UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended
March 31, 2008
Commission File No. 1-2921
_______________
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
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 P No ___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer ___ Non-accelerated filer P Smaller reporting company ___
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes No P
Panhandle Eastern Pipe Line, LP meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. Item 2 of Part I has been reduced and Item 3 of Part I and Items 2, 3 and 4 of Part II have been omitted in accordance with Instruction H.
FORM 10-Q
March 31, 2008
Table of Contents
PART I. FINANCIAL INFORMATION: | Page(s) | ||
ITEM 1. Financial Statements (Unaudited): | |||
2 | |||
3-4 | |||
5 | |||
6 | |||
7 | |||
18 | |||
21 | |||
21 | |||
PART II. OTHER INFORMATION: | |||
22 | |||
22 | |||
23 | |||
23 | |||
23 | |||
23 | |||
23 | |||
25 | |||
1
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Operating revenue | ||||||||
Transportation and storage of natural gas | $ | 153,382 | $ | 133,705 | ||||
LNG terminalling revenue | 30,890 | 32,902 | ||||||
Other revenue | 2,779 | 2,423 | ||||||
Total operating revenue | 187,051 | 169,030 | ||||||
Operating expenses | ||||||||
Operation, maintenance and general | 60,692 | 56,280 | ||||||
Depreciation and amortization | 25,061 | 20,709 | ||||||
Taxes, other than on income | 8,649 | 7,795 | ||||||
Total operating expenses | 94,402 | 84,784 | ||||||
Operating income | 92,649 | 84,246 | ||||||
Other income (expense) | ||||||||
Interest expense, net | (21,065 | ) | (22,026 | ) | ||||
Other, net | 7,511 | 11,057 | ||||||
Total other income (expense) | (13,554 | ) | (10,969 | ) | ||||
Earnings before income taxes | 79,095 | 73,277 | ||||||
Income taxes | 30,856 | 28,796 | ||||||
Net earnings | $ | 48,239 | $ | 44,481 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
March 31, 2008 | December 31, 2007 | |||||||
Assets | (In thousands) | |||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 308 | $ | 320 | ||||
Accounts receivable, billed and unbilled, less allowances of | ||||||||
$1,163 and $1,163 respectively | 83,131 | 68,219 | ||||||
Accounts receivable - related parties (Note 4) | 5,492 | 12,067 | ||||||
Gas imbalances - receivable | 227,304 | 104,124 | ||||||
System gas and operating supplies (Note 3) | 151,944 | 180,801 | ||||||
Deferred income taxes, net | 6,071 | 320 | ||||||
Note receivable - CrossCountry Citrus | 19,638 | 9,831 | ||||||
Other | 23,703 | 19,545 | ||||||
Total current assets | 517,591 | 395,227 | ||||||
Property, plant and equipment | ||||||||
Plant in service | 3,002,262 | 2,830,068 | ||||||
Construction work-in-progress | 354,589 | 355,695 | ||||||
3,356,851 | 3,185,763 | |||||||
Less accumulated depreciation and amortization | 311,326 | 290,465 | ||||||
Net property, plant and equipment | 3,045,525 | 2,895,298 | ||||||
Investment in unconsolidated subsidiary | 1,831 | 1,757 | ||||||
Note receivable - Southern Union | 111,355 | 221,655 | ||||||
Note receivable - CrossCountry Citrus | 392,582 | 402,389 | ||||||
Non-current system gas (Note 3) | 10,001 | 18,947 | ||||||
Other | 18,088 | 14,929 | ||||||
Total assets | $ | 4,096,973 | $ | 3,950,202 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PANHANDLE EASTERN PIPE LINE COMPANY, LP
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, 2008 | December 31, 2007 | |||||||
(In thousands) | ||||||||
Partners' Capital | ||||||||
Partners' capital | $ | 1,240,386 | $ | 1,192,147 | ||||
Accumulated other comprehensive income (loss) | (24,261 | ) | 1,636 | |||||
Tax sharing note receivable - Southern Union | (11,820 | ) | (12,704 | ) | ||||
Total partners' capital | 1,204,305 | 1,181,079 | ||||||
Long-term debt (Note 5) | 1,570,493 | 1,581,061 | ||||||
Total capitalization | 2,774,798 | 2,762,140 | ||||||
Current liabilities | ||||||||
Current portion of long-term debt (Note 5) | 319,552 | 309,680 | ||||||
Accounts payable | 9,183 | 21,114 | ||||||
Accounts payable - related parties (Note 4) | 88,611 | 56,706 | ||||||
Gas imbalances - payable | 369,185 | 271,450 | ||||||
Accrued taxes | 18,864 | 14,501 | ||||||
Accrued interest | 16,238 | 20,304 | ||||||
Capital accruals | 75,473 | 97,662 | ||||||
Other | 59,739 | 54,043 | ||||||
Total current liabilities | 956,845 | 845,460 | ||||||
Deferred income taxes, net | 253,287 | 256,448 | ||||||
Other | 112,043 | 86,154 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Total partners' capital and liabilities | $ | 4,096,973 | $ | 3,950,202 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Cash flows provided by (used in) operating activities: | ||||||||
Net earnings | $ | 48,239 | $ | 44,481 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 25,061 | 20,709 | ||||||
Deferred income taxes | 6,846 | 5,319 | ||||||
Other | 349 | (109 | ) | |||||
Changes in operating assets and liabilities | 3,748 | 21,531 | ||||||
Net cash flows provided by operating activities | 84,243 | 91,931 | ||||||
Cash flows provided by (used in) investing activities: | ||||||||
Net decrease (increase) in note receivable - Southern Union | 110,300 | (19,550 | ) | |||||
Net increase in income taxes payable - related parties | 23,126 | - | ||||||
Decrease in note receivable - CrossCountry Citrus | - | 6,664 | ||||||
Additions to property, plant and equipment | (204,355 | ) | (53,527 | ) | ||||
Other | (2,760 | ) | (599 | ) | ||||
Net cash flows used in investing activities | (73,689 | ) | (67,012 | ) | ||||
Cash flows provided by (used in) financing activities: | ||||||||
Decrease in book overdraft | (10,566 | ) | (17,209 | ) | ||||
Issuance of long-term debt | - | 455,000 | ||||||
Repayment of debt | - | (462,289 | ) | |||||
Issuance costs of debt | - | (525 | ) | |||||
Net cash flows used in financing activities | (10,566 | ) | (25,023 | ) | ||||
Change in cash and cash equivalents | (12 | ) | (104 | ) | ||||
Cash and cash equivalents at beginning of period | 320 | 531 | ||||||
Cash and cash equivalents at end of period | $ | 308 | $ | 427 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL AND COMPREHENSIVE INCOME
(UNAUDITED)
Partners' Capital | Accumulated Other Comprehensive Income (Loss) | Tax Sharing Note Receivable-Southern Union | Total | ||||||||||
(In thousands) | |||||||||||||
Balance December 31, 2007 | $ | 1,192,147 | $ | 1,636 | $ | (12,704 | ) | $ | 1,181,079 | ||||
Tax sharing receivable - Southern Union | - | - | 884 | 884 | |||||||||
Comprehensive loss: | |||||||||||||
Net earnings | 48,239 | - | - | 48,239 | |||||||||
Net change in other comprehensive loss (Note 6) | (25,897 | ) | (25,897 | ) | |||||||||
Comprehensive income | 22,342 | ||||||||||||
Balance March 31, 2008 | $ | 1,240,386 | $ | (24,261 | ) | $ | (11,820 | ) | $ | 1,204,305 | |||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited interim condensed consolidated financial statements of Panhandle Eastern Pipe Line Company, LP, a Delaware limited partnership (PEPL), and its subsidiaries (collectively, Panhandle, or the Company) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for quarterly reports on Form 10-Q. These statements do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America (GAAP), and should be read in conjunction with Panhandle’s financial statements and notes thereto for the year ended December 31, 2007, which are included in Panhandle’s Form 10-K filed with the SEC. The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and reflect adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim period. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Due to the seasonal nature of the Company’s operations, the results of operations and cash flows for any interim period are not necessarily indicative of the results that may be expected for the full year.
