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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2004
COMMISSION FILE NO. 1-2921
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PANHANDLE EASTERN PIPE LINE COMPANY, LP
(Exact name of registrant as specified in its charter)
DELAWARE 44-0382470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5444 WESTHEIMER ROAD 77056-5306
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 989-7000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
- ------------------- -----------------------------------------
PEPL 08 New York Stock Exchange
PEPL 13 New York Stock Exchange
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
PANHANDLE EASTERN PIPE LINE COMPANY, LP
FORM 10-Q
SEPTEMBER 30, 2004
INDEX
Page(s)
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated statements of operations 2-3
Consolidated balance sheets 4-5
Consolidated statements of owner's equity and comprehensive income 6
Consolidated statements of cash flows 7
Notes to consolidated financial statements 8-18
Item 2. Management's Discussion and Analysis of Financial Condition and Results 19-30
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 6. Exhibits and Reports on Form 8-K 33-34
1
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------------ ------------------
OPERATING REVENUE
Transportation and storage of natural gas $ 91,800 $ 96,370
LNG terminalling revenue 15,004 15,577
Other revenue 2,514 2,271
--------- ---------
Total operating revenue 109,318 114,218
--------- ---------
OPERATING EXPENSES
Operation, maintenance and general 49,125 52,933
Depreciation and amortization 15,178 16,348
Taxes, other than on income 7,044 7,018
--------- ---------
Total operating expenses 71,347 76,299
--------- ---------
OPERATING INCOME 37,971 37,919
OTHER INCOME (EXPENSE)
Interest (expense), net (12,030) (11,274)
Other, net 446 6,607
--------- ---------
Total other income (expense) (11,584) (4,667)
--------- ---------
EARNINGS BEFORE INCOME TAXES 26,387 33,252
INCOME TAXES 10,331 13,131
--------- ---------
NET EARNINGS $ 16,056 $ 20,121
========= =========
See accompanying notes.
2
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
POST-ACQUISITION PRE-ACQUISITION
------------------------------------- ---------------
NINE MONTHS JUNE 12 - JANUARY 1 -
ENDED SEPTEMBER 30, SEPTEMBER 30, JUNE 11,
2004 2003 2003
-------------------- -------------- ---------------
OPERATING REVENUE
Transportation and storage of natural gas $ 305,564 $ 116,971 $ 196,408
LNG terminalling revenue 42,847 18,821 26,750
Other revenue 7,427 2,955 11,112
--------- --------- ---------
Total operating revenue 355,838 138,747 234,270
--------- --------- ---------
OPERATING EXPENSES
Operation, maintenance and general 151,434 63,069 90,800
Depreciation and amortization 45,201 19,512 23,110
Taxes, other than on income 21,244 8,613 12,478
--------- --------- ---------
Total operating expenses 217,879 91,194 126,388
--------- --------- ---------
OPERATING INCOME 137,959 47,553 107,882
OTHER INCOME (EXPENSE)
Interest (expense), net (36,209) (13,404) (35,416)
Other, net 1,686 6,672 6,077
--------- --------- ---------
Total other income (expense) (34,523) (6,732) (29,339)
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES 103,436 40,821 78,543
INCOME TAXES 40,179 16,088 30,532
--------- --------- ---------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 63,257 24,733 48,011
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX:
Asset retirement obligations, SFAS 143 - - 2,003
--------- --------- ---------
NET EARNINGS $ 63,257 $ 24,733 $ 50,014
========= ========= =========
See accompanying notes.
3
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Plant in service $1,931,643 $1,893,960
Construction work-in-progress 152,823 90,556
---------- ----------
2,084,466 1,984,516
Less accumulated depreciation and amortization 68,824 32,114
---------- ----------
Net property, plant and equipment 2,015,642 1,952,402
---------- ----------
INVESTMENT IN AFFILIATE 1,374 1,394
---------- ----------
CURRENT ASSETS
Cash and cash equivalents 23,372 16,810
Accounts receivable, less allowances
of $1,405 and $1,464, respectively 39,915 56,315
Accounts receivable - related parties 731 816
Gas imbalances - receivable 24,068 26,974
System gas and operating supplies 73,690 60,937
Deferred income taxes, net 10,935 7,731
Note receivable - Southern Union 98,870 87,350
Other 10,508 8,271
---------- ----------
Total current assets 282,089 265,204
---------- ----------
Intangibles, net 8,601 30,698
Restricted cash 1,500 1,500
Debt issuance cost, net 4,737 4,699
Non-current system gas 29,972 23,938
Other 2,358 1,708
---------- ----------
TOTAL ASSETS $2,346,273 $2,281,543
========== ==========
See accompanying notes.
4
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
OWNER'S EQUITY AND LIABILITIES
OWNER'S EQUITY
Partners' capital $ 777,730 $ -
Member's capital - 679,465
Accumulated other comprehensive income 545 1,372
Retained earnings - 51,452
Tax sharing note receivable - Southern Union (90,938) (85,471)
----------- -----------
Total owner's equity 687,337 646,818
Long-term debt 1,178,267 995,773
----------- -----------
Total capitalization 1,865,604 1,642,591
----------- -----------
CURRENT LIABILITIES
Current portion of long-term debt 12,021 209,671
Accounts payable 3,466 1,452
Accounts payable - overdrafts 10,730 6,607
Accounts payable - related parties 14,947 9,039
Gas imbalances - payable 60,501 66,049
Accrued taxes 19,250 9,979
Accrued interest 8,923 21,017
Other 72,703 65,230
----------- -----------
Total current liabilities 202,541 389,044
----------- -----------
Deferred income taxes, net 173,802 131,991
Post-retirement benefits 31,201 33,473
Other 73,125 84,444
----------- -----------
Commitments and contingencies
TOTAL OWNER'S EQUITY AND LIABILITIES $ 2,346,273 $ 2,281,543
=========== ===========
See accompanying notes.
5
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF OWNER'S EQUITY
(UNAUDITED)
(IN THOUSANDS)
Accumulated Other
Partners' Common Comprehensive Other Paid-in Member's
Capital Stock Income (Loss) Capital Capital
---------- ----------- ----------------- ------------- ----------
Balance January 1, 2003 (Pre-acquisition) $ - $ 1,000 $ (39,179) $ 1,280,794 $ -
Comprehensive income:
Net earnings - - - - -
Unrealized loss related to interest rate
swaps, net of tax - - (3,180) - -
----------- ----------- ----------- ----------- ----------
Comprehensive income - - (3,180) - -
----------- ----------- ----------- ----------- ----------
Return of capital - Centennial - - - (40,000) -
Return of capital - Guardian equity investment - - - (27,781) -
Capital contribution from CMS Gas Transmission - - - 15,149 -
Other - - - 194 -
----------- ----------- ----------- ----------- ----------
Balance June 11, 2003 (Acquisition date) $ - $ 1,000 $ (42,359) $ 1,228,356 $ -
----------- ----------- ----------- ----------- ----------
Acquisition adjustments to eliminate original balances - (1,000) 42,359 (1,228,356) -
Pushdown of purchase price and related costs - - - - 679,465
Tax sharing note receivable - Southern Union - - - - -
----------- ----------- ----------- ----------- ----------
Balance June 12, 2003 (Post-acquisition) - - - - 679,465
Comprehensive Income
Comprehensive income:
Net earnings - - - - -
Unrealized gain related to interest rate
swaps, net of tax - - 1,372 - -
----------- ----------- ----------- ----------- ----------
Comprehensive income - - 1,372 - -
----------- ----------- ----------- ----------- ----------
Balance December 31, 2003 (Post-acquisition) $ - $ - $ 1,372 $ - $ 679,465
Adjustment to pushdown of purchase price and related costs - - - - (16,444)
Tax sharing note receivable - Southern Union - - - - -
Comprehensive income:
Net earnings - - - - -
Unrealized gain related to interest rate
swaps, net of tax - - 405 - -
----------- ----------- ----------- ----------- ----------
Comprehensive income prior to change in legal
ownership structure (see Note I) - - 405 - -
----------- ----------- ----------- ----------- ----------
Change in legal ownership structure 761,674 - - - (663,021)
Comprehensive income:
Net earnings 16,056 - - - -
Unrealized loss related to interest rate
swaps, net of tax - - (1,232) - -
----------- ----------- ----------- ----------- ----------
Comprehensive income 16,056 - (1,232) - -
---------- ----------- ----------- ----------- ----------
Balance September 30, 2004 (Post-acquisition) $ 777,730 $ - $ 545 $ - $ -
=========== =========== =========== =========== ==========
Tax Sharing
Retained Note Note
Earnings Receivable- Southern
(Deficit) CMS Capital Union Total
----------- ------------ ---------- -----------
Balance January 1, 2003 (Pre-acquisition) $ (340,031) $ (150,000) $ - $ 752,584
Comprehensive income:
Net earnings 50,014 - - 50,014
Unrealized loss related to interest rate swaps, net of tax - - - (3,180)
----------- ------------ ----------- -----------
Comprehensive income 50,014 - - 46,834
----------- ------------ ----------- -----------
Return of capital - Centennial - - - (40,000)
Return of capital - Guardian equity investment - - - (27,781)
Capital contribution from CMS Gas Transmission - - - 15,149
Other - - - 194
----------- ------------ ----------- -----------
Balance June 11, 2003 (Acquisition date) $ (290,017) $ (150,000) $ - $ 746,980
----------- ------------ ----------- -----------
Acquisition adjustments to eliminate original balances 290,017 150,000 - (746,980)
Pushdown of purchase price and related costs - - - 679,465
Tax sharing note receivable - Southern Union - - (85,471) (85,471)
----------- ------------ ---------- -----------
Balance June 12, 2003 (Post-acquisition) - - (85,471) 593,994
Comprehensive Income
Comprehensive income:
Net earnings 51,452 - - 51,452
Unrealized gain related to interest rate swaps, net of tax - - - 1,372
----------- ------------ ----------- -----------
Comprehensive income 51,452 - - 52,824
----------- ------------ ----------- -----------
Balance December 31, 2003 (Post-acquisition) $ 51,452 $ - $ (85,471) $ 646,818
Adjustment to pushdown of purchase price and related costs - - - (16,444)
Tax sharing note receivable - Southern Union - - (5,467) (5,467)
Comprehensive income:
Net earnings 47,201 - - 47,201
Unrealized gain related to interest rate swaps, net of tax - - - 405
----------- ------------ ----------- -----------
Comprehensive income prior to change in legal
ownership structure 47,201 - - 47,606
----------- ------------ ----------- -----------
Change in legal ownership structure (see Note I) (98,653) - - -
Comprehensive income:
Net earnings - - - 16,056
Unrealized loss related to interest rate swaps, net of tax - - - (1,232)
----------- ------------ ----------- -----------
Comprehensive income - - - 14,824
----------- ------------ ----------- -----------
Balance September 30, 2004 (Post-acquisition) $ - $ - $ (90,938) $ 687,337
=========== ============ =========== ===========
See accompanying notes.
