILLIONS (AS RESTATED) - - - -------------------------------------------------------------- Gas in storage $ -- $144.9 Materials and supplies 67.4 70.5 ------ ------ Total inventory and supplies $ 67.4 $215.4 ====== ======
Materials and supplies are accounted for using average cost. Other current assets in the consolidated balance sheet included current gas in storage of $46.6 million at December 31, 1993 that is used for pipeline operations. The consolidated balance sheet includes net in-kind balances as a result of differences in gas volumes received and delivered. At December 31, 1993 and 1992, other current liabilities included $3.1 million and other current assets included $73.1 million, respectively, for these imbalances. 6. INVESTMENTS AFFILIATES The Company has investments in the following companies that are accounted for using the equity method. These investments include undistributed earnings of $42.3 million in 1993 and $38.1 million in 1992 related to 50% or less owned entities.
INVESTMENTS IN AFFILIATES DECEMBER 31 ----------- 1993 1992 MILLIONS, EXCEPT % % OWNERSHIP (AS RESTATED) - - - ----------------------------------------------------------------------------------------------- Northern Border Pipeline Company 5.95(1) $ 33.9 $126.5 National Methanol Company 25.00 45.9 43.0 TEPPCO Partners, L.P. 10.45 22.4 22.2 Midland Cogeneration Venture 14.34 6.4 8.1 Other affiliates Various 20.6 23.9 ------ ------ Total investments in affiliates $129.2 $223.7 ====== ======
(1) Represents effective ownership percentage through Northern Border Partners, L.P. Ownership decreased from 22.75% at December 31, 1992 as a result of the sale of a portion of the Company's interest in Northern Border Pipeline Company. 50 21
EQUITY IN EARNINGS YEARS ENDED DECEMBER 31 ----------------------- 1993 1992 1991 MILLIONS (AS RESTATED) (AS RESTATED) - - - ---------------------------------------------------------------------------------------------- Northern Border Pipeline Company $13.9 $15.9 $15.3 National Methanol Company 3.3 1.2 10.4 TEPPCO Partners, L.P. 0.8 0.4 0.4 Midland Cogeneration Venture (1.6) (4.8) (6.4) Other affiliates (0.3) (6.9) 1.9 ----- ----- ----- Total equity in earnings $16.1 $ 5.8 $21.6 ===== ===== =====
Distributions and dividends received amounted to $14.2 million, $12.9 million and $21 million in 1993, 1992 and 1991, respectively. NORTHERN BORDER PIPELINE COMPANY (NORTHERN BORDER). Northern Border is a partnership operating a pipeline transporting natural gas from Canada to the Midwest area of the United States. During 1993, the Company transferred its 22.75% interest in Northern Border to Northern Border Partners, L.P., a master limited partnership (MLP), in exchange for general partner interests as well as subordinated and common limited partner units. Also during 1993, the Company sold 74% of its MLP limited partner units, resulting in a fourth quarter pre-tax gain of $48.2 million ($28.7 million after tax). The Company received net proceeds of approximately $147 million that were used for the repayment of debt and for general corporate purposes. During 1992 and 1991, PEPL paid $13.7 million and $26.6 million, respectively, to Northern Border pursuant to a transportation agreement. Under the terms of a settlement agreement in 1992, PEPL guarantees payments 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. The fair value of this guarantee is not readily determinable. In the opinion of management, the probability of performance under this guarantee is remote. NATIONAL METHANOL COMPANY (NATIONAL METHANOL). National Methanol is a joint venture that owns and operates a chemical-grade methanol plant located in Jubail, Saudi Arabia. National Methanol produced approximately one million metric tons of methanol in 1993 and is constructing a 700,000 metric ton-per-year MTBE (methyl tertiary butyl ether) unit, which is expected to be completed in 1994. MTBE is an oxygenate used to produce cleaner-burning gasoline blends. TEPPCO PARTNERS, L.P. TEPPCO Partners, L.P. is an MLP that owns and operates a petroleum products pipeline. 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 the support period. No API purchases have been required since inception through the date of this report and the fair value of this agreement is not material. Furthermore, a subsidiary partnership of the MLP has $361.5 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. MIDLAND COGENERATION VENTURE LIMITED PARTNERSHIP (MCV). MCV converted an incomplete nuclear plant to a dual-purpose energy unit that uses natural gas to generate electricity and produce industrial process steam. STINGRAY PIPELINE COMPANY (STINGRAY). Stingray transports natural gas from offshore Louisiana and Texas. The Company's 50% interest in Stingray was sold in 1991 for $32.5 million, including $9.2 million in 1991 dividends received, and resulted in a gain of $11.4 million ($9 million after tax). The sale was required by the Federal Trade Commission in order to resolve certain matters relating to the purchase of TEC in 1989. OTHER INVESTMENTS In 1992, the Company recognized a charge of $8.2 million for the sale of certain office buildings located in Kansas City, Missouri. In addition to real estate holdings, other investments include financial instruments, such as insurance contracts and long-term receivables. These financial instruments have been recorded in the consolidated balance sheet at $60.4 million and $77.4 million at December 31, 1993 and 1992, respectively, representing the cost of such investments. The fair value of these instruments was approximately $49.8 million and $66.8 million at December 31, 1993 and 1992, respectively, based on market values determined by the insurance companies and discounted cash flows, as applicable. 51 22 7. PLANT, PROPERTY AND EQUIPMENT A summary of plant, property and equipment by classification follows:
DECEMBER 31 ----------- DEPRECIATION 1993 1992 MILLIONS, EXCEPT % % RATES (AS RESTATED) - - - ------------------------------------------------------------------------------------------------- Transmission 1.70 - 3.25 $5,157.3 $4,936.3 Gathering 1.30 - 2.40 351.7(1) 512.8 Underground storage 1.87 - 3.50 400.4 419.4 LNG facilities -- (2) 600.3 605.8 LNG vessels 2.78 - 2.86 144.5 144.7 General plant 2.53 - 33.33 289.0 261.7 Construction work in progress -- 133.0 103.1 -------- -------- Total plant, property and equipment $7,076.2 $6,983.8 ======== ========
(1) Reflects the sale of the Wattenberg system, a natural gas supply system in Colorado. (2) Modified unit-of-production method. A summary of plant, property and equipment, net of accumulated depreciation, by classification follows:
DECEMBER 31 ----------- 1993 1992 MILLIONS (AS RESTATED) - - - ----------------------------------------------------------------------- Transmission $3,334.9 $3,270.9 Gathering 50.3 86.3 Underground storage 306.0 332.9 LNG project 325.2 332.1 General plant 193.9 178.4 Construction work in progress 133.0 103.1 -------- -------- Net plant, property and equipment $4,343.3 $4,303.7 ======== ========
8. DEBT AND CREDIT FACILITIES A summary of long-term debt is as follows:
DECEMBER 31 ----------- 1993 1992 MILLIONS (AS RESTATED) - - - ----------------------------------------------------------------------------------------------- PEC 7-3/4% revenue bonds maturing 2022 $ 328.0 $ 328.0 -------- -------- TETCO Debentures Serial Series 1, 8.5% maturing 1993 -- 15.0 12% maturing 2010 -- 150.0 10 1/8% maturing 2011 100.0 100.0 10% maturing 2011 150.0 150.0 Notes 8.67% maturing 1993 -- 50.0 10% maturing 1998 -- 150.0 10 3/8% maturing 2000 200.0 200.0 10% maturing 2001 100.0 100.0 8% maturing 2002 100.0 100.0 Medium Term, Series A, 7.64-9.07% maturing 1999-2012 100.0 100.0 Revolving Credit Agreement -- 85.0 Redeemable Preferred Stock -- 3.7 Unamortized Discount (32.8) (45.2) -------- -------- Total TETCO 717.2 1,158.5 -------- -------- ALGONQUIN Notes 8.795-8.936% maturing 1996 $ 50.0 $ 50.0 9.13% maturing 2003 100.0 100.0 Unamortized Discount (3.2) (4.2) -------- -------- Total Algonquin 146.8 145.8 -------- -------- PEPL Debentures 9 7/8% maturing 1996 250.0 250.0 10 3/8% maturing 2011 -- 100.0 7.95% maturing 2023 100.0 -- 7.2% maturing 2024 100.0 -- Notes Variable Rate maturing 1993 -- 48.0 Variable Rate (4.25%) maturing 1995 50.0 -- 4% maturing 1996 4.5 -- Revolving Credit Agreement -- 170.0 Redeemable Preferred Stock -- 2.0 Unamortized Discount (1.2) (1.2) -------- -------- Total PEPL 503.3 568.8 -------- -------- TRUNKLINE Redeemable Preferred Stock -- 5.1 -------- -------- TEC Swiss Franc bonds (9.26%) maturing 1996 67.3 68.2 Notes Medium Term, Series A, 8.5-9.0% maturing 1996-1997 139.0 142.5 Medium Term, Series B, maturing 1993 -- 75.0 10.7% maturing 1995 -- 100.0 10.5% maturing 1997 100.0 100.0 Unamortized Discount (16.6) (21.8) -------- -------- Total TEC 289.7 463.9 -------- -------- LESS CURRENT MATURITIES (62.5) (191.5) -------- -------- TOTAL LONG-TERM DEBT $1,922.5 $2,478.6 ======== ========
The interest rates indicated were in effect on principal balances outstanding at December 31, 1993. Interest costs capitalized in 1993, 1992 and 1991 were $3.2 million, $1.8 million and $2 million, respectively. The estimated fair value of the Company's outstanding debt at December 31, 1993 and 1992 (including current maturities) was approximately $2.2 billion and $2.8 billion, respectively. Quoted market prices for the same or similar issues, discounted cash flows and/or rates currently available to the Company for debt with similar terms and remaining maturities were used to estimate fair value. The Company has entered into an agreement to reduce the impact of changes in currency exchange rates on TEC's Swiss Franc bonds. At December 31, 1993 and 1992, the net book value of the Company's foreign currency exchange contract was an asset of $13.5 million and $14.5 million, respectively, while the estimated fair value of this asset was 52 23 $10.3 million and $7.3 million, respectively. The fair values are based on the estimated amount the Company would receive if the agreement was terminated at those dates, considering current exchange rates and the creditworthiness of the parties to the agreement. Required sinking fund and installment payments applicable to long-term debt are as follows:
MILLIONS ------------------------- 1994 $ 62.5 1995 112.5 1996 271.3 1997 230.7 1998 16.3
TETCO and PEPL have effective shelf registration statements with the Securities and Exchange Commission for the issuance of $200 million each of unsecured debt securities. CREDIT AGREEMENTS. 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. The bank commitments under the credit agreements will terminate October 1, 1996 and are guaranteed by PEC on an unsecured basis. 9. LEASES AND OTHER COMMITMENTS The Company utilizes assets under operating leases in several areas of operations. Consolidated rental expense amounted to $24.7 million, $26.2 million and $24.8 million for the years 1993, 1992 and 1991, respectively. Minimum rental payments under the Company's various operating leases for the years 1994 through 1998 are $19.2 million, $15.5 million, $12.6 million, $10.8 million and $9.6 million, respectively. Thereafter, payments aggregate $53.7 million through 2011. In connection with the sale of Petrolane Incorporated (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 total approximately $95.7 million over the remaining terms of the leases, which expire in 2006. The fair value of this indemnification of guaranteed lease obligations is not readily determinable as there are no quoted market prices available for these lease guarantees. 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. 10. COMMON STOCK STOCK ISSUANCES. In June 1993, PEC completed the sale of 10 million shares of common stock priced at $21.25 per share, resulting in net proceeds to the Company of $204.5 million. Proceeds from the offering were applied towards the early redemption, also in June, of $176 million of outstanding debentures. The following table presents unaudited pro forma results of operations as if the stock sale and repayment of indebtedness from the resulting proceeds had occurred on January 1, 1993. These pro forma results have been prepared for comparative purposes only, do not purport to be indicative of what would have occurred had these transactions been made at such date and are not intended to be a projection of future results.
YEAR ENDED MILLIONS, EXCEPT PER SHARE AMOUNTS DECEMBER 31, 1993 - - - ----------------------------------------------------------------- Net income $154.5 Average common shares outstanding 119.2 Earnings per common share $ 1.30
In July 1991, PEC completed the sale of 13.8 million shares of common stock priced at $10.75 per share, resulting in net proceeds to the Company of $141.7 million. These proceeds were applied towards the redemption of outstanding debt. 53 24 STOCK OPTIONS. Transactions under various stock option and incentive plans are summarized as follows:
SHARES OPTION PRICES - - - ---------------------------------------------------------------------------------------------- Outstanding Dec. 31, 1991 1,466,460 $12.19 - $30.63 Granted 62,500 14.94 - 16.00 Exercised (15,697) 12.81 - 16.93 Expired (177,154) 12.81 - 30.63 --------- Outstanding Dec. 31, 1992 1,336,109 12.19 - 30.63 Granted 555,000 19.06 - 21.31 Exercised (98,535) 12.81 - 19.40 Expired (31,367) 16.38 - 30.63 --------- Outstanding Dec. 31, 1993 1,761,207 12.19 - 30.63 ========= Exercisable at December 31 1991 574,410 $12.19 - $30.63 1992 754,609 12.19 - 30.63 1993 911,707 12.19 - 30.63
STOCK AWARDS. Under the Company's 1990 Long Term Incentive Plan, there were 3 million shares of PEC common stock reserved for issuance to key employees. Awards representing 92,600 and 114,750 common shares, along with dividend equivalents, were granted to key employees during 1991 and 1990, respectively. Common shares are issued over a period of two to six years pursuant to these awards. In addition, in 1993 and 1991, respectively, 300,000 and 40,000 common shares were issued as restricted stock awards, with restrictions being removed over periods of three and four years, respectively. RESTRICTIONS ON DIVIDENDS. Under the most restrictive covenants contained in the Company's debt agreements, $768.2 million of PEC's consolidated common stockholders' equity was available for the payment of dividends at December 31, 1993. 11. 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 Kentucky. 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 December 31, 1993 and 1992, TETCO had recorded current and long-term liabilities of $93 million and $298.7 million (1993) and $87.8 million and $341.1 million (1992), respectively, for remaining estimated cleanup costs. These cost estimates represent gross cleanup costs expected to be incurred by TETCO, and have not been reduced by customer or insurance recoveries. TETCO is recovering 57.5% of cleanup costs in rates pursuant to a stipulation and agreement approved by FERC in 1992. At December 31, 1993 and 1992, TETCO had recorded current and long-term regulatory assets of $31.1 million and $196.3 million (1993) and $12.9 million and $236.1 million (1992), 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 carrier's duty to defend and indemnify TETCO continued in 1993. On January 10, 1994, the Court of Appeals for the Third Circuit, on rehearing, affirmed the lower court's summary judgment rulings in favor of the insurance carriers. TETCO's petition for rehearing en banc was denied by the Court on February 3, 1994. TEC and TETCO, as well as certain other TEC 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. 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. Under a consent order with the state of Mississippi, Trunkline conducted a sampling program at its two compressor station sites in Mississippi and submitted a report to the state. Trunkline will develop cleanup plans 54 25 based on this report. 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 has recorded $33 million for liabilities relating to the existing cleanup programs and 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. 12. LITIGATION The Company is involved in various 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. 13. PENSION AND OTHER BENEFITS PENSION BENEFITS. PEC has a non-contributory trusteed pension plan covering all employees with a minimum of one year vesting service. The plan provides pension benefits that are generally based on the employee's years of service and highest average earnings during a specified period. The Company's policy is to fund amounts, as necessary, on an actuarial basis to provide assets sufficient to meet the benefits to be paid to plan members. The components of the net pension benefit are as follows:
YEARS ENDED DECEMBER 31 ----------------------- 1993 1992 1991 MILLIONS (AS RESTATED) (AS RESTATED) - - - ----------------------------------------------------------------------------------------- Actual return on plan assets $ 73.6 $ 51.5 $128.9 Amount deferred (13.4) 7.4 (74.4) ------ ------- ------ Expected return on plan assets 60.2 58.9 54.5 Service cost benefits earned during the period (10.7) (10.2) (11.1) Interest cost on projected benefit obligations (35.0) (33.3) (34.0) Net amortization 2.7 3.7 3.7 ------ ------- ------ Net pension benefit $ 17.2 $ 19.1 $ 13.1 ====== ======= ======
The following table sets forth the pension plan's funded status and the net asset recognized by the Company:
DECEMBER 31 ----------- 1993 1992 MILLIONS (AS RESTATED) - - - ------------------------------------------------------------------------------------------------ Plan assets at fair value (principally common stock and fixed income securities) $725.6 $696.1 ------ ------ Actuarial present value of benefit obligations: Vested 370.4 316.3 Nonvested 15.4 13.4 ------ ------ Accumulated obligations 385.8 329.7 Effects of projected future compensation levels 95.2 80.3 ------ ------ Projected obligations 481.0 410.0 ------ ------ Plan assets in excess of projected obligations 244.6 286.1 Unrecognized net asset (51.0) (55.7) Unrecognized net loss (gain) 1.4 (35.0) Unrecognized prior service cost 27.8 13.5 ------ ------ Prepaid pension $222.8 $208.9 ====== ======
Assumptions used in the Company's pension accounting are as follows:
DECEMBER 31 ----------- 1993 1992 1991 - - - -------------------------------------------------------------------------------------------- Discount rates - rates at which pension liabilities could be settled 7.5% 8.0% 8.0% Rates of increase in compensation levels 5.0 5.0 5.0 Expected long-term rates of return on plan assets 9.5 9.5 9.5
The Company also sponsors defined contribution plans which cover substantially all employees. The Company expensed plan contributions of $11.6 million in 1993 and 1992, and $11.2 million in 1991. OTHER POSTRETIREMENT BENEFITS. The Company's postretirement benefits consist of certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits when they reach retirement age while working for the Company and have attained 10 years of specified service. The benefits are provided through contributory and noncontributory trusteed benefit plans. Effective January 1, 1993, the Company adopted Accounting Standard No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This standard provides for the accrual of such benefit costs over the active service period of employees to the date of full eligibility for the benefits. The Company previously charged amounts to expense based on the annual amount of contributions made to the plans' trust fund. The Company 55 26 is amortizing the net transition obligation, resulting from implementation of the new accounting standard, over approximately 20 years. It is the Company's general policy to fund accrued postretirement health care costs. The retiree life insurance plan is fully funded based on actuarially-determined requirements. The net postretirement benefit cost is summarized as follows:
YEAR ENDED DECEMBER 31, 1993 ----------------- MILLIONS HEALTH CARE LIFE - - - ----------------------------------------------------------------------- Actual return on plan assets $ 0.2 $ 4.2 Amount deferred (0.2) 0.7 ------- ----- Expected return on plan assets -- 4.9 Service cost benefits earned during the period (1.3) (0.3) Interest cost on accumulated obligations (10.8) (4.2) Net amortization and deferral (3.0) 0.1 ------- ----- Net postretirement benefit (cost) $ (15.1) $ 0.5 ======= =====
The change in the method of accounting for these benefits did not result in a significant change in postretirement benefit costs recognized in 1993. Amounts charged to expense for retiree health care and life insurance were $15.5 million and $12.2 million for 1992 and 1991, respectively. The following table sets forth the postretirement benefit plans' funded status and the net liability recognized by the Company:
DECEMBER 31, 1993 ----------------- MILLIONS HEALTH CARE LIFE - - - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligations: Retirees $(115.0) $(50.2) Fully eligible active plan participants (2.0) (0.1) Other active plan participants (26.4) (7.4) ------- ------ Accumulated obligations (143.4) (57.7) Plan assets at fair value (principally common stocks, corporate bonds and U.S. government and agency bonds) 9.7 54.7 ------- ------ Accumulated obligations in excess of plan assets (133.7) (3.0) Unrecognized transition obligations (assets) 115.2 (2.5) Unrecognized net loss 7.7 5.9 ------- ------ Net postretirement benefit asset (liability) $ (10.8) $ 0.4 ======= ======
The assumed health care cost trend rate used to estimate the cost of postretirement benefits was 10.5% for 1994. The health care cost trend rate is expected to decrease, with a 5.5% ultimate trend rate expected to be achieved by 1999. The effect of a 1% increase in the assumed health care cost trend rate for each future year is $0.6 million on the annual aggregate of the service and interest cost components of net periodic postretirement benefit costs and $8.9 million on the accumulated postretirement benefit obligations at December 31, 1993. Other assumptions used in postretirement benefit accounting are as follows:
DECEMBER 31, 1993 ----------------- HEALTH CARE LIFE - - - -------------------------------------------------------------------------------- Discount rates -- rates at which liabilities could be settled 7.5% 7.5% Rate of increase in compensation levels not 5.0 applicable Expected long-term rates of return, net of applicable tax, on plan assets 5.7 9.5
In December 1992, FERC issued a policy statement that generally provides, subject to individual pipeline proceedings, for current rate recovery of the accrued benefit costs resulting from implementation of Accounting Standard No. 106, including amortization of the transition obligation, provided that the Company makes payments to an irrevocable trust fund equaling the estimated costs included in rate recovery. Pending FERC approval for recovery of these costs, the Company's pipelines have deferred certain postretirement benefit costs. OTHER POSTEMPLOYMENT BENEFITS. Accounting Standard No. 112, "Employers' Accounting for Postemployment Benefits," will be implemented by the Company in the first quarter of 1994. This standard requires accruals for benefits provided by the Company to certain former or inactive employees. The Company expects to record an additional liability of approximately $11 million, net of related taxes, upon implementation of Accounting Standard No. 112. The Company's pipelines have received permission from FERC to defer such costs, pending future rate filings requesting recovery. The earnings impact of Accounting Standard No. 112 is not expected to be significant. 56 27 CONSOLIDATED QUARTERLY FINANCIAL DATA PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
QUARTERS ENDED ------------------------------------------------- 1993 MILLIONS, EXCEPT PER SHARE AMOUNTS MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - - - ----------------------------------------------------------------------------------------------------- INCOME Operating revenues $612.6 $573.8 $447.5 $487.0 Operating expenses 425.6 459.6 341.5 454.3(1) ------ ------ ------ ------ Operating income 187.0 114.2 106.0 32.7 Other income and deductions 7.8 10.4 9.9 52.0(2) Interest expense 77.6 69.5 65.6 56.6 ------ ------ ------ ------ Income before income tax 117.2 55.1 50.3 28.1 Income tax 47.7 20.7 24.7(3) 9.5 ------ ------ ------ ------ Net income $ 69.5 $ 34.4 $ 25.6(3) $ 18.6(1,2) ------ ------ ------ ------ COMMON Average common shares outstanding 108.6 112.2(4) 119.3 119.7 SHARES Earnings per common share $ 0.64 $ 0.31 $ 0.21 $ 0.16 ====== ====== ====== ====== 1992 (AS RESTATED)(5) INCOME Operating revenues $682.5 $486.1 $568.7(6) $697.1 Operating expenses 492.5 393.3 394.4 541.7 ------ ------ ------ ------ Operating income 190.0 92.8 174.3 155.4 Other income and deductions (5.5) (1.8) 0.3 1.8 Interest expense 76.7 75.9 61.5(6) 80.7 ------ ------ ------ ------ Income before income tax 107.8 15.1 113.1 76.5 Income tax 47.2 3.5 41.2 33.5 ------ ------ ------ ------ Net income $ 60.6 $ 11.6 $ 71.9(6) $ 43.0 ------ ------ ------ ------ COMMON Average common shares outstanding 108.2 108.2 108.2 108.2 SHARES Earnings per common share $ 0.56 $ 0.11 $ 0.66 $ 0.40 ====== ====== ====== ======
(1) Includes a $100 million charge ($60.2 million after tax) reflecting TETCO's proposed settlement of Order 636 implementation and other issues. (2) Includes a benefit of $48.2 million ($28.7 million after tax) resulting from the sale of certain interests in Northern Border Partners, L.P. (3) Includes a net tax provision of approximately $5 million, primarily reflecting approximately $9 million for the retroactive impact of the federal tax rate increase. (4) Reflects the issuance of 10 million shares of common stock in June 1993. (5) Restated to reflect implementation of Accounting Standard No. 109, "Accounting for Income Taxes." (6) Includes benefits for the LNG project settlement of $88.6 million in operating revenues and $17.5 million in reduced interest expense ($57.7 million after tax). 57 28 SUMMARY OF SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES
YEARS ENDED DECEMBER 31 -------------------------------------------------------------------------- MILLIONS, EXCEPT PER SHARE AMOUNTS 1993 1992 1991 1990 1989(1) - - - ---------------------------------------------------------------------------------------------------------------------------- INCOME OPERATING REVENUES $ 2,120.9 $ 2,434.4(2) $ 2,459.4 $ 2,993.6 $ 2,538.9 COSTS AND EXPENSES Gas purchased 527.7 712.0 903.8 1,390.8 1,210.5 Operating and maintenance 619.8(3) 551.3 538.7 635.3 508.8 Depreciation and amortization 227.2 237.0 251.3 274.1 203.3 Special charge -- LNG facilities write-down -- -- -- 310.0 -- Other costs and expenses 306.3 321.6 333.0 355.0 232.2 ---------- ---------- ----------- ----------- ---------- OPERATING INCOME 439.9 612.5 432.6 28.4 384.1 INTEREST EXPENSE 269.3 294.8(2) 336.0 357.5 362.9 INCOME (LOSS) FROM CONTINUING OPERATIONS 148.1(3,4) 187.1(2) 85.8 (249.7) 69.5 NET INCOME (LOSS) $ 148.1(3,4) $ 187.1(2) $ 85.8 $ (285.5)(5) $ 29.2 AVERAGE COMMON SHARES OUTSTANDING 115.0(6) 108.2 98.9(6) 88.9 71.9 EARNINGS (LOSSES) PER COMMON SHARE Continuing operations $ 1.29 $ 1.73 $ 0.87 $ (2.81) $ 0.97 Total 1.29 1.73 0.87 (3.21) 0.41 DIVIDENDS PER COMMON SHARE $ 0.80 $ 0.80 $ 0.80 $ 1.40 $ 2.00 ---------- --------- ---------- ---------- ---------- BALANCE SHEET PLANT, PROPERTY AND EQUIPMENT $ 7,076.2 $ 6,983.8 $ 6,806.0 $ 6,686.4 $ 6,225.0 Accumulated depreciation and amortization (2,732.9) (2,680.1) (2,603.2) (2,449.6) (2,019.9) ---------- --------- ---------- ---------- ---------- Net plant, property and equipment 4,343.3 4,303.7 4,202.8 4,236.8 4,205.1 TOTAL ASSETS $ 6,731.0 $ 6,946.1 $ 6,756.3 $ 7,055.4 $ 6,265.6 CAPITAL STRUCTURE Long-term debt due within one year $ 62.5 $ 191.5 $ 224.7 $ 258.0 $ 216.2 Secured and other notes payable 18.4 39.5 -- -- 71.3 Long-term debt 1,922.5 2,478.6 2,251.6 2,470.1 2,785.6 Common stockholders' equity 1,665.6 1,370.5 1,266.5 1,070.5(5) 1,415.1 ---------- --------- ---------- ---------- ---------- TOTAL CAPITALIZATION 3,669.0 4,080.1 3,742.8 3,798.6 4,488.2 BOOK VALUE PER COMMON SHARE $ 13.88 $ 12.65 $ 11.71 $ 11.79 $ 16.21 ---------- --------- ---------- ---------- ---------- CASH FLOWS OPERATING CASH FLOW $ 706.5 $ 103.7 $ 322.0 $ (5.1) $ 678.7 CAPITAL EXPENDITURES $ 298.7 $ 263.2 $ 236.7 $ 400.3 $ 311.2 ---------- --------- ---------- ---------- ---------- OPERATING NATURAL GAS PIPELINE VOLUMES, BCF(7) Market-area Transports 1,956 1,768 1,454 1,302 949 Sales 123 263 347 551 509 ---------- --------- ---------- ---------- ---------- Total Market Area 2,079 2,031 1,801 1,853 1,458 Supply-Area Transports 307 347 329 329 331 ---------- --------- ---------- ---------- ---------- Total Deliveries 2,386 2,378 2,130 2,182 1,789 ========== ========= ========== ========== ==========
(1) Includes TEC's operating activity since April 27, 1989. (2) Includes benefits for the LNG project settlement of $88.6 million in operating revenues and $17.5 million in reduced interest expense ($57.7 million after tax). (3) Includes a $100 million charge ($60.2 million after tax) reflecting TETCO's proposed settlement of Order 636 implementation and other issues. (4) Includes a benefit of $48.2 million ($28.7 million after tax) resulting from the sale of certain interests in Northern Border Partners, L.P. (5) Includes a $60.7 million decrease for the cumulative effect of a change in accounting principle. See Notes 1 and 3 of the Notes to Consolidated Financial Statements. (6) Includes the issuance of 10 million shares of common stock in June 1993 and 13.8 million shares in July 1991. (7) Billion cubic feet at 14.73 pounds per square inch atmospheric pressure. See the Notes to Consolidated Financial Statements for a discussion of material contingencies and Notes 1 and 3 for the restatement resulting from a change in accounting for income tax. 58 29 STOCKHOLDERS' INFORMATION COMMON STOCK
DIVIDENDS PAID 1993 QUARTERS HIGH LOW PER SHARE - - - -------------------------------------------------------------- First $23 3/4 $16 3/4 $0.20 ------- ------- ----- Second 25 19 3/4 0.20 ------- ------- ----- Third 27 1/4 23 0.20 ------- ------- ----- Fourth 26 20 3/8 0.20 ------- ------- ----- 1992 QUARTERS First $15 7/8 $13 1/2 $0.20 ------- ------- ----- Second 17 1/4 12 7/8 0.20 ------- ------- ----- Third 19 3/8 15 3/4 0.20 ------- ------- ----- Fourth 19 3/4 16 1/4 0.20 ------- ------- -----
PEC common stock is listed for trading under the symbol PEL on the New York and Pacific Stock Exchanges. There were 30,489 stockholder accounts at December 31, 1993. See Page 35 for an explanation of the dividend policy and Note 10 of the Notes to Consolidated Financial Statements on Page 54 for a discussion of restrictions on dividends. DEBT RATINGS
MOODY'S STANDARD DUFF FITCH INVESTORS & & INVESTORS SERVICE POOR'S PHELPS SERVICE - - - -------------------------------------------------------------------------- TETCO Baa2 BBB- BBB BBB PEPL Baa2 BBB- BBB BBB TEC Baa3 BB+ BBB BBB
ANNUAL MEETING. Stockholders are cordially invited to attend the company's 65th Annual Meeting, 10 a.m. Wednesday, April 27, 1994, at the J.W. Marriott Hotel at the Houston Galleria, 5150 Westheimer, Houston, Texas. DIVIDEND REINVESTMENT. The company has a Dividend Reinvestment Program that provides stockholders a convenient and economical method of purchasing additional shares of common stock through the reinvestment of cash dividends or through optional cash investments at market prices. Please contact Shareholder Services for further information. SHAREHOLDER SERVICES. Stockholders who need assistance with their accounts should call 1-800-225-5838 or 713-627-4681. Written requests should be addressed to Shareholder Services, P.O. Box 1642, Houston, Texas 77251-1642. REQUESTS FOR FORM 10-K, STATISTICAL REPORTS. The company will furnish to any stockholder, without charge, copies of the 1993 report on SEC Form 10-K and the 1993 Statistical Report. Please direct requests to Investor Relations. INVESTOR RELATIONS. Securities analysts and investors who want information about the company should contact Bradley K. Porlier, Director, Investor Relations, at 713-627-4600 or 1-800-347-3636, or write to Investor Relations at P.O. Box 1642, Houston, Texas 77251-1642. MEDIA RELATIONS. Inquiries from the news media should be directed to James W. Hart, Jr., Vice President, Public Affairs, at 713-627-4900. TRANSFER AGENT AND REGISTRAR. Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 59 30 APPENDIX TO EXHIBIT 13 PANHANDLE EASTERN CORPORATION AND SUBSIDIARIES Descriptions of Graphics Contained Within Management's Discussion and Analysis of Financial Condition and Results of Operations Located on page 31, a bar chart titled "Operating Income Before Special Items" depicts operating income before special items of $433 million, $524 million and $540 million for the years 1991, 1992 and 1993, respectively. The 1992 and 1993 bars are referenced to the following footnote: "Excludes nonrecuurring benefits of $89 million in 1992 and a special charge of $100 million in 1993." The following caption appears below the chart: "Natural gas transmission units' operating income in 1993 and 1992 helped the company achieve its financial goals." Located on page 32, a pie chart titled "1993 Operating Revenues" is divided into three sections, representing transportation, sales and other operating revenues of $1,063 million, $860 million and $198 million, respectively. Located directly below the 1993 Operating Revenues chart on page 32, another pie chart titled "1992 Operating Revenues" is divided into three sections, representing transportation, sales and other operating revenues of $781 million, $1,369 million and $284 million, respectively. The following caption appears below the charts: "Transportation and storage revenues have increased in the Order 636 environment." Located on page 34, a bar chart titled "Capital Expenditures" depicts capital expenditures for the years 1991, 1992 and 1993 and for the 1994 budget. Each bar contains sections representing TETCO, Algonquin, PEPL, Trunkline and Other. The sections of the bars are proportioned, in the order previously described, as follows: $114 million, $72 million, $17 million, $30 million and $4 million (1991); $107 million, $90 million, $31 million, $32 million and $3 million (1992); $131 million, $68 million, $41 million, $52 million and $7 million (1993); and $197 million, $92 million, $72 million, $26 million and $38 million (1994 Budget), respectively. The following caption appears below the chart: "Capital expenditures have steadily increased, especially for customer- supported projects in the Northeast." Located on page 35, a bar chart titled "Capitalization" depicts capitalization as of December 31, 1991, 1992 and 1993. Each bar contains two sections representing Debt and Equity as follows: $2,476 million and $1,267 million (1991); $2,710 million and $1,371 million (1992); and $2,003 million and $1,666 million (1993), respectively. The following caption appears below the chart: "Equity as a percentage of capitalization has risen to 45% at the end of 1993." Located on page 36, a pie chart titled "1993 Operating Income by Business Group" is divided into five sections, depicting 1993 operating income by business group. TETCO's portion, representing 41% of operating income, is highlighted. Located on page 37, a pie chart titled "1993 Operating Income by Business Group" is divided into five sections, depicting 1993 operating income by business group. Algonquin's portion, representing 13% of operating income, is highlighted. Also located on page 37, a pie chart titled "1993 Operating Income by Business Group" is divided into five sections, depicting 1993 operating income by business group. PEPL's portion, representing 27% of operating income, is highlighted. Located on page 38, a pie chart titled "1993 Operating Income by Business Group" is divided into five sections, depicting 1993 operating income by business group. Trunkline's portion, representing 12% of operating income, is highlighted. Located on page 39, a bar chart titled "Interest Expense" depicts interest expense for the years 1991, 1992 and 1993. Each bar contains two sections, representing interest expense on Long-term debt and Other as follows: $281 million and $55 million (1991); $269 million and $26 million (1992); and $239 million and $30 million (1993), respectively. The following caption appears below the chart: "Reduced levels of debt and lower interest rates have resulted in strengthened financial position and decreased interest costs." EX-23 8 CONSENT OF KPMG PEAT MARWICK 1 ACCOUNTANTS' CONSENT The Board of Directors Panhandle Eastern Corporation: We consent to incorporation by reference in the Registration Statements listed below of Panhandle Eastern Corporation of our report dated January 26, 1994, relating to the consolidated balance sheet of Panhandle Eastern Corporation and Subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993, and our report dated January 26, 1994 relating to the financial statement schedules for each of the years in the three-year period ended December 31, 1993, which reports are included or incorporated by reference in the December 31, 1993 annual report on Form 10-K of Panhandle Eastern Corporation. Such report on the consolidated financial statements refers to changes in the Company's methods of accounting for income taxes and postretirement benefits other than pensions. 1. Form S-8 Registration Statements for the following: (A) 1989 Nonemployee Directors Stock Option Plan (No. 33-28912) (B) 1977 Non-Qualified Stock Option Plan (No. 2-61225) (C) 1982 Key Employee Stock Option Plan (No. 2-79180) (D) Special Recognition Bonus Plan (No. 33-35253) (E) 1990 Long Term Incentive Plan (No. 33-35251) (F) Employees' Savings Plan (No. 33-36698) (G) Employees' Savings Plan (No. 33-41079) 2. Form S-3 Registration Statements for the following: (A) Dividend Reinvestment and Stock Purchase Plan (No. 33-28914) /s/ KPMG PEAT MARWICK ------------------------------- KPMG PEAT MARWICK Houston, Texas March 28, 1994 EX-24 9 POWERS OF ATTORNEY 1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each undersigned Officer and/or Director of PANHANDLE EASTERN CORPORATION (the "Company"), a Delaware corporation, does hereby constitute and appoint J. B. HIPPLE, CARL B. KING, and ROBERT W. REED, and each of them, his true and lawful attorney and agent to do any and all acts and things, and execute any and all instruments which, with the advice of Counsel, said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the filing under said Act of the Form 10-K Annual Report for the year ended December 31, 1993, including specifically, but without limitation thereof, to sign his name as Officer and/or Director of the Company on said Form 10-K Report, and to any instrument or document filed as a part of, or in connection with, said Form 10-K Report or Amendment thereto; and the undersigned do hereby ratify and confirm all that said attorney and agent shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have subscribed these presents this _____ day of _____________, 1994. /s/ Paul M. Anderson /s/ Harold S. Hook - - - ----------------------------- ----------------------------- Paul M. Anderson Harold S. Hook /s/ Milton Carroll /s/ Christopher C. Kraft, Jr. - - - ----------------------------- ----------------------------- Milton Carroll Christopher C. Kraft, Jr. /s/ Robert Cizik /s/ Leo E. Linbeck, Jr. - - - ----------------------------- ----------------------------- Robert Cizik Leo E. Linbeck, Jr. /s/ Charles W. Duncan, Jr. /s/ George L. Mazanec - - - ----------------------------- ----------------------------- Charles W. Duncan, Jr. George L. Mazanec /s/ Harry E. Ekblom /s/ Ralph S. O'Connor - - - ----------------------------- ----------------------------- Harry E. Ekblom Ralph S. O'Connor /s/ William R. Esrey /s/ George Kupp - - - ----------------------------- ----------------------------- William R. Esrey George Kupp /s/ Dennis R. Hendrix /s/ Sandra P. Meyer - - - ----------------------------- ----------------------------- Dennis R. Hendrix Sandra P. Meyer /s/ J. B. Hipple - - - ----------------------------- J. B. Hipple 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each undersigned Officer and/or Director of TEXAS EASTERN TRANSMISSION CORPORATION (the "Company"), a Delaware corporation, does hereby constitute and appoint, J. B. HIPPLE, CARL B. KING, and ROBERT W. REED, and each of them, his true and lawful attorney and agent to do any and all acts and things, and execute any and all instruments which, with the advice of Counsel, said attorney and agent may deem necessary or advisable to enable the Company to comply with the Securities Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the filing under said Act of the Form 10-K Annual Report for the year ended December 31, 1993, including specifically, but without limitation thereof, to sign his name as Officer and/or Director of the Company on said Form 10-K Report, and to any instrument or document filed as a part of, or in connection with, said Form 10-K Report or Amendment thereto; and the undersigned do hereby ratify and confirm all that said attorney and agent shall so or cause to be done by virtue hereof. IN WITHNESS WHEREOF, the undersigned, have subscribed these presents this day of , 1994. /s/ FRED J. FOWLER - - - ------------------------------------------ Fred J. Fowler EX-99 10 DEFINITIVE PROXY STATEMENT 1 SCHEDULE 14A (RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the registrant /X/ Filed by a party other than the registrant / / Check the appropriate box: / / Preliminary proxy statement /X/ Definitive proxy statement / / Definitive additional materials / / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 Panhandle Eastern Corporation - - - -------------------------------------------------------------------------------- (Name of Registrant as Specified in Its Charter) Robert W. Reed - - - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement) Payment of filing fee (Check the appropriate box): /X/ $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2). / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - - - -------------------------------------------------------------------------------- (2) Aggregate number of securities to which transactions applies: - - - -------------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:(1) - - - -------------------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: - - - -------------------------------------------------------------------------------- / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount previously paid: - - - -------------------------------------------------------------------------------- (2) Form, schedule or registration statement no.: - - - -------------------------------------------------------------------------------- (3) Filing party: - - - -------------------------------------------------------------------------------- (4) Date filed: - - - -------------------------------------------------------------------------------- - - - --------------- (1) Set forth the amount on which the filing fee is calculated and state how it was determined. 