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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-2921
PANHANDLE EASTERN PIPE LINE COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 44-0382470
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
5400 Westheimer Court P.O.Box 1642 77251-1642
Houston, Texas
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
713-627-5400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
7.95% Debentures Due 2023 The New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF CLASS
-------------
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The Registrant meets the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format. Items 4, 10, 11, 12 and 13 have been omitted and Item 7 has
been reduced in accordance with such Instruction I.
All of the Registrant's common shares are indirectly owned by Duke Energy
Corporation (File No. 1-4928), which files reports and proxy materials pursuant
to the Securities Exchange Act of 1934.
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at February 27, 1998........................................none
Number of shares of Common Stock, without par value, outstanding at
February 27, 1998.........................................................1,000
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PANHANDLE EASTERN PIPE LINE COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
ITEM PAGE
PART I.
1. Business......................................................................................................1
General..............................................................................................1
Natural Gas Transmission.............................................................................1
Competition..........................................................................................1
Regulation...........................................................................................2
Environmental Matters................................................................................2
Other Matters........................................................................................3
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995....................3
Operating Statistics.................................................................................3
2. Properties....................................................................................................3
3. Legal Proceedings.............................................................................................3
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters........................................3
6. Selected Financial Data......................................................................................4
7. Management's Discussion and Analysis of Results of Operations and Financial Condition.........................4
7A. Quantitative and Qualitative Disclosures About Market Risk....................................................6
8. Financial Statements and Supplementary Data...................................................................7
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................23
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................23
Signatures...................................................................................................24
Exhibit Index................................................................................................25
PART I.
ITEM 1. BUSINESS.
GENERAL
Panhandle Eastern Pipe Line Company (PEPL) is a wholly owned subsidiary of
PanEnergy Corp (PanEnergy), which is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). PEPL was incorporated in Delaware in 1929.
PEPL and its subsidiaries (the Company) are primarily engaged in the interstate
transportation and storage of natural gas. The interstate natural gas
transmission and storage operations of the Company are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC).
On June 18, 1997, PanEnergy was merged with a wholly owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted into
the right to receive 1.0444 shares of Duke Energy common stock. In addition,
each option to purchase PanEnergy common stock became an option to purchase
common stock of Duke Energy. The merger was accounted for as a pooling of
interests.
Executive offices of the Company are located at 5400 Westheimer Court,
Houston, Texas 77056-5310, and the telephone number is (713) 627-5400.
NATURAL GAS TRANSMISSION
PEPL and its principal subsidiary, Trunkline Gas Company (Trunkline),
together with Texas Eastern Transmission Corporation (TETCO), and Algonquin Gas
Transmission Company (Algonquin), all subsidiaries of Duke Energy, had
consolidated natural gas deliveries of 2,862 TBtu (Trillion British thermal
units) in 1997, compared to 2,939 TBtu in 1996, which represented approximately
12% of the natural gas consumed in the United States.
The Company's throughput volumes for the years 1993 to 1997 were 1,240
TBtu, 1,186 TBtu, 1,182 TBtu, 1,319 TBtu, and 1,279 TBtu, respectively. A
substantial majority of delivered volumes of the Company's interstate pipelines
represents gas transported under long-term firm service agreements with local
distribution company (LDC) customers in the pipelines' market areas. Firm
transportation services are also provided under contract to gas marketers,
producers, other pipelines, electric power generators and a variety of
end-users. In addition, the pipelines offer interruptible transportation to
customers on a short-term or seasonal basis. The Company's market volumes are
concentrated among approximately 20 utilities located in the Midwest market area
that encompasses large portions of Michigan, Ohio, Indiana, Illinois and
Missouri. Trunkline's major customers include eight utilities located in
portions of Tennessee, Missouri, Illinois, Indiana and Michigan.
Since the implementation of FERC Order 636, each of PEPL, Trunkline and Pan
Gas Storage Company (Pan Gas), a subsidiary of PEPL, offer firm and
interruptible storage on an open-access basis. PEPL owns and operates three
underground storage fields located in Illinois, Michigan and Oklahoma. Trunkline
owns and operates one storage field in Louisiana. The combined maximum working
gas capacity of the four fields is 44 Bcf. Additionally, the Company, through
Pan Gas, is the owner of a storage field in Kansas with an estimated maximum
working gas capacity of 26 Bcf. PEPL is the operator of the field. In addition
to owning and operating storage fields, the Company also leases storage
capacity. PEPL and Trunkline have retained the right to use up to 15 Bcf and 10
Bcf, respectively, of their storage capacity for system needs. See further
discussion of Order 636 in "Business, Regulation."
During 1997, sales to ProLiance Energy, L.L.C. and Consumers Energy Company
each accounted for approximately 10% of consolidated revenues of the Company. In
1996, no single customer accounted for 10% or more of consolidated revenues. In
1995, sales to Consumers Power Company accounted for approximately 10% of
consolidated revenues. No other customer accounted for 10% or more of
consolidated revenues during 1997, 1996 or 1995.
COMPETITION
The Company'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, terms of
service and flexibility and reliability of service. The Company's pipelines
continue to offer selective discounting to maximize revenues from existing
capacity and to advance projects that provide expanded services to meet the
specific needs of customers.
The Company competes directly with ANR Pipeline Company, Natural Gas
Pipeline Company of America and Texas Gas Transmission Corporation in the
Midwest market area.
1
Natural gas competes with other forms of energy available to the Company'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
alternative fuels, and other factors, including weather, affect the demand for
natural gas in the areas served by the Company.
REGULATION
The FERC has authority to regulate rates and charges for natural gas
transported in or stored for interstate commerce or sold by a natural gas
company in interstate commerce for resale. For further discussion of rate
matters, see Note 3 to the Consolidated Financial Statements, "Regulatory
Matters." The 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 such facilities. Subsidiaries providing natural gas transmission
services 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 Company's pipelines operate as open-access transporters of natural gas.
In 1992, the FERC issued Order 636, which requires open-access pipelines to
provide firm and interruptible transportation services on an equal basis for all
gas supplies, whether purchased from the pipeline or from another gas supplier.
To implement this requirement, Order 636 provided, among other things, for
mandatory unbundling of services that have historically been provided by
pipelines into separate open-access transportation, sales and storage services.
Order 636 allows pipelines to recover eligible costs, known as "transition
costs," resulting from the implementation of Order 636. For further discussion
of Order 636, see Note 3 to the Consolidated Financial Statements, "Regulatory
Matters."
Regulation of the importation and exportation of natural gas is vested
in the Secretary of Energy, who has delegated various aspects of this
jurisdiction to Office of Fossil Fuels of the Department of Energy.
The Company is also subject to the Natural Gas Pipeline Safety Act of 1968,
which regulates gas pipeline safety requirements and to the Hazardous Liquid
Pipeline Safety Act of 1979, which regulates oil and petroleum pipelines.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local regulations with regard
to air and water quality, hazardous and solid waste disposal and other
environmental matters. Certain environmental regulations affecting the Company
include, but are not limited to:
o The Clean Air Act Amendments of 1990;
o The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), which can require any individual or entity which may have owned
or operated a disposal site, as well as transporters or generators of
hazardous wastes which were sent to such site, to share in remediation
costs for the site.