6
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
POST-ACQUISITION PRE-ACQUISITION
--------------------------------- ---------------
NINE MONTHS ENDED JUNE 12 - JANUARY 1 -
SEPTEMBER 30, SEPTEMBER 30, JUNE 11,
2004 2003 2003
----------------- ------------ ---------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net earnings $ 63,257 $ 24,733 $ 50,014
Adjustments to reconcile net earnings to net cash from operating
activities:
Depreciation and amortization 45,201 19,512 23,110
Cumulative effect of change in accounting principle - - (2,003)
Gain on extinguishment of debt (231) (6,123) -
Deferred income taxes, net 29,159 16,088 30,532
Debt premium amortization, net (4,429) (5,771) (201)
Changes in operating assets and liabilities:
Accounts receivable 16,485 10,465 219
Inventory (7,133) (21,457) 2,520
Gas imbalances - receivable 2,906 30,149 (30,952)
Other assets (7,243) 2,295 11,955
Payables 7,922 4,788 2,883
Accrued taxes 9,271 6,419 6,673
Interest accrued (12,094) (11,341) (4,768)
Gas imbalances - payable (5,548) (12,120) 27,527
Other liabilities (5,837) (6,056) (6,915)
--------- --------- ---------
Net cash flows from operating activities 131,686 51,581 110,594
--------- --------- ---------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Net increase in current Note receivable - Southern Union (11,520) (74,204) -
Net increase in current Note receivable - CMS Capital - - (62,570)
Capital and investment expenditures (109,509) (26,221) (29,339)
Sale (purchase) of system gas,net - 490 (2,724)
Sale of Centennial - - 40,000
Retirements and other (264) 496 (886)
--------- --------- ---------
Net cash flows used in investing activities (121,293) (99,439) (55,519)
--------- --------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Change in bank overdrafts 4,123 319 219
Debt issuance 200,000 550,000 10,000
Debt retirements (206,904) (542,129) (45,852)
Debt issuance costs (1,050) (3,995) -
Debt retirement costs - (1,595)
Return of capital - - (40,000)
--------- --------- ---------
Net cash flows from (used in) financing activities (3,831) 2,600 (75,633)
--------- --------- ---------
Change in cash and cash equivalents 6,562 (45,258) (20,558)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,810 59,987 80,545
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,372 $ 14,729 $ 59,987
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest (net of amounts capitalized) $ 63,405 $ 32,815 $ 38,187
Income taxes (net of refunds) 76 - 83
OTHER NONCASH INVESTING AND FINANCING ACTIVITIES WERE:
Return of capital - Guardian equity investment $ - $ - $ (27,781)
Property contributions received - - 15,149
See accompanying notes.
7
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Form 10-K of Panhandle
Eastern Pipe Line Company, LLC (now Panhandle Eastern Pipe Line Company, LP), a
Delaware limited partnership, including all of its subsidiaries (collectively,
Panhandle), for the year ended December 31, 2003. All dollar amounts in the
tables herein are stated in thousands, unless otherwise indicated. Certain prior
period amounts have been reclassified to conform with the current period
presentation, which includes a reclassification on the Consolidated Statements
of Cash Flows of $62,570,000 and $74,204,000 of net increases in current Notes
receivable from affiliates for the 2003 periods from January 1-June 11 and June
12-September 30, respectively, from Financing Activities to Investing
Activities.
These interim financial statements are unaudited, but in management's opinion,
reflect all adjustments necessary (including both normal recurring as well as
non-recurring) for a fair presentation of financial position, results of
operations and cash flows for the periods presented. Because of the seasonal
nature of the operations of Panhandle, the results as presented for any interim
period are not necessarily indicative of results to be achieved for the fiscal
year.
I CORPORATE STRUCTURE
Panhandle became an indirect wholly-owned subsidiary of Southern Union Company
(Southern Union Company and together with its subsidiaries, Southern Union) upon
Southern Union's June 11, 2003 acquisition of Panhandle (Panhandle Acquisition)
from CMS Gas Transmission Company (CMS Gas Transmission), a subsidiary of CMS
Energy Corporation (together with CMS Gas Transmission, CMS). Panhandle is
primarily engaged in the interstate transportation and storage of natural gas
and also provides liquefied natural gas (LNG) terminalling and regasification
services and is subject to the rules and regulations of the Federal Energy
Regulatory Commission (FERC). The Panhandle entities include Panhandle Eastern
Pipe Line Company, LP (Panhandle Eastern Pipe Line), Trunkline Gas Company, LLC
(Trunkline) a wholly-owned subsidiary of Panhandle Eastern Pipe Line, Sea Robin
Pipeline Company (Sea Robin), a Louisiana joint venture and an indirect
wholly-owned subsidiary of Panhandle Eastern Pipe Line, Trunkline LNG Company,
LLC (Trunkline LNG) which is a wholly-owned subsidiary of Trunkline LNG
Holdings, LLC (LNG Holdings), an indirect wholly-owned subsidiary of Panhandle
Eastern Pipe Line and Pan Gas Storage, LLC (d.b.a. Southwest Gas Storage), a
wholly-owned subsidiary of Panhandle Eastern Pipe Line. Collectively, the
pipeline assets include more than 10,000 miles of interstate pipelines that
transport natural gas from the Gulf of Mexico, South Texas and the Panhandle
regions of Texas and Oklahoma to major U.S. markets in the Midwest and Great
Lakes region. The pipelines have a combined peak day delivery capacity of 5.4
billion cubic feet (Bcf) per day and 72 Bcf of owned underground storage
capacity. Trunkline LNG, located on Louisiana's Gulf Coast, operates one of the
largest LNG import terminals in North America, based on current send out
capacity, and has 6.3 Bcf of above ground LNG storage capacity.
On June 11, 2003, Southern Union acquired Panhandle from CMS for approximately
$581,729,000 in cash and 3,000,000 shares of Southern Union common stock (before
adjustment for subsequent stock dividends) valued at approximately $48,900,000
based on market prices at closing of the Panhandle Acquisition and in connection
therewith incurred transaction costs of approximately $31,922,000. At the time
of the acquisition, Panhandle had approximately $1,157,228,000 of debt principal
outstanding that it retained. Southern Union funded the cash portion of the
acquisition with approximately $437,000,000 in cash proceeds it received for the
January 1, 2003 sale of its Texas operations, approximately $121,250,000 of the
net proceeds it received from concurrent common stock and equity units offerings
and with working capital available to Southern Union. Southern Union structured
the Panhandle Acquisition and the sale of its Texas operations to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. Panhandle Eastern Pipe Line and five of its subsidiaries,
as well as the Southern Union subsidiary that became Panhandle's direct parent
upon the acquisition, converted from Delaware corporations to Delaware limited
liability companies in June 2003. On June 29, 2004, Panhandle Eastern Pipe Line
filed with the state of Delaware and converted from a limited liability company
to a limited partnership. Pursuant to the conversion, all rights and liabilities
of Panhandle Eastern Pipe Line vested in Panhandle Eastern Pipe Line Company,
LP, a Delaware limited partnership, together with its subsidiaries. As a result
of the conversion, retained earnings and member's capital were reclassified as
partners' capital. There was no effect on Panhandle's results of operations
(including income taxes), cash flows or financial
8
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
position as a result of this conversion. Southern Union Panhandle, LLC serves as
the general partner of Panhandle and owns a one percent general partner
interest. Southern Union Company holds a ninety-nine percent limited partner
interest in Panhandle.
Under the terms of the Panhandle sale agreement, CMS retained Panhandle's
ownership interests in and obligations associated with the Centennial Pipeline,
LLC (Centennial) and Guardian Pipeline, LLC (Guardian) pipeline projects, as
well as certain of Panhandle's net deferred tax assets of $28,124,000, all tax
liabilities of $17,405,000, net pension liabilities recorded of $42,965,000,
certain other net postretirement liabilities recorded of $16,351,000 and other
net liabilities of $2,214,000. CMS also retained financial responsibility for
all existing stock options. Panhandle disposed of its interest in Centennial and
Guardian and certain cash collateral related to Guardian was transferred to CMS.
Such disposition to CMS via sale to its partners was recorded at Panhandle's net
book value with no gain or loss recognized (See Note IV -- Related Party
Transactions). The Note receivable from CMS Capital Corp. (CMS Capital), a
subsidiary of CMS was eliminated in the sale as the purchase by Southern Union
from CMS included the offsetting Note payable of CMS Capital and thus the note
was eliminated in pushdown accounting and subsequently extinguished (see Note IV
- -- Related Party Transactions). On March 1, 2003, certain assets previously held
by CMS with a net book value of $15,149,000 were contributed to Panhandle by CMS
and were included in the Southern Union purchase.
The Panhandle Acquisition was accounted for using the purchase method of
accounting in accordance with accounting principles generally accepted in the
United States of America with Panhandle allocating the purchase price paid by
Southern Union to Panhandle's net assets as of the acquisition date. The
Panhandle assets acquired and liabilities assumed have been recorded based on
their estimated fair value as of the acquisition date based on the results of
outside appraisals. Accordingly, the post-acquisition financial statements
reflect a new basis of accounting and pre-acquisition period and
post-acquisition period financial results (separated by a heavy black line) are
presented but are not comparable. During the six month period ended June 30,
2004, Southern Union's estimated deferred state income tax liability incurred as
a result of the Panhandle Acquisition was reduced by $17,918,000, which resulted
in corresponding reductions in Partners' capital, Intangibles, net, and Deferred
income taxes, net totaling $17,918,000, $22,066,000 and $4,148,000,
respectively. Partners' capital was increased by $1,474,000 due to additional
transaction costs recorded which also increased Plant in service. Based on the
final valuation, certain contingent liabilities were reduced by $9,930,000 with
a corresponding decrease to Plant in service.
The following table summarizes the final adjusted purchase accounting-based
changes in owner's equity associated with the acquisition as of June 11, 2003
including details of the fair value adjustments to the pre-acquisition carrying
amounts of the net assets acquired.
Owner's Equity, pre-acquisition $ 746,980
Fair value adjustments to pre-acquisition net assets:
Current assets, excluding system gas 1,177
System gas 14,055
Property, plant and equipment 230,065
Intangibles 9,503
Goodwill (112,582)
Deferred debt costs (14,469)
Other assets (352)
Current liabilities (863)
Long-term debt (63,764)
Deferred credits and other liabilities (12,614)
-------
Net fair value adjustments 50,156
Net liabilities retained by CMS 50,811
Elimination of CMS Capital note receivable (184,926)
---------
Subtotal 663,021
Tax sharing note receivable (90,938)
---------
Adjusted Owner's Equity, post-acquisition $ 572,083
=========
9
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
II ACCOUNTING STANDARDS
FASB INTERPRETATION NO. 46R, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" (FIN
NO. 46R): Issued by the Financial Accounting Standards Board (FASB) in December
2003, the interpretation identifies a variable interest entity as an entity
whose equity owners do not have sufficient equity at risk and do not have
substantive voting rights. The interpretation is effective for special-purpose
entities for periods ending after December 15, 2003 and for all other types of
variable interest entities for periods ending after March 15, 2004. This
standard requires a company to consolidate a variable interest entity if it is
allocated a majority of the entity's losses and/or returns, including fees paid
by the entity. Panhandle has not identified any material variable interest
entities or interests in variable interest entities for which the provisions of
FIN No. 46R would require a change in Panhandle's current accounting for such
interests.
