Panhandle Eastern Corporation

5400 Westheimer Court
Houston, Texas 77056
U.S.A.
(713) 627-5400
Fax: (713) 627-4145

Public Company
Incorporated: 1929 as Interstate Pipe Line Company
Employees: 5,400
Sales: $2.99 billion
Stock Exchanges: New York Pacific Toronto Boston Cincinnati Midwest Philadelphia

Panhandle Eastern Corporation is one of the largest naturalgas pipeline companies in the United States. Due to its 1989 merger with Texas Eastern, another pipeline firm, Panhandle Eastern controls 27,500 miles of pipeline connecting customers in the Northeast and Midwest with the gas-producing areas of Texas, Kansas, Oklahoma, and the Louisiana-Texas gulf coast. In addition, the company operates a helium-extraction plant in Kansas through its National Helium subsidiary.

Panhandle Eastern was founded in 1929 under the name Interstate Pipe Line Company. It began as a subsidiary of a gas pipeline company, Missouri-Kansas Pipe Line Company (Mo-Kan). Interstate’s original network consisted of an 860-mile line that supplied the Midwest with gas from the southwest Kansas and Texas panhandle. The next year, its name was changed to Panhandle Eastern Pipe Line Company at the suggestion of William G. Maguire, then a consultant to Mo-Kan. The network’s route was also altered based on a Maguire proposal; originally, it was supposed to terminate at Minneapolis, Minnesota, but Maguire reasoned that it should feed into the more populous Midwestern states that bordered Lake Michigan. Thus began Maguire’s long association with running Panhandle Eastern’s affairs.

Soon, however, the company found itself embroiled in a protracted legal struggle. In 1930 Mo-Kan had sold a 50% stake in Panhandle Eastern to a direct competitor, Columbia Oil and Gasoline Corporation, an affiliate of Columbia Gas and Electric Corporation. Two years later, Mo-Kan went bankrupt and was placed in receivership. In 1935 its trustees filed an antitrust lawsuit against Columbia, charging that Columbia had wrested control of Panhandle Eastern from Mo-Kan through bad-faith bargaining and in so doing, had driven Mo-Kan to its ruin. According to the suit, Mo-Kan had transferred most of its pipeline and gas reserves to Panhandle Eastern on the understanding that the subsidiary would then use them to secure a public bond issue that would finance the construction of more pipeline. Columbia, however, bought the entire issue from the underwriter and gained control of Panhandle Eastern.

The proceedings dragged on until 1943, when U.S. Circuit Court and Securities and Exchange Commission rulings forced Columbia to sign over its entire stake in Panhandle Eastern to a third party designated by Mo-Kan, Phillips Petroleum Company. Phillips then sold half of the shares to Mo-Kan, on whose behalf it had been acting. This again gave Mo-Kan, which had emerged from receivership in 1937, a controlling interest in Panhandle Eastern. Maguire, by then president of Mo-Kan, became chairman and CEO of Panhandle Eastern.

With the legal wrangling over, Mo-Kan emerged as a holding company for Panhandle Eastern, controlling stock and cash, but little else in the way of assets; Panhandle Eastern still held the gas and pipeline assets. An effort was made to merge Mo-Kan and Panhandle Eastern in 1943, but it failed. The next year, a liquidation scheme for Mo-Kan was conceived, under which shareholders would have the right to convert their Mo-Kan stock into Panhandle Eastern stock. Enough shareholders took advantage of the plan, and Panhandle Eastern eventually gained independence from Mo-Kan, which was merged into Panhandle Eastern and dissolved in 1971.

In 1951 Panhandle Eastern founded its Trunkline Gas Company subsidiary to ship gas from fields on the gulf coast to its markets in the Midwest. Thanks to Maguire’s conservative approach to business, Panhandle remained throughout the 1950s a company that grew slowly, but kept its debt burden low and its profit margins healthy in an industry where how much a company could charge for its product was closely regulated by the government. Maguire also believed in the importance of maintaining a high level of gas reserves in order to meet growing demand, reasoning that although one could lay down pipe relatively quickly, exploring for gas was troublesome and time-consuming. True to this philosophy, Panhandle Eastern founded Andarko Production in 1959, to develop leases on more than 500,000 acres of land in the gas-laden Andarko basin, which is spread over portions of Texas, Oklahoma, and Kansas.

In 1960 Panhandle Eastern formed National Helium Corporation in a joint venture with National Distillers & Chemical Corporation, a company in which Panhandle Eastern owned a minority stake. Three years later, National Helium opened what was then the world’s largest helium extraction plant, in Kansas.

Maguire died in 1965. He was succeeded by W.K. Sanders, who had been president of Trunkline Gas. Sanders retired as CEO in 1970 and was succeeded by Richard O’Shields. Under O’Shields, Panhandle Eastern, like most of its competitors, began to anticipate a shortfall in natural gas supplies. The shortfall was expected because governmental price controls on natural gas discouraged producers from exploring for new sources, and rising demand would soon catch up with shrinking supply, driving the price upward and making alternative sources of fuel both economically feasible and necessary. By the middle of the 1970s, there was indeed a gas shortage. Synthetic fuels, coal gasification, and liquefied natural gas (LNG) were seen as expensive solutions, but necessary and cost effective because of short supply and because the cost of these products was expected to remain competitive with rapidly rising oil prices. In connection with its coal gasification plans, Panhandle Eastern in 1976 acquired Youghioheny and Ohio Coal Company. In 1979 Panhandle Eastern joined with ten other pipeline companies in proposing a giant pipeline project that would bring natural gas down from the fields in Alaska’s Prudhoe Bay.

