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SECURITIES AND EXCHANGE COMMISSION
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WASHINGTON, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter Ended September 30, 1995
Commission File No. 1-2921
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PANHANDLE EASTERN PIPE LINE COMPANY
(Exact name of registrant as specified in its charter)
A Delaware Corporation
(State of Incorporation or Organization)
44-0382470
(IRS Employer Identification No.)
5400 Westheimer Court, P.O. Box 1642, Houston, Texas 77251-1642
(Address of principal executive offices, including zip code)
(713) 627-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes: X No:
The Registrant meets the conditions set forth in General Instructions
(H)(1)(a) and (b) of the Form 10-Q and is therefore filing this Form 10-Q with
the reduced disclosure format. Part I, Item 2 has been reduced and Part II,
Item 4 has been omitted in accordance with such Instruction H.
The Registrant's parent, Panhandle Eastern Corporation (File No. 1-8157),
files reports and proxy materials pursuant to the Securities Exchange Act of
1934.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
Class Outstanding at October 31, 1995
-------------------------- -------------------------------
Common Stock, no par value 1,000
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
Periods Ended September 30
Three Months Nine Months
---------------- ---------------
Millions 1995 1994 1995 1994
- -------- ------ ------ ------ ------
Operating Revenues
Transportation and storage
of natural gas $134.5 $128.2 $390.1 $397.3
Sales of natural gas - 47.7 - 163.5
Other 5.9 6.9 17.6 20.1
------ ------ ------ ------
Total (Note 2) 140.4 182.8 407.7 580.9
------ ------ ------ ------
Costs and Expenses
Natural gas purchased - 47.7 - 163.5
Operating and maintenance 49.2 54.7 148.2 149.5
General and administrative 17.5 21.3 53.1 63.9
Depreciation and amortization 14.6 10.7 44.0 37.5
Miscellaneous taxes 6.7 6.5 21.6 20.8
------ ------ ------ ------
Total 88.0 140.9 266.9 435.2
------ ------ ------ ------
Operating Income 52.4 41.9 140.8 145.7
------ ------ ------ ------
Other Income and Deductions
Equity in earnings of
unconsolidated affiliates 1.1 1.4 6.2 4.2
Interest income - parent - 12.2 0.3 29.7
Other income, net of deductions (1.4) 0.1 (2.8) 0.9
------ ------ ------ ------
Total (0.3) 13.7 3.7 34.8
------ ------ ------ ------
Gross Income 52.1 55.6 144.5 180.5
Interest Expense 7.3 12.7 31.5 38.0
------ ------ ------ ------
Income Before Income Tax 44.8 42.9 113.0 142.5
Income Tax 17.7 17.4 44.5 56.1
------ ------ ------ ------
NET INCOME $ 27.1 $ 25.5 $ 68.5 $ 86.4
====== ====== ====== ======
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, December 31,
Millions 1995 1994
- -------- ------------- ------------
Current Assets
Cash and cash equivalents $ 0.2 $ 0.4
Note receivable - parent - 8.0
Accounts receivable, net 25.8 38.9
Inventory and supplies 57.6 65.7
Current deferred income tax - 10.7
Other (Note 2) 58.3 52.9
--------- ---------
Total 141.9 176.6
--------- ---------
Investments
Advances and note receivable - parent 656.4 583.8
Other 48.8 45.1
--------- ---------
Total 705.2 628.9
--------- ---------
Plant, Property and Equipment
Original cost 2,767.5 2,742.8
Accumulated depreciation and amortization (1,814.2) (1,763.2)
--------- ---------
Net plant, property and equipment 953.3 979.6
--------- ---------
Deferred Charges (Notes 2 and 4) 161.3 198.5
--------- ---------
TOTAL ASSETS $ 1,961.7 $ 1,983.6
========= =========
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, December 31,
Millions 1995 1994
- -------- ------------- ------------
Current Liabilities
Long-term debt due within one year $ 129.5 $ -
Rate refund provisions (Note 2) 20.2 51.2
Accounts payable 20.6 29.8
Accrued income tax - parent 43.5 69.0
Other accrued taxes 31.3 19.2
Other (Note 4) 56.6 59.8
-------- --------
Total 301.7 229.0
-------- --------
Deferred Liabilities and Credits
Deferred income tax 160.7 191.9
Rate refund provisions (Note 2) 93.3 81.8
Other (Note 4) 131.2 139.2
-------- --------
Total 385.2 412.9
-------- --------
Long-term Debt 299.1 428.5
-------- --------
Commitments and Contingent Liabilities
(Notes 2, 3, 4 and 5)
Common Stockholder's Equity
Common stock, one thousand shares
authorized, issued and outstanding,
no par value 1.0 1.0