The Company does not currently apply Financial Accounting Standards Board (FASB) Statement No. 71, Accounting for the Effects of Certain Types of Regulation (Statement No. 71). In 1999, the Company discontinued application of Statement No. 71 primarily due to the level of discounting from tariff rates and its inability to pass through and recover all costs. The accounting required by the statement differs from the accounting required for businesses that do not apply its provisions. Transactions that are generally recorded differently as a result of applying regulatory accounting requirements include, among others, recognition of regulatory assets, capitalization of an equity component on regulated capital projects and depreciation on assets.
1. Description of Business
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 Company is subject to the rules and regulations of the Federal Energy Regulatory Commission (FERC). The Company’s entities include the following:
· | PEPL, an indirect wholly-owned subsidiary of Southern Union Company (Southern Union Company and, together with its subsidiaries, Southern Union); |
· | Trunkline Gas Company, LLC (Trunkline), a direct wholly-owned subsidiary of PEPL; |
· | Sea Robin Pipeline Company, LLC (Sea Robin), an indirect wholly-owned subsidiary of PEPL; |
· | Trunkline LNG Holdings, LLC (LNG Holdings), an indirect wholly-owned subsidiary of PEPL; |
· | Trunkline LNG Company, LLC (Trunkline LNG), a direct wholly-owned subsidiary of LNG Holdings; and |
· | Pan Gas Storage, LLC (d.b.a. Southwest Gas Storage), a direct wholly-owned subsidiary of PEPL. |
The Company’s pipeline assets include approximately 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 5.5 billion cubic feet per day (Bcf/d) and approximately 74.4 billion cubic feet (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 9.0 Bcf of above ground LNG storage capacity.
Southern Union Panhandle, LLC, a direct wholly-owned subsidiary of Southern Union Company, serves as the general partner of PEPL and owns a one percent general partnership interest in PEPL. Southern Union Company owns a ninety-nine percent limited partnership interest in PEPL.
2. New Accounting Principles
Accounting Principles Recently Adopted.
FASB Statement No. 157, “Fair Value Measurements” (Statement No. 157): Issued by the FASB in September 2006, this Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Where applicable, this Statement simplifies and codifies related guidance within GAAP. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. In February 2008, the FASB released a FASB Staff Position (FSP FAS 157-2, “Effective Date of FASB Statement No. 157”), which delays the effective date of
7
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
this Statement for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. The Company’s major categories of non-financial assets and non-financial liabilities that are recognized or disclosed at fair value for which, in accordance with FSP FAS 157-2, the Company has not applied the provisions of Statement No. 157 as of January 1, 2008 are i) fair value calculations associated with annual or periodic impairment tests and ii) asset retirement obligations measured at fair value upon initial recognition or upon certain remeasurement events under FASB Statement No. 143, “Accounting for Asset Retirement Obligations”. The partial adoption on January 1, 2008 of this Statement for financial assets and liabilities did not have a material impact on the Company’s consolidated financial statements. See Note 9 – Fair Value Measurement for more information.
FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115”: Issued by the FASB in February 2007, this Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The Statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. The Statement is effective for fiscal years beginning after November 15, 2007. At January 1, 2008, the Company did not elect the fair value option under the Statement and, therefore, there was no impact on the Company’s consolidated financial statements.
Staff Accounting Bulletin No. 110 (SAB 110): Issued by the SEC in December 2007, SAB 110 expresses the views of the SEC staff regarding the use of a “simplified” method, as discussed in SAB No. 107, in developing an estimate of expected term of “plain vanilla” share options in accordance with Statement No. 123R, “Accounting for Stock-Based Compensation”. The SEC staff indicated in SAB No. 107 that it would accept a company’s election to use the simplified method, regardless of whether the company has sufficient information to make more refined estimates of expected term, for options granted prior to December 31, 2007. In SAB 110, the SEC staff states that it will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. Pursuant to the guidance provided in SAB 110, the Company has elected to continue utilizing the simplified method in developing the estimate of the expected term for its share options.
Accounting Principles Not Yet Adopted.
FASB Statement No. 141 (revised), “Business Combinations”. Issued by the FASB in December 2007, this Statement changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for preacquisition gain and loss contingencies, the recognition of capitalized in-process research and development costs, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition-related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. The Statement is effective for transactions occurring in fiscal years beginning after December 15, 2008, with early adoption prohibited.
FASB Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. Issued by the FASB in December 2007, this Statement changes the accounting for noncontrolling (minority) interests in consolidated financial statements, including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity, and the elimination of minority interest accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, the Statement revises the accounting for both increases and decreases in a parent’s controlling ownership interest. The Statement is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133”. Issued by the FASB in March 2008, this Statement requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Statement is effective for fiscal years beginning after
8
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
November 15, 2008, with early adoption permitted. The Company is currently evaluating the impact of this Statement on its consolidated financial statements.
3. System Gas and Operating Supplies
System gas and operating supplies consist of gas held for operations and materials and supplies, both of which are carried at the lower of weighted average cost or market, while gas received from or owed back to customers is valued at market. The gas held for operations that the Company does not expect to consume in its operations in the next twelve months is reflected in non-current assets. Gas held for operations at March 31, 2008 was $148.7 million, or 15,743,000 million British thermal units (MMBtu), of which $10 million was classified as non-current. Gas held for operations at December 31, 2007 was $187 million, or 26,001,000 MMBtu, of which $19 million was classified as non-current. Materials and supplies include spare parts which are critical to the pipeline system operations and were $13.3 million and $12.8 million at March 31, 2008 and December 31, 2007, respectively.