EITF 01-8, "DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE" (EITF 01-8): In
May 2003, the Emerging Issues Task Force (EITF) of the FASB reached a consensus
on EITF 01-8 that outlines certain criteria for determining when a contract or
portion thereof should be accounted for as a lease within the scope of SFAS No.
13, "Accounting for Leases". Because of certain contractual changes entered into
during January 2004 between Trunkline LNG and BG LNG Services, Inc., a
subsidiary of BG Group of the United Kingdom (BG LNG Services), regarding LNG
services at the Lake Charles facility, the BG LNG Services contract was required
to be reassessed under the provisions of EITF 01-8 and was determined to contain
an operating lease. The impact of this accounting treatment did not have an
impact on Panhandle's financial condition or results of operations.
FASB STATEMENT NO.132R "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, AND 106":
Issued by the FASB in December 2003, the Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It
retains the disclosure requirements contained in FASB Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
it replaces, and requires additional disclosure about the assets, obligations,
cash flows and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The Statement does not change the
measurement or recognition of those plans required by FASB Statements No. 87,
"Employers' Accounting for Pensions", No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". The Statement is effective for fiscal years
ending after December 15, 2003. The interim-period disclosures required by the
Statement are effective for interim periods beginning after December 15, 2003
(see Note VII -- Employee Benefits).
III REGULATORY MATTERS
In conjunction with a FERC Order issued in September 1997, certain natural gas
producers were required to refund previously collected Kansas ad valorem taxes
to interstate natural gas pipelines. These pipelines were ordered to refund
these amounts to their customers. All payments were to be made in compliance
with prescribed FERC requirements. In June 2001, Panhandle filed a proposed
settlement of these proceedings which all the customers and most of the
producers supported. The settlement provided for the producers to refund and the
customers to accept a reduction from the amounts originally billed to the
producers. In September 2001, the FERC approved the settlement without
modification and the settlement became effective on October 15, 2001.
Settlements were reached with all of the non-settling producers in November
2003, except for Pioneer Natural Resources, Inc. (Pioneer). A FERC hearing to
resolve the outstanding issues with Pioneer was conducted on October 16, 2003.
FERC orders which established Pioneer's refund amount were issued on June 2,
2004 and October 12, 2004. On January 29, 2004 and February 13, 2004, the
Commission approved settlements with the remaining non-settling producers. At
September 30, 2004 and December 31, 2003, accounts receivable included $266,000
and $3,017,000, respectively, for Kansas ad valorem tax collections due from
natural gas producers. At September 30, 2004 and December 31, 2003, other
current liabilities included $472,000 and $8,556,000, respectively, for Kansas
ad valorem tax collections due to customers.
In December 2002, FERC approved a Trunkline LNG certificate application to
expand the Lake Charles facility to approximately 1.2 Bcf per day of sustainable
send out capacity versus the current sustainable send out capacity of .63 Bcf
per day and increase terminal storage capacity to 9 Bcf from the current 6.3
Bcf. BG LNG Services has
10
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
contract rights for the .57 Bcf per day of additional capacity. Construction on
the Trunkline LNG expansion project (Phase I) commenced in September 2003 and is
expected to be completed at an estimated cost totaling $137 million, plus
capitalized interest, by the end of 2005. On September 17, 2004, as modified on
September 23, 2004, FERC approved Trunkline LNG's further incremental LNG
expansion project (Phase II). Phase II is estimated to cost approximately $77
million, plus capitalized interest, and would increase the LNG terminal
sustainable send out capacity to 1.8 Bcf per day. Phase II has an expected
in-service date of mid-2006. BG LNG Services has contracted for all the proposed
additional capacity, subject to Trunkline LNG achieving certain construction
milestones at this facility. Approximately $107 million of costs are included in
the line item Construction work-in-progress for the expansion projects through
September 30, 2004.
In February 2004, Trunkline filed an application with the FERC to request
approval of a 30-inch diameter, approximately 23-mile natural gas pipeline loop
from the LNG terminal. Trunkline's filing was approved on September 17, 2004, as
modified on September 23, 2004. The estimated cost of this pipeline expansion is
approximately $41 million, plus capitalized interest. The pipeline creates
additional transport capacity in association with the Trunkline LNG expansion
and also includes new and expanded delivery points with major interstate
pipelines. Approximately $5 million of costs are included in the line item
Construction work-in-progress for this project through September 30, 2004.
IV RELATED PARTY TRANSACTIONS
Panhandle had a number of significant transactions with former related parties
during the pre-acquisition period. Revenue transactions, primarily for the
transportation of natural gas for Consumers Energy Company and other CMS
affiliates which were related parties until June 12, 2003, were based on
regulated prices, market prices or competitive bidding. Panhandle will continue
transporting gas for these former related parties under the contracts currently
in effect, and thereafter if contracts are renewed. Panhandle has transportation
and storage revenues with Missouri Gas Energy, a Southern Union division, which
account for less than one percent of annual consolidated revenues. These
deliveries are at previously contracted rates.
POST-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
---------------------- -------------------------------- ---------------
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 12 - JANUARY 1-
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 11,
RELATED PARTY TRANSACTIONS 2004 2003 2004 2003 2003
- -------------------------- ------- ------- ----------------- ------------- ---------------
Transportation and storage
of natural gas $ 974 $ 1,091 $ 2,906 $ 1,293 $28,094
Other operating revenues 54 54 154 67 410
Operation and maintenance
Management & royalty fees 2,732 2,939 8,973 2,939 -
Other expenses (a) 4,948 4,171 13,586 4,872 9,727
Other income (expense), net 468 54 1,166 54 6,162
(a) Includes corporate allocations and insurance paid by parent for 2004 and
2003. Benefit plan costs are included in the pre-acquisition period of
2003.
Prior to June 12, 2003, related party expenses included payments for services
provided by former affiliates, as well as allocated CMS benefit plan costs.
Panhandle, through CMS, provided retirement benefits under a number of different
plans, including certain health care and life insurance under a postretirement
benefit plan other than pensions (OPEB), benefits to certain management
employees under a supplemental executive retirement plan, and benefits to
substantially all its employees under a trusteed, non-contributory, defined
benefit pension plan and a defined contribution 401(k) plan. Effective January
1, 2003, and until the sale of Panhandle on June 11, 2003, CMS ceased charging
Panhandle management and royalty fees. Subsequent to June 11, 2003, related
party expenses primarily include payments for services provided by Southern
Union, including management and royalty fees implemented by Southern Union.
11
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in Other income (expense), net, is interest income of $6,204,000 for
the period January 1 through June 11, 2003 related to interest on the Note
receivable - CMS Capital. The Note receivable - CMS Capital of $184,926,000 as
of the acquisition date was eliminated with the acquisition of Panhandle by
Southern Union (see Note I -- Corporate Structure). The $150,000,000 portion of
the note classified as a reduction to equity as of the acquisition date was also
eliminated.
Pursuant to a demand note with Southern Union under a cash management program,
Panhandle has loaned excess cash, net of repayments, totaling $98,870,000 to
Southern Union since the Panhandle Acquisition; net repayments of $87,015,000
and net loans of $11,520,000 were recorded during the three and nine month
periods ended September 30, 2004, respectively. Panhandle is credited with
interest on the note at a one month London InterBank Offered Rate (LIBOR).
Included in Other income (expense), net is interest income of $468,000 for the
three month period ended September 30, 2004 and $1,166,000 for the nine month
period ended September 30, 2004 related to interest on the Note receivable -
Southern Union. Panhandle expects to draw down on the note over the next twelve
months to fund capital expenditures in excess of operating cash flows and has
thus reflected the note receivable from Southern Union as a current asset.
A summary of certain balances due from or (due to) related parties included in
the Consolidated Balance Sheets for the periods presented is as follows:
SEPTEMBER 30, DECEMBER 31,
RELATED PARTY BALANCES 2004 2003
- ---------------------- ------------- ------------
Note receivable - Southern Union $ 98,870 $ 87,350
Accounts receivable 731 816
Accounts payable (14,947) (9,039)
Owner's equity - Tax sharing note receivable - Southern Union 90,938 85,471
Deferred tax - receivable - 8,684
The Panhandle Acquisition by Southern Union was treated as an asset acquisition
for tax purposes pursuant to a Section 338(h)(10) election of the Internal
Revenue Code of 1986, as amended, which eliminated Panhandle's deferred tax
assets and liabilities and gave rise to a new tax basis in Panhandle's assets
equal to their purchase price. The Panhandle assets acquired and liabilities
assumed have been recorded based on their estimated fair value as of the
acquisition date based on the results of outside appraisals. Southern Union
structured the Panhandle Acquisition in a manner intended to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. For tax purposes, the Panhandle assets that were part of
the exchange were recorded at the tax basis of the Southern Union assets for
which they were exchanged. The resulting transaction generated a deferred tax
liability originally estimated at $85 million, with a final calculated amount of
approximately $91 million at the acquisition date and a corresponding note
receivable from Southern Union reflected as a reduction to owner's equity on
Panhandle's Consolidated Balance Sheet. Repayment of the note receivable from
Southern Union is limited to actual tax liabilities otherwise payable by
Panhandle pursuant to the tax sharing agreement with Southern Union.
V ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
Panhandle follows SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, to account for derivative and hedging
activities. Panhandle utilizes interest-rate related derivative instruments to
manage its exposure on its debt instruments and does not enter into derivative
instruments for any purpose other than hedging purposes. All derivatives are
recognized on the balance sheet at their fair value. On the date the derivative
contract is entered into, Panhandle designates the derivative as either: (i) a
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment (fair value hedge) or (ii) a hedge of a forecasted transaction
or the variability of cash flows to be received or paid in conjunction with a
recognized asset or liability (cash flow hedge).
12
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest rate swaps are used to reduce interest rate risks and to manage
interest expense. By entering into these agreements, Panhandle converts
floating-rate debt into fixed-rate debt or converts fixed-rate debt to floating.
Interest differentials paid or received under the swap agreements are reflected
as an adjustment to interest expense. These interest rate swaps are financial
derivative instruments that qualify for hedge treatment. For derivatives treated
as hedges of future cash flows, the effective portion of changes in fair value
is recorded in other comprehensive income until the related hedge items impact
earnings. Any ineffective portion of a hedge is reported in earnings
immediately. For derivatives treated as a hedge of the fair value of a debt
instrument, the effective portion of changes in fair value are recorded as an
adjustment to the hedged debt. The ineffective portion of a fair value hedge is
recognized in earnings if the short cut method of assessing effectiveness is not
used. Upon termination of a fair value hedge of a debt instrument, the resulting
gain or loss is amortized to income through the maturity date of the debt
instrument.
