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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ___________ to ___________
Commission file number 1-4169
TEXAS GAS TRANSMISSION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-0405152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 Frederica Street, Owensboro, Kentucky 42301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 926-8686
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
State the aggregate market value of the voting stock held
by nonaffiliates of the registrant. The aggregate market
value shall be computed by reference to the price at which
stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date
of filing. None
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest
practicable date. 1,000 shares as of March 20, 2000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE
FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
TABLE OF CONTENTS
1999 FORM 10-K
TEXAS GAS TRANSMISSION CORPORATION
Page
Part I
Item 1. Business.................................................. 3
Item 2. Properties................................................ 7
Item 3. Legal Proceedings......................................... 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................... 8
Item 7. Management's Narrative Analysis of the Results of
Operations............................................... 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk..................................................... 12
Item 8. Financial Statements and Supplementary Data............... 13
Item 9. Disagreements on Accounting and Financial Disclosure...... 34
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................. 34
PART I
Item 1. Business.
GENERAL
Texas Gas Transmission Corporation and its wholly owned
subsidiary, TGT Enterprises, Inc., (collectively, Texas Gas)
are wholly owned by Williams Gas Pipeline Company (WGP), which
is a wholly owned subsidiary of The Williams Companies, Inc.
(Williams).
Texas Gas is an interstate natural gas transmission company
which owns and operates a natural gas pipeline system
originating in the Louisiana Gulf Coast area and in East Texas
and running generally north and east through Louisiana,
Arkansas, Mississippi, Tennessee, Kentucky, Indiana and into
Ohio, with smaller diameter lines extending into Illinois.
Texas Gas' direct market area encompasses eight states in the
South and Midwest, and includes the Memphis, Tennessee;
Louisville, Kentucky; Cincinnati and Dayton, Ohio; and
Indianapolis, Indiana metropolitan areas. Texas Gas also has
indirect market access to the Northeast through
interconnections with unaffiliated pipelines.
TRANSPORTATION AND SALES
At December 31, 1999, Texas Gas' system, having a mainline
delivery capacity of approximately 2.8 billion cubic feet
(Bcf) of gas per day, was composed of approximately 5,900
miles of mainline and branch transmission pipelines and 32
compressor stations having a sea-level-rated capacity totaling
approximately 555,000 horsepower.
Texas Gas owns and operates natural gas storage reservoirs
in 10 underground storage fields located on or near its
pipeline system and/or market areas. The storage capacity of
Texas Gas' certificated storage fields is approximately 177
Bcf of gas. Texas Gas owns a majority of its storage gas
which it uses, in part to meet operational balancing needs on
its system, in part to meet the requirements of Texas Gas'
firm and interruptible storage customers, and in part to meet
the requirements of Texas Gas' "no-notice" transportation
service, which allows Texas Gas' customers to temporarily draw
from Texas Gas' storage gas to be repaid in-kind during the
following summer season. A large portion of the gas delivered
by Texas Gas to its market area is used for space heating,
resulting in substantially higher daily requirements during
winter months.
In 1999, Texas Gas transported gas to customers in
Louisiana, Arkansas, Mississippi, Tennessee, Kentucky,
Indiana, Illinois and Ohio and to Northeast customers served
indirectly by Texas Gas. Gas was transported for 98
distribution companies and municipalities for resale to
residential, commercial and industrial users. Transportation
services were provided to approximately 18 industrial
customers located along the system. At December 31, 1999,
Texas Gas had transportation contracts with approximately 570
shippers. Transportation shippers include distribution
companies, municipalities, intrastate pipelines, direct
industrial users, electrical generators, marketers and
producers. The largest customer of Texas Gas in 1999,
ProLiance Energy, LLC (ProLiance) accounted for approximately
13.4 percent of total operating revenue. No other customer
accounted for more than 10 percent of total operating revenue
in 1999. ProLiance is co-owned by Indiana Energy, Inc., who
will merge with SIGCORP, Inc. on March 31, 2000 to create
Vectren Corporation. SIGCORP, Inc. is the parent company of
two of Texas Gas' firm transportation customers, Southern
Indiana Gas and Electric Company (SIGECO) and SIGCORP Energy
Services (SIGCORP Energy). Indiana Energy, Inc. also has
announced its intention to acquire the natural gas business of
DPL, Inc., who is the parent company of another of Texas Gas'
firm transportation customers, Dayton Power and Light Company
(Dayton). Collectively, ProLiance, SIGECO, SIGCORP Energy and
Dayton accounted for approximately 18.7 percent of Texas Gas'
total operating revenue in 1999. Texas Gas' firm
transportation and storage agreements are generally long-term
agreements with various expiration dates and account for the
major portion of Texas Gas' business. Additionally, Texas Gas
offers interruptible transportation and storage services under
agreements that are generally short-term.