4. Related Party Transactions
PEPL receives transportation revenues from Missouri Gas Energy, a Southern Union division, which account for less than one percent of annual consolidated revenues. The following table provides a summary of related party transactions for the periods presented.
Three Months Ended | ||||||||
March 31, | ||||||||
Related Party Transactions | 2008 | 2007 | ||||||
(In thousands) | ||||||||
Transportation and storage of natural gas | $ | 1,356 | $ | 1,393 | ||||
Operation and maintenance: | ||||||||
Management and royalty fees | 4,719 | 4,225 | ||||||
Other expenses | 5,393 | 7,912 | ||||||
Other income, net | 7,024 | 10,488 | ||||||
Pursuant to a demand note with Southern Union Company under a cash management program, as of March 31, 2008, the Company has loaned excess cash, net of repayments, totaling $111.4 million to Southern Union since Southern Union acquired the Company. Net receipts of $110.3 million were recorded during the three-month period ended March 31, 2008. The Company is credited with interest on the note at a one month LIBOR rate. Included in Other, net in the accompanying Condensed Consolidated Statement of Operations is interest income of $1.3 million for the three-month period ended March 31, 2008, with $1.9 million for the three-month period ended March 31, 2007, related to interest on the Note receivable – Southern Union. Due to uncertainties regarding the timing of the Company’s cash flows, including financings, capital expenditures and operating cash flows, the Company reports the Note receivable – Southern Union as a non-current asset. The Company does have access to the funds via the demand note and does expect repayment to ultimately occur to fund capital expenditures.
On December 1, 2006, LNG Holdings, as borrower, and PEPL and CrossCountry Citrus, as guarantors, entered into a $465 million unsecured term loan facility due April 4, 2008 (2006 Term Loan), which was later amended and restated to extend the maturity to June 29, 2012. On December 1, 2006, LNG Holdings loaned the proceeds of the 2006 Term Loan to CrossCountry Citrus in exchange for an interest-bearing promissory note with a principal amount of $465 million, the amount of the 2006 Term Loan. The promissory note was amended and restated to extend the maturity when the 2006 Term Loan was amended and restated. Accrued interest under the promissory note is payable quarterly. The interest rate under the promissory note is based on the interest rate under the amended and restated term loan facility, which at March 31, 2008 was a floating rate at 3.25 percent, plus a credit spread over LIBOR of 112.5 basis points. Included in Other, net in the accompanying Condensed Consolidated Statement of Operations is interest income of $5.6 million and $8.4 million for the three-month
9
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
periods ended March 31, 2008 and 2007, respectively, related to interest on the Note receivable – CrossCountry Citrus.
Southern Union structured the acquisition of PEPL in a manner intended to qualify as a like-kind exchange of property under Section 1031 of the Internal Revenue Code of 1986. For tax purposes, the Company’s assets that were part of the exchange were recorded at the tax basis of the Southern Union Company assets for which they were exchanged. The resulting transaction generated an estimated deferred tax liability at the acquisition date and a corresponding receivable from Southern Union reflected as a reduction to Partners’ Capital on the Company’s Condensed Consolidated Balance Sheet. Repayment of the receivable from Southern Union is limited to actual tax liabilities otherwise payable by the Company pursuant to the tax sharing agreement with Southern Union Company. For the three months ended March 31, 2008 the Company recorded $884,000 of income tax liability settlements against the tax sharing note receivable.
The following table provides a summary of the accounts receivable and payable related party balances included in the Condensed Consolidated Balance Sheet at the dates indicated.
Three Months Ended March 31, | Year Ended December 31, | |||||||
Related Party | 2008 | 2007 | ||||||
Accounts receivable - related parties: | (In thousands) | |||||||
Southern Union (1) | $ | 299 | $ | 1,174 | ||||
Other (2) | 5,193 | 10,893 | ||||||
5,492 | 12,067 | |||||||
Accounts payable - related parties: | ||||||||
Southern Union - income taxes (3) | $ | 64,546 | $ | 41,420 | ||||
Southern Union - other (4) | 23,826 | 14,945 | ||||||
Other (5) | 239 | 341 | ||||||
$ | 88,611 | $ | 56,706 | |||||
______________________________
(1) | Primarily related to expenditures made on behalf of Southern Union and interest associated with the Note receivable – Southern Union. |
(2) | Primarily related to interest from CrossCountry Citrus. |
(3) | Related to income taxes payable to Southern Union per the tax sharing agreement, which was amended in September 2007, to provide for taxes to be remitted upon the filing of the tax return. |
(4) | Primarily related to payroll funding provided by Southern Union. |
(5) | Primarily related to various administrative and operating costs paid by other affiliate companies on behalf of the Company. |
5. Debt
The flowing table sets forth the debt obligations of the Company at the dates indicated:
Long-term Debt Obligations | March 31, 2008 | December 31, 2007 | ||||||
(In thousands) | ||||||||
4.80% Senior Notes due 2008 | $ | 300,000 | $ | 300,000 | ||||
6.05% Senior Notes due 2013 | 250,000 | 250,000 | ||||||
6.20% Senior Notes due 2017 | 300,000 | 300,000 | ||||||
6.50% Senior Notes due 2009 | 60,623 | 60,623 | ||||||
8.25% Senior Notes due 2010 | 40,500 | 40,500 | ||||||
7.00% Senior Notes due 2029 | 66,305 | 66,305 | ||||||
Term Loans due 2012 | 867,220 | 867,220 | ||||||
Net premiums on long-term debt | 5,397 | 6,093 | ||||||
Total debt outstanding | 1,890,045 | 1,890,741 | ||||||
Current portion of long-term debt | (319,552 | ) | (309,680 | ) | ||||
Total long-term debt | $ | 1,570,493 | $ | 1,581,061 | ||||
10
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Retirement of Debt Obligations
The Company plans to refinance its $300 million of debt maturing in August 2008 with new capital market debt or bank financings. Alternatively, should the Company not be successful in its refinancing efforts, the Company may choose to retire such debt upon maturity by utilizing some combination of cash flows from operations, draw downs under the demand note with Southern Union Company, and altering the timing of controllable expenditures, among other things. The Company believes, based on its investment grade credit ratings and general financial condition, successful historical access to capital and debt markets, current economic and capital market conditions and market expectations regarding the Company’s future earnings and cash flows, that it will be able to refinance and/or retire these obligations under acceptable terms prior to their maturity. There can be no assurance, however, that the Company will be able to achieve acceptable refinancing terms in any negotiation of new capital market debt or bank financings. Moreover, there can be no assurance the Company will be successful in its implementation of these refinancing and/or retirement plans and the Company’s inability to do so would cause a material adverse effect on the Company’s financial condition and liquidity.