2 PANHANDLE EASTERN CORPORATION March 11, 1994 Dear Stockholder: You are cordially invited to attend the Annual Meeting of Stockholders of Panhandle Eastern Corporation, on Wednesday, April 27, 1994, at 10:00 a.m., in the Ballroom of the J. W. Marriott Hotel, 5150 Westheimer, Houston, Texas. Information about the business of the meeting is set forth in the formal meeting notice and the Proxy Statement on the following pages. In addition, I will discuss the general operations of the Company, described in the Company's 1993 Annual Report to Stockholders, and stockholders will be offered an opportunity to ask questions. The Board of Directors is recommending approval of the Panhandle Eastern Corporation 1994 Long Term Incentive Plan. A description of this proposal is contained in the Proxy Statement along with the reasoning of the Board in seeking your approval. We urge you to read this material before completing your Proxy. For the reasons set forth in the Proxy Statement, your Board of Directors recommends a vote FOR this matter. The stockholders also will be voting on the election of the 1997 Class of Directors. Dr. Christopher C. Kraft, Jr., is retiring from the Board of Directors after serving the Company as a Director since 1986, and, therefore, is not a nominee for election this year. Additionally, Dr. George E. Rupp will not stand for re-election upon the expiration of his current term at the Annual Meeting. We are extremely grateful to both for their many contributions to the Company's success over the years and we will miss their counsel. Your participation in the Company's affairs is important, regardless of the number of shares you hold. To ensure your representation, even if you cannot attend the meeting, please return your proxy to the Company as soon as possible. To vote, simply place an "X" in the appropriate box on the enclosed form of proxy, sign and date it, and mail it in the self-addressed, postage-paid return envelope. We encourage you to participate in this year's Annual Meeting in person or by mailing your proxy. Sincerely, /s/ Dennis Hendrix ------------------------ DENNIS HENDRIX Chairman and Chief Executive Officer 3 PANHANDLE EASTERN CORPORATION NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 27, 1994 To the Stockholders of Panhandle Eastern Corporation: The 1994 Annual Meeting of Stockholders of Panhandle Eastern Corporation will be held in the Ballroom of the J. W. Marriott Hotel, 5150 Westheimer, Houston, Texas, on Wednesday, April 27, 1994, at 10:00 a.m., for the purposes of: 1. Electing four Directors, constituting the 1997 Class of the Company's Board of Directors, for terms of three years, each to hold office until the 1997 Annual Meeting or until a successor shall have been elected and shall have qualified; 2. Considering and acting upon a proposal to approve the Panhandle Eastern Corporation 1994 Long Term Incentive Plan, as described in Section E of the Proxy Statement; and, 3. Transacting such other business as may properly come before the Annual Meeting or any adjournment or adjournments thereof. Stockholders of record on February 28, 1994, are entitled to receive notice of, and to vote at, the meeting or any adjournment or adjournments thereof. The transfer books of the Company will not be closed. The list showing stockholders entitled to vote at the meeting will be located in the office of the Secretary at the Company's headquarters, 5400 Westheimer Court, Houston, Texas, for examination for at least 10 days prior to the Annual Meeting. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE SIGN, DATE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. BY ORDER OF THE BOARD OF DIRECTORS /S/ ROBERT W. REED ---------------------------------- ROBERT W. REED Secretary Dated: March 11, 1994 Houston, Texas 4 PANHANDLE EASTERN CORPORATION PROXY STATEMENT ------------------------ ANNUAL MEETING OF STOCKHOLDERS APRIL 27, 1994 ------------------------ This statement is furnished in connection with the solicitation by the Board of Directors (the "Board") of Panhandle Eastern Corporation (the "Company") of proxies for use at the Annual Meeting of Stockholders (the "Annual Meeting") to be held on Wednesday, April 27, 1994, at 10:00 a.m., in the Ballroom of the J. W. Marriott Hotel, 5150 Westheimer, Houston, Texas, for the purposes set forth in the accompanying Notice of Annual Meeting. Business at the Annual Meeting is limited to matters properly brought before the meeting. Unless revoked prior to its exercise, any proxy given pursuant to this solicitation will be voted at the Meeting. A stockholder may revoke a proxy at any time prior to the Annual Meeting by giving written notice of such revocation addressed to the Secretary of the Company, P.O. Box 1642, Houston, Texas 77251-1642. Also, a stockholder may attend the Annual Meeting and vote in person, whether or not such stockholder has previously given a proxy. Proxy material is being mailed to stockholders on or about March 11, 1994. On February 28, 1994, the record date for the determination of stockholders entitled to vote at the Annual Meeting, the Company had outstanding 120,262,733 shares of Common Stock, par value $1.00 per share (the "Common Stock"). Each of such shares is entitled to one vote at the Annual Meeting. Votes cast by proxy or in person at the Annual Meeting will be tabulated by the election inspectors appointed for the Meeting. The holders of a majority of the shares entitled to vote at the Annual Meeting, whether present in person or represented by proxy, will constitute a quorum for the transaction of business at the Meeting. All elections will be decided by a plurality of the votes cast in respect thereof. Approval of the 1994 Long Term Incentive Plan ("1994 LTIP" or "the Plan") will require the affirmative vote of the holders of a majority of the issued and outstanding shares present in person or by proxy and entitled to vote at the Annual Meeting. If no voting direction is indicated on the proxy card, the shares will be considered votes FOR the election of the nominees for Director and approval of the 1994 LTIP. Proxy cards that are not signed or that are not returned are treated as not voted for any purposes. If a broker indicates on a proxy that it does not have discretionary authority as to certain shares to vote on a particular matter, those shares will not be considered as present and entitled to vote with respect to that matter. If a stockholder indicates on a proxy card that he or she abstains from voting with respect to the 1994 LTIP, the stockholder's shares will be considered present and entitled to vote with respect to that matter and the abstention will have the effect of a vote against the 1994 LTIP. The cost of preparing, assembling, and mailing the material in connection with the solicitation of proxies will be borne by the Company. In addition to use of the mails, proxies may be solicited by officers and other employees of the Company personally, by telephone, or other means. To assist in the solicitation of proxies, the Company has engaged Corporate Investor Communications, Inc., for approximately $9,000. The Company will also request brokerage houses and other nominees or fiduciaries to forward copies of its proxy material and Annual Report to beneficial owners of Common Stock held in their names, and the Company will reimburse them for reasonable out-of-pocket expenses incurred in doing so. 1 5 STOCKHOLDER PROPOSALS The Company knows of no proposals to be considered at the Annual Meeting other than those set forth in the Notice of Annual Meeting. Stockholder proposals will be eligible for consideration for inclusion in the Proxy Statement for the 1995 Annual Meeting if they are received by the Secretary of the Company no later than November 11, 1994 at the address set forth above. A. ELECTION OF DIRECTORS Currently, there are 13 authorized members of the Board of Directors and one Advisory Director. In accordance with the Company's By-Laws, the Board of Directors is divided into three Classes of Directors of approximately equal size, with staggered terms in office. At each Annual Meeting, Directors constituting one Class are elected for three-year terms. Each Class is designated by the year in which its current term ends. At this year's Meeting, the 1997 Class of Directors is to be elected to hold office until the 1997 Annual Meeting or until a successor shall have been elected and shall have qualified. The terms of the Directors constituting the other two Classes will continue as indicated below. The terms of Directors William T. Esrey, Christopher C. Kraft, Jr., George L. Mazanec, and George E. Rupp expire at the 1994 Annual Meeting. Dr. Kraft will retire at the Annual Meeting and Dr. Rupp will not stand for re-election. Accordingly, at its February 23, 1994, regular meeting, the Board selected Ms. Ann Maynard Gray to fill the vacancy created by Dr. Kraft's retirement, subject to election by the stockholders; reassigned Director Paul M. Anderson from the 1995 Class of Directors to the 1997 Class, thereby equalizing the membership of each Class at four Directors; and, on the recommendation of the Compensation/Organization/Nominating Committee ("Compensation Committee"), nominated the 1997 Class for election. The Board also reduced the authorized number of Directors from 13 to 12, effective at the Annual Meeting. The proxy holders named on the proxy card will vote FOR the election of the nominees listed below, unless otherwise instructed on proxy cards that have been signed or returned. If you do not wish your shares to be voted for particular nominees, please identify the exceptions on the proxy card. If any of these nominees should be unable to serve, the proxies will be voted by the proxy holders for the election of such other person as they shall determine, in accordance with their judgment. INFORMATION REGARDING NOMINEES FOR ELECTION AS DIRECTORS (1997 CLASS) NAME BUSINESS EXPERIENCE AND AGE IN 1994 Paul M. Anderson........... Age 49. President of the Company since December 1993 and Director of the Company since December 1992. Executive Vice President of the Company from March 1991 to December 1993. President and Chief Executive Officer from April 1991 to January 1994, Director since 1991, and Chairman of the Board since January 1994 of Panhandle Eastern Pipe Line Company, ("PEPL"). Chairman of the Board of Trunkline Gas Company ("Trunkline") since April 1991. Director of Texas Eastern Transmission Corporation ("TETCO") and Algonquin Gas Transmission Company ("Algonquin") since April 1991 and Chairman of the Board of TETCO and Vice Chairman of the Board of Algonquin since January 1994. Vice President, Finance and Chief Financial Officer, Inland Steel Industries Inc., 1990-1991. Senior Vice President, Texas Eastern Corporation ("TEC"), 1987-1989. PEPL, Trunkline, TEC, TETCO, and Algonquin are subsidiaries of the Company. Director of Temple-Inland, Inc. 2 6 NAME BUSINESS EXPERIENCE AND AGE IN 1994 William T. Esrey........... Age 54. Chairman, President, and Chief Executive Officer of Sprint Corporation ("Sprint"), Westwood, Kansas, a diversified telecommunications holding company, since April 1990. President and Chief Executive Officer of Sprint from April 1985 to April 1990. Director of the Company since 1985. Director of Sprint, Equitable Life Assurance Society of the United States, Boettcher Venture Capital Partners, L.P., and General Mills, Inc. Ann Maynard Gray........... Age 49. Since 1991, President, Diversified Publishing Group of Capital Cities/ABC, Inc., New York, New York, involved in television, radio, and publishing, and Corporate Vice President since 1986. Senior Vice President -- Finance, ABC Television Network from 1988 to 1991. Director of Cyprus Amax Minerals Company and Trustee of Neuberger & Berman Income Funds, Neuberger & Berman Income Trust, and Neuberger & Berman Income Managers Trust. George L. Mazanec.......... Age 58. Vice Chairman of the Board of Directors of the Company since December 1993. Director of the Company since December 1992. Executive Vice President of the Company from March 1991 to December 1993. Director of TEC from January 1990 to the present, and Executive Vice President of TEC from April 1991 to the present. Director since January 1990, Vice Chairman of the Board since January 1994, and President and Chief Executive Officer from January 1991 to January 1994 of TETCO. Director of PEPL and Trunkline since January 1990 and Vice Chairman of the Board of PEPL and Trunkline since January 1994; Chairman of the Board of Algonquin Energy, Inc. ("AEI"), and Algonquin. AEI is a subsidiary of the Company. From 1989 to 1991, Group Vice President of the Company. Senior Vice President, TEC and TETCO, 1987-1989. INFORMATION REGARDING DIRECTORS CONTINUING IN OFFICE NAME BUSINESS EXPERIENCE AND AGE IN 1994 1995 CLASS Charles W. Duncan, Jr...... Age 68. Engaged in private investments in Houston, Texas, since 1981. Deputy Secretary of the United States Department of Defense, January 1977 to August 1979; Secretary of the United States Department of Energy, August 1979 until January 1981. Director of TEC from 1981 until 1989. Director of the Company since 1990. Director of American Express Company, The Coca-Cola Company, Chemical Banking Corporation, Newfield Exploration Company, Texas Commerce Bancshares, Inc., and United Technologies Corporation. Harry E. Ekblom............ Age 66. Vice Chairman of A. T. Hudson & Co., Inc., Oradell, New Jersey, a management consulting firm, since 1985, and, since January 1984, President of Harry E. Ekblom & Co., Inc., Ridgewood, New Jersey, a financial consulting firm. Director of the Company since 1971. Director of Harris & Harris Group, Inc., and The Commercial Bank of New York. 3 7 NAME BUSINESS EXPERIENCE AND AGE IN 1994 Dennis R. Hendrix.......... Age 54. Chairman of the Board and Chief Executive Officer of the Company since November 1990. President of the Company from November 1990 to December 1993. President of TEC, November 1985 through December 1989. TEC's Chief Executive Officer from June 1987 to July 1989. Director of Texas Commerce Bancshares, Inc. Ralph S. O'Connor.......... Age 68. From June 1, 1987, to the present, principally engaged in investments as Chairman and Chief Executive Officer of Ralph S. O'Connor & Associates, Houston, Texas. Prior thereto, President and Chief Executive Officer of HRI Resources, Inc., and President of Highland Resources, Inc., for more than five years. Member of the Board of Directors of TEC from 1963 until 1989. Director of the Company since 1991. Director of First City Bancorporation of Texas, Inc. 1996 CLASS Milton Carroll............. Age 44. Chairman, President, and Chief Executive Officer of Instrument Products, Inc., Houston, Texas, a manufacturer of oilfield tools and other precision products, since 1977. Director of the Company since 1993. Advisor with Lazard Freres & Co. since 1993. Director of the Federal Reserve Bank of Dallas, Houston Industries, Inc., Houston Lighting & Power Co., and Houston Endowment, Inc. Robert Cizik............... Age 63. Chairman of the Board and Chief Executive Officer of Cooper Industries, Inc. ("Cooper"), Houston, Texas, a diversified, international manufacturing company, since 1983. From 1975 to 1983, President and Chief Executive Officer of Cooper. Director of TEC from April 1988 until July 1989. Director of the Company since 1991. Director of Cooper, Temple-Inland, Inc., Harris Corporation, and Air Products and Chemicals, Inc. Harold S. Hook............. Age 63. Chairman and Chief Executive Officer of American General Corporation ("American General"), Houston, Texas, an insurance-based, diversified financial services organization, for more than five years. Member of the Board of Directors of TEC from April 1989 through July 1989. Director of the Company since 1978. Director of American General, American General Finance, Inc., Chemical Banking Corporation, Chemical Bank, Cooper, Sprint, and Texas Commerce Bancshares, Inc. Leo E. Linbeck, Jr......... Age 60. Since 1975, Chairman, President, and Chief Executive Officer of Linbeck Construction Corporation, Houston, Texas, a construction management and general construction firm. Director of the Company since 1986. Director of Transamerica Group of Mutual Funds and Daniel Industries, Inc. 4 8 B. ADDITIONAL INFORMATION Mr. Max R. Lents, a Director and former Chairman of the Board of Miller and Lents, Ltd., an independent oil and gas consulting firm, Houston, Texas, has been elected by the Board as an Advisory Director for ten one-year terms since his retirement as a member of the Board in January 1985. His current term began in January 1994 and expires in January 1995. An Advisory Director has no voting rights but attends meetings of the Board and certain Board committees in an advisory capacity only. The Board's policy with respect to the retirement of Directors provides that a Nonemployee Director will retire at the first meeting of the Board following the Director's 70th birthday. Accordingly, Dr. Christopher C. Kraft, Jr., will retire from the Board at the time of the Annual Meeting. MEETINGS OF THE BOARD AND ITS COMMITTEES During 1993, the Board met seven times. Each Director attended at least 75 percent of the aggregate of the Board meetings and the meetings of Board committees on which he served. Among the Board's standing committees are the Audit Committee, the Compensation Committee, and the Executive Committee. The Audit and Compensation Committees are composed solely of Nonemployee Directors. Mr. Ekblom is Chairman, and Messrs. Hook, Lents, O'Connor, and, until his retirement from the Board, Dr. Kraft, are members, of the Audit Committee. The Audit Committee recommends the appointment of independent auditors and reviews with them the plan, scope, and results of their audit. It monitors their fees for audit and other services; reviews the recommendations resulting from such audit and management responses thereto; and reviews the Company's accounting principles, policies, internal accounting controls, and the internal auditing department plans and procedures. The Audit Committee also reviews the Company's annual financial statements and recommends accounting and internal auditing policies which, in its judgment, should receive the attention of the Board. The Audit Committee met two times in 1993. Mr. Esrey is Chairman of the Compensation Committee and Messrs. Cizik, Duncan, Ekblom, and Linbeck are members. The Compensation Committee establishes the compensation policies for the Chief Executive Officer and other senior officers; approves the salaries and certain remuneration arrangements of senior officers; recommends the adoption of compensation plans in which officers and certain key employees are eligible to participate; and recommends awards pursuant thereto, including bonuses, stock option grants, and other awards. It acts on management recommendations for the election of officers and recommends the election of a Chief Executive Officer when appropriate. It reviews management succession plans; makes recommendations to fill Board vacancies and considers nominees for election as Directors at the Annual Meeting; considers the removal of Directors; and reviews the Board retirement policy. In addition, the Compensation Committee will consider stockholders' suggestions of nominees for Director that are submitted in writing to the Compensation Committee, in care of the Secretary of the Company. The Compensation Committee met four times in 1993. Mr. Hendrix is Chairman, and Messrs. Anderson, Carroll, Cizik, Duncan, Hook, Lents, Mazanec, and O'Connor are members, of the Executive Committee, which reviews and, where appropriate, authorizes corporate action with respect to, the conduct of the business of the Company between Board meetings. Actions taken by the Executive Committee are regularly submitted to the Board for review and ratification at the next meeting. The Executive Committee met once in 1993. SECURITY OWNERSHIP OF MANAGEMENT As of December 31, 1993, all Directors and executive officers of the Company as a group owned beneficially, or had the right to acquire within 60 days of December 31, 1993, under the 1982 Key Employee Stock Option Plan, as amended (the "1982 Plan"), the 1989 Nonemployee Directors Stock Option Plan (the "1989 Plan"), and the 1990 Long Term Incentive Plan (the "1990 LTIP"), less than 1 percent of the presently issued and outstanding Common Stock. 5 9 The following table shows the number of shares of Common Stock beneficially owned as of December 31, 1993, or as to which there was a right to acquire beneficial ownership within 60 days of such date, by each Director or nominee for Director, each executive officer of the Company named in the Summary Compensation Table on page 10 ("Named Executive Officers"), and all Directors and executive officers of the Company as a group.