For further discussion of environmental matters involving the Company,
including possible liability and capital costs, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues-
Environmental" and Note 11 to the Consolidated Financial Statements,
"Commitments and Contingencies - Environmental." Except as set forth therein,
compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
protecting the environment, is not expected to have a material adverse effect on
the consolidated results of operations or financial position of the Company.
OTHER MATTERS
Demand for gas transmission of the Company's pipeline systems is seasonal,
with the highest throughput occurring during the colder periods in the first and
fourth quarters.
Foreign operations and export sales were not material to the Company's
business as a whole.
At December 31, 1997, the Company had approximately 1,000 employees.
2
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, the Company may make statements regarding its
expectations, intent or beliefs about future events. These statements are
intended as "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. The Company cautions that assumptions, projections and
expectations about future events may and often do vary from actual results, the
differences between assumptions, projections and expectations and actual results
can be material, and there can be no assurance that the forward-looking
statements will be realized. For a discussion of some factors that could cause
actual achievements and events to differ materially from those expressed or
implied in such forward-looking statements, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition, Current Issues -
Forward-Looking Statements."
OPERATING STATISTICS
- --------------------------------------------------------- -----------------------------------------------------------------------
NATURAL GAS TRANSMISSION YEARS ENDED DECEMBER 31,
- --------------------------------------------------------- -----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Throughput Volumes (TBtu a):
PEPL 659 687 663 626 607
Trunkline 620 632 519 560 633
-------------- ------------- ------------- -------------- -------------
Total 1,279 1,319 1,182 1,186 1,240
========================================================= ============== ============= ============= ============== =============
a Trillion British thermal units
ITEM 2. PROPERTIES.
PEPL's gas transmission system, which consists of four large-diameter
parallel pipelines and 13 mainline compressor stations, extends a distance of
approximately 1,300 miles from producing areas in the Anadarko Basin of Texas,
Oklahoma and Kansas through the states of Missouri, Illinois, Indiana and Ohio
into Michigan. Trunkline's transmission system extends approximately 1,400 miles
from the Gulf Coast areas of Texas and Louisiana through the states of Arkansas,
Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the
Indiana-Michigan border. The system consists principally of three large-diameter
parallel pipelines and 18 mainline compressor stations. PEPL and Trunkline
systems connect with the TETCO system in Lebanon, Ohio.
Trunkline also owns and operates two offshore Louisiana gas supply systems
consisting of 337 miles of pipeline extending approximately 81 miles into the
Gulf of Mexico.
For information concerning natural gas storage properties, see "Business,
Natural Gas Transmission".
Include maps for Natural Gas Transmission
ITEM 3. LEGAL PROCEEDINGS.
See Note 11 to the Consolidated Financial Statements, "Commitments and
Contingencies" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition, Current Issues - Environmental" for a
discussion of legal proceedings.
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
All of the Company's outstanding common stock, without par value, is owned
by PanEnergy. In 1997 and 1996, PEPL declared and paid dividends on common stock
of $75 million and $200 million, respectively, in the form of promissory notes
due PanEnergy bearing interest at prime rates.
3
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------------------- ------------- ------------ ------------ ------------ -------------
IN MILLIONS 1997 1996 1995 1994 1993
- ---------------------------------------------- ------------- ------------ ------------ ------------ -------------
INCOME Operating Revenues $ 534.1 $ 539.3 $ 547.5 $ 745.2 $ 884.7
STATEMENT Operating Expenses 338.8 345.5 350.1 542.2 692.7
------------- ------------ ------------ ------------ -------------
Operating Income 195.3 193.8 197.4 203.0 192.0
Other Income and Expenses 6.3 4.0 - (3.8) 42.2
------------- ------------ ------------ ------------ -------------
Earnings Before Interest and
Taxes 201.6 197.8 197.4 199.2 234.2
Interest Income - Parent - - - 42.6 24.8
Interest Expense 73.0 61.8 37.6 47.5 55.7
------------- ------------ ------------ ------------ -------------
Earnings Before Income Taxes 128.6 136.0 159.8 194.3 203.3
Income Taxes 48.3 48.3 59.1 75.8 83.2
------------- ------------ ------------ ------------ -------------
Net Income $ 80.3 $ 87.7 $ 100.7 $ 118.5 $ 120.1
============= ================================ ============= ============ ============ ============ =============
BALANCE Total Assets $ 1,906.1 $ 1,899.9 $ 1,916.4 $ 1,983.6 $ 2,265.1
SHEET Long-term Debt $ 299.2 $ 299.2 $ 303.7 $ 428.5 $ 503.3
- ------------- -------------------------------- ------------- ------------ ------------ ------------ -------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
INTRODUCTION
Panhandle Eastern Pipe Line Company (PEPL) is a wholly owned subsidiary of
PanEnergy Corp (PanEnergy), which is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). PEPL was incorporated in Delaware in 1929.
PEPL and its subsidiaries (the Company) are primarily engaged in the interstate
transportation and storage of natural gas. The interstate natural gas
transmission and storage operations of the Company are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC).
On June 18, 1997, PanEnergy was merged with a wholly owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted into
the right to receive 1.0444 shares of Duke Energy common stock. In addition,
each option to purchase PanEnergy common stock became an option to purchase
common stock of Duke Energy. The merger was accounted for as a pooling of
interests.
The following information is provided to facilitate increased understanding
of the 1997 and 1996 consolidated financial statements and accompanying notes of
the Company, and should be read in conjunction therewith. Because all of the
outstanding common stock of PEPL is indirectly owned by Duke Energy, the
following discussion has been prepared in accordance with the reduced disclosure
format permitted by Form 10-K for issuers that are wholly owned subsidiaries of
reporting companies under the Securities Exchange Act of 1934 set forth in
General Instruction I (1)(a) and (b) for Form 10-K.
RESULTS OF OPERATIONS
The Company reported consolidated net income of $80.3 million in 1997
compared to consolidated net income of $87.7 million in 1996. Operating income
was $195.3 million in 1997 compared to $193.8 in 1996. Operating income and
earnings before interest and taxes are not materially different, and are
affected by the same fluctuations for the Company.
Earnings before interest and taxes for the Company in 1997 were relatively
flat when compared to the prior year. Revenues decreased $5.2 million in 1997
from the prior year primarily due to lower transportation throughput in 1997
compared to 1996. In 1997, total operating expenses were down $6.7 million from
the prior year due primarily to non-recurring severance and lease expenses in
1996, offset by litigation expenses recorded in 1997. Earnings before interest
and taxes was also improved by the favorable resolution of certain regulatory
matters in 1997 in excess of those in 1996, which increased revenues and other
income.
Other impacts on net income include an increase of interest expense of
$11.2 million, or 18.1%, as compared to 1996 as a result of higher average
outstanding short term notes payable-parent.
4
LIQUIDITY AND CAPITAL RESOURCES
Capital and investment expenditures for 1997 and 1996 were $105.2 million
and $51.6 million, respectively. This increase is primarily due to the
Terrebonne business expansion project. In July 1997, the FERC approved
Trunkline's expansion of the Terrebonne system, with a planned second quarter
1998 in-service date, which targets expanding natural gas production in the Gulf
of Mexico.
In 1997, PanEnergy also announced the Spectrum project, which will utilize
existing and released capacity on PanEnergy's four interstate pipelines to
provide up to 500 billion British thermal units per day of firm transportation
capacity from the Chicago area to the East Coast.