6. Comprehensive Income
The table below provides an overview of comprehensive income for the periods indicated.
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Net earnings | $ | 48,239 | $ | 44,481 | ||||
Reclassification of realized (gain) loss on interest rate hedges | ||||||||
into earnings, net of tax of $184 and $(155), respectively | 277 | (229 | ) | |||||
Reduction of prior service credit relating to other postretirement | ||||||||
benefits, net of tax of $(3,231) and $0, respectively | (6,603 | ) | - | |||||
Change in fair value of interest rate hedges, net of tax of | ||||||||
$(12,466) and $0, respectively | (19,130 | ) | - | |||||
Reclassification of actuarial gain and prior service credit | ||||||||
relating to other postretirement benefits into earnings, net of tax | ||||||||
of $(245) and $(222), respectively | (441 | ) | (678 | ) | ||||
Total other comprehensive income (loss) | (25,897 | ) | (907 | ) | ||||
Total comprehensive income | $ | 22,342 | $ | 43,574 | ||||
See Note 7 – Postretirement Benefits for a discussion related to an amendment of the Company’s postretirement benefit plan in March 2008, which resulted in a $6.6 million net of tax reduction in the prior service credit included in Accumulated other comprehensive income.
11
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. Postretirement Benefits
Net periodic benefit cost for the three-month periods ended March 31, 2008 and 2007 includes the components noted in the table below.
Postretirement Benefits | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Service cost | $ | 400 | $ | 336 | ||||
Interest cost | 700 | 511 | ||||||
Expected return on plan assets | (575 | ) | (483 | ) | ||||
Prior service credit amortization | (675 | ) | (900 | ) | ||||
Net periodic benefit cost (credit) | $ | (150 | ) | $ | (536 | ) | ||
In March 2008, a postretirement benefit plan change was approved for retirements beginning April 1, 2008. The change resulted in a pre-tax postretirement benefit obligation increase of approximately $9.8 million.
8. Commitments and Contingencies
Litigation. The Company 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, the Company has made accruals in accordance with FASB Statement No. 5, Accounting for Contingencies, in order to provide for such matters. The Company believes the final disposition of these proceedings will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Jack Grynberg, an individual, filed actions for damages against a number of companies, including the Company, now transferred to the U.S. District Court for the District of Wyoming, alleging mis-measurement of gas volumes and Btu content, resulting in lower royalties to mineral interest owners. On October 20, 2006, the District Judge adopted in part the earlier recommendation of the Special Master in the case and ordered the dismissal of the case against the Company. Grynberg is appealing that action to the Tenth Circuit Court of Appeals. Grynberg’s opening brief was filed on July 31, 2007. Respondents filed their brief rebutting Grynberg’s arguments on November 21, 2007. A hearing is set for September 2008. A similar action, known as the Will Price litigation, also has been filed against a number of companies, including the Company, in U.S. District Court for the District of Kansas. The Company is currently awaiting the decision of the trial judge on the defendants’ motion to dismiss the Will Price action. The Company believes that its measurement practices conformed to the terms of its FERC gas tariff, which was filed with and approved by FERC. As a result, the Company believes that it has meritorious defenses to these lawsuits (including FERC-related affirmative defenses, such as the filed rate/tariff doctrine, the primary/exclusive jurisdiction of FERC, and the defense that the Company complied with the terms of its tariff) and will continue to vigorously defend against them, including any appeal from the dismissal of the Grynberg case. The Company does not believe the outcome of these cases will have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Environmental Matters. The Company’s operations are subject to federal, state and local laws and regulations regarding water quality, hazardous and solid waste management, air quality control and other environmental matters. These laws and regulations require the Company to conduct its operations in a specified manner and to obtain and comply with a wide variety of environmental registrations, licenses, permits, inspections and other approvals. Failure to comply with environmental requirements may expose the Company to significant fines, penalties and/or interruptions in operations. The Company’s environmental policies and procedures are designed to achieve compliance with such laws and regulations. These evolving laws and regulations and claims for damages to property, employees, other persons and the environment resulting from current or past operations
12
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
may result in significant expenditures and liabilities in the future. The Company engages in a process of updating and revising its procedures for the ongoing evaluation of its operations to identify potential environmental exposures and enhance compliance with regulatory requirements. The Company follows the provisions of American Institute of Certified Public Accountants Statement of Position 96-1, Environmental Remediation Liabilities, for recognition, measurement, display and disclosure of environmental remediation liabilities.
Environmental Remediation. The Company is responsible for environmental remediation at certain sites on its gas transmission systems for contamination resulting from the past use of lubricants containing polychlorinated biphenyls (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. The Company has developed and is implementing a program to remediate such contamination. Remediation and decontamination has been completed at each of the 35 compressor station sites where auxiliary buildings that house the air compressor equipment were impacted by the past use of lubricants containing PCBs. At some locations, PCBs have been identified in paint that was applied many years ago. A program has been implemented to remove and dispose of PCB impacted paint during painting activities. At one location on the Trunkline system, PCBs were discovered on the painted surfaces of equipment in a building that is outside of the scope of the compressed air system program and the existing PCB impacted paint program. The estimated cost to remediate the painted surfaces at this location is approximately $300,000. An initial assessment program was undertaken at seven locations to determine whether this condition exists at any of the other 78 similar buildings on the PEPL, Trunkline and Southwest Gas systems. As of March 31, 2008, a total of 37 locations have been preliminarily assessed, indicating PCBs at regulated levels in a small number of samples at a total of 13 locations. Until the complete results of the assessment program are available and the analysis is completed, the costs associated with remediation of the painted surfaces cannot be reasonably estimated.