NUMBER NUMBER OF OF SHARES SHARES WHICH BENEFICIALLY MAY BE OWNED(1) ACQUIRED(2) ------- ------- Paul M. Anderson.................................... 42,842 18,278 Milton Carroll...................................... 500 -- Robert Cizik........................................ 1,322 6,000 Charles W. Duncan, Jr............................... 7,767(3) 7,000 Harry E. Ekblom..................................... 7,276(4) 8,000 William T. Esrey.................................... 2,500 8,000 Ann Maynard Gray.................................... 500(5) -- Dennis R. Hendrix................................... 439,000 -- James B. Hipple..................................... 10,320(6) 12,185 Harold S. Hook...................................... 5,000 8,000 Carl B. King........................................ 19,831 6,667 Christopher C. Kraft, Jr............................ 423 8,000 Leo E. Linbeck, Jr.................................. 1,200 8,000 George L. Mazanec................................... 22,333 18,278 Ralph S. O'Connor................................... 35,502(7) 6,000 George E. Rupp...................................... 1,000(8) 6,000 All Directors, nominees for Director, and eleven executive officers as a group, including those named above....................................... 642,154 170,946
- - - --------------- (1) Included are beneficially owned and undistributed shares of Common Stock held as of December 31, 1993, in the Employees' Savings Plan of Panhandle Eastern Corporation and in the Panhandle Eastern Corporation Dividend Reinvestment and Stock Purchase Plan. (2) Shares of Common Stock which the Directors or executive officers of the Company have the right to acquire, within 60 days of December 31, 1993, pursuant to options outstanding under the 1982 Plan, the 1989 Plan, and the 1990 LTIP. Nonemployee Directors do not participate in the 1982 Plan or the 1990 LTIP and Employee Directors do not participate in the 1989 Plan. (3) Includes 4,531 shares held by Duncan Investors, a partnership in which Mr. Duncan is a limited and general partner. (4) Includes 3,000 shares held by Mrs. Ekblom. (5) Shares of Common Stock purchased by Ms. Gray after December 31, 1993. (6) Includes 48 shares held by Mrs. Hipple. (7) Includes 4,502 shares of Common Stock held by a trust of which Mr. O'Connor is co-trustee and 1,000 shares of Common Stock held by a foundation of which Mr. O'Connor is president. Mr. O'Connor disclaims beneficial ownership of all such shares. (8) Includes 1,000 shares of Common Stock held by a foundation of which Dr. Rupp is a vice president and of which Mr. O'Connor is president. Dr. Rupp disclaims beneficial ownership of all of such shares. To the Company's knowledge, based on information furnished to it pursuant to Rule 16a-3 of the Securities Exchange Act of 1934 ("Exchange Act") and written representations that no other reports were required, during the year ended December 31, 1993, all applicable Section 16(a) filing requirements were complied with, except that one such report covering one transaction in Common Stock was filed late by Milton Carroll. 6 10 Texas Eastern Products Pipeline Company, a wholly owned subsidiary of TEC, is the general partner of TEPPCO Partners, L.P. ("TEPPCO"), a publicly traded master limited partnership. The following table shows the number of units of limited partnership interests in TEPPCO beneficially owned as of December 31, 1993, or as to which there was a right to acquire beneficial ownership within 60 days of such date, by each Director or nominee for Director, each of the Named Executive Officers, and all Directors and executive officers of the Company as a group. As of December 31, 1993, the percentage of units beneficially owned by all Directors and executive officers as a group does not exceed 1 percent of the presently issued and outstanding units.
NUMBER OF NUMBER UNITS OF WHICH UNITS MAY BENEFICIALLY BE OWNED ACQUIRED ------ --- Paul M. Anderson........................................ 1,000 -- Milton Carroll.......................................... -- -- Robert Cizik............................................ -- -- Charles W. Duncan, Jr. ................................. -- -- Harry E. Ekblom......................................... -- -- William T. Esrey........................................ -- -- Ann Maynard Gray........................................ -- -- Dennis R. Hendrix....................................... 10,000 -- James B. Hipple......................................... 500 -- Harold S. Hook.......................................... 2,000 -- Carl B. King............................................ -- -- Christopher C. Kraft, Jr. .............................. 500 -- Leo E. Linbeck, Jr. .................................... -- -- George L. Mazanec....................................... 1,000 -- Ralph S. O'Connor....................................... 6,000* -- George E. Rupp.......................................... -- -- All Directors, nominees for Director, and eleven executive officers as a group, including those named above................................................. 23,000* --
- - - --------------- * Includes 5,000 units owned by an individual for whom Mr. O'Connor acts as guardian pursuant to a declaration of interest in guardianship. Mr. O'Connor disclaims beneficial ownership of all such units. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table shows the number of shares of Common Stock held by beneficial owners of more than 5 percent of the Common Stock as of December 31, 1993, and the percentage of the total outstanding shares of Common Stock as of that date.
NUMBER PERCENT OF OF SHARES OUTSTANDING NAME AND ADDRESS BENEFICIALLY SHARES OF BENEFICIAL OWNER OWNED OWNED ---------------------------------------------------- -------- --- Sonatrach Petroleum Investment Corp., B.V. c/o De Brauw Blackstone Westbroek Atrium -- 7th Floor Strawinskylaan 3115 1077 ZX Amsterdam, The Netherlands.................. 7,500,000 6.25 Employees' Savings Plan of Panhandle Eastern Corporation 5400 Westheimer Ct., Houston, Texas 77056................................ 8,925,162 7.44 FMR Corp. 82 Devonshire Street Boston, Massachusetts 02109......................... 7,492,464 6.24
7 11 Sonatrach Petroleum Investment Corp., B.V., is a Dutch corporation owned by two shareholders: Sonatrach (the national oil and gas company of Algeria), which owns a 99.9 percent interest, and Banque Algerienne du Commerce Exterieur ("BACE"), a Swiss bank, which owns a 0.1 percent interest. The principal executive offices of Sonatrach are located at 10, Rue du Sahara, Hydra, Algiers (Algeria), and the principal executive offices of BACE are located at Schutzengasse 4, Postfach, 8023 Zurich, Switzerland. Sonatrach and BACE are wholly owned by the government of Algeria. The Company and Sonatrach, directly and through subsidiaries, are parties to agreements entered into in 1987 providing for the importation of liquefied natural gas ("LNG") over a period of up to 20 years at volumes and prices and upon other terms to be agreed upon from time to time. The agreements provide that if LNG is purchased by the Company from Sonatrach, Sonatrach will receive an f.o.b. payment equal to approximately 63 percent of the average gross selling price of an equivalent quantity of regasified LNG, with the Company receiving the balance. For the year ended December 31, 1993, payments to Sonatrach under this program for LNG and shipping were approximately $52.2 million. Employees' Savings Plan of Panhandle Eastern Corporation ("ESP"), holds shares of Common Stock for the account of participants, who are employees of the Company and participating affiliates. Generally, the ESP passes through to participants the right to vote shares of Common Stock allocated to their accounts and to tender such shares in response to a tender or exchange offer for Common Stock. The ESP is administered by an administrative committee whose members are H. D. Church, Senior Vice President of TETCO; Paul F. Ferguson, Jr., Vice President of the Company; D. R. Hennig, Vice President of PEPL, TETCO, and Trunkline; James B. Hipple, Senior Vice President and Chief Financial Officer of the Company; T. Holeman, Vice President of Trunkline; Sandra P. Meyer, Controller of the Company; J. D. Rogers, General Manager, Administration, of Algonquin; and J. D. Thomas, Treasurer of the Company. FMR Corp. ("FMR") is the parent company of Fidelity Management & Research Company and other investment advisors. According to Amendment No. 1 to Schedule 13G, dated February 11, 1994, filed with the Securities and Exchange Commission ("SEC") and provided to the Company by FMR, FMR may be deemed to be the beneficial owner of and to have sole dispositive power with respect to 7,492,464 shares of Common Stock and to have sole voting power with respect to 491,010 shares of Common Stock. Such shares are owned by a number of FMR's investment advisory clients. COMPENSATION OF DIRECTORS Directors who also are employees of the Company (Messrs. Anderson, Hendrix, and Mazanec) receive no fees for their service as Directors or for attendance at Board and Committee meetings. Nonemployee Directors receive an annual retainer fee of $30,000, and $1,000 for each Board meeting and each Committee meeting attended. Nonemployee Committee Chairmen receive an additional annual retainer of $4,000. Nonemployee Directors are reimbursed for expenses incurred in attending Board and Committee meetings. In addition to the foregoing, the Company maintains, or formerly maintained, the following plans for Nonemployee Directors: 1. The 1982 Directors Deferred Compensation Plan permits Nonemployee Directors to elect, on a year-to-year basis, to defer either 50 percent or 100 percent of their Directors' fees. Deferrals earn interest based on six-month Certificate of Deposit rates. Amounts accrued are payable either in a lump sum or over a period of five or 10 years, as elected by the Nonemployee Director, commencing on January 15th of the year next succeeding the year in which the Nonemployee Director either ceases to be a Director or upon the attainment of the age the Nonemployee Director previously elected. For the year ended December 31, 1993, amounts deferred under this Plan and interest accrued relative to such deferrals were $159,266 for the four participating Nonemployee Directors as a group. 2. The 1989 Nonemployee Directors Stock Option Plan ("1989 Plan") provides for the granting of non-qualified options for the purchase of shares of Common Stock to each Nonemployee Director, other than an Advisory Director. Stock appreciation rights ("SARs") are not permitted. All options are granted at the fair market value of the Common Stock on the date of grant. On May 1, 1989, each 8 12 Nonemployee Director was granted an option to purchase 5,000 shares of Common Stock, and any new Nonemployee Director is granted an option to purchase 5,000 shares of Common Stock effective on the May 1 next following election to the Board. Additional options to purchase 1,000 shares of Common Stock are granted to each Nonemployee Director on May 1 of each year, through and including May 1, 1998. On May 1, 1993, options to purchase a total of 14,000 shares of Common Stock were granted under the 1989 Plan at an exercise price of $21.3125 per share. Options granted under the 1989 Plan become exercisable one year from the date of grant and expire on the tenth anniversary of the date of grant. Accordingly, the options granted on May 1, 1993, are not included in the table on page 6 hereof. No options were exercised during 1993 under the 1989 Plan. 3. The Nonemployee Directors Retirement Plan provides an annual unfunded retirement benefit for each Nonemployee Director of the Company upon the later to occur of the Director's retirement date or the attainment of age 65. A retired Nonemployee Director with 10 years or more of service on the Board will receive annually for life (a guaranteed minimum of 10 years) an amount equal to 60 percent of the annual retainer fee in effect on the Director's retirement date. For a Nonemployee Director retiring with less than 10 years of service, the annual benefit accrues at a rate of 6 percent of the annual retainer fee in effect on the Director's retirement date for each year of service, not to exceed a total of 60 percent of such annual retainer fee. In the event of a "change of control" (as defined), a Nonemployee Director shall be deemed to have served as such until the earlier of the tenth anniversary of the Director's service on the Board or attainment of age 70. There are also certain pre-retirement supplemental death benefits provided under this plan. 4. At the time it was acquired by the Company in 1989, TEC maintained an unfunded plan, the TEC Directors' Retirement Plan, which provided an annual benefit payable for 10 years following a Nonemployee Director's retirement from active service on the TEC Board of Directors. Upon the Nonemployee Director's death following retirement, any unpaid installments will be paid to the named beneficiary. Under this plan, Messrs. Duncan and O'Connor have vested rights to annual benefits of $18,000 commencing January 1, 1999. 5. The Directors Deferred Compensation Plan of Panhandle Eastern Corporation ("Nonemployee Directors Plan") was available until December 31, 1986, to Nonemployee Directors and permitted deferral of up to 100 percent of each participating Nonemployee Director's annual retainer fee. Benefit payment amounts related to retainer fees deferred, to interest accrued at seniority-based rates, and to age at the time of deferral. For the year ended December 31, 1993, interest accrued relative to amounts deferred under the Nonemployee Directors Plan was $120,747. 9 13 EXECUTIVE COMPENSATION AND OTHER INFORMATION The following table and notes present the cash and certain other compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company ("Named Executive Officers"), as of December 31, 1993, for the years ended December 31, 1991, 1992, and 1993: SUMMARY COMPENSATION TABLE - - - --------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------------------------------------------------------- AWARDS ------------------------- SECURITIES PAYOUTS ALL OTHER OTHER ANNUAL RESTRICTED UNDERLYING ------- COMPEN- NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK OPTIONS/SARS LTIP SATION POSITION(1) YEAR ($) ($) ($)(2) AWARD(S)($) (#)(3) PAYOUTS ($) ($)(2)(4) (A) (B) (C) (D) (E) (F) (G) (H) (I) - - - -------------------------------------------------------------------------------------------------------------- Dennis R. Hendrix......... 1993 -- -- 23,578(5) 6,525,000(6) -- -- 55,532 1992 -- -- 23,087(5) -- -- -- 60,560 1991 -- -- -- -- -- -- -- Paul M. Anderson........ 1993 337,917 160,153 -- -- 250,000 -- 61,066 1992 315,000 160,000 53,909(5) -- -- -- 35,712 1991 262,500 108,240 -- 565,000(7) 30,000 -- -- George L. Mazanec......... 1993 336,667 177,710 -- -- 250,000 203,644 76,851 1992 297,917 175,000 -- -- -- 99,388 41,162 1991 275,000 124,163 -- -- 30,000 43,500 -- James B. Hipple... 1993 253,750 113,016 -- -- -- 66,644 63,104 1992 238,333 112,500 -- -- -- 53,786 49,064 1991 220,000 94,380 -- -- 20,000 34,438 -- Carl B. King...... 1993 253,833 103,709 -- -- -- 67,744 31,485 1992 241,000 103,630 -- -- -- 53,786 13,008 1991 241,000 99,533 -- -- 20,000 34,438 -- - - - -------------------------------------------------------------------------------------------------------------
(1) The principal positions of Messrs. Hendrix, Anderson, and Mazanec are described on pages 2 and 3. Mr. King is Senior Vice President and General Counsel of the Company and TEC. Mr. Hipple is Senior Vice President and Chief Financial Officer of the Company, PEPL, TEC, TETCO, and Trunkline. (2) In accordance with the transitional provisions applicable to the revised rules on executive and director compensation disclosure adopted by the SEC, presentation of amounts of Other Annual Compensation and All Other Compensation, if any, is not required for the Company's 1991 fiscal year. (3) In December 1991, the Compensation Committee granted 126 executives and management employees, including Messrs. Anderson, Mazanec, King, and Hipple, options to purchase 778,500 shares of Common Stock, together with an equivalent amount of EPS Performance Units. Stock options for 40,500 shares of Common Stock, together with an equivalent number of EPS Performance Units, were also granted in April 1992 to seven executives and management employees; 12,000 options and EPS Performance Units were granted to one executive in July 1992; and in January 1993, 41,000 options and EPS Performance Units were granted to eight management employees. In December 1993, Messrs. Anderson and Mazanec each were granted options to purchase 250,000 shares of Common Stock, together with an equivalent number of EPS Performance Units. Furthermore, in January 1994, 129 executive and management employees were granted options to purchase 324,300 shares, together with an equivalent number of EPS Performance Units. Each EPS Performance Unit creates a credit to an employee's EPS Performance Unit account when earnings per share exceed a threshold, which was $0.80 per share for awards made in 1991 and 1992, $1.10 for awards made in January 1993, and $1.50 for awards made in December 1993 and January 1994. When earnings for a calendar year (exclusive of certain special items) exceed the threshold, the excess amount is credited to the employee's EPS Performance Unit account. The balance in the account may be used to exercise stock options granted in connection with the EPS Performance 10 14 Units or may be withdrawn two years after the underlying options expire, usually 10 years from the date of grant. Under the agreements for such stock options, the options become exercisable in equal installments over periods of one, two, and three years from the date of grant. Options may also be exercised by normal means once vesting requirements are met. (4) Amounts reported include (a) amounts contributed by the Company for the Named Executive Officers under the ESP, (b) that portion of interest credits on deferred compensation amounts that are considered, pursuant to rules promulgated by the SEC, to be at above-market rates, (c) the value of EPS Performance Units credited to EPS Performance Unit accounts of the Named Executive Officers in 1993, and (d) the imputed value of premiums paid by the Company for insurance on the Named Executive Officers' lives. None of the Named Executive Officers has any cash value rights related to such insurance. Such amounts include:
VALUE OF EPS INTEREST AT PERFORMANCE VALUE OF LIFE ESP ABOVE MARKET RATES UNITS INSURANCE PREMIUMS ------------------- ------------------- ---------------- ------------------- 1992 1993 1992 1993 1992 1993 1992 1993 ------- ------- ------- ------- ---- ------- ------- ------- Mr. Hendrix.... $ 0 $ 0 $46,275 $41,247 $0 $ 0 $14,285 $14,285 Mr. Anderson... 14,984 15,372 19,806 16,494 0 28,200 922 1,002 Mr. Mazanec.... 11,149 12,691 25,100 30,352 0 28,200 4,913 5,610 Mr. Hipple..... 12,967 14,067 27,931 25,062 0 18,800 8,166 5,176 Mr. King....... 10,520 10,049 0 0 0 18,800 2,488 2,636
(5) Pursuant to rules on executive and director compensation disclosure adopted by the SEC, Other Annual Compensation is reportable if in the aggregate the components thereof exceed the lesser of $50,000 or 10 percent of the sum of the Named Executive Officer's salary and bonus. Each component thereof that exceeds 25 percent of the total for each Named Executive Officer for whom disclosure is required must be identified. Accordingly, the amounts reported in column (e) include:
USE OF COMPANY REIMBURSED MOVING AIRCRAFT EXPENSES ------------------- ------------------- 1992 1993 1992 1993 ------- ------- ------- ------- Mr. Hendrix................................. $18,300 $19,203 -- -- Mr. Anderson................................ -- -- $43,452 --
(6) In November 1990, Mr. Hendrix and the Company entered into an agreement whereby he would receive no salary for 1991, 1992, and 1993. Instead, Mr. Hendrix was awarded 300,000 shares of restricted Common Stock under the terms of the 1990 LTIP as compensation for that period. Mr. Hendrix received dividends payable to holders of record of Common Stock on the restricted shares. These shares were initially restricted as to the transfer of ownership, with such restrictions being removed on 25,000 shares every three months, beginning in February 1991 and continuing through November 1993. The value of the 300,000 restricted shares, based on the fair market value of the Company's Common Stock as reported on The New York Stock Exchange Composite Reporting System on November 12, 1990, which was $11.00 per share, was $3,300,000. Based on the December 31, 1993, fair market value of $23.625 per share, the 300,000 restricted shares would be valued at $7,087,500. Effective February 24, 1993, the agreement with Mr. Hendrix was amended to extend the term through November 1996 and to award him an additional 300,000 shares of restricted Common Stock in lieu of salary for the period November 1993 through November 1996. The restrictions, and the removal thereof, were the same as for the 1990 award, and Mr. Hendrix receives dividends payable to holders of record of Common Stock on these restricted shares. However, in December 1993 this award was amended to provide for the accelerated removal of restrictions in that month of 200,000 shares. Accordingly, at December 31, 1993, Mr. Hendrix's aggregate ownership of restricted stock was 100,000 shares. The restrictions on the remaining 100,000 shares will be removed as follows: 36,000 shares in quarterly installments of 9,000 shares each in 1994, 34,000 shares in quarterly installments of 8,500 shares each in 1995, and 30,000 shares in quarterly installments of 7,500 shares each in 1996. The full amount reported in the table for 1993 represents the value of the 300,000 restricted shares based on the fair market value of the Company's Common Stock on February 24, 1993, which was $21.75. Based on the December 31, 1993, fair market value, these 300,000 shares also would be valued at $7,087,500. 11 15 (7) In March 1991, Mr. Anderson was awarded 40,000 shares of restricted Common Stock under the terms of the 1990 LTIP. These shares are initially restricted as to the transfer of ownership, with such restriction being removed on 10,000 shares on March 1 of each year, beginning on March 1, 1992, and continuing through March 1, 1995. The amount reported in the table for 1991 represents the value of the 40,000 restricted shares, based on the fair market value of the Company's Common Stock as reported on The New York Stock Exchange Composite Reporting System on March 1, 1991, which was $14.125 per share. Based on the December 31, 1993, fair market value of $23.625 per share, the 40,000 restricted shares would be valued at $945,000. At December 31, 1993, Mr. Anderson's aggregate restricted stock holdings were 20,000 shares, which, based on the fair market value at that date, would be valued at $472,500. Of the remaining restricted shares, 10,000 will have their restrictions removed in 1994. Mr. Anderson receives dividends payable to holders of record of Common Stock on the restricted shares. STOCK OPTION/SAR GRANTS IN 1993 The following table shows all grants of stock options to the Named Executive Officers in 1993. No SARs were granted to any Named Executive Officer in 1993 nor were the exercise prices on stock options previously awarded to any of them amended or adjusted. OPTION/SAR GRANTS IN LAST FISCAL YEAR - - - ----------------------------------------------------------------------------------------------- GRANT DATE INDIVIDUAL GRANTS VALUE - - - -----------------------------------------------------------------------------------------------
PERCENT OF TOTAL NUMBER OF OPTIONS/ SECURITIES SARS GRANTED GRANT DATE UNDERLYING TO EMPLOYEES EXERCISE OR PRESENT OPTIONS/SARS IN BASE PRICE EXPIRATION VALUE(2) NAME GRANTED(#) FISCAL YEAR ($/SH) DATE $ (A) (B) (C) (D) (E) (F) - - - ----------------------------------------------------------------------------------------------- Mr. Hendrix.................... 0 0 0 N/A 0 Mr. Anderson................... 250,000(1) 46 21.3125 12-1-03 1,603,766 Mr. Mazanec.................... 250,000(1) 46 21.3125 12-1-03 1,603,766 Mr. Hipple..................... 0 0 0 N/A 0 Mr. King....................... 0 0 0 N/A 0 - - - -----------------------------------------------------------------------------------------------
(1) On December 1, 1993, the Board of Directors granted stock options to Messrs. Anderson and Mazanec to purchase 250,000 shares each of Common Stock at an exercise price of $21.3125, which was the fair market value of the Common Stock on the date of grant. The options, which have a term of ten years, vest in three equal installments on the first, second, and third anniversary dates of the grants. The grants include the award of an equivalent number of EPS Performance Units, but do not include SARs. Each EPS Performance Unit creates a credit to the grantee's EPS Performance Unit account when the Company's earnings per share, exclusive of certain special items, have exceeded a threshold of $1.50. When earnings for a calendar year, beginning with 1994, exceed the threshold, the excess amount is credited to the grantee's EPS Performance Unit account. The balance of the account may be used to exercise the stock options or it may be withdrawn two years after the expiration of the options. The options may also be exercised by normal means once vesting requirements are met. (2) Based on the Black-Scholes option valuation model. The key input variables used in valuing the options were: risk-free interest rate - 7 percent; dividend yield - 4 percent; stock price volatility - .301; option term - ten years. The Standard and Poor's Compustat Database was used and the volatility variable reflected 20 months of stock price trading data. No adjustments for non-transferability or risk of forfeiture were made. The actual value, if any, a grantee may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance the value realized will be at or near the value estimated by the Black-Scholes model. 12 16 EXERCISES OF STOCK OPTIONS IN 1993 AND YEAR-END OPTION VALUES The following table provides information concerning the stock options exercised by each of the Named Executive Officers during 1993 and the value of unexercised stock options to the Named Executive Officers as of December 31, 1993. The value assigned to each unexercised, "in the money" stock option is based on the positive spread between the exercise price of such stock option and the fair market value of the Common Stock on December 31, 1993. The fair market value is the average of the high and low prices of a share of Common Stock on that date as reported on The New York Stock Exchange, Inc., Composite Transactions Reporting System. In assessing the value, it should be kept in mind that no matter what theoretical value is placed on a stock option on a particular date, its ultimate value will be dependent on the market value of the Company's Common Stock at a future date. That future value will depend in part on the efforts of the Named Executive Officers to foster the future success of the Company for the benefit of all stockholders. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
- - - ----------------------------------------------------------------------------------------------- NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT OPTIONS/SARS SHARES FY-END (#) AT FY-END ($) ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE* UNEXERCISABLE (A) (B) (C) (D) (E) - - - ----------------------------------------------------------------------------------------------- Mr. Hendrix........................... 0 0 0/0 0/0 Mr. Anderson.......................... 1,722 6,673 18,278/260,000 132,516/650,625 Mr. Mazanec........................... 1,722 7,103 18,278/260,000 132,516/650,625 Mr. Hipple............................ 1,148 4,449 28,291/ 6,667 132,610/ 48,336 Mr. King.............................. 6,666 15,832 6,666/ 6,667 48,336/ 48,336 - - - -----------------------------------------------------------------------------------------------
* Future exercisability of currently unexercisable stock options depends on the grantee remaining employed by the Company throughout the vesting period of the options, subject to provisions applicable at retirement, death, or total disability. The currently unexercisable options will vest, and become exercisable, on the following schedule:
DECEMBER 1, DECEMBER 4, DECEMBER 1, DECEMBER 1, 1994 1994 1995 1996 ----------- ----------- ----------- ----------- Mr. Anderson....................... 83,333 10,000 83,333 83,334 Mr. Mazanec........................ 83,333 10,000 83,333 83,334 Mr. Hipple......................... 6,667 Mr. King........................... 6,667
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, AND CHANGE IN CONTROL ARRANGEMENTS In November 1990, Mr. Hendrix and the Company entered into a five-year employment agreement pursuant to which he received no salary for the first three years of his employment. Instead, he was awarded 300,000 shares of Common Stock under the terms of the 1990 LTIP, which shares were initially restricted as to the transfer of ownership. Such restriction was removed on 25,000 shares every three months, beginning in February 1991 and continuing through November 1993. Mr. Hendrix received dividends on the restricted shares. The restriction would have terminated early as to all of the restricted shares in the event of death or disability, involuntary termination by the Company for any reason other than cause (as defined), or change in control of the Company. Effective February 24, 1993, the employment agreement with Mr. Hendrix was amended to extend the term for one additional year. The amendment provides that Mr. Hendrix will continue to receive no salary for the three years from November 1993 through November 1996. Instead, he was awarded an additional 300,000 shares of Common Stock on the same terms and subject to the same restrictions as those described above, 13 17 with restrictions being removed at the rate of 25,000 shares every three months, beginning in February 1994. Mr. Hendrix began receiving dividends on the additional shares in December 1993. On January 1, 1994, the Omnibus Budget Reconciliation Act of 1993 (the "Budget Act") became effective. Certain provisions of the Budget Act would have denied to the Company a tax deduction for a substantial portion of compensation expenses related to Mr. Hendrix in 1994, 1995, and 1996. In order to preserve the deduction, on December 20, 1993, the agreement was amended again to provide for the restrictions on 200,000 shares to be removed immediately and for the restrictions on the remaining shares to be removed over the next 36 months. Based on certain assumptions as to stock price, preserving the deduction was estimated to result in tax savings to the Company of approximately $1.8 million. In addition to the restricted shares, Mr. Hendrix participates in the welfare plans available to employees generally; however, to the extent permitted by law, he has waived and relinquished his right to participate in the ESP, the Retirement Income Plan of Panhandle Eastern Corporation and Participating Affiliates, and certain other plans available to Company employees and executives. The Company and Mr. Mazanec entered into a five-year employment agreement in November 1989 which set a minimum base salary of $250,000 per year. In addition to maintaining certain non-qualified retirement benefits to which he was entitled as an executive of TEC, the agreement provides Mr. Mazanec a supplemental lump sum cash benefit of $750,000 plus 8 percent interest compounded semi-annually from November 1, 1989, payable within 30 days of his termination from the Company for any reason. If Mr. Mazanec terminates employment due to a material breach of the agreement by the Company which is not remedied within 30 days after written notice by Mr. Mazanec, or if the Company terminates the agreement without cause, the Company also will pay him, in a lump sum, base pay and incentive compensation projected through the employment period, as well as providing him an extension of welfare plan benefits through the employment period. Effective November 1, 1992, the Company and Mr. Mazanec entered into an amendment to the employment agreement, extending the period of employment covered by the agreement through October 31, 1996. On March 1, 1991, the Company and Mr. Anderson entered into an employment agreement, the primary term of which originally was to expire on December 31, 1993. Unless either party serves notice of termination, on December 31 of each year, the term is automatically extended for an additional one-year period. On December 31, 1991, December 31, 1992, and December 31, 1993, the primary term was automatically extended through December 31, 1994, December 31, 1995, and then through December 31, 1996, respectively. The Company may terminate the agreement for cause, death, or disability. Under such circumstances, or if Mr. Anderson terminates the agreement for other than good reason (as defined), Mr. Anderson or his estate will be paid base pay and incentive compensation earned for that fraction of the year which he was actually employed. If the agreement is terminated by Mr. Anderson for good reason, or by the Company for reasons other than cause, death, or disability, Mr. Anderson will receive in a lump sum the present value of his base pay and incentive compensation projected through the employment period, as well as an extension of welfare plan benefits through the employment period. Effective March 1, 1991, Mr. Anderson was awarded 40,000 shares of restricted Common Stock under the terms of the 1990 LTIP. These shares are initially restricted as to the transfer of ownership, with such restriction being removed on 10,000 shares on March 1 of each year, beginning on March 1, 1992, and continuing through March 1, 1995, provided Mr. Anderson remains in the employ of the Company during that period. The restriction will terminate early as to all of the restricted shares in the event of death or disability, involuntary termination by the Company for any reason other than cause (as defined), or change in control of the Company. Mr. Anderson receives dividends payable to holders of record of Common Stock on the restricted shares. The Company's Executive Severance Program ("Program") provides that in the event of a "change in control," as defined in the agreements entered into between the Company and the participants in the Program, such participants will have certain benefits provided to them in the event of the termination of their employment within three years of the effective date of such change in control. Such benefits are provided unless such termination of employment is (i) because of the death or retirement of the executive, (ii) by the 14 18 Company or its subsidiaries for "cause" (as defined) or disability, or (iii) by the executive other than for "good reason" (as defined). Generally, benefits include a lump-sum cash payment equal to two and one-half times the average of the participant's annual compensation for the five years preceding the change in control (including deferred amounts, bonuses, and employer contributions to the ESP); cash payment for the participant's account in the ESP; a continuation of various medical, insurance, and certain other benefits for a period of two and one-half years; and a lump-sum cash payment, at termination, equal to the present value of the additional retirement benefits the participant would have received as a result of two and one-half years additional service. The aggregate of each participant's benefits, when combined, will not exceed three times the "base amount" (as defined in the Internal Revenue Code). In consideration of these benefits, the participant agrees, in the event a person seeks to effect a change in control, not to leave the employ of the Company, and to continue to render services commensurate with the participant's position, until such person has abandoned or terminated efforts or the change in control has occurred. The participant also agrees to retain in confidence all of the confidential business information of the Company or its subsidiaries known to the participant. The Program presently covers four executive officers of the Company, including Messrs. Hipple and King. The Company's Change in Control Severance Pay Plan ("Severance Plan") is available for all employees of the Company and certain of its subsidiaries, except those employees covered by an agreement under the Executive Severance Program or a collective bargaining agreement. The Severance Plan provides a number of severance benefits for eligible employees, which would be triggered by certain specific events occurring subsequent to a "change in control" (as defined) of the Company. In addition to the variable cash payments provided for in the Severance Plan, eligible employees and dependents would receive, at no cost to the employee, six months' continuation of medical and dental benefits at the current benefit level, or at the benefit level immediately prior to the change in control, whichever is greater. As of December 31, 1993, no benefits had been provided under the Severance Plan. PENSION PLAN The Company's qualified retirement plan provides benefits, expressed in the form of a single life annuity commencing at normal retirement date (age 65, or, if later, the fifth anniversary of participation in the retirement plan) based on a benefit formula that, in part, uses final five-year average pay, which considers the regular compensation of the participant, including overtime payments, bonus payments, and some forms of deferred compensation. Qualified retirement plan benefits may be subject to statutory limitations if the participant receives compensation in excess of a maximum, is covered by other qualified plans, if benefits are paid before social security retirement age, if the participant has less than 10 years of plan participation, or if benefits are paid in a more valuable form than a single life annuity. Benefits are not reduced by the amount of any social security payments received by the participant. When qualified plan benefits are limited by statute, non-qualified plans restore certain benefits for participants covered by the non-qualified plans to a level which would have been available if such statutory limits did not exist. 15 19 The table below shows the estimated annual benefits payable at age 65 under the qualified and non-qualified retirement plans at various levels of final average compensation and assuming various years of benefit accrual service (dollars in thousands): PENSION PLAN TABLE
YEARS OF SERVICE ------------------------------------ REMUNERATION 15 20 25 30 35 ------------ ---- ---- ---- ---- ---- $200...................................... $ 46 $ 62 $ 77 $ 93 $108 300...................................... 70 94 117 141 164 400...................................... 94 126 157 189 220 500...................................... 118 158 197 237 276 600...................................... 142 190 237 285 332