The Company plans to actively maintain its facilities and also pursue
business expansion as opportunities arise. Projected 1998 capital and investment
expenditures, including allowance for funds used during construction, are
approximately $71.1 million. These projections are subject to periodic review
and revision. Actual expenditures incurred may vary from estimates due to
various factors, including business expansion opportunities and environmental
matters. Expenditures for 1998 are expected to be funded by cash from operations
and/or the collection of intercompany amounts owed the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. The Company is exposed to changes in interest rates as
a result of significant financing through its issuance of variable-rate debt and
fixed-rate debt. The Company manages its interest rate exposure by limiting its
variable-rate exposure to a certain percentage of total capitalization, as set
by policy, and by monitoring the effects of market changes in interest rates.
(See Notes 8 and 9 to the Consolidated Financial Statements.) All of the
Company's variable-rate debt is due to PanEnergy.
If market interest rates average 1% more in 1998 than in 1997, the
Company's intercompany interest expense would increase, and income before taxes
would decrease by approximately $6.8 million. This amount has been determined by
considering the impact of the hypothetical interest rates on the Company's
variable-rate debt balances as of December 31, 1997. These analyses do not
consider the effects of the reduced level of overall economic activity that
could exist in such an environment. In the event of a significant change in
interest rates, management would likely take actions to further mitigate its
exposure to the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, the sensitivity analysis assumes
no changes in the Company's financial structure.
CURRENT ISSUES
OPERATIONS OUTLOOK AND COMPETITION. Due to increased competition,
especially in the Midwestern section of the U.S., limited opportunities for
growth exist for the Company's future natural gas transmission operations. The
market for transmission of natural gas to the Midwest is increasingly
competitive, and may become more so, in light of projects in progress to
increase Midwest transmission capacity for gas originating in Canada and the
Rocky Mountain region. The Company continues to offer selective discounting to
maximize revenues from existing capacity and to advance projects that provide
expanded services to meet the specific needs of customers.
Currently, the interstate natural gas transmission industry is regulated
on a basis designed to recover the costs of providing services to customers. If
competitive forces do not allow interstate pipelines to charge rates that would
allow them to recover the costs of providing service, companies would no longer
be able to follow the specialized accounting rules for regulated companies under
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation." Such companies would therefore be required to
write off their regulatory assets. The regulatory assets of the Company are
indicated on the Consolidated Balance Sheets. Management cannot predict the
potential impact of these competitive forces on the Company's future results of
operations or financial position. However, the Company continues to manage costs
and posture the business to operate in a competitive environment.
ENVIRONMENTAL. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal
and other environmental matters.
SUPERFUND SITES. The Company is considered by regulators to be a
potentially responsible party and may be subject to future liability at two
federal Superfund sites. The Company will share in any liability associated with
remediation of contamination at these sites with other potentially responsible
parties. Management is of the opinion that resolution of these matters will not
have a material adverse effect on the consolidated results of operations or
financial position of the Company.
5
PCB (POLYCHLORINATED BIPHENYL) ASSESSMENT AND CLEAN-UP PROGRAMS. The
Company has identified environmental contamination at certain sites on its
systems and is undertaking clean-up programs at these sites. The contamination
resulted from the past use of lubricants containing PCBs and the prior use of
wastewater collection facilities and other on-site disposal areas. Soil and
sediment testing, to date, has detected no significant off-site contamination.
The Company has communicated with the Environmental Protection Agency (EPA) and
appropriate state regulatory agencies on these matters. Environmental clean-up
programs are expected to continue until 2002.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on its systems, which were included in Other
Current Liabilities and Deferred Credits and Other Liabilities in the
Consolidated Balance Sheets. These cost estimates represent gross clean-up costs
expected to be incurred, have not been discounted or reduced by customer
recoveries and do not include fines, penalties or third-party claims. Costs
expected to be recovered from customers are included in the Consolidated Balance
Sheets as of December 31, 1997 and 1996, as Regulatory Assets.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
AIR QUALITY CONTROL. In 1994, the State of Missouri issued a Notice of
Violation to the Company alleging violations of Missouri air pollution
regulations at the Company's Houstonia compressor station. The Company is in
negotiations with the State to resolve this matter. The State is seeking a
penalty and correction of the alleged violations.
LITIGATION AND CONTINGENCIES. For information concerning litigation and
other commitments and contingencies, see Note 11 to the Consolidated Financial
Statements.
COMPUTER SYSTEMS CHANGES FOR THE YEAR 2000. The Company is incurring
incremental costs to modify or replace existing computer systems to accommodate
the year 2000 and beyond. The Company is currently making the necessary
modifications to its programs and is of the opinion that remaining modifications
will be completed before they become problematic. Management is of the opinion
that the costs associated with these modifications will not have a material
adverse effect on the consolidated results of operations or financial position
of the Company.
FORWARD-LOOKING STATEMENTS. From time to time, the Company may make
statements regarding its expectations, intent or beliefs about future events.
These statements are intended as "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. The Company cautions that assumptions,
projections and expectations about future events may and often do vary from
actual results, the differences between assumptions, projections and
expectations and actual results can be material, and there can be no assurance
that the forward-looking statements will be realized. The following are some of
the factors that could cause actual achievements and events to differ materially
from those expressed or implied in such forward-looking statements: state and
federal legislative and regulatory initiatives that affect cost and investment
recovery, have an impact on rate structures, and affect the speed and degree to
which competition enters the natural gas industry; the weather and other natural
phenomena; the timing and extent of changes in commodity prices and interest
rates; changes in environmental and other laws and regulations to which the
Company and its subsidiaries are subject or other external factors over which
the Company has no control; the results of financing efforts; growth in
opportunities for the Company's subsidiaries and diversified operations; and the
effect of the Company's accounting policies, in each case during the periods
covered by the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition, Quantitative and Qualitative Disclosures About Market
Risk."
6
Item 8. Financial Statements and Supplementary Data
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In millions)
Year Ended December 31
---------------------------------------
1997 1996 1995
------ ------ ----
Operating Revenues
Transportation and storage of natural gas $ 500.8 $ 510.1 $ 516.8
Other 33.3 29.2 30.7
------------ -------- ---------
Total operating revenues 534.1 539.3 547.5
------------- --------- ----------
Operating Expenses
Operation and maintenance 253.7 260.7 263.1
Depreciation and amortization 58.9 57.8 59.2
Property and other taxes 26.2 27.0 27.8
------------- -------- -------
Total operating expenses 338.8 345.5 350.1
------------- --------- -------
Operating Income 195.3 193.8 197.4
------------- -------- --------
Other Income and Expenses 6.3 4.0 -
------------- -------- -------
Earnings Before Interest and Taxes 201.6 197.8 197.4
Interest Expense 73.0 61.8 37.6
------------- --------- -------
Earnings Before Income Taxes 128.6 136.0 159.8
Income Taxes 48.3 48.3 59.1
------------- ------- -------
Net income $ 80.3 $ 87.7 $ 100.7
============== ========= ==========
See Notes to Consolidated Financial Statements.