OPERATING STATISTICS
The following table summarizes Texas Gas' total system
transportation volumes for the periods shown (expressed in
trillion British thermal units [TBtu]):
For the Year Ended December 31,
1999 1998 1997
Transportation Volumes 749.6 752.4 773.6
Average Daily Transportation Volumes 2.1 2.1 2.1
Average Daily Firm Reserved Capacity 2.2 2.2 2.2
REGULATORY MATTERS
Texas Gas is subject to regulation by the Federal Energy
Regulatory Commission (FERC) under the Natural Gas Act of 1938
(Natural Gas Act) and under the Natural Gas Policy Act of 1978
(NGPA), and as such, its rates and charges for transportation
of natural gas in interstate commerce, the extension,
enlargement or abandonment of facilities, and its accounting,
among other things, are subject to regulation. As necessary,
Texas Gas files with the FERC changes in its transportation
and storage rates and charges designed to allow it to recover
fully its costs of providing service to its interstate system
customers, including a reasonable rate of return.
Texas Gas is also subject to regulation by the Department
of Transportation under the Natural Gas Pipeline Safety Act of
1968 with respect to safety requirements in the design,
construction, operation and maintenance of its interstate gas
transmission facilities.
Regulatory Matters
Texas Gas' rates are established primarily through the FERC
ratemaking process. Key determinants in the ratemaking
process are (1) costs of providing service, including
depreciation rates, (2) allowed rate of return, including the
equity component of Texas Gas' capital structure, and (3)
volume throughput assumptions. The allowed rate of return is
determined by the FERC in each rate case. Rate design and the
allocation of costs between the demand and commodity rates
also impact profitability.
On April 30, 1997, Texas Gas filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. In March 1998, Texas Gas filed an offer of
settlement. Pursuant to the provisions of the settlement, the
settlement became effective November 14, 1998, and a filing to
implement the settlement was made on November 30, 1998.
Refunds representing the difference between collected rates
and the settlement rates, including interest, of $17.2 million
were distributed to customers on January 13, 1999. The FERC
issued a letter order on September 15, 1999, which accepted
Texas Gas' final refund report as being in satisfactory
compliance with the settlement. Accordingly, Texas Gas
included in the third quarter of 1999 a total of $7.4 million
in operating income in recognition of the final resolution of
its pending rate case issues.
For discussion of other regulatory matters affecting Texas
Gas, see Note C of Notes to Consolidated Financial Statements
contained in Item 8 hereof.
Environmental Matters
Texas Gas is subject to extensive federal, state and local
environmental laws and regulations, which affect Texas Gas'
operations, related to the construction and operation of its
pipeline facilities. For a complete discussion of this issue,
see Note C of Notes to Consolidated Financial Statements
contained in Item 8 hereof.
COMPETITION
The FERC continues to regulate interstate natural gas
pipeline companies pursuant to the Natural Gas Act and the
NGPA. However, competition has led to a buyers' market in the
natural gas industry for both the commodity and pipeline
capacity. This market is characterized by a shifting customer
base from local distribution companies to marketers and
producers and an increased reliance by customers on capacity
obtained through the release market. Low growth in demand,
excess supply, and an over-abundance of annual pipeline
capacity have all contributed to the current situation. In
addition, future load growth is expected to occur primarily in
price-sensitive markets, such as electric power generation,
which will limit gas price increases to the price of competing
fuels. This problem is compounded by the fact that large
volumes of natural gas reserves found in western Canada,
previously confined to low growth, competitive areas of North
America, are now being delivered to the Chicago, Illinois area
and the Northeast portion of the United States where there is
already adequate pipeline capacity and growing supply access
due to increased drilling activity in the Gulf of Mexico
states.
When restructured tariffs became effective under FERC Order
636 in 1993, all suppliers of natural gas were able to compete
for any gas markets capable of being served by the pipelines
using nondiscriminatory transportation services provided by
the pipelines. As the FERC Order 636 regulated environment
has matured, many pipelines have faced reduced levels of
subscribed capacity as contractual terms expire and customers
opt for alternative sources of transmission and related
services. This issue is known as "capacity turnback" in the
industry. Texas Gas is continuing to work diligently to
replace any and all markets made available by capacity
turnback, as well as to pursue new markets. During 1999,
Texas Gas remarketed all capacity that was turned back without
significant discounting and expects to either renegotiate or
otherwise remarket all of the capacity subject to turnback in
2000. Texas Gas anticipates that it will continue to be able
to remarket all future capacity subject to turnback, although
competition may cause the remarketed capacity to be sold at
lower margins.