Other remediation typically involves the management of contaminated soils and may involve remediation of groundwater. Activities vary with site conditions and locations, the extent and nature of the contamination, remedial requirements, complexity and sharing of responsibility. The ultimate liability and total costs associated with these sites will depend upon many factors. If remediation activities involve statutory joint and several liability provisions, strict liability, or cost recovery or contribution actions, the Company could potentially be held responsible for contamination caused by other parties. In some instances, such as the Pierce waste oil sites described below, the Company may share liability associated with contamination with other potentially responsible parties. The Company may also benefit from contractual indemnities that cover some or all of the cleanup costs. These sites are generally managed in the normal course of business or operations. The Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
PEPL and Trunkline, together with other non-affiliated parties, were identified as potentially liable for conditions at three former waste oil disposal sites in Illinois – the Pierce Oil Springfield site, the Dunavan Waste Oil site and the McCook site (collectively, the Pierce Waste Oil Sites). PEPL and Trunkline received notices of potential liability from the United States Environmental Protection Agency (U.S. EPA) for the Dunavan site by letters dated September 30, 2005. Although no formal notice has been received for the Pierce Oil Springfield site, special notice letters are anticipated and the process of listing the site on the National Priority List has begun. No formal notice has been received for the McCook site. The Company believes the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
On June 16, 2005, PEPL experienced a release of liquid hydrocarbons near Pleasant Hill, Illinois. The U.S. EPA took the lead role in overseeing the subsequent cleanup activities, which have been completed. PEPL has resolved claims of affected boat owners and the marina operator. PEPL received a violation notice from the Illinois Environmental Protection Agency (IEPA) alleging that PEPL was in apparent violation of several sections of the Illinois Environmental Protection Act by allowing the release. The violation notice did not propose a penalty. Responses to the violation notice were submitted and the responses were discussed with the agency. In December 2005, the IEPA notified PEPL that the matter might be considered for referral to the Office of the Attorney General, the State’s Attorney or the U.S. EPA for formal enforcement action and the imposition of penalties. There has been no contact from the IEPA on this matter since the Company submitted responses in January 2007 to an IEPA information request. The Company believes the outcome of this matter will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
13
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below reflects the amount of accrued liabilities recorded in the Condensed Consolidated Balance Sheet at March 31, 2008 and December 31, 2007 to cover probable environmental response actions:
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Current | $ | 996 | $ | 996 | ||||
Noncurrent | 6,673 | 6,901 | ||||||
Total Environmental Liabilities | $ | 7,669 | $ | 7,897 | ||||
Air Quality Control. In early April 2007, the IEPA proposed a rule to the Illinois Pollution Control Board (IPCB) for adoption to control NOx emissions from reciprocating engines and turbines, including a provision applying the rule beyond issues addressed by federal provisions, pursuant to a blanket statewide application. After objections were filed with the IPCB, the IEPA filed an amended proposal withdrawing the statewide applicability provisions of the proposed rule and applying the rule requirements to non-attainment areas. The amended proposal was approved on January 10, 2008. No controls on PEPL and Trunkline stations are required under the most recent proposal. However, the IEPA indicated in earlier industry discussions that it was reserving the right to make future proposals for statewide controls. In the event the IEPA proposes a statewide rule again, preliminary estimates indicate the cost of compliance would require minimum capital expenditures of approximately $45 million for emission controls.
Spill Prevention, Control and Countermeasure Rules (SPCC). In May 2007, the U.S. EPA extended the SPCC rule compliance dates until July 1, 2009, permitting owners and operators of facilities to prepare or amend and implement SPCC Plans in accordance with previously enacted modifications to the regulations. In October 2007, the U.S. EPA proposed amendments to the SPCC rules with the stated intention of providing greater clarity, tailoring requirements, and streamlining requirements. The Company is currently reviewing the impact of the modified regulations on its operations and may incur costs for tank integrity testing, alarms and other associated corrective actions as well as potential upgrades to containment structures. Costs associated with such activities cannot be estimated with certainty at this time, but the Company believes such costs will not have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Other Commitments and Contingencies.
Hurricane Damage. Late in the third quarter of 2005, Hurricanes Katrina and Rita came ashore along the Upper Gulf Coast. These hurricanes caused damage to property and equipment owned by Sea Robin, Trunkline and Trunkline LNG. As of March 31, 2008, the Company has incurred approximately $35 million of capital expenditures related to the hurricanes, primarily for replacement or abandonment of damaged property and equipment at Sea Robin and construction project delays at the Trunkline LNG terminal.
The Company anticipates reimbursement from its property insurance carriers for a significant portion of damages from the hurricanes in excess of its $5 million deductible. Such reimbursement is currently estimated by the Company’s property insurance carrier ultimately to be limited to 63 percent of the portion of the claimed damages accepted by the insurance carrier, but the amount is subject to the level of total ultimate claims from all companies relative to the carrier’s $1 billion total limit on payout per event that was in effect during 2005. The Company’s property insurance carrier’s $1 billion total limit on payout per event was reduced for subsequent years to $750 million. As of March 31, 2008, the Company has received payments of $7.6 million from its insurance carriers. No receivables due from the insurance carriers have been recorded as of March 31, 2008.
14
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, the Company 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 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 the Company and each of its subsidiaries. Based on the latest actuarial information available as of December 31, 2007, the aggregate amount of the projected benefit obligations of these pension plans was approximately $162.8 million and the estimated fair value of all of the assets of these plans was approximately $128.3 million.
9. Fair Value Measurement
Adoption of Statement No. 157
Effective January 1, 2008, the Company partially adopted Statement No. 157 (see Note 2 – New Accounting Principles) which provides a framework for measuring fair value. As defined in Statement No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to any applicable valuation techniques. These inputs can be readily observable, market corroborated, or generally unobservable. The Company endeavors to utilize the best available information, including valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Statement No. 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value as follows:
· | Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities; |
· | Level 2 – Observable inputs such as: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active; or (iii) valuations based on pricing models where significant inputs (e.g., interest rates, yield curves, etc.) are observable for the assets or liabilities, are derived principally from observable market data, or can be corroborated by observable market data; |
· | Level 3 – Unobservable inputs, including valuations based on pricing models where significant inputs are not observable and not corroborated by market data. Unobservable inputs are used to the extent that observable inputs are not available and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the assets or liabilities. Unobservable inputs are based on the best information available in the circumstances, which might include the Company’s own data. |
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.
The following table is a summary of the Company’s financial liabilities that are measured at fair value on a recurring basis in accordance with Statement No. 157. At March 31, 2008, the Company had no financial assets measured at fair value on a recurring basis in accordance with Statement No. 157.
Fair Value | Fair Value Measurements at March 31, 2008 | |||||||||||||||
as of | Using Fair Value Hierarchy | |||||||||||||||
March 31, 2008 | Level 1 | Level 2 | Level 3 | |||||||||||||
Liabilities: | ||||||||||||||||
Interest-rate derivatives | 46,623 | - | 13,053 | 33,570 | ||||||||||||
Total | $ | 46,623 | $ | - | $ | 13,053 | $ | 33,570 | ||||||||
The Company’s Level 3 instruments include interest-rate swap derivatives for which the Company does not have sufficient corroborative market evidence to support classifying the related liability as Level 2, due to the limited market data available in the form of binding broker quotes or quoted prices for similar liabilities in various markets.
15
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The financial liabilities that the Company has currently categorized in Level 3 may later be reclassified to the Level 2 category when the Company is able to obtain additional observable market data to corroborate non-binding broker quotes used to measure the fair value of these liabilities. The Company’s Level 2 instruments include interest rate lock derivatives that are valued based on non-binding broker quotes which have been corroborated with observable market data.
The following table is a summary of the Company’s financial liabilities that are measured at fair value on a recurring basis in accordance with Statement No. 157 using significant unobservable inputs (Level 3).