7
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
Years Ended December 31
--------------------------------------------------------
1997 1996 1995
--------------- ---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 80.3 $ 87.7 $ 100.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 60.9 60.8 63.0
Deferred income taxes 2.1 (87.9) (3.7)
Rate settlement (70.5) (9.5) (5.4)
(Increase) Decrease in
Receivables (47.9) (31.0) (11.4)
Inventory 6.1 11.0 10.4
Other current assets 11.2 (1.5) 24.1
Increase (Decrease) in
Accounts payable 15.1 (2.5) 2.7
Taxes accrued (9.7) 8.2 (13.7)
Other current liabilities 35.0 23.2 (3.8)
Other, net 23.8 47.5 (12.4)
--------------- ---------------- ----------------
Net cash provided by operating activities 106.4 106.0 150.5
--------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital and investment expenditures (105.2) (51.6) (64.6)
Net decrease (increase) in advances receivable - parent (9.2) (84.2) 25.6
Retirements and other 7.9 29.7 13.4
--------------- ---------------- ----------------
Net cash used in investing activities (106.5) (106.1) (25.6)
--------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for the redemption of long-term debt - - (125.1)
--------------- ---------------- ----------------
Net cash used in financing activities - - (125.1)
--------------- ---------------- ----------------
Net decrease in cash and cash equivalents (0.1) (0.1) (0.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 0.1 0.2 0.4
=============== ================ ================
CASH AND CASH EQUIVALENTS AT END OF YEAR $ - $ 0.1 $ 0.2
=============== ================ ================
SUPPLEMENTAL DISCLOSURES
Cash paid for interest (net of amount capitalized) $ 80.5 $ 62.2 $ 39.7
--------------- ---------------- ----------------
Cash paid for income taxes $ 64.8 $ 59.8 $ 78.9
--------------- ---------------- ----------------
See Notes to Consolidated Financial Statements.
8
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
December 31
------------------------------------
1997 1996
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ - $ 0.1
Receivables 106.0 58.1
Inventory and supplies 38.2 44.3
Current deferred income tax 4.3 8.6
Current portion of regulatory assets 6.5 8.9
Other 37.3 48.5
---------------- ----------------
Total current assets 192.3 168.5
---------------- ----------------
INVESTMENTS AND OTHER ASSETS
Advances and note receivable - parent 662.1 652.9
Investment in affiliates 47.0 44.6
Other 7.1 15.3
---------------- ----------------
Total investments and other assets 716.2 712.8
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
Cost 2,733.9 2,672.2
Less accumulated depreciation and amortization 1,776.0 1,749.6
---------------- ----------------
Net property, plant and equipment 957.9 922.6
---------------- ----------------
REGULATORY ASSETS
Debt expense 12.7 14.9
Other 27.0 81.1
---------------- ----------------
Total regulatory assets 39.7 96.0
---------------- ----------------
TOTAL ASSETS $ 1,906.1 $ 1,899.9
================ ================
See Notes to Consolidated Financial Statements.
9
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
December 31
------------------------------------
1997 1996
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable $ 45.5 $ 30.4
Notes payable - parent 675.0 600.0
Taxes accrued 76.7 86.4
Interest accrued 8.0 8.0
Other 114.1 116.9
---------------- ----------------
Total current liabilities 919.3 841.7
---------------- ----------------
LONG-TERM DEBT 299.2 299.2
---------------- ----------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 82.1 83.5
Other 104.5 179.8
---------------- ----------------
Total deferred credits and other liabilities 186.6 263.3
---------------- ----------------
COMMON STOCKHOLDER'S EQUITY
Common stock, no par, 1,000 shares authorized, issued and outstanding 1.0 1.0
Paid-in capital 465.9 465.9
Retained earnings 34.1 28.8
---------------- ----------------
Total common stockholder's equity 501.0 495.7
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,906.1 $ 1,899.9
================ ================
See Notes to Consolidated Financial Statements.
10
PANHANDLE EASTERN PIPE LINE COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
(IN MILLIONS)
Years Ended December 31
---------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
COMMON STOCK
Balance at beginning of year $ 1.0 $ 1.0 $ 1.0
---------------- ---------------- ----------------
BALANCE AT END OF YEAR 1.0 1.0 1.0
---------------- ---------------- ----------------
PAID-IN-CAPITAL
Balance at beginning of year 465.9 465.9 471.8
Other - - (5.9)
---------------- ---------------- ----------------
BALANCE AT END OF YEAR 465.9 465.9 465.9
---------------- ---------------- ----------------
RETAINED EARNINGS
Balance at beginning of year 28.8 141.1 440.4
Net income 80.3 87.7 100.7
Common stock dividends (75.0) (200.0) (400.0)
---------------- ---------------- ----------------
BALANCE AT END OF YEAR 34.1 28.8 141.1
---------------- ---------------- ----------------
TOTAL COMMON STOCKHOLDER'S EQUITY $ 501.0 $ 495.7 $ 608.0
================ ================ ================
See Notes to Consolidated Financial Statements
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NOTE 1. NATURE OF OPERATIONS
Panhandle Eastern Pipe Line Company (PEPL) is a wholly owned subsidiary of
PanEnergy Corp (PanEnergy), which is an indirect wholly owned subsidiary of Duke
Energy Corporation (Duke Energy). PEPL was incorporated in Delaware in 1929.
PEPL and its subsidiaries (the Company) are primarily engaged in the interstate
transportation and storage of natural gas. The interstate natural gas
transmission and storage operations of the Company are subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC).
On June 18, 1997, PanEnergy was merged with a wholly owned subsidiary of
Duke Energy, with PanEnergy as the surviving corporation. Pursuant to the
merger, each share of PanEnergy's outstanding common stock was converted into
the right to receive 1.0444 shares of Duke Energy common stock. In addition,
each option to purchase PanEnergy common stock became an option to purchase
common stock of Duke Energy. The merger was accounted for as a pooling of
interests.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements reflect consolidation
of all of the Company's majority-owned subsidiaries after the elimination of
intercompany transactions. Investments in other entities that are not majority
owned and where the Company has significant influence over operations are
accounted for using the equity method.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles appropriate in the circumstances to
reflect in all material respects the substance of events and transactions which
should be included. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported. However, actual results could differ from these
estimates.
CASH AND CASH EQUIVALENTS. All liquid investments with maturities at date
of purchase of three months or less are considered cash equivalents.
INVENTORY. Inventory, which consists of gas held for operations and
materials and supplies, is recorded at the lower of cost or market, primarily
using the weighted average cost method ($19.7 million and $31.1 million at
December 31, 1997 and 1996, respectively) and the last in first out method
($18.5 million and $13.2 million at December 31, 1997 and 1996, respectively).
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at
original cost. The Company capitalizes all construction-related direct labor and
materials. The cost of renewals and betterments that extend the useful life of
property is also capitalized. The cost of repairs and replacements is charged to
expense. Depreciation is computed using the straight-line method. The Company's
composite weighted-average depreciation rates were 2.21, 2.13 and 2.14 percent
for 1997, 1996 and 1995, respectively.
At the time property, plant and equipment maintained by the Company's
FERC-regulated operations are retired, the original cost plus the cost of
retirement, less salvage, is charged to accumulated depreciation and
amortization. When entire FERC-regulated operating units are sold or
non-regulated properties are retired or sold, the property and related
accumulated depreciation and amortization accounts are reduced and any gain or
loss is recorded in income, unless otherwise required by the FERC.
UNAMORTIZED DEBT PREMIUM, DISCOUNT AND EXPENSE. Expenses incurred in
connection with the issuance of presently outstanding long-term debt, and
premiums and discounts relating to such debt, are amortized over the terms of
the respective issues. Also, any call premiums or unamortized expenses
associated with refinancing higher-cost debt obligations used to finance
regulated assets and operations are amortized consistent with regulatory
treatment of these items.