In July 1998, the FERC issued a Notice of Proposed
Rulemaking (NOPR) concerning the regulation of short-term
transportation services and a Notice of Inquiry (NOI)
addressing long-term transportation services. The scope of
the inquiry initiated by these two proceedings and the
potential policy implications are unprecedented in the history
of natural gas regulation. It is likely that, when finalized
and implemented, these changes will materially affect the
pipeline business. On February 9, 2000, the FERC issued a
final rule, Order 637, in response to the comments received on
the NOPR and NOI. The FERC adopts in Order 637 certain
policies that it finds are necessary to adjust its current
regulatory model to the needs of the evolving markets, but
determines that any fundamental changes to its regulatory
policy, which changes were raised and commented on in the NOPR
and NOI, will be considered after further study and evaluation
of the evolving marketplace. Most significantly, in Order
637, the FERC (i) revises its pricing policy to waive, for a
two-year period, the maximum price ceilings for short-term
releases of capacity of less than one year, and (ii) permits
pipelines to file proposals to implement seasonal rates for
short-term services and term-differentiated rates, subject to
certain requirements including the requirement that a pipeline
be limited to recovering its annual revenue requirement under
those rates.
OWNERSHIP OF PROPERTY
Texas Gas' pipeline system is owned in fee, with certain
portions, such as the offshore areas, being held jointly with
third parties. However, a substantial portion of Texas Gas'
system is constructed and maintained pursuant to rights-of-
way, easements, permits, licenses or consents on and across
property owned by others. The majority of Texas Gas'
compressor stations, with appurtenant facilities, are located
in whole or in part on lands owned in fee by Texas Gas, with a
few sites held under long-term leases or permits issued or
approved by public authorities. Storage facilities are either
owned or contracted for under long-term leases.
EMPLOYEE RELATIONS
Texas Gas had 832 employees as of December 31, 1999.
Certain of those employees were covered by a collective
bargaining agreement. A favorable relationship existed
between management and labor during the period. The
International Chemical Workers Council of the United Food and
Commercial Workers Union Local 187 represents 145 of Texas
Gas' 346 field operating employees. The current collective
bargaining agreement between Texas Gas and Local 187 expires
on April 30, 2001.
Texas Gas has a non-contributory, defined benefit pension
plan and various other plans which provide regular active
employees with group life, hospital and medical benefits as
well as disability benefits and savings benefits. Officers
and directors who are full-time employees may participate in
these plans.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding
historical information, include forward-looking statements.
Although Texas Gas believes such forward-looking statements
are based on reasonable assumptions, no assurance can be given
that every objective will be reached. Such statements are
made in reliance on the safe harbor protections provided under
the Private Securities Litigation Reform Act of 1995.
As required by such Act, Texas Gas hereby identifies the
following important factors that could cause actual results to
differ materially from any results projected, forecasted,
estimated or budgeted by Texas Gas in forward-looking
statements: (i) risks and uncertainties related to changes
in general economic conditions in the United States,
availability and cost of capital, changes in laws and
regulations to which Texas Gas is subject, including tax,
environmental and employment laws and regulations, the cost
and effects of legal and administrative claims and proceedings
against Texas Gas or which may be brought against Texas Gas
and the effect of changes in accounting policies; (ii) risks
and uncertainties related to the impact of future federal and
state regulation of business activities, including allowed
rates of return, the pace of deregulation in retail natural
gas and electricity markets, and the resolution of other
regulatory matters discussed herein; (iii) risks and
uncertainties related to the ability to develop expanded
markets and product offerings as well as maintain existing
markets; and (iv) risks and uncertainties related to Texas
Gas' ability to control costs. In addition, future
utilization of pipeline capacity could depend on energy
prices, competition from other pipelines and alternate fuels,
the general level of natural gas demand, decisions by
customers not to renew expiring natural gas transportation
contracts, and weather conditions, among other things.
Further, gas prices which indirectly impact transportation and
operating profits may fluctuate in unpredictable ways.
Item 2. Properties.
See "Item 1. Business."
Item 3. Legal Proceedings.