Paid-in capital 465.8 471.8
Retained earnings 508.9 440.4
-------- --------
Total 975.7 913.2
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,961.7 $1,983.6
======== ========
See accompanying notes to consolidated financial statements
Item 1. Financial Statements - Unaudited (Continued)
Panhandle Eastern Pipe Line Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30
-----------------
Millions 1995 1994
- -------- ------ -------
Operating Activities
Net income $ 68.5 $ 86.4
Adjustments to reconcile net income to operating
cash flows:
Depreciation and amortization 44.0 37.5
Deferred income tax expense (5.7) 2.0
Interest income - parent (0.3) (29.7)
Other non-cash items in net income (15.2) (18.4)
Net change in operating assets
and liabilities 2.6 83.0
------ -------
Net Cash Flows Provided by Operating Activities 93.9 160.8
------ -------
Investing Activities
Additions to plant, property and equipment (36.9) (69.0)
Net increase in advances/note receivable - parent (64.3) (153.9)
Property retirements and other 10.6 13.0
------ -------
Net Cash Flows Used in Investing Activities (90.6) (209.9)
------ -------
Financing Activities
Retirement of debt - (50.0)
Issuance of debt - 99.9
Other (3.5) (0.9)
------ -------
Net Cash Flows Provided by (Used in)
Financing Activities (3.5) 49.0
------ -------
Net Change in Cash
Decrease in cash and cash equivalents (0.2) (0.1)
Cash and cash equivalents, beginning of period 0.4 0.4
------ -------
Cash and Cash Equivalents, End of Period $ 0.2 $ 0.3
====== =======
Supplemental Disclosures
Cash paid for interest (net of amount capitalized) $ 32.7 $ 29.3
Cash paid for income tax (including
intercompany amounts) 70.4 83.1
See accompanying notes to consolidated financial statements
PANHANDLE EASTERN PIPE LINE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. References
Panhandle Eastern Pipe Line Company (PEPL) and its subsidiaries (the
Company), including Trunkline Gas Company (Trunkline), are involved in
the interstate transportation and storage of natural gas. PEPL is a
wholly-owned subsidiary of Panhandle Eastern Corporation (PEC). The
interstate gas transmission operations of PEPL and Trunkline are subject
to the rules, regulations and accounting procedures of the Federal
Energy Regulatory Commission (FERC). Certain amounts for the prior
periods have been reclassified in the consolidated financial statements
to conform to the current presentation.
2. Natural Gas Revenues and Regulatory Matters
When rate cases are pending final FERC approval, a portion of revenues
collected by PEPL and Trunkline is subject to possible refunds. The
Company has established adequate reserves where required for such cases.
The following is a summary of pending rate cases before FERC and certain
regulatory matters.
FERC Order 636 and the Termination of Merchant Services
During 1993, PEPL and Trunkline began providing restructured services
pursuant to FERC Order 636. This order, which is on appeal to the
courts, requires pipeline service restructuring that "unbundles" sales,
transportation and storage services. Order 636 provides for the use of
the straight fixed-variable (SFV) rate design, which assigns return on
equity, related taxes and other fixed costs to the reservation component
of rates. In addition, Order 636 allows pipelines to recover eligible
costs resulting from implementation of the order (transition costs).
At September 30, 1995, the Company had incurred approximately
$60 million of transition costs, including amounts that have been
recovered from customers. PEPL's transition cost recoveries, which are
subject to certain challenges that are pending before FERC, will occur
through 1998.
In the past, during the normal course of business, PEPL and Trunkline
entered into certain gas purchase contracts containing take-or-pay
provisions, which exposed the Company to financial risk. As of June 30,
1995, all such contracts had been terminated or assigned to third
parties. PEPL and Trunkline are currently collecting certain
take-or-pay settlement costs through volumetric surcharges with interest
through 1997.
The U.S. Department of the Interior announced its intention to seek
additional royalties from gas producers as a result of payments received
by such producers in connection with past take-or-pay settlements, and
buyouts and buydowns of gas sales contracts with natural gas pipelines.