Panhandle's subsidiary LNG Holdings is party to interest rate swap agreements
with an aggregate notional amount of $195,902,000 as of September 30, 2004 that
fix the interest rate applicable to floating rate long-term debt and which
qualify for hedge accounting. For the nine month periods ended September 30,
2004 and 2003, the amount of swap ineffectiveness was not significant. As of
September 30, 2004, floating rate LIBOR based interest payments were exchanged
for weighted average fixed rate interest payments of 5.88%, which does not
include the spread on the underlying variable debt rate of 1.625%. As such,
payments or receipts on interest rate swap agreements, in excess of the
liability recorded, are recognized as adjustments to interest expense. As of
September 30, 2004 and December 31, 2003, the fair value liability position of
the swaps was $14,299,000 and $19,806,000, respectively. Current market pricing
models were used to estimate fair values of interest rate swap agreements.
In March 2004, Panhandle entered into interest rate swaps to hedge the risk
associated with the fair value of its $200 million 2.75% Senior Notes (see Note
VI -- Debt). These swaps are designated as fair value hedges and qualify for the
short cut method under SFAS No. 133. Under the swap agreements Panhandle will
receive fixed interest payments at a rate of 2.75% and will make floating
interest payments based on the six-month LIBOR. No ineffectiveness is assumed in
the hedging relationship between the debt instrument and the interest rate swap.
As of September 30, 2004, these swaps have an average interest rate of 2.07%.
13
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VI DEBT
SEPTEMBER 30, DECEMBER 31,
LONG-TERM DEBT YEAR DUE 2004 2003
- -------------- -------- ------------- ------------
6.125% Senior Notes 2004 $ - $ 146,080
7.875% Senior Notes 2004 - 52,455
6.50% Senior Notes 2009 60,623 60,623
8.25% Senior Notes 2010 40,500 40,500
7.00% Senior Notes 2029 66,305 66,305
4.80% Senior Notes 2008 300,000 300,000
6.05% Senior Notes 2013 250,000 250,000
2.75% Senior Notes 2007 200,000 -
LNG bank loans (floating rate) 2007 261,200 269,570
----------- -----------
Total debt outstanding 1,178,628 1,185,533
Current portion of long-term debt (12,021) (209,671)
Interest rate swaps (2.75% Senior Notes) (3,633) -
Unamortized debt premium, net 15,293 19,911
----------- -----------
Total long-term debt $ 1,178,267 $ 995,773
=========== ===========
Panhandle has $1,190,288,000 of debt recorded at September 30, 2004, of which
$12,021,000 is current. Debt of $929,088,000, including net premiums of
$15,293,000 and unamortized interest rate swaps of $3,633,000, is at fixed rates
ranging from 2.75 percent to 8.25 percent, with $261,200,000 of variable rate
bank loans having an average rate of 3.1 percent and 2.9 percent for the three
and nine month periods ended September 30, 2004, respectively. The variable rate
loans are secured by the Trunkline LNG facilities. See Note V -- Accounting for
Derivatives and Hedging Activities for discussion of interest rate swap
agreements associated with outstanding debt.
Panhandle's notes are subject to certain requirements such as the maintenance of
a fixed charge coverage ratio and a leverage ratio which restrict certain
payments if not maintained, and limitations on liens. At September 30, 2004,
Panhandle, based on the currently most restrictive debt covenant requirements,
was subject to a $294,450,000 limitation on additional restricted payments
including dividends and loans to affiliates, and a limitation of $321,362,000 of
additional secured indebtedness or other defined liens based on a limitation on
liens covenant.
At September 30, 2004, Panhandle had scheduled debt payments of $2,767,000,
$12,548,000, $13,969,000, $431,916,000, $300,000,000 and $417,428,000 for the
remainder of 2004 and for the years 2005 through 2008 and thereafter,
respectively.
On March 12, 2004, Panhandle issued $200,000,000 of 2.75% Senior Notes due 2007,
Series A in reliance on an exemption from the registration requirements of the
Securities Act of 1933 for offers and sales of securities not involving a public
offering or sale, in order to refinance Panhandle's maturing debt. Panhandle
used a portion of the net proceeds to retire $146,080,000 of 6.125% Senior Notes
which matured on March 15, 2004, as well as for other general corporate
purposes. A portion of the remaining net proceeds was also used to pay off the
$52,455,000 of 7.875% Senior Note which matured on August 15, 2004. Panhandle
filed a registration statement on May 12, 2004 to initiate an exchange of the
unregistered 2.75% Senior Notes due 2007, Series A for substantially identical
securities registered under the Securities Act of 1933. Such exchange was
completed June 25, 2004.
14
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VII EMPLOYEE BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST
Net periodic benefit costs for the three and nine month periods ended September
30, 2004 for OPEB includes the following components:
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
OPEB 2004 2003 2004
- ---- ------------- ------------- -------------
Service cost $ 641 $ 633 $ 1,761
Interest cost 784 692 2,153
Expected return on plan assets (175) - (327)
Amortization of prior service cost - - -
Amortization of transition obligation - - -
Recognized actuarial gain (loss) - - -
Settlement recognition - - -
------- ------- -------
Net periodic benefit cost $ 1,250 $ 1,325 $ 3,587
======= ======= =======
For the three and nine month periods ended September 30, 2004, approximately
$1,953,000 and $5,859,000 in contributions have been made to the OPEB plan,
respectively. Panhandle presently anticipates contributing an additional
$1,953,000 to fund the OPEB plan during the remainder of 2004 for a total of
$7,812,000 for the calendar year.
The OPEB plan information for periods prior to June 12, 2003, which has been
previously disclosed, is not presented because the plan is for CMS and its
affiliates (including Panhandle) of which Panhandle received an allocation, and
the assets and costs for Panhandle are not distinguishable from the OPEB plan
information, therefore, the presentation would not be meaningful. For the period
January 1 through June 11, 2003, Panhandle contributions to the CMS OPEB plan
totaled $3,498,000.
Following the June 11, 2003 acquisition by Southern Union, Panhandle continues
to provide certain retiree benefits through employer contributions to a
qualified defined contribution plan, which contributions range from four to six
percent of the participating employee's salary based on the participating
employee's age and years of service. During the three and nine month periods
ended September 30, 2004 approximately $1 million and $3 million, respectively,
was recorded as expense associated with Panhandle contributions to the qualified
defined contribution plan. Approximately $1 million was recorded as expense for
the three month period ended September 30, 2003. Panhandle, through its former
parent company, participated in the CMS pension plan, a defined benefit plan.
The total pension plan expenses, which were allocated to Panhandle by CMS, were
approximately $3 million for the period January 1 through June 11, 2003. There
were no contributions made by Panhandle to CMS on behalf of the CMS pension plan
for these periods.
15
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VIII COMPREHENSIVE INCOME
The table below provides an overview of comprehensive income for the periods
indicated.
POST-ACQUISITION POST-ACQUISITION PRE-ACQUISITION
---------------- ----------------------------------- ---------------
THREE MONTHS NINE MONTHS ENDED JUNE 12 - JANUARY 1 -
ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, JUNE 11,
2004 2003 2004 2003 2003
--------------------------- ---------------- ------------- ---------------
Net earnings $ 16,056 $ 20,121 $ 63,257 $ 24,733 $ 50,014
Unrealized gain (loss) related to
interest rate swaps, net of tax (1,232) 789 (827) 1,795 (3,180)
-------- -------- -------- -------- --------
Total comprehensive income $ 14,824 $ 20,910 $ 62,430 $ 26,528 $ 46,834
======== ======== ======== ======== ========
Accumulated other comprehensive income reflected in the Consolidated Balance
Sheet at September 30, 2004, includes unrealized gains related to interest rate
swaps.
IX COMMITMENTS AND CONTINGENCIES
LITIGATION. Panhandle is involved in legal, tax and regulatory proceedings
before various courts, regulatory commissions and governmental agencies
regarding matters arising in the ordinary course of business, some of which
involve substantial amounts. Where appropriate, Panhandle has made accruals in
accordance with SFAS No. 5 in order to provide for such matters. Management
believes the final disposition of these proceedings will not have a material
adverse effect on Panhandle's consolidated results of operations or financial
position.
Hope Land Mineral Corporation contends that it owns the storage rights to
property that contains a portion of Panhandle's Howell storage field. During
June 2003, the Michigan Court of Appeals reversed the trial court's previous
order, which had granted summary judgment in favor of Panhandle and dismissed
the case. Panhandle filed an appeal of the Court of Appeals order with the
Michigan Supreme Court which was denied in December of 2003. The trial has been
transferred back to the trial court for a trial on the merits. The case is
presently expected to begin in 2005. Panhandle does not believe the outcome of
this case will have a material adverse effect on Panhandle's consolidated
results of operations or financial position.
ENVIRONMENTAL MATTERS. Panhandle's interstate natural gas transportation
operations are subject to federal, state and local regulations regarding water
quality, hazardous and solid waste disposal and other environmental matters.
Panhandle has identified environmental contamination at certain sites on its gas
transmission systems and has undertaken cleanup programs at these sites. The
contamination resulted from the past use of lubricants containing
polychlorinated bi-phenyls (PCBs) in compressed air systems; the past use of
paints containing PCBs; and the prior use of wastewater collection facilities
and other on-site disposal areas. Panhandle has developed and is implementing a
program to remediate such contamination in accordance with federal, state and
local regulations. Some remediation is being performed by former Panhandle
affiliates in accordance with indemnity agreements that also indemnify against
certain future environmental litigation and claims.
As part of the cleanup program resulting from contamination due to the use of
lubricants containing PCBs in compressed air systems, Panhandle Eastern Pipe
Line and Trunkline have identified PCB levels above acceptable levels inside the
auxiliary buildings that house the air compressor equipment at thirty-three
compressor station sites. Panhandle has developed and is implementing a United
States Environmental Protection Agency (EPA) approved process to remediate this
PCB contamination in accordance with federal, state and local regulations.
Thirteen sites have been decontaminated per the EPA approved process as
prescribed in the EPA regulations.
16
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At some locations, PCBs have been identified in paint that was applied many
years ago. In accordance with EPA regulations, Panhandle has implemented a
program to remediate sites where such issues are identified during painting
activities. If PCBs are identified above acceptable levels, the paint is removed
and disposed of in an EPA approved manner.
The Illinois Environmental Protection Agency (Illinois EPA) notified Panhandle
Eastern Pipe Line and Trunkline, together with other non-affiliated parties, of
contamination at three former waste oil disposal sites in Illinois. Panhandle
Eastern Pipe Line's and Trunkline's estimated share for the costs of assessment
and remediation of the sites, based on the volume of waste sent to the
facilities, is approximately 17 percent. Panhandle and 21 other non-affiliated
parties conducted an initial voluntary investigation of the Pierce Oil
Springfield site, one of the three sites. Based on the information found during
the initial investigation, Panhandle and the 21 other non-affiliated parties
have decided to further delineate the extent of contamination by authorizing a
Phase II investigation at this site. Once data from the Phase II investigation
is evaluated, Panhandle and the 21 other non-affiliated parties will determine
what additional actions will be taken. In addition, Illinois EPA has informally
indicated that it has referred the Pierce Oil Springfield site to the EPA so
that environmental contamination present at the site can be addressed through
the federal Superfund program. No formal notice has yet been received from
either agency concerning the referral. However, the EPA is expected to issue
special notice letters in 2004 and has begun the process of listing the site on
the National Priority List. Panhandle and three of the other non-affiliated
parties associated with the Pierce Oil Springfield site met with the EPA and
Illinois EPA regarding this issue. Panhandle was given no indication as to when
the listing process was to be completed.