For a discussion of Texas Gas' current legal proceedings,
see Note C of Notes to Consolidated Financial Statements
contained in Item 8 hereof.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
(a) and (b) As of December 31, 1999, all of the outstanding
shares of Texas Gas' common stock are owned by WGP, a wholly
owned subsidiary of Williams. Texas Gas' common stock is not
publicly traded and there exists no market for such common
stock.
Item 7. Management's Narrative Analysis of the Results of
Operations.
Introduction
Property, plant and equipment at December 31, 1999,
includes an aggregate of approximately $430 million related to
amounts in excess of the original cost of regulated
facilities, as a result of the Williams' 1995 and prior
acquisitions. This amount is being amortized over 40 years,
the estimated remaining useful lives of the assets at the date
of acquisition, at approximately $11 million per year.
Current FERC policy does not permit Texas Gas to recover
through its rates amounts in excess of original cost.
Effect of Inflation
Texas Gas generally has experienced increased costs in
recent years due to the effect of inflation on the cost of
labor, materials and supplies, and property, plant and
equipment. A portion of the increased labor and materials and
supplies costs can directly affect income through increased
maintenance and operating costs. The cumulative impact of
inflation over a number of years has resulted in increased
costs for current replacement of productive facilities. The
majority of Texas Gas' property, plant and equipment and
inventory is subject to ratemaking treatment, and under
current FERC practices, recovery is limited to historical
costs. While amounts in excess of historical cost are not
recoverable under current FERC practices, Texas Gas believes
it will be allowed to recover and earn a return based on
increased actual cost incurred when existing facilities are
replaced. Cost based regulation along with competition and
other market factors limit Texas Gas' ability to price
services or products based upon inflation's effect on costs.
Year 2000 Compliance
Texas Gas and Williams encountered only minor problems
associated with the date change from 1999 to 2000, and it
experienced no business disruptions. The total cost of Texas
Gas' project to prepare for the year 2000 date change was $0.7
million, all of which was charged to expense. Texas Gas
believes that limited and insignificant continued exposure to
year 2000 complications remains.
Williams, including Texas Gas, initiated its enterprise-
wide project in 1997 to address the year 2000 compliance issue
for both traditional information technology areas and non-
traditional areas, including embedded technology that is
prevalent throughout the company. This project focused on all
technology hardware and software, external interfaces with
customers and suppliers, operations process control,
automation and instrumentation systems, and facility items.
The phases of the project were awareness, inventory and
assessment, renovation and replacement, testing and validation
and contingency planning. During the inventory and assessment
phase, all systems with possible year 2000 implications were
inventoried and classified into five categories: 1) highest,
business critical, 2) high, compliance necessary within a
short period of time following January 1, 2000, 3) medium,
compliance necessary within 30 days from January 1, 2000, 4)
low, compliance desirable but not required, and 5)
unnecessary. Categories 1 through 3 were designated as
critical and were the major focus of this project. Texas Gas
initiated a formal communications process with other companies
with which it conducted business in 1998 to determine the
extent to which those companies were addressing year 2000
compliance. Texas Gas has also worked directly with key
business partners to reduce the risk of a break in service or
supply and with non-compliant companies to mitigate any
material adverse effect on Texas Gas. Significant focus on
the contingency plan phase of the project took place in 1999.
Contingency plans were developed for critical business
processes, critical business partners, and suppliers.
Renovation/replacement and testing/validation of critical
systems was completed by December 31, 1999. Over the December
31, 1999 to January 4, 2000 weekend, an extensive system-
monitoring plan was in place with regular reporting of
results. Texas Gas utilized internal resources (consisting of
a core group of 20 people) to complete the year 2000
compliance project.
The future costs for monitoring and problem resolution will
be expensed and are expected not to exceed $50,000. The costs
of previously planned system replacements are not considered
to be year 2000 costs and are, therefore, excluded from the
amounts discussed above.
The preceding discussion contains forward-looking statements
including, without limitation, statements relating to Texas
Gas' expectations, intentions, and adequate resources, that
are made pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Readers are
cautioned that such forward-looking statements contained in
the year 2000 update are based on certain assumptions which
may vary from actual results. Specifically, management's
assumptions about the final impact on Texas Gas and the total
costs to Texas Gas of the year 2000 compliance issue are based
upon the assumption that there will not be a significant
future impact resulting from, for example, problems caused by
customers or suppliers that have not yet been fully
recognized, or problems with billing, payroll, or financial
closing at the quarters or year end. However, there can be no
guarantee that these assumptions are correct.