PEPL and Trunkline, with respect to certain producer contract
settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The
potential liability of the producers to the government and of the
pipelines to the producers involves complex issues of law and fact which
are likely to take a substantial period of time to resolve. If PEPL and
Trunkline ultimately have to reimburse or indemnify the producers, PEPL
and Trunkline will file with FERC to recover a portion of these costs
from pipeline customers.
The Company believes that Order 636 transition cost issues and
take-or-pay settlement matters will not have a material adverse effect
on future consolidated results of operations or financial position.
Jurisdictional Transportation and Sales Rates
PEPL - On April 1, 1992 and November 1, 1992, PEPL placed into effect,
subject to refund, general rate increases incorporating the SFV rate
design. Hearings in these rate proceedings were completed in the first
half of 1994. The FERC issued an order on May 25, 1995 on the earlier
rate proceeding and PEPL has requested rehearing of certain matters in
that order. The latter rate proceeding is pending FERC review of the
initial Administrative Law Judge decision.
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 December 7, 1994, FERC
approved a settlement agreement with a majority of the customers which
resolves refund matters and terminates other actions for the period
these rates were effective for the settling parties.
Trunkline - On September 1, 1994, Trunkline placed into effect, subject
to refund, a general rate increase as a result of a filing made in
accordance with terms of a rate case settlement in 1993. An offer of
settlement, supported by Trunkline's customers, was approved by FERC on
July 6, 1995 and is currently pending rehearing.
Other - PEPL and Trunkline have, pursuant to FERC requirements,
requested FERC approval to record the impact of adopting Statement of
Financial Accounting Standards (Accounting Standard) No. 109,
"Accounting for Income Taxes," including the recognition of a portion
of the impact as an increase to stockholder's equity. The FERC
accounting branch has denied approval of these requests, pending future
rate proceedings, and PEPL and Trunkline have filed for rehearing. The
Company believes the ultimate resolution of this matter will not have
a material adverse effect on consolidated financial position.
3. Other Contingency
Under the terms of a settlement related to a transportation agreement
between PEPL and Northern Border Pipeline Company (Northern Border),
PEPL guarantees payment to Northern Border under a transportation
agreement by an affiliate of Pan-Alberta Gas Limited. The transpor-
tation agreement requires estimated total payments of $184 million for
the years 1995 through 2001. In the opinion of management, the
probability that PEPL will be required to perform under this guarantee
is remote.
4. Environmental Matters
The Company has identified environmental contamination at up to 53 sites
on the PEPL and Trunkline systems and is undertaking cleanup programs
at these sites. The contamination resulted from the past use of
lubricants containing PCBs (polychlorinated biphenyls) and the prior use
of wastewater collection facilities and other on-site disposal areas.
Soil and sediment testing, to date, has detected no significant off-site
contamination. The Company has communicated with the U.S. Environmental
Protection Agency and appropriate state regulatory agencies on these
matters. The environmental cleanup programs are expected to continue
until 2002.
At September 30, 1995 and December 31, 1994, the Company had
undiscounted liabilities recorded of $70.4 million and $70 million,
respectively, relating to PEPL and Trunkline PCB, wastewater and
disposal area cleanup programs and had regulatory assets recorded of
$80.3 million and $82.4 million, respectively, representing costs to be
recovered from customers.
The federal and state cleanup programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. The
Company believes the ultimate resolution of matters relating to the
cleanup programs will not have a material adverse effect on consolidated
results of operations or financial position.
5. 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.
6. Fair Presentation
The information as furnished reflects all normal recurring adjustments
that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position as of September 30,
1995, results of operations for the three and nine months ended
September 30, 1995 and 1994, and cash flows for the nine months ended
September 30, 1995 and 1994.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information is provided to facilitate increased understanding
of the 1995 and 1994 interim consolidated financial statements and
accompanying notes presented in Item 1. Because all of the outstanding
capital stock of PEPL is owned by PEC, the following discussion has been
prepared in accordance with the reduced disclosure format permitted by Form
10-Q for issuers that are wholly-owned subsidiaries of reporting companies
under the Securities Exchange Act of 1934.
OPERATING ENVIRONMENT
All traditional pipeline sales services ceased during the fourth quarter of
1994 when Trunkline's unbundled sales contracts expired. Pipeline earnings
have generally become more evenly distributed throughout the year as a result
of the SFV rate design required by Order 636. PEPL and Trunkline continue to
offer selective discounting to maximize revenues from existing capacity.