ENVIRONMENTAL EXPENDITURES. Expenditures that relate to an existing
condition caused by past operations, and do not contribute to current or future
revenue generation, are expensed. Environmental expenditures relating to current
or future revenues are expensed or capitalized as appropriate. Liabilities are
recorded when environmental assessments and/or clean-ups are probable and the
costs can
12
be reasonably estimated. Certain of these environmental assessments and clean-up
costs have been deferred and are included in Regulatory Assets as they are
expected to be recovered from the Company's customers.
COST-BASED REGULATION. The regulated operations of the Company are subject
to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Accordingly, the
Company records certain assets and liabilities that result from the effects of
the ratemaking process that would not be recorded under generally accepted
accounting principles for non-regulated entities. The regulatory assets and
regulatory liabilities of the Company are classified as Regulatory Assets and
Deferred Credits and Other Liabilities, respectively, in the Consolidated
Balance Sheets. The Company regularly evaluates the continued applicability of
SFAS No. 71, considering such factors as the impact of competition and necessity
to discount cost based rates charged to customers. Increased competition might
require entities to reduce their asset balances to reflect a market basis less
than cost and would also require entities to write off their associated
regulatory assets. Management cannot predict the potential impact, if any, of
increased competition on the Company's future financial position and results of
operations. However, the Company continues to position itself to effectively
meet these challenges by maintaining prices that are competitive.
REVENUES. The Company recognizes transportation and storage revenues in the
period service is provided. When rate cases associated with the transportation
and storage of natural gas are pending final FERC approval, a portion of the
revenues collected by the Company is subject to possible refund. The Company has
established reserves where required for such cases. See Note 3, Regulatory
Matters.
During 1997, sales to ProLiance Energy, L.L.C. and Consumers Energy Company
each accounted for approximately 10% of consolidated revenues of the Company. In
1996, no single customer accounted for 10% or more of consolidated revenues. In
1995, sales to Consumers Power Company accounted for approximately 10% of
consolidated revenues. No other customer accounted for 10% or more of
consolidated revenues during 1997, 1996 or 1995.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC). AFUDC represents the
estimated debt and equity costs of capital funds necessary to finance the
construction of new regulated facilities. AFUDC is a non-cash item and is
recognized as a cost of Property, Plant and Equipment, with offsetting credits
to Other Income and Expenses and to Interest Expense. After construction is
completed, the Company is permitted to recover these costs, including a fair
return, through their inclusion in rate base and in the provision for
depreciation.
Rates used for capitalization of AFUDC by the Company's regulated
operations are calculated in compliance with FERC rules.
INCOME TAXES. Prior to the merger, PanEnergy and its subsidiaries filed a
consolidated federal income tax return. Subsequent to the merger, Duke Energy
and its subsidiaries file a consolidated federal income tax return. Federal
income taxes have been provided by the Company on the basis of its separate
company income and deductions in accordance with established practices of the
consolidated group.
Deferred income taxes have been provided for temporary differences.
Temporary differences occur when events and transactions recognized for
financial reporting result in taxable or tax-deductible amounts in different
periods.
RECLASSIFICATIONS. Certain amounts have been reclassified in the
consolidated financial statements to conform to the current presentation.
NOTE 3. REGULATORY MATTERS
FERC ORDER 636 AND NATURAL GAS TRANSITION COSTS. The Company's interstate
natural gas pipelines primarily provide transportation and storage services
pursuant to FERC Order 636. Order 636 allows pipelines to recover eligible costs
resulting from implementation of the order (transition costs).
On July 16, 1996, the U.S. Court of Appeals for the District of Columbia
upheld, in general, all aspects of Order 636 and remanded certain issues for
further explanation. One of the issues remanded for further explanation is
whether pipelines should be entitled to recover 100% of gas supply realignment
(GSR) costs. On February 27, 1997, FERC issued an order reaffirming the right of
interstate pipelines to recover 100% of GSR costs. This matter is substantially
mitigated by PEPL's transition cost settlement agreements with customers.
The Company believes the exposure associated with gas purchase contract
commitments is substantially mitigated by transition cost recoveries pursuant to
customer settlements, Order 636 and other mechanisms, and that this issue will
not have a material adverse effect on consolidated results of operations or
financial position of the Company.
13
JURISDICTIONAL TRANSPORTATION AND SALES RATES. On April 1, 1992 and
November 1, 1992, PEPL placed into effect, subject to refund, general rate
increases. On February 26, 1997, the FERC approved PEPL's settlement agreement
which provided final resolution of refund matters and established prospective
rates. The agreement terminated other actions relating to these proceedings as
well as PEPL's restructuring of rates and transition cost recoveries related to
FERC Order 636. As a result of the resolution of this matter, PEPL refunded
$37.8 million to customers. The settlement will not have a material impact on
future operating revenues or financial position of the Company.
As a result of the resolution of these and certain other proceedings, the
Company recorded earnings before interest and taxes of $32.7 million, $8
million, and $20.6 million in 1997, 1996, and 1995, respectively.
Effective August 1, 1996, Trunkline placed into effect a general rate
increase, subject to refund, reflecting an annual cost of service increase of $5
million. Hearings were completed in the third quarter of 1997.
KANSAS AD-VALOREM TAX. In conjunction with a FERC order issued in
September 1997, certain natural gas producers were required to refund
previously collected Kansas ad-valorem taxes to interstate natural gas
pipelines. These pipelines were also ordered to refund these amounts to their
customers. All payments are to be made in compliance with proscribed
FERC requirements. At December 31, 1997, the Company had $53.6 million due from
natural gas producers included in Accounts Receivable. Also at December 31,
1997, the Company had $53.6 million due to customers included in Other Current
Liabilites.
NOTE 4. RELATED PARTY TRANSACTIONS
A summary of related party transactions included in the consolidated
statements of income for each of the three years in the period ended December
31, 1997 is as follows:
- ------------------------------------- ------------ ----------- -----------
IN MILLIONS 1997 1996 1995
- ------------------------------------- ------------ ----------- -----------
Transportation of natural gas $ 31.8 $ 30.2 $ 33.4
Other operating revenues 27.1 8.8 10.7
Operation and maintenance (1) 65.5 67.9 48.5
Interest expense, net 48.8 34.8 (0.3)
- ------------------------------------- ------------ ----------- -----------
(1) Includes allocated retirement plan costs.
A summary of certain balances due to or due from related parties included
in the consolidated balance sheets at December 31, 1997 and 1996 is as follows:
- --------------------------------------------- ------------ -----------
IN MILLIONS 1997 1996
- --------------------------------------------- ------------ -----------
Receivables $ 8.1 $ 5.0
Accounts payable 36.6 19.6
Taxes accrued 54.8 63.4
- --------------------------------------------- ------------ -----------
Advances and Note Receivable-Parent included a $30 million note at December
31, 1997 and 1996 which bears interest at the London Interbank Offered Rate plus
.5%. The remainder of Advances and Note Receivable-Parent do not bear interest.
Advances are carried as open accounts and are not segregated between current and
non-current amounts. Increases and decreases in advances result from the
movement of funds to provide for operations, capital expenditures and debt
payments of the Company.
NOTE 5. GAS IMBALANCES
The consolidated balance sheets included in-kind balances as a result of
differences in gas volumes received and delivered. At December 31, 1997 and
1996, other current assets include $24.2 million and $20.4 million,
respectively, and other current liabilities include $22.0 million and $14.1
million, respectively, related to gas imbalances.