Panhandle expects these cleanup programs for all of the above matters to
continue for several years and has estimated its share of remaining cleanup
costs to range from $8,835,000 to $16,795,000. At September 30, 2004, Panhandle
has related accruals totaling approximately $13,507,000, of which $3,474,000 is
included in Other current liabilities for the estimated current amounts and
$10,033,000 is included in Other non-current liabilities on the Consolidated
Balance Sheet. At December 31, 2003, Panhandle had $2,933,000 included in Other
current liabilities and $11,644,000 included in Other non-current liabilities.
AIR QUALITY CONTROL. In 1998, the EPA issued a final rule on regional ozone
control that requires Panhandle to place controls on certain large internal
combustion engines in five midwestern states. The part of the rule that affects
Panhandle was challenged in court by various states, industry and other
interests, including Interstate Natural Gas Association of America (INGAA), an
industry group to which Panhandle belongs. In March 2000, the court upheld most
aspects of the EPA's rule, but agreed with INGAA's position and remanded to the
EPA the sections of the rule that affected Panhandle. The final rule was
promulgated by US EPA in April 2004. The five midwestern states have one year to
promulgate state laws and regulations to address the requirements of this rule.
Based on an EPA guidance document negotiated with gas industry representatives
in 2002, it is believed that Panhandle will be required under state rules to
reduce nitrogen oxide (NOx) emissions by 82% on the identified large internal
combustion engines and will be able to trade off engines within the company and
within each of the five Midwestern states affected by the rule in an effort to
create a cost effective NOx reduction solution. The final implementation date is
May 2007. The rule impacts 20 large internal combustion engines on the Panhandle
system in Illinois and Indiana at an approximate cost of $17 million for capital
improvements through 2007, based on current projections.
In 2002, the Texas Commission on Environmental Quality enacted the
Houston/Galveston SIP regulations requiring reductions in NOx emissions in an
eight-county area surrounding Houston. Trunkline's Cypress compressor station is
affected and may require the installation of emission controls. New regulations
also require certain grandfathered facilities in Texas to enter into the new
source permit program which may require the installation of emission controls at
five additional facilities. These rules affect six company facilities in Texas
at an estimated cost of approximately $12 million for capital improvements
through March 2007, based on current projections.
The EPA promulgated various Maximum Achievable Control Technology (MACT) rules
in February 2004. The rules require that Panhandle Eastern Pipe Line and
Trunkline control Hazardous Air Pollutants (HAPs) emitted from certain internal
combustion engines at major HAPs sources. Most of Panhandle Eastern Pipe Line
and Trunkline compressor stations are major HAPs sources. The HAPs pollutant of
concern for Panhandle Eastern
17
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pipe Line and Trunkline is formaldehyde. As promulgated, the rule seeks to
reduce formaldehyde emissions by 76% from these engines. Catalytic controls will
be required to reduce emissions under these rules with a final implementation
date of May 2007. Panhandle Eastern Pipe Line and Trunkline have 22 internal
combustion engines subject to the rules. It is expected that compliance with
these regulations will cost an estimated $5 million for capital improvements,
based on current projections.
OTHER COMMITMENTS AND CONTINGENCIES. In 1993, the U.S. Department of the
Interior announced its intention to seek, through its Mineral Management
Service, 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.
Panhandle Eastern Pipe Line 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
substantial time to resolve. If required to reimburse or indemnify the
producers, Panhandle Eastern Pipe Line and Trunkline may file with FERC to
recover these costs from pipeline customers. Management believes these
commitments and contingencies will not have a material adverse effect on
Panhandle's business, financial condition or results of operations.
CONTROLLED GROUP PENSION LIABILITIES. Southern Union (including certain of its
divisions) sponsors a number of defined benefit pension plans for employees.
Under applicable pension and tax laws, upon being acquired by Southern Union,
Panhandle became a member of Southern Union's "controlled group" with respect to
those plans, and, along with Southern Union and any other members of that group,
is jointly and severally liable for any failure by Southern Union (along with
any other persons that may be or become a sponsor of any such plan) to fund any
and all of these pension plans or to pay any unfunded liabilities that these
plans may have if they are ever terminated. In addition, if any of the
obligations of any of these pension plans is not paid when due, a lien in favor
of that plan or the Pension Benefit Guaranty Corporation may be created against
the assets of each member of Southern Union's controlled group, including
Panhandle and each of its subsidiaries. Based on the latest actuarial
information available as of June 30, 2004, the aggregate amount of the projected
benefit obligations of these pension plans was approximately $363,486,000 and
the estimated fair value of all of the assets of these plans was approximately
$276,155,000.
18
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of
Panhandle's financial condition, changes in financial condition and results of
operations. The following section includes an overview of Panhandle's business
as well as recent developments that Panhandle believes are important in
understanding its results of operations, and to anticipate future trends in
those operations. Subsequent sections include an analysis of Panhandle's results
of operations on a consolidated basis and information relating to Panhandle's
liquidity and capital resources, quantitative and qualitative disclosures about
market risk, an outlook perspective for Panhandle, and other matters. All dollar
amounts in the tables herein are stated in thousands.
OVERVIEW
Panhandle became an indirect wholly-owned subsidiary of Southern Union Company
(Southern Union Company and together with its subsidiaries, Southern Union) upon
Southern Union's June 11, 2003 acquisition of Panhandle (Panhandle Acquisition)
from CMS Gas Transmission Company (CMS Gas Transmission), a subsidiary of CMS
Energy Corporation (together, CMS). Panhandle is primarily engaged in the
interstate transportation and storage of natural gas and also provides liquefied
natural gas (LNG) terminalling and regasification services. The Panhandle
entities include Panhandle Eastern Pipe Line Company, LP (Panhandle Eastern Pipe
Line), Trunkline Gas Company, LLC (Trunkline) a wholly-owned subsidiary of
Panhandle Eastern Pipe Line, Sea Robin Pipeline Company (Sea Robin), a Louisiana
unincorporated joint venture and an indirect wholly-owned subsidiary of
Panhandle Eastern Pipe Line, Trunkline LNG Company, LLC (Trunkline LNG) which is
a wholly-owned subsidiary of Trunkline LNG Holdings, LLC (LNG Holdings), an
indirect wholly-owned subsidiary of Panhandle Eastern Pipe Line and Pan Gas
Storage, LLC (d.b.a. Southwest Gas Storage), a wholly-owned subsidiary of
Panhandle Eastern Pipe Line. Collectively, the pipeline assets include more than
10,000 miles of interstate pipelines that transport natural gas from the Gulf of
Mexico, South Texas and the Panhandle regions of Texas and Oklahoma to major
U.S. markets in the Midwest and Great Lakes region. The pipelines have a
combined peak day delivery capacity of 5.4 Bcf per day, 72 Bcf of owned
underground storage capacity and 6.3 Bcf of above ground LNG storage capacity.
Trunkline LNG, located on Louisiana's Gulf Coast, operates one of the largest
LNG import terminals in North America, based on current send out capacity.
On June 11, 2003, Southern Union acquired Panhandle from CMS for approximately
$581,729,000 in cash and 3,000,000 shares of Southern Union common stock (before
adjustment for subsequent stock dividends) valued at approximately $48,900,000
based on market prices at closing of the Panhandle Acquisition and in connection
therewith incurred transaction costs of approximately $31,922,000. At the time
of the acquisition, Panhandle had $1,157,228,000 principal amount of debt
outstanding that it retained. Southern Union funded the cash portion of the
acquisition with approximately $437,000,000 in cash proceeds it received for the
January 1, 2003 sale of its Texas operations, approximately $121,250,000 of the
net proceeds it received from concurrent common stock and equity units offerings
and with working capital available to Southern Union. Southern Union structured
the Panhandle Acquisition and the sale of its Texas operations to qualify as a
like-kind exchange of property under Section 1031 of the Internal Revenue Code
of 1986, as amended. Panhandle Eastern Pipe Line and five of its subsidiaries,
as well as the Southern Union subsidiary that became Panhandle's direct parent
upon the acquisition, converted from Delaware corporations to Delaware limited
liability companies in June 2003. On June 29, 2004, Panhandle Eastern Pipe Line
filed with the state of Delaware and converted from a limited liability company
to a limited partnership. Pursuant to the conversion, all rights and liabilities
of Panhandle Eastern Pipe Line vested in Panhandle Eastern Pipe Line Company,
LP, a Delaware limited partnership, together with its subsidiaries. As a result
of the conversion, retained earnings and member's capital were reclassified as
partners' capital. There was no effect on Panhandle's results of operations
(including income taxes), cash flows or financial position as a result of this
conversion. Southern Union Panhandle, LLC serves as the general partner of
Panhandle and owns a one percent general partner interest. Southern Union
Company holds a ninety-nine percent limited partner interest in Panhandle.
19
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Under the terms of the Panhandle sale agreement, CMS retained Panhandle's
ownership interests in and obligations associated with the Centennial and
Guardian pipeline projects, as well as certain of Panhandle's net deferred tax
assets, all tax liabilities, and pension and certain other postretirement assets
and liabilities. In accordance with the sale agreement, Panhandle disposed of
its interest in Centennial via sale to its partners and Guardian and certain
cash collateral related to Guardian was transferred to CMS. The Note receivable
from CMS Capital was included in the sale to Southern Union but was eliminated
under pushdown accounting (see Note IV -- Related Party Transactions). On March
1, 2003, certain assets previously held by CMS with a net book value of
$15,149,000 were contributed to Panhandle by CMS and were included in the
Southern Union purchase.
The Panhandle Acquisition was accounted for in accordance with accounting
principles generally accepted within the United States by allocating the
purchase price and acquisition costs incurred by Southern Union to Panhandle's
net assets as of the acquisition date. The Panhandle assets acquired and
liabilities assumed have been recorded at their estimated fair value as of the
acquisition date based on the results of outside appraisals. Accordingly, the
post-acquisition financial statements reflect a new basis of accounting and
pre-acquisition period and post-acquisition period financial results (separated
by a heavy black line) are presented but are not comparable. However, since
results for the matching prior year stub periods are not available, the results
of operations below are being presented on a combined pre-acquisition and
post-acquisition basis. The most significant impacts of the new basis of
accounting going forward are expected to be higher depreciation expense due to
the step-up of depreciable assets, assignment of purchase price to certain
amortizable intangible assets, and lower interest costs (though not cash
payments) for the remaining life of pre-acquisition debt due to its revaluation
and related debt premium amortization.
A majority of Panhandle's total operating revenue comes from long-term service
agreements with local distribution company customers and their affiliates.
Panhandle also provides firm transportation services under contract to gas
marketers, producers, other pipelines, electric power generators, and a variety
of end-users. In addition, Panhandle's pipelines offer both firm and
interruptible transportation to customers on a short-term or seasonal basis.