Financial Analysis of Operations
1999 Compared to 1998
Operating income was $11.1 million higher for the year
ended December 31, 1999, than for 1998. The increase in
operating income was due primarily to $7.4 million from the
settlement of regulatory and rate issues related to its RP97-
344 rate case. Operating income also increased due to
recognition of $3.0 million of previously deferred revenues
associated with allocations related to Texas Gas' January 1999
GSR reconciliation filing with the FERC and lower operation
and maintenance expense, partially offset by a first quarter
1998 adjustment to estimated GSR costs of $2.0 million.
Compared to 1998, net income was $7.4 million higher for the
same reasons.
Operating revenues decreased $14.1 million primarily
attributable to lower gas sales and discounting of
transportation rates, partially offset by the recognition of
deferred revenues and reserve adjustments discussed above.
Texas Gas' gas sales result from requirements to meet its pre-
Order 636 gas purchase commitments, substantially all of which
are managed by Texas Gas' gas marketing affiliate, Williams
Energy Services Company, as exclusive agent for Texas Gas.
Although the sales and purchase commitments remain in Texas
Gas' name, management of the commitments and any associated
profit or loss is solely the responsibility of the agent.
Therefore, the resulting sales and purchases have no impact on
Texas Gas' results of operations. System deliveries were
749.6 trillion British thermal units (TBtu) and 752.4 TBtu for
the years ended December 31, 1999 and 1998, respectively.
Operating costs and expenses decreased $25.2 million
primarily attributable to lower costs of gas sold; lower costs
of gas transportation, primarily due to termination of
contracts for transportation by others and a 1998 adjustment
to GSR costs discussed above; and lower operation and
maintenance expenses, primarily due to higher capitalization
of costs and operating efficiencies.
1998 Compared to 1997
Operating income was $6.3 million higher for the year ended
December 31, 1998, than for 1997. The increase in operating
income was primarily attributable to lower operation,
maintenance and administrative and general expenses, and
higher revenues related to new services and higher cost
recovery due to the current rate case, partially offset by the
effect of favorable resolutions in 1997 of certain contractual
issues. Compared to 1997, net income was $1.7 million higher
due to the reasons discussed above, offset by higher interest
expense due to pending refunds to customers and lower interest
income as a result of lower interest rates and advances to
Williams.
Operating revenues decreased $31.6 million primarily
attributable to lower gas sales, lower transportation costs
charged to Texas Gas by others and passed through to customers
as provided in Texas Gas' rates, and the effect of favorable
resolutions in 1997 of certain contractual issues, partially
offset by higher revenues related to new services and higher
cost recovery due to the current rate case. Total deliveries
were 752.4 TBtu and 773.6 TBtu for the year ended December 31,
1998 and 1997, respectively, which also contributed to lower
revenues.
Operating costs and expenses decreased $37.9 million
primarily attributable to lower costs of gas sold and lower
costs of gas transportation, both of which are passed through
to customers, as well as lower operation, maintenance,
administrative and general expenses.
Financial Condition and Liquidity
Through the years, Texas Gas has consistently maintained
its financial strength and experienced strong operational
results. Williams' ownership of Texas Gas further enhances
its financial and operational strength, as well as allows
Texas Gas to take advantage of new opportunities for growth.
Texas Gas expects to access public and private capital
markets, as needed, to finance its own capital requirements.
Texas Gas is a participant with other Williams subsidiaries
in a $1 billion credit agreement under which Texas Gas may
borrow up to $200 million, subject to borrowings by other
affiliated companies. Interest rates vary with current market
conditions. To date, Texas Gas has no amounts outstanding
under this facility.
As of December 31, 1999, Texas Gas has $100 million of
shelf availability remaining under a Registration Statement
filed with the Securities and Exchange Commission in 1997.
As of December 31, 1999, Texas Gas was a participant in
Williams' cash management program. The advances due Texas Gas
by Williams were represented by demand notes. Effective
February 1, 2000, Texas Gas began participating in WGP's cash
management program. The advances due Texas Gas by WGP are
represented by demand notes. The interest rate on
intercompany demand notes is the London Interbank Offered Rate
on the first day of the month plus an applicable margin based
on the current Standard and Poor's Rating of the Borrower.
In May 1995, Texas Gas entered into a program with a bank
to sell up to $35 million of trade receivables with limited
recourse. As of December 31, 1999 and 1998, $21.9 million and
$19.6 million, respectively, of such receivables were sold.
Texas Gas' capital expenditures for the years ended
December 31, 1999 and 1998, were $65.1 million and $60.8
million, respectively. Texas Gas' budgeted capital
expenditures for 2000 are $86.1 million.