14
NOTE 6. INCOME TAXES
Income tax expense for the years ended December 31, 1997, 1996 and 1995
consisted of the following:
- ------------------------------------- ------------ ------------- ------------
IN MILLIONS 1997 1996 1995
- ------------------------------------- ------------ ------------- ------------
Current income taxes
Federal $ 41.4 $ 123.1 $ 54.0
State 4.8 13.1 8.8
-------- --------- --------
Total current income taxes 46.2 136.2 62.8
----------- -------- -------
Deferred income taxes, net
Federal 1.3 (75.6) 2.3
State 0.8 (12.3) (6.0)
-------- ---------- ----------
Total deferred income taxes, net 2.1 (87.9) (3.7)
-------- ---------- ----------
Total income tax expense $ 48.3 $ 48.3 $ 59.1
====== ======== ======
- ------------------------------------- ------------ ------------- ------------
Total income tax differs from the amount computed by applying the federal
income tax rate of 35% to income before income taxes. The reasons for this
difference are as follows:
- -------------------------------------------------------- ------------ ------------- ------------
IN MILLIONS 1997 1996 1995
- -------------------------------------------------------- ------------ ------------- ------------
Income tax, computed at the statutory rate $ 45.0 $ 47.6 $ 55.9
Adjustments resulting from:
State income tax, net of federal income tax effect 3.7 0.5 1.8
Other items, net (0.4) 0.2 1.4
----- --------- --------
Total income tax expense $ 48.3 $ 48.3 $ 59.1
====== ====== ======
Effective tax rate 37.6% 35.5% 37.0%
- -------------------------------------------------------- ------------ ------------- ------------
The tax effects of temporary differences that resulted in deferred income
tax assets and liabilities, and a description of the significant items that
created these differences as of December 31, 1997 and 1996 , are as follows:
- ---------------------------------------------------------- ------------ -------------
IN MILLIONS 1997 1996
- ---------------------------------------------------------- ------------ -------------
Deferred credits and other liabilities $ 94.5 $ 127.5
Other 3.0 -
--------- --------
Total deferred income tax assets 97.5 127.5
--------- --------
Investments and other assets (16.1) (16.0)
Property, plant and equipment (130.9) (129.8)
Regulatory assets (22.7) (46.8)
Other - (4.7)
---------- --------
Total deferred income tax liabilities (169.7) (197.3)
---------- --------
State deferred income tax, net of federal tax effect (5.6) (5.1)
---------- ---------
Net deferred income tax liability (77.8) (74.9)
Portion classified as current asset 4.3 8.6
---------- ---------
Noncurrent liability $ (82.1) $ (83.5)
========== ==========
15
NOTE 7. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment by classification as of December
31, 1997 and 1996 is as follows:
- ----------------------------------------------------- ----------------- ----------------
In Millions 1997 1996
- ----------------------------------------------------- ----------------- ----------------
Transmission $ 1,924.7 $ 1,933.0
Gathering 256.6 215.6
Underground storage 320.0 319.5
General plant 171.7 180.4
Construction work in progress 60.9 23.7
---------- ---------
Total property, plant, and equipment 2,733.9 2,672.2
Less accumulated depreciation and amortization 1,776.0 1,749.6
--------- --------
Net property, plant and equipment $ 957.9 $ 922.6
===================================================== ================= ================
NOTE 8. FINANCIAL INSTRUMENTS
During 1997, the Company terminated its agreement to sell accounts
receivable which was entered into in 1996. Also in 1997, the liquefied natural
gas (LNG) settlement receivables sale agreement, which was entered into in 1993,
expired, as all the receivables were collected. Amounts outstanding at December
31, 1996 under these agreements were $34 million and $29.9 million, respectively
and were included in Other Current Liabilities in the Consolidated Balance
Sheets.
The Company's financial instruments include $299.2 million of long-term
debt at both December 31, 1997 and 1996 with an approximate fair value of $313.1
million and $302.6 million as of December 31, 1997 and 1996, respectively.
Estimated fair value amounts of long-term debt were obtained from independent
parties. Judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates determined as of December
31, 1997 and 1996 are not necessarily indicative of the amounts the Company
could have realized in current market exchanges.
The fair value of cash and cash equivalents and notes payable - parent are
not materially different from their carrying amounts because of the short-term
nature of these instruments or the stated rates approximating market rates.
The financial instruments, guarantees made to affiliates, have no book
value associated with them and there are no fair values readily determinable
since quoted market prices are not available. The fair values of advances and
note receivable - parent are not readily determinable since such amounts are
carried as open accounts. See Note 4, Related Party Transactions.
NOTE 9. DEBT AND CREDIT FACILITIES
Long-term debt outstanding as of December 31, 1997 and 1996 consisted of
the following:
- ---------------------------------------------- -------------- -------------- ---------------
DOLLARS IN MILLIONS Year Due 1997 1996
- ---------------------------------------------- -------------- -------------- ---------------
7 7/8% Notes 2004 $ 100.0 $ 100.0
7.2% - 7.95% Debentures 2023 - 2024 200.0 200.0
Unamortized debt discount and premium, net (0.8) (0.8)
-------------- ---------------
Total long-term debt $ 299.2 $ 299.2
============================================== ============== ============== ===============
Notes payable-parent includes a $75 million dividend declared on December
31, 1997 in the form of a promissory note due PanEnergy, bearing interest at
prime rate and maturing on June 30, 1998. Notes payable-parent also includes a
$600 million note bearing interest at prime rate and maturing on June 30, 1998.
NOTE 10. INVESTMENT IN AFFILIATES
Investments in other entities that are not majority owned and where the
Company has significant influence over operations are accounted for using the
equity method. These investments include undistributed earnings of $14.8 million
in 1997 and $15.5 million in 1996. The Company's proportionate share of net
income from these affiliates for the years ended December 31, 1997, 1996 and
1995 was $5.3 million, $5.7 million, and $7.5 million, respectively. These
amounts are reflected in Other Operating Revenues in the Consolidated Statements
of Income. Investment in affiliates includes the following two investments:
16
NORTHERN BORDER PARTNERS, L.P. Northern Border Partners, L.P. is a master
limited partnership (MLP) that owns 70% of Northern Border Pipeline Company
(Northern Border), a partnership operating a pipeline transporting natural gas
from Canada to the Midwest area of the United States. The Company has general
partner interests as well as subordinated limited partnership interests,
totaling 7.7%, in Northern Border Partners, L.P., and thus, an indirect 5.4%
ownership interest in Northern Border.
WESTANA GATHERING COMPANY. Westana Gathering Company is a joint venture
that provides gathering, processing and marketing services for natural gas
producers in Oklahoma.
NOTE 11. COMMITMENTS AND CONTINGENCIES
FUTURE CONSTRUCTION COSTS. The Company plans to actively maintain its
regulated facilities, and also pursue business expansion of its regulated
operations as opportunities arise. Projected 1998 capital and investment
expenditures, including allowance for funds used during construction are
approximately $71.1 million. These projections are subject to periodic review
and revisions. Actual expenditures incurred may vary from such estimates due to
various factors, including business expansion opportunities and environmental
matters.
ENVIRONMENTAL. The Company is subject to federal, state and local
regulations regarding air and water quality, hazardous and solid waste disposal,
and other environmental matters.