Demand for gas transmission on Panhandle's pipeline systems is seasonal, with
the highest throughput and a higher portion of annual total operating revenues
and net earnings occurring in the traditional winter heating season in the first
and fourth calendar quarters. For the years 1999 to 2003, Panhandle's combined
throughput was 1,139 trillion British thermal units (TBtu), 1,374 TBtu, 1,335
TBtu, 1,259 TBtu and 1,380 TBtu, respectively. For the nine month periods ended
September 30, 2004 and September 30, 2003, Panhandle's combined throughput was
957 TBtu and 1,039 TBtu, respectively. Beginning in March 2000, the combined
throughput includes Sea Robin's throughput.
20
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following is a comparison of consolidated net earnings for the three month
periods ended September 30, 2004 and 2003.
POST-ACQUISITION
----------------
THREE MONTHS ENDED THREE
SEPTEMBER 30, MONTHS
2004 2003 CHANGE
- ----------------------------------------------------------------------------------------------------------
Operating revenue:
Reservation revenue $ 77,081 $ 80,232 $ (3,151)
LNG terminalling revenue 15,004 15,577 (573)
Commodity revenue 14,719 16,138 (1,419)
Other revenue 2,514 2,271 243
--------- --------- ---------
Total operating revenue 109,318 114,218 (4,900)
Operating expenses:
Operation, maintenance and general 49,125 52,933 (3,808)
Depreciation and amortization 15,178 16,348 (1,170)
Taxes, other than on income and revenues 7,044 7,018 26
--------- --------- ---------
Total operating expenses 71,347 76,299 (4,952)
--------- --------- ---------
Operating income 37,971 37,919 52
Other income (expense):
Interest (expense), net (12,030) (11,274) (756)
Other, net 446 6,607 (6,161)
--------- --------- ---------
Total other expense, net (11,584) (4,667) (6,917)
--------- --------- ---------
Earnings before income taxes 26,387 33,252 (6,865)
Income taxes 10,331 13,131 (2,800)
--------- --------- ---------
Net earnings $ 16,056 $ 20,121 $ (4,065)
========= ========= =========
OPERATING REVENUE. For the three months ended September 30, 2004, operating
revenue decreased $4,900,000 versus the same time period during 2003. Such
decrease is primarily due to lower reservation revenues of $3,151,000 primarily
due to replacement of contract expirations on Trunkline during 2004 at lower
average reservation rates than were in effect in 2003. Commodity revenues were
down $1,419,000 primarily due to a reduction in throughput volumes of seven
percent resulting from lower storage refills and lower parking revenue activity
in 2004. Commodity revenues are dependent upon a number of variable factors,
including weather, storage levels, and customer demand for firm, interruptible
and parking services. In addition, LNG terminalling revenues were down $573,000
primarily due to reduced volumes received in 2004.
OPERATION, MAINTENANCE AND GENERAL. Operation, maintenance and general expenses
decreased $3,808,000 for the three months ended September 30, 2004, versus the
same time period during 2003, primarily due to the net overrecovery of
approximately $1,790,000 in 2004 of previously underrecovered fuel volumes
versus a net underrecovery of approximately $1,481,000 of fuel volumes in 2003
21
and a $968,000 reduction in contract storage expenses due to a reduction
in contracted storage capacity beginning March 2004.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$1,170,000 for the three months ended September 30, 2004 versus the same time
period during 2003 primarily due to preliminary estimated purchase price
allocations used in the third quarter of 2003 which were revised in the fourth
quarter of 2003.
Depreciation and amortization expense is expected to be slightly higher in the
last quarter of 2004 as compared to the corresponding period in 2003 primarily
due to approximately $2 million of reduced depreciation expense resulting from
purchase accounting adjustments recorded in the fourth quarter of 2003
associated with the Panhandle Acquisition.
INTEREST, NET. Interest expense increased $756,000 for the three months ended
September 30, 2004 versus the same time period during 2003, primarily due to
lower debt premium amortization partially offset by lower interest expense as a
result of refinancing and increased capitalized interest on the LNG expansion
projects.
Debt premium amortization is expected to be lower for the next three months than
during the same period of 2003 due to post-acquisition debt retirements,
resulting in higher interest expense. However, cash interest should be lower
during the next three months of 2004 versus 2003 and partially offset the
reduced premium amortization. For further discussion of Panhandle's long-term
debt, see Note VI -- Debt.
OTHER INCOME, NET. Other income, net for the three months ended September 30,
2004 decreased $6,161,000 versus the same time period during 2003, primarily due
to a non-recurring $6,123,000 gain on debt extinguishment during the third
quarter of 2003.
INCOME TAXES. Income taxes during the three months ended September 30, 2004,
versus the same time period during 2003, decreased $2,800,000, primarily due to
decreases in pretax income.
22
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a comparison of consolidated net earnings for the nine month
periods ended September 30, 2004 and 2003.
PRE-
POST-ACQUISITION ACQUISITION COMBINED
---------------- ----------- NINE MONTHS
JANUARY 1 - JUNE 12 - JANUARY 1 ENDED NINE
SEPTEMBER 30, SEPTEMBER 30, JUNE 11, SEPTEMBER 30, MONTHS
2004 2003 2003 2003 CHANGE
- --------------------------------------------------------------------------------------------------------------------------
Operating revenue:
Reservation revenue $ 256,156 $ 97,349 $ 160,030 $ 257,379 $ (1,223)
LNG terminalling revenue 42,847 18,821 26,750 45,571 (2,724)
Commodity revenue 49,408 19,622 36,378 56,000 (6,592)
Other revenue 7,427 2,955 11,112 14,067 (6,640)
--------- --------- --------- --------- ---------
Total operating revenue 355,838 138,747 234,270 373,017 (17,179)
Operating expenses:
Operation, maintenance and general 151,434 63,069 90,800 153,869 (2,435)
Depreciation and amortization 45,201 19,512 23,110 42,622 2,579
Taxes, other than on income and revenues 21,244 8,613 12,478 21,091 153
--------- --------- --------- --------- ---------
Total operating expenses 217,879 91,194 126,388 217,582 297
--------- --------- --------- --------- ---------
Operating income 137,959 47,553 107,882 155,435 (17,476)
Other income (expense):
Interest (expense), net (36,209) (13,404) (35,416) (48,820) 12,611
Other, net 1,686 6,672 6,077 12,749 (11,063)
--------- --------- --------- --------- ---------
Total other expense, net (34,523) (6,732) (29,339) (36,071) 1,548
--------- --------- --------- --------- ---------
Earnings before income taxes 103,436 40,821 78,543 119,364 (15,928)
Income taxes 40,179 16,088 30,532 46,620 (6,441)
--------- --------- --------- --------- ---------
Net earnings from continuing operations 63,257 24,733 48,011 72,744 (9,487)
--------- --------- --------- --------- ---------
Cumulative effect of change in
accounting principles, net of tax -- -- 2,003 2,003 (2,003)
--------- --------- --------- --------- ---------
Net earnings $ 63,257 $ 24,733 $ 50,014 $ 74,747 $ (11,490)
========= ========= ========= ========= =========
OPERATING REVENUE. For the nine months ended September 30, 2004, operating
revenue decreased $17,179,000 versus the same time period during 2003. Such
decrease includes the impact of lower commodity revenues of $6,592,000 primarily
due to an eight percent reduction in throughput volumes resulting from a cooler
winter during 2003 versus 2004, lower storage refills and lower parking revenue
activity in 2004. Commodity revenues are dependent upon a number of variable
factors, including weather, storage levels, and customer demand for firm,
interruptible and parking services. The decrease in revenues in 2004 was also
affected by non-recurring imbalance cash out net gains of approximately
$5,505,000 realized during 2003, lower LNG terminalling revenues of $2,724,000
primarily due to reduced volumes received in 2004 and lower reservation revenues
of $1,223,000 during 2004 versus 2003 primarily due to lower storage capacity
sold and certain contract expirations on Trunkline during 2004 at lower average
reservation rates than were in effect in 2003, partially offset by higher
average reservation rates on Panhandle Eastern Pipe Line's capacity.
OPERATION, MAINTENANCE AND GENERAL. Operation, maintenance and general expenses
decreased $2,435,000 for the nine months ended September 30, 2004, versus the
same time period during 2003, primarily due to the net overrecovery of
approximately $6,067,000 in 2004 of previously underrecovered fuel volumes
versus a net underrecovery of approximately $3,638,000 of fuel volumes in 2003
and decreased benefit costs of $2,439,000 associated with the change in benefit
plans subsequent to the acquisition of Panhandle by Southern Union. Such
decreases were partially offset by higher corporate charges of $9,389,000. Prior
to the acquisition of Panhandle by Southern Union, corporate charges were
temporarily reduced during the first half of 2003 by CMS due to Panhandle being
a discontinued operation.
DEPRECIATION AND AMORTIZATION. For the nine months ended September 30, 2004,
depreciation and amortization increased $2,579,000 versus the same time period
during 2003, primarily due to the step-up of depreciable assets and assignment
of purchase price to certain shorter-lived amortizable intangible assets related
to the Panhandle Acquisition.
INTEREST, NET. Interest expense, net for the nine months ended September 30,
2004 was reduced by $12,611,000 versus the same time period during 2003
primarily due to amortization of debt premiums established in purchase
accounting related to the Panhandle Acquisition by Southern Union, reduced cash
interest charges as a result of Panhandle's debt refinancing during the third
quarter of 2003 and the refinancing of the debt which matured in March 2004 and
August 2004.
OTHER INCOME, NET. Other income, net for the nine months ended September 30,
2004 decreased $11,063,000 versus the same time period during 2003, primarily
due to a non-recurring $6,123,000 gain on debt extinguishment during the third
quarter of 2003. In addition, related party interest income decreased by
$5,050,000 versus the same time period during 2003 due to lower average rates
and balances in 2004. For further discussion of Panhandle's related party
interest income, see Note IV -- Related Party Transactions.
INCOME TAXES. Income taxes during the nine months ended September 30, 2004,
versus the same time period during 2003, decreased $6,441,000 primarily due to
decreases in pretax income.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Based on Panhandle's current level of operations,
management believes that cash flow from operations, available existing cash, and
other sources, including liquid working capital and new borrowings, will be
adequate to meet Panhandle's short-term cash needs and long-term cash needs for
the next several
23
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
years, although no assurances can be given as to the sufficiency of cash flows
or the ability to refinance existing obligations.
Cash flows from operating activities for the nine months ended September 30,
2004 were $132 million versus $162 million for the same time period during 2003.
Changes in operating assets and liabilities used cash of $2 million for the nine
months ended September 30, 2004 and $12 million for the same time period during
2003. The decrease in cash flows from operating activities for the nine months
ended September 30, 2004 versus the same time period during 2003 was primarily
attributable to the timing of payments and cash receipts related to Panhandle's
working capital accounts and by a decrease in net income.
INVESTING ACTIVITIES. Historically, Panhandle's capital requirements have
generally been satisfied through operating cash flow, except that Panhandle may
utilize access to capital markets for extraordinary capital expenditures.
Panhandle estimates expenditures associated with the Phase I and Phase II LNG
terminal expansions and the Trunkline 30-inch diameter natural gas pipeline loop
from the LNG terminal, excluding capitalized interest, to be approximately $117
million in 2004, $28 million of which was incurred in the third quarter of 2004;
$88 million and $7 million is expected to be incurred in 2005 and 2006,
respectively. These estimates were developed for budget planning purposes and
are subject to revision.