Texas Gas' debt as a percentage of total capitalization at
December 31, 1999 and 1998, was 27.5% and 28.4%, respectively.
On April 30, 1997, Texas Gas filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. In March 1998, Texas Gas filed an offer of
settlement. Pursuant to the provisions of the settlement, the
settlement became effective November 14, 1998, and a filing
to implement the settlement was made on November 30, 1998.
Refunds representing the difference between collected rates
and the settlement rates, including interest, of $17.2 million
were distributed to customers on January 13, 1999. The FERC
issued a letter order on September 15, 1999, which accepted Texas
Gas' final refund report as being in satisfactory compliance
with the settlement. Accordingly, Texas Gas included in the
third quarter of 1999 a total of $7.4 million in operating
income in recognition of the final resolution of its pending
rate case issues.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
Texas Gas' market risk is limited to its long-term debt.
All interest on long-term debt is fixed in nature. Total long-
term debt at December 31, 1999, had a carrying value of $250.9
million and a fair value of $247.1 million. The weighted-
average interest rate of Texas Gas' long-term debt is 8.08%.
Texas Gas' 8 5/8% and 7 1/4% long-term debt issues mature in
2004 and 2027, respectively.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Texas Gas Transmission Corporation
We have audited the accompanying consolidated balance
sheets of Texas Gas Transmission Corporation as of December
31, 1999 and 1998, and the related consolidated statements of
income, retained earnings and paid-in capital and cash flows
for each of the three years in the period ended December 31,
1999. These consolidated financial statements are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Texas Gas Transmission Corporation at
December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 17, 2000
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, December 31,
ASSETS 1999 1998
Current Assets:
Cash and cash equivalents $ 266 $ 201
Receivables:
Trade 7,011 8,493
Affiliates 1,056 1,049
Other 219 702
Gas receivables:
Transportation and exchange 1,300 2,794
Storage 93 13
Advances to affiliates 73,765 82,755
Inventories 15,627 15,341
Deferred income taxes 10,992 14,496
Costs recoverable from customers 13,714 10,085
Gas stored underground 10,409 10,409
Other 1,483 1,676
Total current assets 135,935 148,014
Investments, at cost 367 340
Property, Plant and Equipment, at cost:
Natural gas transmission plant 960,208 918,747
Other natural gas plant 149,602 150,512
1,109,810 1,069,259
Less - Accumulated depreciation and
amortization 146,245 128,759
Property, plant and equipment, net 963,565 940,500
Other Assets:
Gas stored underground 111,042 113,468
Costs recoverable from customers 48,482 52,358
Other 38,313 38,991
Total other assets 197,837 204,817
Total Assets $1,297,704 $1,293,671
The accompanying notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, December 31,
1999 1998
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Payables:
Trade $ 3,160 $ 3,016
Affiliates 10,071 17,828
Other 5,633 7,026
Gas payables:
Transportation and exchange 15,387 12,764
Storage 13,453 13,010
Accrued taxes 21,964 22,752
Accrued interest 6,557 6,557
Accrued payroll and employee benefits 37,734 35,770
Other accrued liabilities 11,661 12,483
Reserve for regulatory and rate matters - 20,150
Total current liabilities 125,620 151,356
Long-Term Debt 250,860 251,160
Other Liabilities and Deferred Credits:
Deferred income taxes 168,824 156,253
Postretirement benefits other than pensions 38,505 41,392
Other 52,255 60,213
Total other liabilities and deferred
credits 259,584 257,858
Contingent Liabilities and Commitments
Stockholder's Equity:
Common stock, $1.00 par value, 1,000
shares authorized, issued and outstanding 1 1
Premium on capital stock and other
paid-in capital 627,046 627,046
Retained earnings 34,593 6,250
Total stockholder's equity 661,640 633,297
Total Liabilities and Stockholder's
Equity $1,297,704 $1,293,671
The accompanying notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
For the Year Ended December 31,
1999 1998 1997
Operating Revenues:
Gas transportation $267,030 $269,457 $291,209
Gas sales 552 13,537 25,413
Gas Storage 3,798 2,338 514
Other 1,274 1,454 1,201
Total operating revenues 272,654 286,786 318,337
Operating Costs and Expenses:
Cost of gas transportation 8,748 14,321 31,314
Cost of gas sold 544 13,359 25,454
Operation and maintenance 48,310 54,771 58,020
Administrative and general 54,875 56,520 61,871
Depreciation and amortization 43,226 42,764 42,538
Taxes other than income taxes 15,427 14,626 15,019
Total operating costs and expenses 171,130 196,361 234,216
Operating Income 101,524 90,425 84,121