Fair Value Measurements At March 31, 2008 Using Significant Unobservable Inputs (Level 3) | ||||
Liabilities | ||||
Interest-rate | ||||
Derivatives | ||||
(In thousands) | ||||
Beginning balance | $ | 17,121 | ||
Total gains or losses (realized and unrealized): | ||||
Included in operating revenues | - | |||
Included in other comprehensive income | 16,449 | |||
Purchases and settlements, net | - | |||
Ending balance | $ | 33,570 | ||
10. Taxes on Income
The company’s estimated annual consolidated federal and state effective income tax rate (EITR) for each of the three-month periods ended March 31, 2008 and 2007 was 39 percent.
The Company is no longer subject to U.S. federal, state or local examinations for the tax year ended June 30, 2004 and prior years. The Company’s parent, Southern Union Company, settled the IRS examination of the year ended June 30, 2003 in November 2006. Generally, the state impact of the federal change remains subject to state and local examination for a period of up to one year after formal notification to the state and local jurisdictions. In 2007, Southern Union Company filed all required state amended returns as a result of the federal change. Therefore, the state and local statutes will expire with respect to the tax year ended June 30, 2003 in 2008.
11. Regulatory Matters
The Company has commenced construction of an enhancement at its Trunkline LNG terminal. This infrastructure enhancement project, which was originally expected to cost approximately $250 million, plus capitalized interest, will increase send out flexibility at the terminal and lower fuel costs. Recent cost projections indicate the construction costs will likely be approximately $365 million, plus capitalized interest. The revised costs reflect increases in the quantities and cost of materials required, higher contract labor costs and an allowance for additional contingency funds, if needed. The negotiated rate with the project’s customer, BG LNG Services, will be adjusted based on final capital costs pursuant to a contract-based formula. The project is currently expected to be in operation in the second quarter of 2009. In addition, Trunkline LNG and BG LNG Services agreed to extend the existing terminal and pipeline services agreements to coincide with the infrastructure enhancement project contract, which runs 20 years from the in-service date. Approximately $230.7 million and $178.3 million of costs are included in the line item Construction work-in-progress at March 31, 2008 and December 31, 2007, respectively.
Sea Robin filed a rate case with FERC in June 2007, requesting an increase in its maximum rates. Several parties have submitted protests to the rate increase filing with FERC. On July 30, 2007, FERC suspended the effectiveness of the filed rate increase until January 1, 2008. The filed rates were put into effect January 1, 2008,
16
PANHANDLE EASTERN PIPE LINE COMPANY, LP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
subject to refund. On February 14, 2008, at the request of the participants in the proceeding, the Chief Administrative Law Judge suspended the procedural schedule to facilitate the filing of a settlement. On April 29, 2008, Sea Robin submitted to FERC an Offer of Settlement that would resolve all issues in the proceeding.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying unaudited interim condensed consolidated financial statements and notes to help provide an understanding of the Company’s financial condition, changes in financial condition and results of operations. The following section includes an overview of the Company’s business as well as recent developments that the Company believes are important in understanding its results of operations and to anticipate future trends in those operations. Subsequent sections include an analysis of the Company’s results of operations on a consolidated basis and information relating to the Company’s liquidity and capital resources and other matters. The information required by this Item is presented in a reduced disclosure format pursuant to General Instruction H to Form 10-Q.
Overview
The Company is primarily engaged in the interstate transportation and storage of natural gas and also provides LNG terminalling and regasification services, with rates and services regulated by FERC. The Company’s entities include PEPL, Trunkline, Sea Robin, Trunkline LNG and Southwest Gas Storage. Collectively, the pipeline assets include approximately 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 5.5 Bcf/d and approximately 74.4 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 9.0 Bcf of above ground LNG storage capacity.
The Company earns the majority of its revenue by entering into firm transportation and storage contracts, providing capacity for customers to transport or store natural gas in its facilities. The Company provides firm transportation services under contract to local distribution company customers and their affiliates, gas marketers, producers, other pipelines, electric power generators and a variety of end-users. In addition, the Company’s pipelines offer both firm and interruptible transportation to customers on a short-term or seasonal basis. Demand for gas transmission on the Company’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. Average reservation revenue rates realized by the Company are dependent on certain factors, including but not limited to rate regulation, customer demand for reserved capacity, capacity sold levels for a given period and, in some cases, utilization of capacity. Commodity revenues are also dependent upon a number of variable factors including weather, storage levels, and customer demand for firm interruptible and parking services. The majority of Panhandle’s revenues are related to firm capacity reservation charges. For the three-month periods ended March 31, 2008 and 2007, the Company’s combined throughput was 401 trillion British thermal units (TBtu) and 371 TBtu, respectively. For the years 2007, 2006 and 2005, the Company’s combined throughput, including supply area and market area deliveries, was 1,454 TBtu, 1,180 TBtu and 1,214 TBtu, respectively.
The Company’s regulated transportation and storage businesses periodically file (or may be required to file) for changes in their rates, which are subject to approval by FERC. Changes in rates and other tariff provisions resulting from these regulatory proceedings have the potential to negatively impact the Company’s results of operations and financial condition.