The years of benefit accrual service for each Named Executive Officer, except Mr. Hendrix, who does not actively participate in the plan, are as follows: Paul M. Anderson, 15; Carl B. King, 3; James B. Hipple, 36; and George L. Mazanec, 6. The covered compensation is the sum of the salary and bonus reported in the Summary Compensation Table on page 10. In connection with the 1989 acquisition of TEC by the Company, the TEC Retirement Plan was amended to offer enhanced early retirement benefits to active employees age 50 or older whose primary work location was in the headquarters office. Mr. Hipple was among those employees eligible for these enhanced retirement benefits. The Company entered into a contract with Mr. Hipple in 1989 under which, in consideration of his agreement to remain in the employ of the Company through December 1992, the Company agreed to pay him the actuarial equivalent of the enhanced retirement benefits which he lost by not exercising his option to retire early. During 1992, the Board of Directors extended the effectiveness of this contract until Mr. Hipple retires. C. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee, composed exclusively of Nonemployee Directors, is responsible for the Company's executive compensation program. The following is the report of the Compensation Committee on compensation policies regarding executive officers and the basis of compensation actions it has taken. The overriding objectives of the Company's executive compensation programs are (i) to attract and retain executive officers and key employees who provide valuable experience and skills to the Company and who contribute materially on a consistent basis to its long term success, and (ii) to support and reward individual and team performance that increases stockholder value. Toward those ends, the executive compensation programs attempt to provide compensation based on these principles: 1. Competitive Compensation Opportunities. The Company desires that its executive compensation programs provide total compensation (consisting of base salaries, annual cash incentive opportunities, and long term incentive opportunities) competitive with the mean total compensation offered other executives employed by companies of similar size, complexity, and line of business. The Compensation Committee considers data from surveys, proxies, independent compensation consultants, and those peer group companies listed in the Stockholder Return graphs in Section D, below. 2. Performance-Based Pay. Payouts from the short-and long-term compensation programs in which executive officers and key employees participate are reflective of the achievement of both group and individual goals. The programs provide significant rewards for performance at exceptional levels and less than competitive compensation when performance goals are not achieved. Description of the Current Executive Compensation Program Base Salaries. The base salaries of the Company's executive officers, other than the Chief Executive Officer, are consistent with average comparable base salaries determined from data described above. Base 16 20 salaries are reviewed annually by the Compensation Committee and revised, if appropriate, based on factors which include individual performance and general levels of comparable salary increases. At its most recent meetings in December 1993 and January 1994, the Compensation Committee considered the base salaries of executive officers and key employees and elected not to adjust the base salaries of fifteen of them, including Messrs. Anderson, Mazanec, and King. Instead, their long term incentive opportunities were increased so as to keep total compensation opportunities at competitive levels and to reflect past individual performance. Salary increases to executive officers were granted only in the case of certain promotions or individual situations where, due to impending retirement, additions to long term incentives were deemed inappropriate. Annual Cash Incentive Opportunities. The Compensation Committee administers the Annual Cash Bonus Plan ("ACBP") which permits the granting of cash incentive compensation awards. The ACBP requires the Compensation Committee annually to establish administrative guidelines that define who may earn an incentive award, what performance is required to earn it, and how much may be earned. Guidelines effective for 1993 called for the Chief Executive Officer to recommend, and the Compensation Committee to approve, an annual bonus opportunity for each participant. This opportunity, or "target," is expressed as a percentage of base salary and is determined by the Compensation Committee's judgment of the direct or indirect impact each individual could have on the Company's performance, as measured by operating income. Depending on performance, executive officers could receive up to 125 percent of the bonus target. Of the eleven executive officers of the Company, ten are participants in the ACBP. Mr. Hendrix is not a participant. In 1993, each of the executive officers, in consultation with the Chief Executive Officer, established six to ten specific personal objectives. These objectives were primarily directed toward the accomplishment of a successful transition to operating under FERC Order 636, achieving new market initiatives, reducing debt, and making meaningful progress in the expansion of the Company's earnings base. Fifty percent of each executive officer's 1993 bonus was determined by the degree to which, in the opinion of the Chief Executive Officer and the Compensation Committee, the executive officer achieved the personal objectives. Further, each business unit had operating income objectives approved by the Compensation Committee, and fifty percent of each executive officer's bonus was contingent upon achievement of those objectives. If any one business unit failed to reach a minimum level of income established in the guidelines, the executive officer received no compensation for the proportion of the bonus contingent upon that business unit's results. In 1993, six business units met or exceeded their target operating income objectives and two business units did not. Five of the ten participating executive officers achieved 100 percent of their personal objectives, while the other five participating executive officers had results ranging from 89 to 99 percent. Long Term Incentive Opportunities. Through the 1990 LTIP, which was approved by the stockholders in 1990, the Compensation Committee has the flexibility to structure long-term awards to meet particular business needs. To date, four types of awards have been made under the 1990 LTIP: 1. Restricted Stock. Since 1990, the Compensation Committee has awarded 640,000 shares of stock that is restricted as to transferability to two executive officers. Mr. Hendrix received two grants of 300,000 shares of restricted stock each, in 1990 and in 1993, in lieu of salary, bonus, and certain employee benefits. Mr. Anderson received a grant of 40,000 shares of restricted stock in 1991. Restrictions are removed as vesting requirements are met. The purpose of these awards was to make the recipients' compensation substantially contingent on stock price and dividend yield and to ensure significant share ownership. See footnotes 6 and 7 to the Summary Compensation Table on pages 11 and 12, respectively. 2. Conditional Stock. This form of award was employed in November 1990 and January and April 1991 when the Company's current management team was being assembled following the merger of the Company and TEC and in conjunction with the Company's reorganization into distinct business units. The awards, some of which were granted to Messrs. Mazanec, Hipple, and King, as well as other officers of the Company, were for the purpose of focusing the recipients' attention on long-term objectives by adding, through the ownership of Common Stock, a meaningful long-term incentive opportunity that previously did not exist. Conditional stock awards vest and are distributed in scheduled annual installments within four to six years of grant. Recipients are paid dividend equivalents in cash on 17 21 unvested, undistributed shares. These awards were designed for a unique purpose and time and the Compensation Committee has no plans to make additional conditional stock awards. 3. Stock Options. Stock options have been granted to executive officers and others by the Compensation Committee at various times since the inception of the 1990 LTIP and, currently, are intended to be the primary vehicle for providing long-term incentive opportunities to executive officers. The practice is to grant stock options to individuals no more than every three years, except where promotions or changes in responsibility may, in the opinion of the Compensation Committee, dictate otherwise. The number of stock options granted is determined through a process which, first, utilizes survey data to determine the annualized value of long term incentive grants made to other executives and management employees in the Company's compensation data base ("target value"). Next, the Black-Scholes stock option pricing model is used to calculate a ratio which, when multiplied by the exercise price of the option, produces an expected present value of the option. Finally, the number of options required to make a competitive long-term grant is calculated by dividing the target value by the expected present value of a single option. The result of this equation, expressed as a number of options, may be adjusted by the Compensation Committee depending upon the grant recipient's qualitative and quantitative performance, the size of stock option grants awarded the recipient in the past, and expectations of future performance. 4. EPS Performance Units. Although stock options are the primary vehicle for long-term incentive opportunities for executive officers, the Compensation Committee considers them insufficient for the purpose of rewarding specific management actions that enhance earnings and stockholder return. Therefore, the Compensation Committee has granted EPS Performance Units in conjunction with stock options to further encourage stock ownership by executive officers and key employees and to strengthen the linkage among financial performance, stockholder return, and long-term incentives. In December 1991, the Compensation Committee granted 126 executives and management employees, including Messrs. Anderson, Mazanec, King, and Hipple, options to purchase an aggregate 778,500 shares of Common Stock, together with an equivalent number of EPS Performance Units. In April 1992, the Compensation Committee granted seven executives and management employees options to purchase 40,500 shares; in July 1992 it granted one executive an option to purchase 12,000 shares; and in January 1993, it granted eight executives and management employees options to purchase 41,000 shares. In December 1993 the Compensation Committee granted Messrs. Anderson and Mazanec options to purchase 250,000 shares each. Furthermore, in January 1994, 129 executive and management employees were granted options to purchase 324,300 shares. In each instance, an equivalent number of EPS Performance Units were granted. Each EPS Performance Unit creates a credit to the grantee's EPS Performance Unit account when the Company's earnings per share has exceeded a threshold, which was $.80 per share for grants made in 1991 and 1992, $1.10 per share for grants made in January 1993, and $1.50 per share for grants made in December 1993 and January 1994. When earnings for a calendar year, exclusive of certain special items, exceed the threshold, the excess amount is credited to the grantee's EPS Performance Unit account. The balance in the account may be used to exercise stock options granted in connection with the EPS Performance Units or it may be withdrawn two years after the underlying options expire, usually ten years from the date of grant. Options may also be exercised by normal means once vesting requirements are met. Compensation of the Chief Executive Officer Effective February 24, 1993, the employment agreement between the Company and Mr. Hendrix was amended to extend its term for one additional year and to establish an appropriate amount of compensation for the final three years of the agreement. The amendment provided that Mr. Hendrix would continue to receive no salary or bonus for three years from November 1993 through November 1996. Instead, his compensation would take the form of restricted Common Stock. Considering the market price of the Common Stock on the date of amendment of the agreement, and the total compensation of other chief executive officers in the natural gas pipeline industry (including those peer group companies used in the Stockholder Return 18 22 Comparisons in Section D hereof), the Compensation Committee, with the aid of an independent compensation consultant, concluded that the appropriate grant would be 300,000 shares, with restrictions on transferability being removed on 25,000 shares every three months, beginning in February 1994. Mr. Hendrix receives dividends payable to stockholders of record of Common Stock on the restricted shares. The Compensation Committee believes that the value of Mr. Hendrix's compensation is approximately at the mean of that for the chief executive officers of the peer group companies. Provisions of the Budget Act enacted after the amendment date, generally remove the Company's ability to deduct compensation expense in excess of $1 million paid to any of the five highest paid executives, including the Chief Executive Officer, in any year beginning in 1994 unless such compensation is "performance-based" as defined by the Budget Act. Although the award to Mr. Hendrix was set at a competitive level, by its nature achieves the ultimate goal of aligning management and stockholder interests, and has well-served the interests of the stockholders, the terms of the award did not meet the legal definition of "performance-based" compensation under the Budget Act. In the Company's opinion, compensation in excess of $1 million paid to Mr. Hendrix under the terms of the agreement would not have been deductible beginning in 1994 and could have resulted in increased tax cost to the Company of approximately $1.8 million during the period 1994 through 1996. In light of these changes in tax treatment of executive compensation, at its December 20, 1993, meeting, the Compensation Committee reaffirmed its decision to compensate Mr. Hendrix solely with restricted stock. However, due to the significant potential tax cost of the original agreement, the Compensation Committee elected to accelerate the removal of restrictions on 200,000 shares into 1993 when the compensation realized by Mr. Hendrix remained fully deductible by the Company. The restrictions on the remaining 100,000 shares of the award will be removed as follows: 36,000 shares in quarterly installments of 9,000 shares each in 1994, 34,000 shares in quarterly installments of 8,500 shares each in 1995, and 30,000 shares in quarterly installments of 7,500 shares each in 1996. The Compensation Committee intends to continue to structure compensation programs that reward performance while preserving maximum deductibility of all compensation awards. It is not anticipated that compensation realized by any officer under programs now in effect will, in the immediate future, result in any material loss of tax deductions under the Budget Act. THE COMPENSATION/ORGANIZATION/NOMINATING COMMITTEE: WILLIAM T. ESREY, CHAIRMAN ROBERT CIZIK CHARLES W. DUNCAN, JR. HARRY E. EKBLOM LEO E. LINBECK, JR. 19 23 D. STOCKHOLDER RETURN COMPARISON SEC rules require that the Company include in this Proxy Statement a line graph presentation comparing cumulative, five-year stockholder returns on an indexed basis with the S&P 500 Stock Index and either a nationally recognized industry standard or an index of peer companies selected by the Company. This information is set forth on the graph below, which covers the period from year-end 1988 through year-end 1993. The Company has chosen the Dow Jones Pipeline Group for its peer comparison. The Dow Jones Pipeline Group includes Coastal Corp., El Paso Natural Gas Company, Enron Corp., Enserch Corp., Sonat, Inc., Transco Energy Co., Williams Companies, and the Company. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG PANHANDLE EASTERN CORPORATION, S&P 500 STOCK INDEX, AND DOW JONES PIPELINE GROUP (* Total return assumes quarterly reinvestment of dividends)
Measurement Period Panhandle East- Dow Jones Pipe- (Fiscal Year Covered) ern lines S&P 500 12/88 100.00 100.00 100.00 12/89 126.09 157.63 131.69 12/90 54.14 128.68 127.60 12/91 73.07 125.43 166.47 12/92 84.28 155.03 179.15 12/93 123.83 195.23 197.21
20 24 The next graph compares the cumulative stockholder return of the Company with the same indexes, but over a three-year period from year-end 1990 through year-end 1993, the period roughly coinciding with the tenure of the Company's current senior management team. COMPARISON OF THREE YEAR CUMULATIVE TOTAL RETURN* AMONG PANHANDLE EASTERN CORPORATION, S&P 500 STOCK INDEX, AND DOW JONES PIPELINE GROUP (* Total return assumes quarterly reinvestment of dividends)
Measurement Period Panhandle East- Dow Jones Pipe- (Fiscal Year Covered) ern lines S&P 500 12/90 100.00 100.00 100.00 3/91 123.62 100.64 114.53 6/91 99.89 98.35 114.26 9/91 112.49 106.67 120.38 12/91 134.96 97.47 130.47 3/92 129.14 95.71 127.17 6/92 138.71 105.86 129.59 9/92 170.13 124.49 133.68 12/92 155.67 120.48 140.41 3/93 215.81 150.42 146.54 6/93 232.05 163.99 147.25 9/93 239.74 175.00 151.06 12/93 228.72 151.72 154.56