Other (Income) Deductions:
Interest expense 19,802 21,226 20,026
Interest income (3,807) (4,956) (7,220)
Miscellaneous other income, net (521) (224) (274)
Total other deductions 15,474 16,046 12,532
Income Before Income Taxes 86,050 74,379 71,589
Provision for Income Taxes 33,707 29,472 28,370
Net Income $ 52,343 $ 44,907 $ 43,219
The accompanying notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND PAID-IN CAPITAL
(Thousands of Dollars)
Retained Paid-in
Earnings Capital
Balance, December 31, 1996 $ 6,733 $678,146
Add (deduct):
Net income 43,219 -
Dividends on common stock
and returns of capital (43,609) (42,100)
Balance, December 31, 1997 6,343 636,046
Add (deduct):
Net income 44,907 -
Dividends on common stock
and returns of capital (45,000) (9,000)
Balance, December 31, 1998 6,250 627,046
Add (deduct):
Net income 52,343 -
Dividends on common stock (24,000) -
Balance, December 31, 1999 $ 34,593 $627,046
The accompanying notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
For the Year Ended December 31,
1999 1998 1997
OPERATING ACTIVITIES:
Net income $ 52,343 $ 44,907 $ 43,219
Adjustments to reconcile to cash
provided from operations:
Depreciation and amortization 43,226 42,764 42,538
Provision (benefit) for deferred
income taxes 16,075 9,823 (6,408)
Changes in receivables sold 2,300 (10,000) 5,400
Changes in receivables 1,103 4,769 (1,620)
Changes in inventories (286) 45 (450)
Changes in other current assets (1,793) 614 10,959
Changes in accounts payable (1,249) (4,581) (3,242)
Changes in accrued liabilities (16,850) 25,706 27,799
Other, including changes in non-
current assets and liabilities (12,990) (11,727) (29,534)
Net cash provided by
operating activities 81,879 102,320 88,661
FINANCING ACTIVITIES:
Proceeds from long-term debt - - 99,031
Payment of long-term debt - - (100,000)
Dividends and returns of capital (24,000) (54,000) (85,709)
Other, net - (1) (8,173)
Net cash used in
financing activities (24,000) (54,001) (94,851)
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of allowance
for funds used during construction (65,083) (60,781) (74,549)
Proceeds from sales and salvage values,
net of costs of removal (1,721) 770 2,059
Advances to affiliates, net 8,990 10,745 78,644
Proceeds from sale of long-term
investments - 913 156
Net cash (used in) provided by
investing activities (57,814) (48,353) 6,310
Increase (decrease) in cash and cash
equivalents 65 (34) 120
Cash and cash equivalents at beginning
of period 201 235 115
Cash and cash equivalents at end of period $ 266 $ 201 $ 235
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 20,756 $ 19,587 $ 21,806
Income taxes, net 18,325 21,903 33,944
The accompanying notes are an integral part of these consolidated
financial statements.
TEXAS GAS TRANSMISSION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Corporate Structure and Control, Nature of Operations and
Basis of Presentation
Corporate Structure and Control
Texas Gas Transmission Corporation and its wholly owned
subsidiary, TGT Enterprises, Inc., (collectively, Texas Gas)
are wholly owned by Williams Gas Pipeline Company (WGP), which
is a wholly owned subsidiary of The Williams Companies, Inc.
(Williams).
Nature of Operations
Texas Gas is an interstate natural gas transmission company
which owns and operates a natural gas pipeline system
originating in the Louisiana Gulf Coast area and in East Texas
and running generally north and east through Louisiana,
Arkansas, Mississippi, Tennessee, Kentucky, Indiana and into
Ohio, with smaller diameter lines extending into Illinois.
Texas Gas' direct market area encompasses eight states in the
South and Midwest, and includes the Memphis, Tennessee;
Louisville, Kentucky; Cincinnati and Dayton, Ohio; and
Indianapolis, Indiana metropolitan areas. Texas Gas also has
indirect market access to the Northeast through
interconnections with unaffiliated pipelines.
Basis of Presentation
Texas Gas' 1995 acquisition by Williams has been accounted
for using the purchase method of accounting. Accordingly, an
allocation of the purchase price was assigned to the assets
and liabilities of Texas Gas, based on their estimated fair
values. The accompanying financial statements reflect the
pushdown of the purchase price allocation (amounts in excess
of book value) to Texas Gas. Included in property, plant and
equipment at December 31, 1999, is an aggregate of
approximately $430 million related to amounts in excess of the
original cost of the regulated facilities as a result of the
Williams' and prior acquisitions. This amount is being
amortized over 40 years, the estimated useful lives of these
assets at the date of acquisition, at approximately $11
million per year. Current Federal Energy Regulatory
Commission (FERC) policy does not permit Texas Gas to recover
through its rates amounts in excess of original cost.