With implementation of Order 636 and the elimination of pipeline merchant
services, the Company's pipelines are incurring certain costs for the
transition. At September 30, 1995, the Company had incurred approximately
$60 million of transition costs, including amounts that have been recovered
from customers. PEPL's transition cost recoveries, which are subject to
certain challenges pending before FERC, will occur through 1998. The Company
believes that Order 636 transition cost issues will not have a material
adverse effect on future consolidated results of operations, financial
position or liquidity.
For information concerning certain other regulatory proceedings, environmental
matters and other contingencies, see Notes 2, 3, 4 and 5 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Consolidated net income for the nine months ended September 30, 1995 was
$68.5 million compared with $86.4 million for the same period in 1994. Total
natural gas volumes for the Company decreased 4% to 833 billion cubic feet
comparing the first nine months of 1995 with the same period of 1994,
attributable to warmer weather during the first half of 1995.
Operating Income
Consolidated operating income for the Company decreased $4.9 million, or 3%,
to $140.8 million in the first nine months of 1995 compared with the same
period in 1994.
PEPL - PEPL's operating income increased $0.4 million comparing the first nine
months of 1995 with the same period in 1994. PEPL achieved operating
efficiencies during the third quarter of 1995, which helped lower operating
expenses. The comparison for the nine-month period also includes the effects
of $21.6 million of income recorded in 1994 for the resolution of certain
regulatory matters, partially offset by $15.5 million recorded in the third
quarter of 1995 for similar regulatory resolutions.
Trunkline - Operating income for Trunkline decreased $5.7 million comparing
the first nine months of 1995 with the same period in 1994, primarily
resulting from $4 million of revenues recorded in 1994 related to a contract
settlement. Decreased transportation revenue due to lower volumes
attributable to warmer weather during the first half of 1995 was partially
offset by lower operating costs. Sales revenue and associated gas purchased
costs declined $163.5 million as a result of the elimination of Trunkline's
merchant function in late 1994.
Other Income and Deductions
The decrease of $31.1 million in net other income in the first nine months of
1995 compared with the same period in 1994 reflects lower interest income on
net advances receivable from PEC, as receivables for intercompany advances no
longer bear interest effective January 1, 1995.
Interest Expense
Interest expense in the first nine months of 1995 decreased $6.5 million
compared with the same period in 1994 primarily as a result of lower average
debt balances outstanding.
CAPITAL EXPENDITURES
Capital expenditures totaled $36.9 million in the first nine months of 1995,
compared with $69 million for the same period in 1994. Capital expenditures
for 1995 are expected to approximate $70 million, with market-expansion
expenditures expected to approximate 35% of the capital budget. The Company's
current estimate for 1996 capital expenditures is approximately $50 million.
Expenditures for 1995 are being funded, and expenditures for 1996 are expected
to be funded, by cash from operations, debt issuances and/or available credit
facilities.
ACCOUNTING STANDARDS
Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was issued in March 1995.
This standard addresses the accounting for the recognition and measurement of
impairment losses for long-lived assets, certain identifiable intangibles and
goodwill related to those assets to be held and used. This standard also
addresses the accounting for long-lived assets and certain identifiable
intangibles to be disposed of.
The Company does not expect Accounting Standard No. 121 to have a significant
effect on consolidated results of operations or financial position upon
adoption.
PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Notes 2, 4 and 5 of the Notes to Consolidated Financial Statements in
Part I of this Report which are incorporated herein by reference. See also
Item 3 of PEPL's Annual Report on Form 10-K for the year ended December 31,
1994.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned duly authorized officer and chief accounting officer.
PANHANDLE EASTERN PIPE LINE COMPANY
(Registrant)
/s/ Sandra P. Meyer
-----------------------------------
Sandra P. Meyer, Vice President
Date: November 13, 1995
0075rpt.cpz
5
0000076063
PANHANDLE EASTERN PIPE LINE COMPANY
1,000
9-MOS
DEC-31-1995
SEP-30-1995
200
0
25,800
0
57,600
141,900
2,767,500
1,814,200
1,961,700
301,700
299,100
1,000
0
0
974,700
1,961,700
0
407,700
0
148,200
65,600
0
31,500
113,000
44,500
68,500
0
0
0
68,500
0
0
Not meaningful since Panhandle Eastern Pipe Line Company is a wholly-owned
subsidiary.