Results of Operations
Three Months Ended March 31, | ||||||||
2008 | 2007 | |||||||
(In thousands) | ||||||||
Operating revenue: | ||||||||
Transportation and storage of natural gas | $ | 153,382 | $ | 133,705 | ||||
LNG terminalling revenue | 30,890 | 32,902 | ||||||
Other revenue | 2,779 | 2,423 | ||||||
Total operating revenue | 187,051 | 169,030 | ||||||
Operating expenses: | ||||||||
Operation, maintenance and general | 60,692 | 56,280 | ||||||
Depreciation and amortization | 25,061 | 20,709 | ||||||
Taxes, other than on income | 8,649 | 7,795 | ||||||
Total operating expenses | 94,402 | 84,784 | ||||||
Operating income | 92,649 | 84,246 | ||||||
Other income (expense): | ||||||||
Interest expense, net | (21,065 | ) | (22,026 | ) | ||||
Other, net | 7,511 | 11,057 | ||||||
Total other expense, net | (13,554 | ) | (10,969 | ) | ||||
Earnings before income taxes | 79,095 | 73,277 | ||||||
Income taxes | 30,856 | 28,796 | ||||||
Net earnings | $ | 48,239 | $ | 44,481 | ||||
Operating Revenue. For the three-month period ended March 31, 2008, operating revenue increased $18 million versus the same time period in 2007 as the result of:
· | Increased transportation and storage revenue of $19.7 million attributable to: |
· | Higher transportation reservation revenues of $11.8 million primarily due to the phased completion of the Trunkline Field Zone Expansion project during the period December 2007 to February 2008, reduced discounting resulting in higher average rates realized on contracts driven by higher customer demand and utilization of contract capacity, and approximately $1.2 million of additional revenue attributable to the extra day in the 2008 leap year; |
· | Higher other commodity revenues of $4.2 million primarily due to a rate increase on Sea Robin and higher utilization on Sea Robin, net of refund provisions; |
· | Higher storage revenues of $2.1 million due to increased contracted capacity; |
· | Higher parking revenues of $1.6 million resulting from customer demand for parking services and market conditions; and |
· | A $2 million decrease in LNG terminalling revenue due to lower volumes from decreased LNG cargoes during 2008. |
Operating Expenses. Operating expenses for the three-month period ended March 31, 2008 increased $9.6 million versus the same period in 2007 as the result of:
· | An increase in operation, maintenance and general expenses of $4.4 million primarily attributable to: |
· | A $3.7 million increase in contract storage costs resulting from an increase in leased capacity; |
· | A $2 million increase in insurance due to higher premiums; |
· | A $900,000 increase in benefits primarily due to higher medical costs and defined contribution savings plan contributions; |
· | A $500,000 increase in royalty/service fees charged by Southern Union due to higher revenues; |
· | A $2.3 million decrease in LNG power costs resulting from decreased cargoes during 2008; and |
· | A $1.2 million decrease in fuel tracker costs primarily due to a net over-recovery in 2008; |
· | Increased depreciation and amortization expense of $4.4 million due to a $536.5 million increase in property, plant and equipment placed in service after March 31, 2007. Depreciation and amortization expense is expected to continue to increase primarily due to higher capital spending, including the compression modernization construction project and other capital expenditures; and |
· | Higher taxes other than on income of $900,000 primarily due to higher property taxes attributable to higher qualifying operating income in the 2008 period versus the 2007 period upon which certain property tax assessments are based. |
Other Expense, Net. Other expense, net for the three-month period ended March 31, 2008 increased $2.6 million versus the same period in 2007. Interest expense decreased $1 million primarily due to the higher level of interest costs capitalized attributable to higher capital expenditures and lower LIBOR rates in the 2008 period, partially offset by the impact of higher outstanding debt balances resulting from the $300 million 6.20% Senior Notes issued in October 2007. Other, net decreased $3.5 million primarily due to lower related party interest income caused by lower related party note receivable balances in the 2008 period versus the 2007 period.
Income Taxes. The Company’s EITR was 39 percent for each of the three-month periods ended March 31, 2008 and 2007. Income taxes during the three-month period ended March 31, 2008, versus the same period in 2007, increased $2.1 million due to higher pretax income.
OTHER MATTERS
Contingencies
See PART I, ITEM 1. Financial Statements (Unaudited), Note 8 – Commitments and Contingencies in this Quarterly Report on Form 10-Q.
Recently Issued Accounting Standards
See Part I, Item 1. Financial Statements (Unaudited), Note 2 – New Accounting Principles, in this Quarterly Report on Form 10-Q.
Liquidity and Capital Resources
Cash generated from internal operations constitutes the Company’s primary source of liquidity. The $439.3 million working capital deficit at March 31, 2008 is expected to be funded by cash flows from operations and refinancings. Based on the Company’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 liquidity needs for the next several years, although no assurances can be given as to the sufficiency of cash flows or the ability to refinance existing obligations.
2008 Capital Expenditure Funding Sources. The Company intends to cover its 2008 cash requirements, resulting from planned capital expenditures, from various sources including cash flows from operations, repayments of intercompany loans made to Southern Union, loans or advances from other affiliates, or other borrowings, although no assurances can be given as to the sufficiency of cash flows, the availability of funds from Southern Union or other affiliates, or the ability to obtain financing.
Debt Refinancing. The Company plans to refinance its $300 million of debt maturing in August 2008 with new capital market debt or bank financings. Alternatively, should the Company not be successful in its refinancing efforts, the Company may choose to retire such debt upon maturity by utilizing some combination of cash flows from operations, draw downs under the demand note with Southern Union Company, and altering the timing of controllable expenditures, among other things. The Company believes, based on its investment grade credit ratings and general financial condition, successful historical access to capital and debt markets, current economic and capital market conditions and market expectations regarding the Company’s future earnings and cash flows, that it will be able to refinance and/or retire these obligations under acceptable terms prior to their maturity. There can be no assurance, however, that the Company will be able to achieve acceptable refinancing terms in any negotiation of new capital market debt or bank financings. Moreover, there can be no assurance the Company will be successful in its implementation of these refinancing and/or retirement plans and the Company’s inability to do so would cause a material adverse effect on the Company’s financial condition and liquidity.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3, Quantitative and Qualitative Disclosures About Market Risk, has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction H to Form 10-Q.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures to ensure that information required to be disclosed by the Company, including consolidated entities, in reports filed or submitted under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports it files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Operating Officer (COO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure. The Company performed an evaluation under the supervision and with the participation of management, including its COO and CFO, and with the participation of personnel from its Legal, Internal Audit, Risk Management and Financial Reporting Departments, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, Panhandle’s COO and CFO concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2008.
Changes in Internal Controls
Management’s assessment of internal control over financial reporting as of December 31, 2007 was included in Panhandle’s Form 10-K filed on February 29, 2008.
There have been no changes in internal control over financial reporting that occurred during the first three months of 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Cautionary Statement Regarding Forward-Looking Information
The disclosure and analysis in this Form 10-Q contains some forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, the Company also provides forward-looking statements in other materials it releases to the public as well as oral forward-looking statements. Such statements give the Company’s current expectations or forecasts of future events; they do not relate strictly to historical or current facts. The Company has tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results of current and anticipated products, expenses, interest rates, the outcome of contingencies, such as legal proceedings, and financial results.
The Company cannot guarantee that any forward-looking statement will be realized, although management believes that the Company has been prudent in its plans and assumptions. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. If known or unknown risks or uncertainties should materialize, or if underlying assumptions should prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. Readers should bear this in mind as they consider forward-looking statements.
The Company undertakes no obligation publicly to update forward-looking statements, whether as a result of new information, future events or otherwise. Readers are advised, however, to consult any further disclosures the Company makes on related subjects in its Form 10-K, 10-Q and 8-K reports to the SEC. Also note that the Company provides the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its businesses. These are factors that, individually or in the aggregate, management believes could cause the Company’s actual results to differ materially from expected and historical results. The Company notes these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers should
understand that it is not possible to predict or identify all such factors. Consequently, readers should not consider the following to be a complete discussion of all potential risks or uncertainties.