Cash flows used in investing activities for the nine month period ended
September 30, 2004 decreased by approximately $34 million versus the same time
period in 2003 primarily due to a $125 million decrease in loans made to
affiliated companies during 2004, partially offset by proceeds from the sale of
Centennial in the first quarter of 2003 of $40 million and an increase in
capital expenditures of approximately $54 million during 2004 primarily related
to the LNG expansion.
FINANCING ACTIVITIES. Panhandle's note provisions are subject to requirements
such as the maintenance of a fixed charge coverage ratio and a leverage ratio
which restrict certain payments if not maintained, and limitations on liens. At
September 30, 2004, Panhandle, based on the currently most restrictive debt
covenant requirements, was subject to a $294,450,000 limitation on additional
restricted payments including dividends and loans to affiliates, and a
limitation of $321,362,000 of additional secured indebtedness or other defined
liens based on a limitations on liens covenant.
At September 30, 2004, Panhandle had scheduled debt principal payments of
$2,767,000, $12,548,000, $13,969,000, $431,916,000, $300,000,000 and
$417,428,000 for the remainder of 2004 and for the years 2005 through 2008 and
thereafter, respectively.
On March 12, 2004, Panhandle issued $200,000,000 of 2.75% Senior Notes due 2007,
Series A in reliance on an exemption from the registration requirements of the
Securities Act of 1933 for offers and sales of securities not involving a public
offering or sale, in order to refinance Panhandle's maturing debt. Panhandle
used a portion of the net proceeds to retire $146,080,000 of 6.125% Senior Notes
which matured on March 15, 2004, as well as for other general corporate
purposes. A portion of the remaining net proceeds was also used to pay off the
$52,455,000 of 7.875% Senior Note which matured August 15, 2004. Panhandle filed
a registration statement on May 12, 2004 to initiate an exchange of the
unregistered 2.75% Senior Notes due 2007, Series A for substantially identical
securities registered under the Securities Act of 1933. Such exchange was
completed June 25, 2004.
Cash flows used in financing activities for the nine months ended September 30,
2004 decreased by approximately $69 million versus the same time period in 2003
primarily due to the transfer of the Centennial sale proceeds to CMS of $40
million during 2003, a decrease in net debt retirements and related net issuance
costs of $26 million during 2003 and an increase in bank overdrafts of $3
million. Panhandle may enter into a credit facility or utilize other available
sources of capital to cover any potential short-term financing needs during the
period of higher than normal capital expenditures through 2005, primarily
related to the LNG expansions.
24
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OUTLOOK
Panhandle is a leading United States interstate natural gas pipeline system and
also owns one of the largest operating LNG regasification terminals in North
America, based on current send out capacity, and intends to optimize results
through expansion and better utilization of its existing facilities and
construction of new facilities. This involves providing additional
transportation, storage and other value-added services to customers such as
gas-fueled power plants, local distribution companies, industrial end-users,
marketers and others. Panhandle conducts operations primarily in the central,
gulf coast, midwest, great lakes, and southwest regions of the United States.
Pipeline revenues are generally higher in the first and fourth quarters of each
year primarily due to higher contract rates and the increase in customer demand
levels for gas due to the colder weather during these periods.
Trunkline LNG entered into a 22-year contract with BG LNG Services beginning
January 2002, for all the uncommitted capacity at the Lake Charles, Louisiana
facility. Trunkline LNG announced the planned expansion of the Lake Charles
facility to approximately 1.2 Bcf per day of send out capacity, up from its
current send out capacity of .63 Bcf per day and in December 2002, FERC approved
the expansion of the LNG regasification terminal storage capacity to 9 Bcf from
the current storage capacity of 6.3 Bcf. The expanded facility is currently
expected to be in operation by the end of 2005. On September 17, 2004, as
modified on September 23, 2004, FERC approved Trunkline LNG's further
incremental LNG expansion project. This expansion will increase the LNG
terminal's sustainable send out capacity to 1.8 Bcf per day by mid-2006. BG LNG
Services has contracted for all the proposed additional capacity subject to
Trunkline LNG achieving certain construction milestones at this facility.
Panhandle previously owned a one-third interest in Guardian, which constructed a
141-mile, 36-inch pipeline from Illinois to southeastern Wisconsin for the
transportation of natural gas and began operations in December 2002. On March
10, 2003, Panhandle's ownership interest in Guardian was transferred to CMS Gas
Transmission. Trunkline was the operator of the Guardian pipeline until June 30,
2004 when the current agreement with Guardian expired. This is not expected to
have a material impact on Panhandle's results of operations.
OTHER MATTERS
CUSTOMER CONCENTRATION. Panhandle provides LNG terminalling and regasification
services and a comprehensive array of transportation and storage services to
approximately five hundred customers. Such customers are principally located in
the midwest and southwest regions of the United States. The following is a
comparison of the percent of operating revenue by customer for the nine month
periods ended September 30, 2004 and 2003.
PERCENT OF OPERATING REVENUE FOR
NINE MONTHS ENDED
SEPTEMBER 30,
CUSTOMER 2004 2003
- ------------------------------ ---- ----
ProLiance 17 16
BG LNG Services 16 16
CMS Energy subsidiaries (1) 10 13
Other Top 10 customers 27 26
Remaining customers 30 29
--- ---
Total percentage 100% 100%
=== ===
(1) Primarily Consumers Energy
25
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
REGULATION. Panhandle is subject to regulation by various federal, state and
local governmental agencies, including those specifically described below.
FERC has comprehensive jurisdiction over Panhandle Eastern Pipe Line, Trunkline,
Sea Robin, Trunkline LNG, and Southwest Gas Storage as natural gas companies
within the meaning of the Natural Gas Act of 1938. FERC jurisdiction relates,
among other things, to the acquisition, operation and disposal of assets and
facilities and to the service provided and rates charged.
FERC has authority to regulate rates and charges for both transportation and
storage of natural gas in interstate commerce. FERC also has 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 service using such facilities.
Panhandle, Trunkline, Sea Robin, Trunkline LNG, and Southwest Gas Storage hold
certificates of public convenience and necessity issued by the FERC, authorizing
them to construct and operate the pipelines, facilities and properties now in
operation for which such certificates are required, and to transport and store
natural gas in interstate commerce.
The Secretary of Energy regulates the import and export of natural gas and has
delegated various aspects of this jurisdiction to FERC and the Department of
Energy's Office of Fossil Fuels.
Panhandle is also subject to the Natural Gas Pipeline Safety Act of 1968 and the
Pipeline Safety Improvement Act of 2002, which regulate the safety of gas
pipelines. In addition, Panhandle is subject to the Hazardous Liquid Pipeline
Safety Act of 1979, which regulates oil and petroleum pipelines.
COMPETITION. Panhandle's interstate pipelines compete with other interstate and
intrastate pipeline companies in the transportation and storage of natural gas.
The principal elements of competition among pipelines are rates, term of service
and flexibility and reliability of service. Panhandle's primary competitors
include Alliance Pipeline LP, ANR Pipeline Company, Natural Gas Pipeline Company
of America, Northern Border Pipeline Company, Texas Gas Transmission
Corporation, Northern Natural Gas Company and Vector Pipeline.
Natural gas competes with other forms of energy available to Panhandle's
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 alternate
fuels, and other factors, including weather and natural gas storage levels,
affect the demand for transportation services in the areas served by Panhandle.
ENVIRONMENTAL MATTERS. Panhandle's interstate natural gas transportation
operations are subject to federal, state and local regulations regarding water
quality, hazardous and solid waste disposal and other environmental matters.
Panhandle has identified environmental contamination at certain sites on its gas
transmission systems and has undertaken cleanup programs at these sites. The
contamination resulted from the past use of lubricants containing PCBs in
compressed air systems; the past use of paints containing PCBs; and the prior
use of wastewater collection facilities and other on-site disposal areas.
Panhandle has developed and is implementing a program to remediate such
contamination in accordance with federal, state and local regulations. Some
remediation is being performed by former Panhandle affiliates in accordance with
indemnity agreements that also indemnify against certain future environmental
litigation and claims. Panhandle is also subject to various federal, state and
local laws and regulations relating to air quality control. These regulations
include rules relating to regional ozone control and hazardous air pollutants.
The regional ozone control rules are known as SIP and are designed to control
the release of NOx compounds. The rules related to hazardous air pollutants are
known as MACT rules and are the result of the 1990 Clean Air Act Amendments that
regulate the emission of hazardous air pollutants from internal combustion
engines and turbines.
PCB Assessment and Clean-up Programs -- Panhandle previously identified
environmental contamination at certain sites on its systems and undertook
clean-up programs at these sites. The contamination resulted from the past use
of lubricants containing PCBs in compressed air systems and the prior use of
wastewater collection facilities and other on-site disposal areas. Panhandle is
also taking actions regarding PCBs in paints at various locations (see Note IX
- -- Commitments and Contingencies - Environmental Matters).
26
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Air Quality Control -- In 1998, the EPA issued a final rule on regional ozone
control that requires revised SIPs for 22 states, including five states in which
Panhandle operates. Panhandle has completed installation of NOx controls on four
engines and anticipates placing NOx controls on engines at a total of six
compressor station locations. This program is expected to be completed by May
2007.
In 2004, final rules were promulgated by the EPA regarding control of hazardous
air pollutants. Twenty engines owned by Panhandle are affected. In 2002, the
Texas Commission on Environmental Quality enacted the Houston/Galveston SIP
regulations requiring reductions in NOx emissions in an eight-county area
surrounding Houston. Trunkline's Cypress compressor station is affected and may
require the installation of emission controls. New regulations also require
certain grandfathered facilities to enter into the new source permit program
which may require the installation of emission controls at five additional
facilities. These rules affect six company facilities in Texas. Panhandle
expects controls to be installed by March 2007 (see Note IX -- Commitments and
Contingencies - Environmental Matters).
Management believes that disposition of the environmental contingencies
described herein will not have a material adverse affect on consolidated results
of operations, cash flows, or financial position.
ENERGY AFFILIATE RULEMAKING. In response to changes in the structure of the
energy industry, the FERC adopted Order No. 2004 on November 25, 2003 that
established standards of conduct for energy affiliates of FERC-regulated
entities. The final rule revises and conforms the current gas and electric
standards by broadening the definition of an energy affiliate covered by the
standards of conduct to include, in addition to current marketers or merchant
affiliates, gathering, processing, intrastate pipelines and certain local
distribution companies. On February 9, 2004, Panhandle Eastern Pipe Line,
Trunkline, Trunkline LNG, Sea Robin and LNG Holdings submitted an informational
filing describing the measures needed to comply with the standards of conduct.
Southern Union has complied with Order No. 2004.
PIPELINE SAFETY NOTICE OF PROPOSED RULEMAKING. On December 12, 2003, the U.S.
Department of Transportation issued a final rule requiring pipeline operators to
develop integrity management programs to comprehensively evaluate their
pipelines, and take measures to protect pipeline segments located in "high
consequence areas." The final rule took effect on January 14, 2004 and
incorporates requirements of the Pipeline Safety Improvement Act enacted in
December 2002. Although Panhandle cannot predict the actual costs of compliance
with this rule, it does not expect the order to have a material incremental
effect on Panhandle's business, financial condition or results of operations
because such required activities were already being undertaken.