There can be no assurance that the Company's cumulative total return will continue into the future with the same or similar trends depicted in the graphs above. E. PROPOSED PANHANDLE EASTERN CORPORATION 1994 LONG TERM INCENTIVE PLAN The purpose of the 1994 LTIP is to aid the Company in recruiting, motivating, and retaining highly qualified and competent individuals as key employees. The granting of awards will enable such employees to acquire a substantial personal interest in the Company, thereby aligning the employees' interests with those of the stockholders. Key employees of the Company and its affiliates, including Messrs. Hendrix, Mazanec, Anderson, Hipple, and King, and other officers, will be eligible to participate in the 1994 LTIP, which will expire on December 31, 2003. Upon approval of the 1994 LTIP, there will be 3,000,000 shares of Common Stock made available for grant beginning in 1994. Each year thereafter, beginning with 1995, the lesser of (i) 55/100's of one percent of the number of shares of Common Stock outstanding on January 1, together with any shares remaining from prior year(s), or (ii) 3,000,000 shares, will be available for grant. However, no grant of shares may be made if the number of shares subject to the grant, when added to the cumulative shares previously granted, would exceed 5.5 percent of the average of the total shares outstanding as of the first day of each calendar year during which the Plan has then been in effect. 21 25 The 1994 LTIP makes available to the Compensation Committee a number of incentive devices such as incentive stock options ("ISOs"), nonqualified stock options ("NQOs"), SARs, restricted stock, performance units (including EPS Performance Units), performance shares, and dividend equivalents. The Compensation Committee will adopt administrative guidelines from time to time which will define specific eligibility criteria, the types of awards to be employed, and the value of such awards. The Compensation Committee may establish minimum performance targets with respect to each award. Performance targets may be based on financial criteria, such as the Fair Market Value of Common Stock or other measures of financial performance of the Company, or may be based on the performance of a division, subsidiary, or affiliate of the Company or the performance of an individual participant. Specific terms of each award, including minimum performance criteria which must be met to receive payment, will be provided in individual award agreements granted to award participants. Award agreements may contain change-in-control provisions. Any options to purchase shares of Common Stock that may be granted pursuant to the 1994 LTIP will be granted at no less than 100 percent of the Fair Market Value of the Common Stock on the date of grant. The Fair Market Value, as defined by the Plan, is the average of the high and low prices of a share of Common Stock traded on the relevant date, as reported on The New York Stock Exchange, Inc., Composite Transactions Reporting System. During the term of the Plan, no participant may be awarded ISOs, NQOs, and SARs covering an aggregate of more than one million shares. Additionally, amounts received in any year pursuant to awards (other than ISOs, NQOs, or SARs) granted to any participant, the deductibility by the Company of whose awarded compensation is likely to be subject to the $1 million limitation imposed by Section 162(m) of the Code ("Covered Employee"), are restricted to a maximum value of 500 percent of the participant's annual salary at the rate in effect on the first day of the year of receipt. Additionally, cumulative amounts paid pursuant to awards (other than ISOs, NQOs, or SARs) granted in any year to any participant who is a Covered Employee or pursuant to cash-only awards granted in any year to any participant who is subject to Section 16 of the Exchange Act (where the Company intends to comply with Rule 16a-1(c)(3) under the Exchange Act), are restricted to a maximum value of 500% of the participant's annual salary at the rate in effect on the first day of the year of grant. For purposes of these dollar maximums, in the event that the participant does not receive a salary, the participant shall be deemed to have an annual salary, if a Covered Employee, of $500,000; otherwise, of $250,000. The Compensation Committee may delegate the authority to grant and administer awards under the Plan that are made to the Company's Chief Executive Officer and any other employee that the Committee determines is likely to be among the four other highest compensated officers of the Company for the year, as provided in Section 162(m) of the Code, to a subcommittee consisting solely of two or more "outside directors" as defined under Code Section 162(m) and appointed by the Committee. The Compensation Committee will have the right to amend, suspend, or discontinue the 1994 LTIP or alter or amend any or all award agreements made pursuant to it to the extent permitted by law. However, no amendment, suspension, or termination of the 1994 LTIP shall, without the consent of the participant, adversely alter or change any of the rights or obligations under any awards or other rights previously granted to the participant under the Plan. Moreover, the Compensation Committee may not take any such action without approval of the stockholders, if required by law, Rule 16b-3 under the Exchange Act or any successor provisions, or the rules of any stock exchange on which the Common Stock or any other security of the Company is listed. Federal Income Tax Effects. The following is a general summary of the principal Federal income tax effects under current law to employee award recipients and to the Company in connection with the various awards which may be granted under the 1994 LTIP. These descriptions do not purport to cover all of the potential tax consequences with respect to such awards. 1. A NQO is a right to purchase a specified number of shares of Common Stock at a fixed option price over a specified period of time. An optionee will realize no income for Federal income tax purposes upon the grant of a NQO under the 1994 LTIP, but will recognize ordinary income upon the exercise of the NQO in an amount equal to the excess of the Fair Market Value of the shares received upon exercise over the option price 22 26 of such shares. The Company will be entitled to a deduction for Federal income tax purposes in the same year as, and in an amount equal to, the income recognized by the optionee. The optionee's adjusted basis for the shares received upon exercise will be the Fair Market Value on the date of exercise. 2. An ISO is a right, that complies with the terms of Section 422 of the Internal Revenue Code, to purchase a specified number of shares of Common Stock at a fixed option price over a period not to exceed ten years. Except as described below, an optionee who is granted an ISO under the 1994 LTIP will recognize no income for Federal income tax purposes upon either the grant or the exercise of such ISO, and upon any subsequent sale of the shares acquired the optionee will recognize capital gain or loss in an amount equal to the difference between the option exercise price and the amount received upon the sale of the Common Stock. Generally, the Company will not be entitled to a deduction upon the exercise of an ISO. An optionee who receives Common Stock pursuant to the exercise of an ISO and (a) within one year of exercise disposes of the Common Stock, (b) holds the Common Stock for a year or more from the day such shares are received but disposes of the shares within two years from the day the ISO was granted, or (c) has not been an employee of the Company or its affiliates within the last three months, will recognize ordinary income upon the disposition, or in case (c), upon exercise, in an amount equal to the lesser of (i) the excess of the value of any property and cash received upon any disposition over the ISO's exercise price or (ii) the excess of the value of the Common Stock at the time of the ISO's exercise over the ISO's exercise price. The Company will be entitled to a corresponding deduction for Federal income tax purposes. An optionee will also recognize a capital gain to the extent the value of any property and cash received pursuant to the disposition exceeds the value of the Common Stock at the time of the exercise of the ISO. 3. An SAR is a right to receive an amount not in excess of the Fair Market Value on the exercise date of the number of shares of Common Stock for which the SAR is exercised less the exercise price of the SAR. SARs will be payable in cash, Common Stock, or a combination thereof. Upon the exercise of any SAR the employee will recognize ordinary income in the amount of any cash received plus the Fair Market Value on the exercise date of any Common Stock received. The Company will be entitled to a deduction in the same year and in the same amount. 4. Restricted stock is Common Stock that is subject to restrictions on transfer of ownership. Awards of restricted stock may be made with or without cash payment by the employee. An employee who receives a grant of restricted stock and who does not elect to be taxed at the time of grant will not recognize income upon an award of shares of Common Stock and the Company will not be entitled to a deduction until the termination of the restrictions. Upon such termination, the employee will recognize ordinary income in an amount equal to the Fair Market Value of the Common Stock at that time (less any amount paid by the employee for such shares) and the Company will be entitled to a deduction in the same amount. However, the employee may elect to recognize ordinary income in the year the restricted stock is granted in an amount equal to the Fair Market Value of the shares at that time, determined without regard to the restrictions. In that event, the Company will be entitled to a deduction in such year and in the same amount. Any gain or loss recognized by the employee upon subsequent disposition of the stock will be capital in nature. 5. A performance award is a promise by the Company to make payment to the employee, contingent upon the achievement of one or more performance targets. Performance units are payable in cash and performance shares are payable in Common Stock. A dividend equivalent is the right to receive an amount equal to the dividends paid on a specified number of shares of Common Stock and is payable in cash. For performance units, performance shares, and dividend equivalents, any cash plus the Fair Market Value of any Common Stock received as payments under the 1994 LTIP will be considered ordinary income to the employee in the year in which paid and the Company will be entitled to a deduction in the same year and in the same amount. In general, special tax timing rules apply to officers and Directors subject to Section 16(b) of the Exchange Act. The foregoing summary of the proposed 1994 LTIP is qualified in its entirety by reference to the specific provisions of the Plan, the full text of which is set forth as Exhibit I hereto. The Fair Market Value of the Company's Common Stock on February 28, 1994, was $22.00 per share. 23 27 THE BOARD HAS RECOMMENDED THE 1994 LTIP FOR APPROVAL BY THE STOCKHOLDERS AND RECOMMENDS A VOTE FOR THE 1994 LTIP. THE ADOPTION OF THE PLAN WILL REQUIRE FOR APPROVAL THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK PRESENT OR REPRESENTED BY PROXY AND ENTITLED TO VOTE AT THE ANNUAL MEETING. F. OTHER MATTERS INDEPENDENT AUDITORS KPMG Peat Marwick ("Peat Marwick") served as the Company's independent auditor during 1993, and was again appointed by the Board to serve in that capacity for 1994. Representatives of Peat Marwick will be present at the Annual Meeting to respond to appropriate questions from stockholders and to make a statement if they desire to do so. OTHER MATTERS BEFORE THE MEETING It is not expected that any other matters will come before the Annual Meeting. However, if any other matters properly come before the Annual Meeting, it is the intention of the persons named in the accompanying form of proxy to vote such proxy in accordance with their judgment on such matters. It is important that the proxies be returned promptly. All stockholders, whether or not they expect to attend the Annual Meeting in person, are urged to mark, sign, date, and return the accompanying form of proxy in the enclosed pre-addressed envelope, which requires no postage if mailed in the United States. BY ORDERS OF THE BOARD OF DIRECTORS, /s/ ROBERT W. REED ------------------------------- ROBERT W. REED Secretary Dated: March 11, 1994 Houston, Texas 24 28 EXHIBIT I PANHANDLE EASTERN CORPORATION 1994 LONG TERM INCENTIVE PLAN Panhandle Eastern Corporation (the "Company") hereby establishes this Plan for key employees of the Company and its Affiliates, as follows: 1. PURPOSE The purpose of this Plan is to aid the Company and its Affiliates in recruiting, motivating and retaining highly qualified and competent individuals as key employees. It is believed that this purpose will be furthered through the granting of Awards under this Plan to key employees as an incentive for the diligent application of their personal efforts to the continued success of the Company and its Affiliates. This Plan shall be effective January 1, 1994, subject to approval by the Company's stockholders at the 1994 Annual Meeting of Stockholders to be held April 27, 1994, and shall terminate on December 31, 2003, except with respect to any Award then outstanding. 2. DEFINITIONS "Administrative Guidelines" means the interpretative guidelines adopted by the Committee, as amended from time to time by the Committee, which guidelines shall be treated as a part of this Plan and shall be valid and binding upon the Participants. "Affiliate" means any subsidiary corporation (as defined in Section 424 of the Code) of the Company. "Award" means an Award described in Section 4 of this Plan. "Award Agreement" means an agreement entered into between the Company and a Participant, setting forth the terms and conditions applicable to the Award granted to the Participant. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. "Committee" means the Compensation/Organization/Nominating Committee of the Board; provided that to the extent required by Rule 16b-3 under the Exchange Act or any successor provision, such committee shall be comprised only of members who shall qualify as "disinterested persons" under such rule. "Common Stock" means the common stock, $1.00 per share par value, of the Company and shall include both treasury shares and authorized but unissued shares and shall also include any security of the Company issued in substitution, in exchange for, or in lieu of the Common Stock. "Covered Employee" means, for any Plan Year, the Company's Chief Executive Officer (or any individual acting in such capacity) and any employee of the Company or its Affiliates who, in the discretion of the Committee for purposes of determining those employees who are "covered employees" under Section 162(m) of the Code, is likely to be among the four other highest compensated officers of the Company for such Plan Year. "ERISA" means the Employment Retirement Income Security Act of 1974 and the regulations thereunder, as amended from time to time. "Exchange Act" means the Securities Exchange Act of 1934 and the regulations thereunder, as amended from time to time. "Fair Market Value" means the average of the high and low sales prices of a share of Common Stock, or other security for which Fair Market Value is being determined, as quoted on the New York Stock Exchange, Inc. Composite Transactions Reporting System (or such other reporting system as shall be selected by the Committee from time to time) on the relevant date, or if no sale of Common Stock or such other security is reported for such date, the immediately preceding day for which there is a reported sale. The Committee shall I-1 29 determine the Fair Market Value of any security that is not publicly traded, using such criteria as it shall determine, in its sole discretion, to be appropriate for the purposes of such valuation. "Participant" means an individual who has been granted an Award pursuant to this Plan. "Plan" means this Panhandle Eastern Corporation 1994 Long Term Incentive Plan, as set forth herein and as it may be amended from time to time. "Plan Year" means the calendar year. 3. ELIGIBILITY Key employees (including officers and employee directors) of the Company and its Affiliates selected by the Committee from time to time shall be eligible to participate in this Plan. An Award may not be granted to a member of the Board who is not also an employee of the Company or an Affiliate. 4. AWARDS An Award is the right to receive compensation under this Plan, payable in cash, Common Stock or other securities of the Company or an Affiliate, or any combination thereof, determined in accordance with the Administrative Guidelines. All Awards made pursuant to this Plan are in consideration of services performed or to be performed for the Company or its Affiliates. No awards under this Plan shall be granted after December 31, 2003. The Committee may establish minimum performance targets with respect to each Award. Performance targets may be based on financial criteria, such as the Fair Market Value of Common Stock or other measures of financial performance of the Company, or may be based on the performance of a division, subsidiary or Affiliate of the Company, or the performance of an individual Participant. Notwithstanding anything in this Plan to the contrary, any Awards of stock options or similar rights, stock appreciation rights, performance units, or performance shares shall contain the restrictions on assignability in Section 7(a) of this Plan to the extent required by Rule 16b-3 under the Exchange Act or any successor provision. The following types of Awards may be granted under this Plan, singly or in combination or in tandem with other Awards, as the Committee may determine: (a) Non-Qualified Stock Options. A non-qualified stock option is a right to purchase, during such period of time as the Committee may determine, a specified number of shares of Common Stock or other security, which does not qualify as an incentive stock option under Section 422 of the Code, at a fixed option price equal to no less than 100 percent of the Fair Market Value of the Common Stock or other security on the date the Award is granted. The option price may be payable in the following form(s) as determined in accordance with the Administrative Guidelines: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Company, wire transfer, or direct account debit; (ii) through the delivery (together with a blank stock power or other instrument of assignment) or assignment of the ownership of shares of Common Stock or other securities of the Company with a Fair Market Value equal to all or a portion of the option price for the total number of options being exercised. If the Fair Market Value of the shares of Common Stock or other securities delivered is less than the total option price of the options to be exercised, a sequential exercise of the remaining options to be exercised with the proceeds credited from the initial exercise and subsequent exercises shall be permitted, pursuant to a brokerage or similar arrangement, until all requested exercises have been accomplished; provided that, in the case of the last exercise in any such sequence, the optionee must pay in cash any fractional shares required to effect such sequential exercise; or (iii) by a combination of the methods described in clauses (i) and (ii) above. (b) Incentive Stock Options. An incentive stock option is a right to purchase, during such period of time as the Committee may determine, a specified number of shares of Common Stock or other security, that shall comply with the requirements of Section 422 of the Code or any successor provision, at a fixed option price equal to no less than 100 percent of the Fair Market Value of the Common Stock or other I-2 30 security on the date the Award is granted. Notwithstanding any other provision of this Plan, the aggregate number of shares that may be subject to incentive stock options under this Plan shall not exceed 3,000,000 shares of Common Stock, subject to the limitation imposed by Section 6 of this Plan and subject to the adjustment provisions set forth in Section 11 of this Plan. The aggregate Fair Market Value (determined at the time of grant of the Award) of the shares with respect to which incentive stock options are exercisable for the first time by an optionee during a calendar year shall not exceed $100,000 (or such other limit as may be required by the Code). The Committee may provide that the option price under an incentive stock option may be paid by one or more of the methods described with respect to nonqualified stock options in Sections 4(a)(i), (ii) and (iii) above. (c) Stock Appreciation Rights. A stock appreciation right is a right to receive, without payment, an amount not in excess of (i) the Fair Market Value on the exercise date of the number of shares of Common Stock for which the stock appreciation right is exercised less (ii) the exercise price of such stock appreciation right, which price shall equal the Fair Market Value of such shares on the date the stock appreciation right was granted (or, in the case of an option with a tandem stock appreciation right, the option price that the optionee would otherwise have been required to pay for such shares). The right to receive such amount shall be conditioned upon the surrender of the stock appreciation right (or of both the option and the stock appreciation right in the case of a tandem stock appreciation right, or a portion of either). Stock appreciation rights shall be payable in Common Stock, cash or a combination thereof as determined by the Committee. (d) Restricted Stock. Restricted stock is Common Stock or other security of the Company or an Affiliate that is subject to restrictions on transfer and such other restrictions on the incidents of ownership as the Committee may determine at the time of the Award. Restricted stock Awards may be made without cash payment by, or other out-of-pocket consideration from, the Participant, either on the date of grant or the date the restriction(s) lapse or are removed. (e) Performance Units. A performance unit is a promise by the Company to make a payment to, or on behalf of, the Participant, which may be contingent upon the achievement of one or more performance targets specified by the Committee. A performance unit is a right to receive or be credited with an amount that may be determined by reference to Common Stock, other securities of the Company or an Affiliate, or by reference to dollar amounts. Performance units shall be subject to such conditions with respect to vesting, timing, amount and payment as the Committee shall determine at the time of the Award. Performance units shall be payable in cash. Performance unit Awards may be made without cash payment by, or other out-of-pocket consideration from, the Participant, either on the date of grant or the date of payment. By way of example, but not limitation, performance units, called "EPS Units," may be granted in tandem with Awards of stock options and the credited amount with respect to an EPS Unit shall be determined with reference to the difference between (i) the Company's annual earnings per share of Common Stock, as adjusted to exclude items that the Committee determines to be in-appropriate for purposes of the Award, and (ii) an amount specified by the Committee that reflects the level of such earnings at the time of the Award and the principal manner of payment shall be by application toward the option price upon the Participant's exercise of the stock option. (f) Performance Shares. A performance share is a promise by the Company to make a payment to the Participant, which may be contingent upon the achievement of one or more performance targets specified by the Committee at the time of the award. A performance share is a right to receive an amount that may be determined by reference to Common Stock, other securities of the Company or an Affiliate, or by reference to dollar amounts. Performance shares shall be subject to such conditions with respect to vesting, timing, and amount of payments as the Committee shall determine at the time of the Award. Performance shares shall be payable in Common Stock, or other securities of the Company or an Affiliate. Performance share Awards may be made without cash payment by, or other out of pocket consideration from, the Participant, either on the date of grant or the date of payment. (g) Dividend Equivalents. A dividend equivalent is the right to receive an amount equal to the dividends paid on a specified number of shares of Common Stock. A dividend equivalent shall be payable in cash. I-3 31 (h) Other Awards. The Committee may, from time to time, grant such other Awards as the Committee may determine, provided that no such Award shall be inconsistent with the terms of this Plan. Amounts received pursuant to cash-only Awards granted under Sections 4(c) and 4(e) through 4(h) of this Plan, or any combination thereof, if intending to comply with Rule 16a-1(c)(3)(i) under the Exchange Act or any successor provision, for each Plan Year to any Participant who is subject to Section 16 of the Exchange Act shall be limited to a maximum value of 500% of the Participant's annual salary at the rate in effect on the first day of such Plan Year. For purposes of the preceding sentence, if a Participant who is not a Covered Employee, but is subject to Section 16 of the Exchange Act, does not receive a salary, the Participant shall be deemed to have an annual salary of $250,000. 