The Company has identified environmental contamination at certain sites on
the Company's systems and is undertaking clean-up programs at these sites. The
contamination resulted from the past use of lubricants containing PCBs and the
prior use of wastewater collection facilities and other on-site disposal areas.
Soil and sediment testing, to date, has detected no significant off-site
contamination. The Company has communicated with the Environmental Protection
Agency and appropriate state regulatory agencies on these matters. Environmental
clean-up programs are expected to continue until 2002.
At December 31, 1997 and 1996, the Company had accrued liabilities for
remaining estimated clean-up costs on the Company's systems which are included
in Other Current Liabilities and Deferred Credits and Other Liabilities in the
Consolidated Balance Sheets. These cost estimates represent gross clean-up costs
expected to be incurred, have not been discounted or reduced by customer
recoveries and do not include fines, penalties or third-party claims. Costs to
be recovered from customers are included in the Consolidated Balance Sheets as
of December 31, 1997 and 1996, as Regulatory Assets.
The federal and state clean-up programs are not expected to interrupt or
diminish the Company's ability to deliver natural gas to customers. Based on the
Company's experience to date and costs incurred for clean-up operations,
management believes the resolution of matters relating to the environmental
issues discussed above will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
LITIGATION. On April 25, 1997, a group of affiliated plaintiffs that own
and/or operate various pipeline and marketing companies and partnerships
primarily in Kansas filed suit against PEPL in the U.S. District Court for the
Western District of Missouri. The plaintiffs allege that PEPL has engaged in
unlawful and anti-competitive conduct with regard to requests for interconnects
with the PEPL system for service to the Kansas City area. Asserting that PEPL
has violated the antitrust laws and tortiously interfered with the plaintiffs'
contracts with third parties, the plaintiffs seek compensatory and punitive
damages in unspecified amounts. Periodically, similar disputes arise with other
natural gas marketers and pipeline companies concerning interconnections and
other issues involving access to the Company's natural gas transmission systems.
Management is of the opinion that the final disposition of these proceedings
will not have a material adverse effect on the consolidated results of
operations or financial position of the Company.
On May 13, 1997, Anadarko Petroleum Corporation (Anadarko) filed suits
against PEPL and other affiliates, as defendants, both in the United States
District Court for the Southern District of Texas and State District Court of
Harris County, Texas. Anadarko claims that it was effectively indemnified by the
defendants against any responsibility for refunds of Kansas ad-valorem taxes
which are due purchasers of gas from Anadarko, retroactive to 1983. Management
is of the opinion that the final disposition of these proceedings will not have
a material adverse effect on the consolidated results of operations or financial
position of the Company.
The Company is also involved in 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, the Company has made accruals in
accordance with SFAS No. 5, "Accounting for Contingencies," in order to provide
for such matters. Management is of the opinion that the final disposition of
these matters will not have a material adverse effect on the consolidated
results of operations or financial position of the Company.
17
OTHER COMMITMENTS AND CONTINGENCIES. In 1993, the U.S. Department of the
Interior announced its intention to seek additional royalties from gas producers
as a result of payments received by such producers in connection with past
take-or-pay settlements, and buyouts and buydowns of gas sales contracts with
natural gas pipelines. The Company's pipelines, with respect to certain producer
contract settlements, may be contractually required to reimburse or, in some
instances, to indemnify producers against such royalty claims. The potential
liability of the producers to the government and of the pipelines to the
producers involves complex issues of law and fact which are likely to take
substantial time to resolve. If required to reimburse or indemnify the
producers, the Company's pipelines will file with FERC to recover a portion of
these costs from pipeline customers. Management is of the opinion that the
resolution of this matter will not have a material adverse effect on the
consolidated results of operations or financial position of the Company.
Under the terms of a settlement related to a transportation agreement between
PEPL and Northern Border, PEPL guarantees payment to Northern Border under a
transportation agreement held by an affiliate of Pan-Alberta Gas Limited. The
transportation agreement requires estimated total payments of $78.3 million for
1998 through 2001. In the opinion of management, the probability that the
Company will be required to perform under this guarantee is remote.
LEASES. The Company utilizes assets under operating leases in several
areas of operations. Consolidated rental expense amounted to $20.0 million,
$29.6 million, and $16.8 million in 1997, 1996, and 1995, respectively. Future
minimum rental payments under the Company's various operating leases for the
years 1998 through 2002 are $14.3 million, $13.9 million, $13.0 million, $10.3
million, and $6.9 million, respectively.
NOTE 12. BENEFIT PLANS
RETIREMENT PLAN. The Company participates in PanEnergy's non-contributory
defined benefit retirement plan covering most employees with a minimum of one
year vesting service. The plan provides retirement benefits for eligible
employees of the Company that are generally based on an employee's years of
benefit accrual service and highest average eligible earnings. PanEnergy's
policy is to fund amounts, as necessary, on an actuarial basis to provide assets
sufficient to meet benefits to be paid to plan members. With respect to the
entire plan, the fair value of the plan assets of $747.8 million and $857.5
million at December 31, 1997 and 1996, respectively, exceeded the actuarially
computed present value of the vested and non-vested accumulated benefit
obligations of $205.6 million and $384.4 million as of December 31, 1997 and
1996, respectively.
Assumptions used in PanEnergy's pension and other postretirement benefits
accounting include:
- --------------------------------------------------- ------------ ------------- ------------
PERCENT (%) 1997 1996 1995
- --------------------------------------------------- ------------ ------------- ------------
Discount rate 7.25 7.50 7.50
Salary increase 4.75 5.00 5.00
Expected long-term rate of return on plan assets 9.25 9.50 9.50
Assumed tax rate, where applicable 39.60 39.60 39.60
- --------------------------------------------------- ------------ ------------- ------------
The Company's net periodic pension benefit, as allocated by PanEnergy, was
$12.6 million, $11.0 million and $10.6 million for the years ended December 31,
1997, 1996 and 1995, respectively.
PanEnergy also sponsors, and the Company participates in, an employee
savings plan which covers substantially all employees. The Company expensed plan
contributions of $3.3 million, $3.4 million and $3.8 million in 1997, 1996 and
1995, respectively.
OTHER POSTRETIREMENT BENEFITS. The Company, in conjunction with PanEnergy,
provides certain health care and life insurance benefits for retired employees
on a contributory and noncontributory basis. Substantially all employees may
become eligible for these benefits if they have met certain age and service
requirements as defined in the plans.
The Company accrues such benefit costs over the active service period of
employees to the date of full eligibility for the benefits. The net unrecognized
transition obligation, resulting from the implementation of accrual accounting,
is being amortized over approximately 20 years. With respect to the entire
plan, the fair value of the plan assets was $121.7 million and $97.7 million at
December 31, 1997 and 1996, respectively, and the accumulated postretirement
benefit obligation was $256.2 million and $232.7 million at December 31, 1997
and 1996, respectively.
It is the Company's and PanEnergy's general policy to fund accrued
postretirement health care costs. PanEnergy's retiree life insurance plan is
fully funded based on actuarially-determined requirements.
The Company's net periodic postretirement benefit cost, as allocated by
PanEnergy, was $7.2 million, $7.1 million and $6.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
18
The assumed health care cost trend rate used to estimate postretirement
benefits was 6.5% in 1997. This rate is expected to decrease, with a 5.5%
ultimate trend rate expected to be achieved by 1999. The effect of a 1% increase
in the assumed health care cost trend rate for each future year would result in
a $0.3 million increase in the annual aggregate postretirement benefit cost and
a $5.1 million increase in PanEnergy's accumulated postretirement benefit
obligation attributable to the Company at December 31, 1997.