Factors that could cause actual results to differ materially from those expressed in the Company’s forward-looking statements include, but are not limited to, the following:
· | changes in demand for natural gas by the Company’s customers, in the composition of the Company’s customer base and in the sources of natural gas available to the Company; |
· | the effects of inflation and the timing and extent of changes in the prices and overall demand for and availability of natural gas as well as electricity, oil, coal and other bulk materials and chemicals; |
· | adverse weather conditions, such as warmer than normal weather in the Company’s service territories, and the operational impact of natural disasters; |
· | changes in laws or regulations, third-party relations and approvals, decisions of courts, regulators and governmental bodies affecting or involving the Company, including deregulation initiatives and the impact of rate and tariff proceedings before FERC and various state regulatory commissions; |
· | the outcome of pending and future litigation; |
· | the Company’s ability to comply with or to challenge successfully existing or new environmental regulations; |
· | unanticipated environmental liabilities; |
· | the Company’s ability to acquire new businesses and assets and integrate those operations into its existing operations, as well as its ability to expand its existing businesses and facilities; |
· | the Company’s ability to control costs successfully and achieve operating efficiencies, including the purchase and implementation of new technologies for achieving such efficiencies; |
· | the impact of factors affecting operations such as maintenance or repairs, environmental incidents, gas pipeline system constraints and relations with labor unions representing bargaining-unit employees; |
· | 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; |
· | changes in the ratings of the Company’s debt securities or any of its subsidiaries; |
· | changes in interest rates and other general capital markets conditions, and in the Company’s ability to continue to access the capital markets; |
· | acts of nature, sabotage, terrorism or other acts causing damage greater than the Company’s insurance coverage limits; |
· | market risks beyond the Company’s control affecting its risk management activities including market liquidity, commodity price volatility and counterparty creditworthiness; and |
· | other risks and unforeseen events. |
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company 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. The Company and its affiliates are also 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, the Company’s management believes that it is unlikely that these actions, individually or in the aggregate, will have a material adverse effect on its consolidated financial position, results of operations or cash flows. For additional information regarding various pending administrative and judicial proceedings involving regulatory, environmental and other legal matters, reference is made to ITEM 1. Financial Statements (Unaudited), Note 8 – Commitments and Contingencies, as well as to ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part I. Financial Information.
ITEM 1A. Risk Factors
There have been no material changes to the risk factors previously disclosed in the Company’s Form 10-K filed with the SEC on February 29, 2008.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction H to Form 10-Q.
ITEM 3. Defaults Upon Senior Securities
Item 3, Defaults Upon Senior Securities, has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction H to Form 10-Q.
ITEM 4. Submission of Matters to a Vote of Security Holders
Item 4, Submission of Matters to a Vote of Security Holders, has been omitted from this report pursuant to the reduced disclosure format permitted by General Instruction H to Form 10-Q.
ITEM 5. Other Information
N/A
ITEM 6. Exhibits
Exhibit No. | Description |
3(a) | Certificate of Formation of Panhandle Eastern Pipe Line Company, LP. (Filed as Exhibit 3.A to the Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.) |
3(b) | Limited Partnership Agreement of Panhandle Eastern Pipe Line Company, LP, dated as of June 29, 2004, between Southern Union Company and Southern Union Panhandle LLC. (Filed as Exhibit 3.B to the Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.) |
4(a) | Indenture dated as of March 29, 1999, among CMS Panhandle Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee. (Filed as Exhibit 4(a) to the Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference.) |
4(b) | First Supplemental Indenture dated as of March 29, 1999, among CMS Panhandle Holding Company, Panhandle Eastern Pipe Line Company and NBD Bank, as Trustee, including a form of Guarantee by Panhandle Eastern Pipe Line Company of the obligations of CMS Panhandle Holding Company. (Filed as Exhibit 4(b) to the Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference.) |
4(c) | Second Supplemental Indenture dated as of March 27, 2000, between Panhandle, as Issuer and Bank One Trust Company, National Association, as Trustee. (Filed as Exhibit 4(e) to the Form S-4 filed on June 22, 2000, and incorporated herein by reference.) |
4(d) | Third Supplemental Indenture dated as of August 18, 2003, between Panhandle, as Issuer and Bank One Trust Company, National Association, as Trustee (Filed as Exhibit 4(d) to the Form 10-Q for the quarter ended September 30, 2003, and incorporated herein by reference.) |
4(e) | Fourth Supplemental Indenture dated as of March 12, 2004, between Panhandle, as Issuer and J.P. Morgan Trust Company, National Association, as Trustee. (Filed as Exhibit 4.E to the Form 10-K for the year ended December 31, 2004 and incorporated herein by reference.) |
4(f) | Fifth Supplemental Indenture dated as of October 26, 2007, between Panhandle and The Bank of New York Trust Company, N.A., as Trustee (Filed as Exhibit 4.1 to Panhandle’s Current Report on Form 8-K filed on October 29, 2007 and incorporated herein by reference.) |
4(g) | Indenture dated as of February 1, 1993, between Panhandle and Morgan Guaranty Trust Company effective January 1, 1982, as amended December 3, 1999. (Filed as Exhibit 4 to the Form S-3 filed February 19, 1993, and incorporated herein by reference.) |
10(a) | Amended and Restated Credit Agreement between Trunkline LNG Holdings, LLC, as borrower, Panhandle Eastern Pipe Line Company, LP and CrossCountry Citrus, LLC, as guarantors, the financial institutions listed therein and Bayerische Hypo-Und Vereinsbank AG, New York Branch, as administrative agent, dated as of June 29, 2007 (Filed as Exhibit 10.1 to Panhandle’s Current Report on Form 8-K filed on July 6, 2007 and incorporated herein by reference.) |
10(b) | Credit Agreement between Trunkline LNG Holdings, LLC, as borrower, Panhandle Eastern Pipe Line Company, LP and Trunkline LNG Company, LLC, as guarantors, the financial institutions listed therein and Bayerische Hypo- Und Vereinsbank AG, New York Branch, as administrative agent, dated as of March 15, 2007. (Filed as Exhibit 10.1 to Panhandle’s Current Report on Form 8-K filed on March 21, 2007 and incorporated herein by reference.) |
10(c) | Amended and Restated Promissory Note made by CrossCountry Citrus, LLC, as borrower, in favor of Trunkline LNG Holdings LLC, as holder, dated as of June 29, 2007. (Filed as Exhibit 10(c) to Panhandle’s Annual Report on Form 10-K filed on February 29, 2008 and incorporated herein by reference) |
Ratio of Earnings to Fixed Charges | |
Certificate by President and Chief Operating Officer pursuant to Rule 13a – 14(a) or 15d – 14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certificate by Senior Vice President and Chief Financial Officer pursuant to Rule 13a – 14(a) or 15d – 14(a) promulgated under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Certificate by President and Chief Operating Officer pursuant to Rule 13a – 14(b) or 15d – 14(b) promulgated under the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |
Certificate by Senior Vice President and Chief Financial Officer pursuant to Rule 13a – 14(b) or 15d – 14(b) promulgated under the Securities Exchange Act of 1934 and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
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 | |
Date: May 9, 2008 | By: /s/ ROBERT O. BOND |
Robert O. Bond President and Chief Operating Officer (authorized officer) /s/ GARY W. LEFELAR Gary W. Lefelar Senior Vice President and Chief Accounting Officer (principal accounting officer) | |
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