GUARDIAN. As of December 31, 2002, Panhandle owned a one-third interest in
Guardian, which constructed a 141-mile, 36-inch pipeline from Illinois to
southeastern Wisconsin for the transportation of natural gas and began
operations in December 2002. On March 10, 2003, Panhandle's ownership interest
in Guardian was transferred to CMS Gas Transmission. Trunkline was the operator
of the Guardian pipeline until June 30, 2004 when the current agreement with
Guardian expired. This is not expected to have a material impact on Panhandle's
results of operations.
CONTROLLED GROUP PENSION LIABILITIES. Southern Union (including certain of its
divisions) sponsors a number of defined benefit pension plans arising from its
(including any of its present or former divisions) or its predecessor's
businesses when Southern Union acquired Panhandle. Under applicable pension and
tax laws, upon being acquired by Southern Union, Panhandle became a member of
Southern Union's "controlled group" with respect to those plans, and, along with
Southern Union and any other members of that group, is jointly and severally
liable for any failure by Southern Union (along with any other persons that may
be or become a sponsor of any such plan) to fund any and all of these pension
plans or to pay any unfunded liabilities that these plans may have if they are
ever terminated. In addition, if any of the obligations of any of these pension
plans is not paid when due, a lien in favor of that plan or the Pension Benefit
Guaranty Corporation may be created against the assets of each member of
Southern Union's controlled group, including Panhandle and each of its
subsidiaries. Based on the latest actuarial information available as of June 30,
2004, the aggregate amount of the projected benefit
27
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
obligations of these pension plans was approximately $363,486,000 and the
estimated fair value of all of the assets of these plans was approximately
$276,155,000.
PENDING SOUTHERN UNION ACQUISITION. Pursuant to a purchase agreement dated as of
June 24, 2004 and amended as of September 1, 2004, CCE Holdings, LLC (CCE), a
joint venture between Southern Union and its 50% equity partner GE Commercial
Finance Energy Financial Services, agreed to acquire 100% of the equity
interests of CrossCountry Energy, LLC (CrossCountry) from Enron Corp. and its
affiliates (collectively, Enron) for $2,450,000,000 in cash including the
assumption of certain consolidated debt (the Transaction). The closing of the
Transaction is subject to approval by certain state and federal regulatory
bodies, in addition to satisfaction of customary closing conditions, and is
expected to occur on or before December 17, 2004. It is currently contemplated
that CCE will be operated by Southern Union, including the involvement of
Panhandle management personnel.
ACCOUNTING STANDARDS
FASB INTERPRETATION NO. 46R, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES" (FIN
NO. 46R): Issued by the Financial Accounting Standards Board (FASB) in December
2003, the interpretation identifies a variable interest entity as an entity
whose equity owners do not have sufficient equity at risk and do not have
substantive voting rights. The interpretation is effective for special-purpose
entities for periods ending after December 15, 2003 and for all other types of
variable interest entities for periods ending after March 15, 2004. This
standard requires a company to consolidate a variable interest entity if it is
allocated a majority of the entity's losses and/or returns, including fees paid
by the entity. Panhandle has not identified any material variable interest
entities or interests in variable interest entities for which the provisions of
FIN No. 46R would require a change in Panhandle's current accounting for such
interests.
EITF 01-8, "DETERMINING WHETHER AN ARRANGEMENT CONTAINS A LEASE" (EITF 01-8): In
May 2003, the Emerging Issues Task Force (EITF) of the FASB reached a consensus
on EITF 01-8 that outlines certain criteria for determining when a contract or
portion thereof should be accounted for as a lease within the scope of SFAS No.
13, "Accounting for Leases". Because of certain contractual changes entered into
during January 2004 between Trunkline LNG and BG LNG Services, Inc., a
subsidiary of BG Group of the United Kingdom (BG LNG Services), regarding LNG
services at the Lake Charles facility, the BG LNG Services contract was required
to be reassessed under the provisions of EITF 01-8 and was determined to contain
an operating lease. The impact of this accounting treatment did not have an
impact on Panhandle's financial condition or results of operations.
FASB STATEMENT NO.132R "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS - AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, AND 106":
Issued by the FASB in December 2003, the Statement revises employers'
disclosures about pension plans and other postretirement benefit plans. It
retains the disclosure requirements contained in FASB Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
it replaces, and requires additional disclosure about the assets, obligations,
28
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
cash flows and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. The Statement does not change the
measurement or recognition of those plans required by FASB Statements No. 87,
"Employers' Accounting for Pensions", No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". The Statement is effective for fiscal years
ending after December 15, 2003. The interim-period disclosures required by the
Statement are effective for interim periods beginning after December 15, 2003
(see Note VII -- Employee Benefits).
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION. The Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this Form 10-Q may contain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements constitute forward-looking statements that are based on current
expectations, estimates and projections about the industry in which Panhandle
operates and management's beliefs and assumptions. These forward-looking
statements are not historical facts, but rather reflect current expectations
concerning future results and events. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. Similarly, statements that describe objectives, plans or goals are
or may be forward-looking statements.
These statements are not guarantees of future performance and involve various
risks, uncertainties and assumptions, which are difficult to predict and many of
which are outside Panhandle's control. Therefore, actual results, performance
and achievements may differ materially from what is expressed or forecasted in
such forward-looking statements. Prospective investors may review Panhandle's
reports filed in the future with the Commission for more current descriptions of
developments that could cause actual results to differ materially from such
forward-looking statements. However, prospective investors should not place
undue reliance on forward-looking statements, which speak only as of the date of
this Form 10-Q, or, in the case of documents incorporated by reference, the date
of those documents.
Factors that could cause actual results to differ materially from those
expressed in the forward-looking statements include, but are not limited to, the
following: customer growth; gas throughput volumes and available sources of
natural gas; discounting of transportation rates due to competition, abnormal
weather conditions in Panhandle's service territories; new legislation and
government regulations affecting or involving Panhandle; Panhandle's ability to
comply with or to challenge successfully existing or new environmental
regulations; the outcome of pending and future litigation; the impact of
relations with labor unions of bargaining-unit union employees; the impact of
future rate cases or regulatory rulings; Panhandle's ability to control costs
successfully and achieve operating efficiencies, including the purchase and
implementation of new technologies for achieving such efficiencies; the nature
and impact of any extraordinary transactions, such as any acquisition or
divestiture of a business unit or any assets; the economic climate and growth in
Panhandle's industry and service territories and competitive conditions of
energy markets in general; inflationary trends; changes in gas or other energy
market commodity prices and interest rates; the current market conditions
causing more customer contracts to be of shorter duration, which may increase
revenue volatility; exposure to customer concentration with a significant
portion of revenues realized from a relatively small number of customers and any
credit risks associated with the financial position of those customers;
Panhandle or its parent's debt securities ratings; factors affecting operations
such as maintenance or repairs, environmental incidents or gas pipeline system
constraints; the possibility of war or terrorist attacks; and other risks and
unforeseen events.
In light of these risks, uncertainties and assumptions, the results reflected in
the forward-looking statements contained or incorporated by reference in this
Form 10-Q might not occur. In addition, Panhandle could be affected by general
industry and market conditions, and general economic conditions, including
interest rate fluctuations, federal, state and local laws and regulations
affecting the retail gas industry or the energy industry generally.
Panhandle does not undertake any obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. All subsequent written and oral forward-
29
PANHANDLE EASTERN PIPE LINE COMPANY, LP
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
looking statements attributable to Panhandle or persons acting on Panhandle's
behalf are expressly qualified in their entirety by the cautionary statements
contained throughout this Form 10-Q.
30
PANHANDLE EASTERN PIPE LINE COMPANY, LP
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There are no material changes in market risks faced by Panhandle from those
reported in Panhandle's Annual Report on Form 10-K for the year ended December
31, 2003.
The information in Item 3 updates, and should be read in conjunction with,
information set forth in Part II, Item 7 and Item 7A in Panhandle's Annual
Report on Form 10-K for the year ended December 31, 2003, in addition to the
interim consolidated financial statements, accompanying notes, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Panhandle performed an evaluation under the supervision and with the
participation of its management, including its Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), and with the participation of personnel from its
Legal, Internal Audit and Financial Reporting Departments, of the effectiveness
of the design and operation of Panhandle's disclosure controls and procedures
(as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange
Act of 1934) as of the end of the period covered by this report. Based on that
evaluation, Panhandle's CEO and CFO concluded that its disclosure controls and
procedures were effective as of September 30, 2004 and have communicated that
determination to the Board of Managers and Southern Union's Audit Committee,
which also serves as our Audit Committee.
CHANGES IN INTERNAL CONTROLS
There has not been any change in Panhandle's internal controls over financial
reporting identified in connection with our evaluation thereof that occurred
during the quarter ended September 30, 2004 that materially affected, or is
reasonably likely to materially affect, Panhandle's internal control over
financial reporting.
31
PANHANDLE EASTERN PIPE LINE COMPANY, LP
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Panhandle and certain of its affiliates are occasionally parties to lawsuits and
administrative proceedings incidental to their businesses involving, for
example, claims for personal injury and property damage, contractual matters,
various tax matters, and rates and licensing. Reference is made to ITEM 1.
Financial Statements, Note IX -- Commitments and Contingencies - Litigation,
Environmental Matters, and Air Quality Control, as well as to ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Part I. Financial Information for additional information
regarding various pending administrative and judicial proceedings involving
regulatory, environmental and other legal matters.
ENVIRONMENTAL MATTERS - Panhandle and its affiliates are subject to various
federal, state and local laws and regulations relating to the environment.
Several of these companies have been named parties to various actions involving
environmental issues. Based on our present knowledge and subject to future legal
and factual developments, Panhandle's management believes that it is unlikely
that these actions, individually or in the aggregate, will have a material
adverse effect on its financial condition. See ITEM 1. Financial Statements,
Note IX -- Commitments and Contingencies - Environmental Matters and Air Quality
Control and ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations included in Part I. Financial Information.
32
PANHANDLE EASTERN PIPE LINE COMPANY, LP
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------
31.1 Rule 13a - 14(a)/15d - 14(a) Certification of Chief Executive Officer
31.2 Rule 13a - 14(a)/15d - 14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification
32.2 Section 1350 Certification
(b) REPORTS ON FORM 8-K:
None
33
PANHANDLE EASTERN PIPE LINE COMPANY, LP
Pursuant to the requirements of the Securities Exchange Act of 1934, Panhandle
Eastern Pipe Line Company, LP has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
PANHANDLE EASTERN PIPE LINE COMPANY, LP
---------------------------------------
(Registrant)
Date: November 9, 2004 By: /s/ THOMAS F. KARAM
--------------------------------------
Thomas F. Karam
Chief Executive Officer
34
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Rule 13a - 14(a)/15d - 14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a - 14(a)/15d - 14(a) Certification of Chief Financial
Officer.
32.1 Section 1350 Certification.
32.2 Section 1350 Certification.