The U.S. government began deregulating natural gas prices in 1978, however, and conventional sources of natural gas became worthwhile to exploit once again. Supply rebounded and the price fell, aided in part by the fact that higher natural gas prices had made residual fuel oil an affordable option for customers with furnaces that could use either. Unconventional sources of gas soon became expensive and unnecessary, and for that reason Panhandle Eastern came to regret its biggest foray into alternative fuel sources. In 1977 it had entered into an agreement to buy Algerian liquefied natural gas from Entreprise Nationale Sonatrach (Sonatrach), the Algerian national energy company. The agreement involved substantial capital outlays for Panhandle Eastern—$508 million for a new receiving and regasification facility in Louisiana and $36 million for a stake in two tankers—and was to last into the 21st century. Delivery was scheduled to begin in 1981. As consumers began to discover the economic benefits of using fuel oil and downward pressure on gas prices accumulated, however, the deal became a liability. Matters worsened when Sonatrach postponed the date at which it would begin supplying the LNG. Ostensibly, Sonatrach was having technical problems, but, in fact, it had reconsidered the selling price to which it had originally agreed. New prices were negotiated before delivery began in 1982.

In 1981 Panhandle Eastern Corporation was formed to hold Panhandle Eastern Pipe Line Company as a subsidiary. O’Shields was succeeded by Robert D. Hunsucker in 1982. In 1983, caught between upward cost pressure from Sonatrach and downward price pressure from customers, Panhandle Eastern unilaterally suspended its contract with Sonatrach. Immediately, Panhandle Eastern was sued by Sonatrach and by Lachmar, Panhandle Eastern’s shipping partner. In 1986, after the initiation of arbitration proceedings, Panhandle Eastern agreed to purchase the interests of its partners in Lachmar for $32 million.

The Algerian LNG deal did not affect Panhandle Eastern right away. The company had the highest return on equity of any gas producer-pipeliner between 1977 and 1982. Panhandle Eastern, however, perhaps distracted by its misadventure with imported LNG, was slow to adapt to its increasingly deregulated market environment. Nevertheless, the 1.5 trillion cubic feet of reserves that Panhandle Eastern owned through its Andarko subsidiary made it an attractive takeover target. In 1986 Wagner & Brown, an oil and gas firm owned by Texas wildcatters Cyril Wagner Jr. and Jack E. Brown, offered $2.3 billion, 60% in cash and the remainder in preferred stock for Panhandle Eastern, only to be turned down. Takeover speculation continued to surround the company after the brief battle, which occurred amidst the spate of oil and gas industry leveraged buyouts in the mid-1980s, but no further action occurred. Several months afterward, Panhandle Eastern spun off Andarko. Rumors also circulated that Hunsucker had intentionally slowed resolution of the company’s Algerian liabilities so that they would act as repellents against further hostile bids. Hunsucker actually had tried to expedite the settlements, a prerequisite to spinning off Andarko as an independent company, which was accomplished in October 1986.

The problem of how to grow in a business environment that had suddenly become more competitive remained unsolved. The company lost market share, a trend that halted in 1988 only after Panhandle Eastern began discounting transportation fees. In 1989, however, Panhandle Eastern acquired 81% of Texas Eastern Corporation stock for a total of $2.61 billion in cash. The merger was completed by the issuance of 27.1 million shares of Panhandle Eastern stock for the remaining shares of Texas Eastern. Texas Eastern operated a pipeline network that ran from Texas to Pennsylvania, New York, New Jersey, and southern New England; its geographical strength thus complemented Panhandle Eastern’s presence in the Midwest.

Hunsucker retired in 1990 and was succeeded by Philip Burguieres. Burguieres stepped down later that year because of ill health. Former Texas Eastern CEO Dennis Hendrix then became the top executive. The merger was not working out as planned at least initially, because of intense competition in the interstate pipeline industry, which depressed profit margins for all participants. This competition was engendered by a combination of regulatory changes and market forces, including a lingering oversupply of gas and reduced U.S. economic activity. Panhandle Eastern took several steps to improve the situation, including decentralizing management for its pipeline operations. These steps led to a resumption of earnings growth and reaffirmation of investment-grade status for the company’s senior debt in 1991. The company also planned increased service to the northeastern United States, thus achieving the synergies originally envisioned in combining Panhandle Eastern and Texas Eastern. While the merger may not have solved Panhandle Eastern’s problems immediately, in the long run it may have positioned the company to compete effectively as a bigger entity in an increasingly competitive business environment.

Principal Subsidiaries

Panhandle Eastern Pipe Line Company; Trunkline Gas Company; Texas Eastern Transmission Corporation; Algonquin Gas Transmission Company; Trunkline LNG Company; Centana Energy Corporation; Panhandle Trading Company.

—Douglas Sun