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------- --------------- --------------- --------------- --------------- --------------
First Second Third Fourth
IN MILLIONS Quarter Quarter Quarter Quarter Total
- -------------------------------- --------------- --------------- --------------- --------------- --------------
1997
Operating revenues $ 166.4 A B $ 119.3 $ 115.6 $ 132.8 $ 534.1
Operating income 88.2 A 43.6 24.3 39.2 195.3
Net income 47.7 B 18.3 3.6 10.7 80.3
1996
Operating revenues $ 152.8 A $ 120.0 $ 124.3 $ 142.2 $ 539.3
Operating income 54.8 A 46.1 36.0 56.9 193.8
Net income 24.0 20.5 19.3 23.9 87.7
================================ =============== =============== =============== =============== ==============
A For the first quarter of 1997 and 1996, $1.3 million and $1.4 million,
respectively, related to equity in earnings of unconsolidated affiliates
were reclassed to operating revenues from other income to be consistent
with the Company's current presentation.
B Includes the effect of the favorable resolution of certain regulatory
matters in 1997.
Amounts reported on a quarterly basis are not necessarily indicative of
amounts expected for the respective years due to the effects of seasonal
temperature variations on energy consumption.
19
INDEPENDENT AUDITORS' REPORT
Panhandle Eastern Pipe Line Company:
We have audited the accompanying consolidated balance sheet of Panhandle Eastern
Pipe Line Company and subsidiaries (the Company) as of December 31, 1997, and
the related consolidated statements of income, common stockholder's equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit. The consolidated
financial statements of the Company for the years ended December 31, 1996 and
1995 were audited by other auditors whose report, dated January 16, 1997,
expressed an unqualified opinion on those financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1997 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Charlotte, North Carolina
February 13, 1998
20
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Panhandle Eastern Pipeline Company
We have audited the accompanying consolidated balance sheet of Panhandle
Eastern Pipeline Company as of December 31, 1996, and the related consolidated
statements of income, common stockholder's equity, and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Panhandle
Eastern Pipeline Company as of December 31, 1996; and the results of their
operations and their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
January 16, 1997
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements of Panhandle Eastern Pipe Line Company are
prepared by management, which is responsible for their integrity and
objectivity. The statements are prepared in conformity with generally accepted
accounting principles appropriate in the circumstances to reflect in all
material respects the substance of events and transactions which should be
included. The other information in the annual report is consistent with the
financial statements. In preparing these statements, management makes informed
judgments and estimates of the expected effects of events and transactions that
are currently being reported.
The Company's system of internal accounting control is designed to provide
reasonable assurance that assets are safeguarded and transactions are executed
according to management's authorization. Internal accounting controls also
provide reasonable assurance that transactions are recorded properly, so that
financial statements can be prepared according to generally accepted accounting
principles. In addition, the Company's accounting controls provide reasonable
assurance that errors or irregularities which could be material to the financial
statements are prevented or are detected by employees within a timely period as
they perform their assigned functions. The Company's accounting controls are
continually reviewed for effectiveness. In addition, written policies, standards
and procedures, and a strong internal audit program augment the Company's
accounting controls.
Jeffrey L. Boyer
Vice President and Principal Accounting Officer
21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No disclosure required.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Consolidated Financial Statements, Supplemental Financial Data and
Supplemental Schedules included in Part II of this annual report are as follows:
Consolidated Financial Statements
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Common Stockholder's Equity for the
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Quarterly Financial Data (unaudited) (included in Note 13 to the
Consolidated Financial Statements)
All schedules are omitted because of the absence of the conditions
under which they are required or because the required information is included in
the financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
(c) Exhibits - See Exhibit Index immediately following the signature page.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 30, 1998 PANHANDLE EASTERN PIPE LINE COMPANY
(Registrant)
By /s/ Richard J. Osborne
-------------------------------------------------
Richard J. Osborne
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
(i) Principal executive officer:
Steven M. Roverud
President and Director
(ii) Principal financial officer:
Richard J. Osborne
Senior Vice President and Chief Financial Officer
(iii) Principal accounting officer:
Jeffrey L. Boyer
Vice President and Principal Accounting Officer
(iv) A majority of the Directors:
Paul M. Anderson
Fred J. Fowler
Date: March 30, 1998
Richard J. Osborne, by signing his name hereto, does hereby sign this
document on behalf of the registrant and on behalf of each of the above-named
persons pursuant to a power of attorney duly executed by the registrant and such
persons, filed with the Securities and Exchange Commission as an exhibit hereto.
By (Signature of Richard J.Osborne)
---------------------------------------------------
Richard J. Osborne
Attorney-in-fact
23
EXHIBIT INDEX
Exhibits filed herewith are designated by an asterisk (*). All exhibits not
so designated are incorporated by reference to a prior filing, as indicated.
- -------------------- ------------------------------ ------------------------------------- ------------------
Exhibit Number Description Originally Filed as Exhibit Exhibit Number
- -------------------- ------------------------------ ------------------------------------- ------------------
3.01 Restated Certificate of 3.01 to Form 10-K of registrant 1-2921
Incorporation of Panhandle for the year ended December
Eastern Pipe Line Company 31, 1993
dated October 25, 1993
3.02 By-Laws of Panhandle Eastern 19(a) to Form 10-Q of registrant 1-2921
Pipe Line Company, effective for quarter ended September 30,
July 23, 1986 1986
4.01 Indenture, dated as of 4 to Form S-3 of registrant filed 33-58552
February 1, 1993, between February 19, 1993
Panhandle Eastern Pipe Line
Company and Morgan Guaranty
Trust Company of New York
4.02 Letter, dated February 24, 4.06 to Form 10-K of registrant 1-2921
1994, from Nations Bank of for the year ended December 31,
Texas, National Association 1993
accepting its appointment as
successor Trustee with
respect to all securities
issued or to be issued under
the Indenture dated as of
February 1, 1993, included
as Exhibit 4.05
10.01 Contract for Firm 10.41 to Form 10-K of PanEnergy 1-8157
Transportation of Natural Corp for the year ended
Gas between Consumers Power December 31, 1989
Company and Trunkline Gas
Company, dated November 1,
1989, and Amendment, dated
November 1, 1989
10.02 Contract for Firm 10.47 to Form 10-K of registrant 1-8157
Transportation of Natural for year ended December 31, 1991
Gas between Consumers Power
Company and Trunkline Gas
Company, dated November 1,
1991
10.03 Contract for Firm 10.3 to Form 10-K of registrant for 1-2921
Transportation of Natural the year ended December 31, 1993
Gas between Consumers Power
Company and Trunkline Gas
Company, dated September 1,
1993
*12 Computation of Ratio of Earnings to Fixed Charges
*23.1 Consent of Deloitte & Touche LLP
*23.2 Consent of KPMG Peat Marwick LLP
*24.1 Power of Attorney authorizing Richard J. Osborne
and others to sign the annual report on behalf of the
registrant and certain of its directors and officers.
24.2 Certified copy of resolution of the Board of Directors of
the registrant authorizing power of attorney.
*27 Financial Data Schedule for
December 31, 1996