5. AWARDS TO COVERED EMPLOYEES The Committee may determine that any Award granted hereunder for any Plan Year to a Participant who is a Covered Employee shall be made and administered by a subcommittee consisting solely of two or more "outside directors" (as defined in Treasury regulations promulgated under Section 162(m) of the Code) appointed by the Committee (the "Subcommittee"). Any such Award may be determined solely on the basis of (a) the achievement by the Company of a specified target earnings per share, return on equity or net income, all as adjusted to exclude items that the Subcommittee determines to be inappropriate for purposes of the Award, (b) the Company's stock price, (c) the achievement by a business unit of the Company of a specified target net income as adjusted to exclude items that the Subcommittee determines to be inappropriate for purposes of the Award, or market share, or (d) any combination of the goals set forth in (a) through (c) above. If an Award is made on such basis, the Subcommittee shall establish such goals prior to the beginning of the Plan Year (or such later date as may be prescribed by the Internal Revenue Service for purposes of Section 162(m) of the Code). Amounts received for each Plan Year pursuant to Awards granted under Sections 4(d) through 4(h) of this Plan, or any combination thereof, to each Covered Employee shall be limited to a maximum value of 500% of the Covered Employee's annual salary at the rate in effect on the first day of such Plan Year. In no event may the cumulative amounts paid pursuant to Awards granted in any Plan Year under Sections 4(d) through 4(h) of this Plan, or any combination thereof, to any Covered Employee exceed 500% of the Covered Employee's annual salary at the rate in effect on the first day of such Plan Year. For purposes of the two preceding sentences, if a Covered Employee does not receive a salary, the Covered Employee shall be deemed to have an annual salary of $500,000. Any payment of an Award granted under this Section 5, other than Awards referred to in Sections 4(a), 4(b) or 4(c) of this Plan or any combination thereof, shall be conditioned on the written certification of the Subcommittee that the goals used as the basis for any such Award, and any other material terms, were in fact satisfied. 6. SHARES SUBJECT TO THIS PLAN Subject to adjustment as provided in Section 11 of this Plan, the total number of shares of Common Stock available for the grant of Awards under this Plan for the 1994 calendar year shall be 3,000,000 shares of Common Stock and for each succeeding calendar year prior to 2004 shall be the lesser of (a) 3,000,000 shares of Common Stock, or (b) the sum of (i) the number of shares available for the grant of Awards under this Plan for the prior year or years but not covered by Awards granted for such prior year or years, plus (ii) fifty- five one hundredths of one percent (0.55%) of the total outstanding shares of Common Stock (not including treasury shares) as of the first day of such succeeding calendar year; provided that no more than one million (1,000,000) shares of Common Stock shall be cumulatively available for the grant of Awards under Sections 4(a), 4(b) or 4(c) of this Plan or any combination thereof pursuant to this Plan to any Participant, and, further provided, that no Award shall be granted if the number of shares of Common Stock subject to the Award, which, when added to the cumulative shares of Common Stock previously granted under this Plan, would exceed five and five tenths of one percent (5.5%) of the average of the number of outstanding shares of Common Stock (not including treasury shares) as of the first day of each calendar year during which this Plan then has been in effect. In addition, any shares of Common Stock issued by the Company through the assumption or substitution of outstanding grants of an acquired entity shall not reduce the shares of Common Stock available for the grant of Awards under this Plan. Other than for purposes of the per Participant limitation referred to above, if any shares of Common Stock subject to any Award under this Plan are forfeited I-4 32 or such Award otherwise terminates without the issuance of such shares or of other consideration in lieu of such shares, the shares of Common Stock subject to such Award, to the extent of any such forfeiture or termination, shall again be available for the grant of Awards under this Plan. 7. AWARD AGREEMENTS Each Award under this Plan shall be evidenced by an Award Agreement setting forth the terms and conditions, as determined by the Administrative Guidelines or pursuant to Section 5 hereof, applicable to the Award. Award Agreements may include: (a) Non-Assignability. A provision to the effect that no Award shall be assignable or transferable except by will or by the laws of descent and distribution or, to the extent permitted by the Committee, except pursuant to a qualified domestic relations order as defined under the Code or Title I of ERISA, and that during the lifetime of a Participant, the Award shall be exercised only by such Participant or by his guardian or legal representative. (b) Termination of Employment. Provisions governing the disposition of an Award in the event of the retirement, disability, death, or other termination of a Participant's employment by or relationship to the Company or an Affiliate. (c) Rights as a Stockholder. A provision concerning what rights, if any, a Participant shall have as a stockholder with respect to any shares of Common Stock covered by an Award until the date the Participant or his nominee becomes the holder of record. Except as provided in Section 11 hereof, no adjustment shall be made for dividends or other rights for which the record date is prior to such date, unless the Award Agreement specifically requires such adjustment. (d) Withholding. A provision requiring the withholding of all taxes as required by law. In the case of payments of Awards in shares of Common Stock or other securities, withholding shall be as required by law and the Administrative Guidelines. The Committee may permit Participants to elect to satisfy withholding requirements by having the Company withhold shares of Common Stock or other securities having a Fair Market Value equal to the amount required to be withheld. In the case of a Participant subject to Section 16 of the Exchange Act, the Committee may require that the election be made on or before the date that the amount of tax to be withheld is determined (the "Tax Date") and be subject to the following restrictions: (i) The election must be irrevocable; (ii) if required by the Committee, the election must be subject to the disapproval of the Committee; and (iii) the election must (A) if permitted by the Committee, be made six months or more prior to the Tax Date, (B) be made during a "window period" beginning on the third business day after release of the Company's quarterly or annual earnings release and ending on the twelfth business day following such release date, or (C) if made outside of such a window period, take effect during such a window period. (e) Holding Period. A provision that the Award, and any shares of Common Stock received upon exercise of the Award, be held at least six months from the date of grant. (f) Miscellaneous. Such other terms and conditions, including, without limitation, the criteria for determining vesting of Awards, the amount or value of Awards, termination of Awards for cause, the exercise of Awards pursuant to a brokerage or similar arrangement, or adjustments for nonrecurring or extraordinary items, as are necessary and appropriate to effect the purposes of this Plan. 8. CHANGE IN CONTROL Award Agreements may include, as set forth in the Administrative Guidelines, that any or all of the following actions may occur as a result of, or in anticipation of, any Change in Control to assure fair and equitable treatment of Participants: (a) acceleration of time periods for purposes of vesting in, or realizing gain from, any outstanding Award made pursuant to this Plan; I-5 33 (b) purchase of any outstanding Award made pursuant to this Plan from the holder for its equivalent cash value, as determined by the Committee, as of the effective date of the Change in Control; and (c) adjustments or modifications to outstanding Awards as the Committee deems appropriate to maintain and protect the rights and interests of Participants. For purposes of this Section, a "Change in Control" shall mean the occurrence of any of the following events: (i) a third person, including a syndicate or group deemed to be a person under Section 13(d)(3) of the Exchange Act, becomes the beneficial owner (as so determined) of Common Stock having thirty percent (30%) or more of the total number of votes that may be cast for the election of members of the Board; (ii) all or substantially all of the assets and business of the Company are sold, transferred or assigned to, or otherwise acquired by, any other entity or entities; or (iii) as a result of, or in connection with, any cash tender or exchange offer, merger or other business combination, sale of assets or contested election, or any combination of the foregoing transactions (a "Transaction"), the persons who are members of the Board before the Transaction shall cease to constitute a majority of the Board of the Company or any successor to the Company. Notwithstanding the foregoing, in no event shall the distribution by the Company to its stockholders of stock in a subsidiary be deemed a Change in Control. 9. AMENDMENT AND TERMINATION The Committee may at any time amend, suspend, or discontinue this Plan or alter or amend any or all Award Agreements under this Plan; provided, however, that no amendment, suspension, or termination of this Plan shall, without the consent of the Participant, adversely alter or change any of the rights or obligations under any Awards or other rights previously granted the Participant under this Plan; provided, further, however, that the Committee may not take any such action without approval of the Company's stockholders if such approval is required by law, Rule 16b-3 under the Exchange Act or any successor provision, or the rules of any stock exchange on which the Common Stock or any other security of the Company is listed. 10. ADMINISTRATION (a) Except as provided in Section 5 of this Plan, this Plan and all Awards granted pursuant thereto shall be administered by the Committee. The Committee shall periodically make determinations with respect to eligible individuals who shall participate in this Plan and receive Awards pursuant thereto. All questions of interpretation and administration with respect to the Plan and Award Agreements shall be determined by the Committee, or the Subcommittee if applicable, in its absolute discretion, and its determination shall be final and conclusive upon all parties in interest. (b) The Committee may authorize persons other than its members to carry out its policies and directives, including the authority to grant Awards, subject to the limitations and guidelines set by the Committee, except that any such delegation shall satisfy any applicable requirements of Rule 16b-3 under the Exchange Act or any successor provision. Any person to whom such Authority is granted shall continue to be eligible to receive Awards under this Plan, provided that such Awards are granted directly by the Committee without delegation. 11. ADJUSTMENT PROVISIONS If the outstanding shares of Common Stock shall be changed into or exchanged for a different number or kind of shares of stock or other securities or property of the Company or of another corporation (whether by reason of merger, consolidation, recapitalization, reclassification, split up, combination of shares, or otherwise), or if the number of such shares of Common Stock shall be increased by a stock dividend or stock split, I-6 34 there shall be substituted for or added to each share of Common Stock theretofore available for purposes of this Plan, whether or not such shares are at the time subject to outstanding Awards, the number and kind of shares of stock or other securities or property into which each outstanding share of Common Stock shall be so changed or for which it shall be so exchanged, or to which each such share shall be entitled, as the case may be. Outstanding Awards may be amended as to price and other terms as the Committee, or the Subcommittee if applicable, may deem necessary or appropriate to reflect the foregoing events. If there shall be any other change in the number or kind of the outstanding shares of Common Stock, or of any stock or other securities or property into which such Common Stock shall have been changed, or for which it shall have been exchanged, or any other event affecting the capitalization of the Company (such as an extraordinary dividend), the Committee, or the Subcommittee if applicable, may, in its sole discretion, make such adjustment or adjustments in the number or kind or price or other terms of the shares then available for the purposes of this Plan, or in any Award theretofore granted or which may be granted under this Plan, as the Committee, or the Subcommittee if applicable, may deem necessary or appropriate. Any such adjustment shall be effective and binding for all purposes of this Plan. In making any substitution or adjustment pursuant to this Section 11, fractional shares may be ignored. The Committee shall have the power, in the event of any merger or consolidation of the Company with or into any other corporation, or the merger or consolidation of any other corporation with or into the Company, to amend all outstanding Awards to permit the exercise thereof in whole or in part at any time, from time to time, prior to the effective date of any such merger or consolidation (but not more than ten (10) years after the date of grant of any incentive stock option) and to terminate each such Award as of such effective date. 12. UNFUNDED PLAN The adoption of this Plan and any setting aside of amounts by the Company with which to discharge its obligations hereunder shall not be deemed to create a trust. The benefits provided under this Plan shall be a general, unsecured obligation of the Company payable solely from the general assets of the Company, and neither a Participant nor the Participant's beneficiaries or estate shall have any interest in any assets of the Company by virtue of this Plan. Nothing in this Section 12 shall be construed to prevent the Company from implementing or setting aside funds in a grantor trust subject to the claims of the Company's creditors. Legal and equitable title to any funds set aside, other than in any grantor trust subject to the claims of the Company's creditors, shall remain in the Company and any funds so set aside shall remain subject to the general creditors of the Company, present and future. Any liability of the Company to any Participant with respect to an Award shall be based solely upon contractual obligations created by this Plan, the Administrative Guidelines and the Award Agreement. 13. RIGHT OF DISCHARGE RESERVED Nothing in this Plan or in any Award shall confer upon any employee or other individual the right to continue in the employment or service of the Company or any Affiliate or affect any right that the Company or any Affiliate may have to terminate the employment or service of any such employee or other individual at any time for any reason. 14. RULE 16B-3 This Plan is intended to comply with the applicable provisions of Rule 16b-3 under the Exchange Act or any successor provision and to the extent any provision of this Plan or any action by the Board or the Committee, or the Subcommittee if applicable, fails to so comply, the provision or action shall be deemed to be amended in order to cause the provision or action to so comply. 15. GOVERNING LAW This Plan shall be governed by, construed and enforced in accordance with the laws of the State of Texas applicable to transactions that take place entirely within the State of Texas, and, where applicable, the laws of the United States. I-7 35 PROXY PANHANDLE EASTERN CORPORATION PLEASE MARK VOTE / / OR /X/ P O Box 1642 Houston, Texas 77251-1642 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS ON APRIL 27, 1994 As evidenced by the signature(s) on the reverse side hereof, the undersigned hereby appoints James B. Hipple, Carl B. King, and Robert W. Reed, and any one of them, as Proxies, each with full power of substitution, to represent and vote all shares of the Common Stock of Panhandle Eastern Corporation (the "Company") which the undersigned would be entitled to vote if personally present at the Annual Meeting of Stockholders of the Company to be held at the J.W. Marriott Hotel, 5150 Westheimer, Houston, Texas, on April 27, 1994, at 10:00 A.M., and at any adjournments thereof, with all power the undersigned would possess if personally present. This card also provides voting instructions for shares, if any, held in the Company's Dividend Reinvestment and Stock Purchase Plan and, if applicable, shares held in the various employee benefit plans. ITEM 1--ELECTION OF DULY NOMINATED DIRECTORS (THREE YEAR TERMS) Nominees. Paul M. Anderson, FOR ALL NOMINEES WITHHELD William T. Esrey, (EXCEPT AS MARKED (AS TO ALL Ann Maynard Gray, and TO THE CONTRARY NOMINEES) George L. Mazanec. AS PROVIDED) / / / /
Nominees. (To withhold authority to vote for any individual nomi- nee write that nominee's name in the space provided below) ------------------------------------------------------- ITEM 2--APPROVAL OF THE PANHANDLE EASTERN CORPORATION 1994 LONG TERM INCENTIVE PLAN FOR AGAINST ABSTAIN / / / / / / ITEM 3--ON ANY OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE MEETING. (CONTINUED AND TO BE SIGNED ON REVERSE SIDE) 36 - - - -------------------------------------------------------------------------------- THIS PROXY WILL BE VOTED AS DIRECTED, OR IF NO DIRECTION IS INDICATED, WILL BE VOTED "FOR" ITEMS 1 AND 2. Dated , 1994 ----------------------------- SIGNATURE(S) OF STOCKHOLDER(S) ----------------------------- SIGNATURE(S) OF STOCKHOLDER(S) When signing as attorney, executor, administrator, trustee, or guardian, or in other representative capacities, please give PLEASE SIGN EXACTLY AS YOUR NAME APPEARS ABOVE, MARK ANY ADDRESS your full title as such. A Proxy for shares CORRECTION, DATE, AND RETURN THIS PROXY USING THE ENCLOSED held in joint ownership should be signed by ENVELOPE. EACH owner.
- - - -------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----