B. Summary of Significant Accounting Policies
Revenue Recognition
Revenues for sales of products are recognized in the period
of delivery and revenues from the transportation of gas are
recognized based on contractual terms and the related
transported volumes. Texas Gas is subject to FERC regulations
and, accordingly, certain revenues collected may be subject to
possible refunds upon final orders in pending cases. Texas
Gas records rate refund liabilities considering Texas Gas and
other third party regulatory proceedings, advice of counsel
and estimated total exposure, as discounted and risk weighted,
as well as collection and other risks (see Note C for a
summary of pending rate cases before the FERC).
Costs Recoverable from/Refundable to Customers
Texas Gas has various mechanisms whereby rates or
surcharges are established and revenues are collected and
recognized based on estimated costs. Costs incurred over or
under approved levels are deferred in anticipation of recovery
or refunds through future rate or surcharge adjustments (see
Note C for a discussion of Texas Gas' rate matters).
Property, Plant and Equipment
Depreciation is provided primarily on the straight-line
method over estimated useful lives. Gains or losses from the
ordinary sale or retirement of property, plant and equipment
generally are credited or charged to accumulated depreciation;
other gains or losses are recorded in net income.
Income Taxes
Deferred income taxes are computed using the liability
method and are provided on all temporary differences between
the book basis and the tax basis of Texas Gas' assets and
liabilities.
For federal income tax reporting, Texas Gas is included in
the consolidated federal income tax return of Williams. It is
Williams' policy to charge or credit Texas Gas with an amount
equivalent to its federal income tax expense or benefit as if
Texas Gas filed a separate return.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Capitalized Interest
The allowance for funds used during construction represents
the cost of funds applicable to regulated natural gas
transmission plant under construction as permitted by FERC
regulatory practices. The allowance for borrowed funds used
during construction and capitalized interest for each of the
years ended December 31, 1999, 1998 and 1997, was $0.7
million. The allowance for equity funds for the years ended
December 31, 1999, 1998 and 1997, was $1.5 million, $1.4
million and $1.6 million, respectively.
Gas in Storage
Texas Gas' gas stored underground, which is valued at
historical cost, is used for system management, in part to
meet operational balancing needs on its system, in part to
meet the requirements of Texas Gas' firm and interruptible
storage customers, and in part to meet the requirements of
Texas Gas' "no-notice" transportation service, which allows
customers to temporarily draw from Texas Gas' gas to be repaid
in-kind during the following summer season. In accordance
with FERC Order 581, that portion of gas stored underground
which exceeded Texas Gas' system management requirements, as
approved by the FERC, has been classified as a current asset
in the accompanying balance sheets.
Gas Imbalances
In the course of providing transportation and storage
services to customers, Texas Gas may receive different
quantities of gas from shippers than the quantities delivered
on behalf of those shippers. These transactions result in
imbalances, which are repaid or recovered in cash or through
the receipt or delivery of gas in the future. Customer
imbalances to be repaid or recovered in-kind are recorded as a
receivable or payable in the accompanying balance sheets.
Settlement of imbalances requires agreement between the
pipeline and shippers as to allocations of volumes to specific
transportation contracts and timing of delivery of gas based
on operational conditions.
Inventory Valuation
Materials and supplies inventories are determined using
the lower of average-cost or market method.
Employee Stock-Based Awards
Williams' employee stock-based awards are accounted for
under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations. Williams' fixed plan common stock options do
not result in compensation expense because the exercise price
of the stock options equals the market price of the underlying
stock on the date of grant.
Cash Equivalents
Texas Gas includes in cash equivalents any short-term
highly-liquid investments that have a maturity of three months
or less when acquired.
Common Stock Dividends and Returns of Capital
Texas Gas charges against paid-in capital that portion of
any common dividend declaration which exceeds the retained
earnings balance. Such excesses are deemed to be returns of
capital.
Recent Accounting Standards
The Financial Accounting Standards Board issued Statement
of Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This standard, as
amended, is effective for Texas Gas on January 1, 2001. This
standard requires that all derivatives be recognized as assets
or liabilities on the balance sheet and that those instruments
be measured at fair value. The effect of this standard on
Texas Gas' results of operations and financial position is
being evaluated.
Effective January 1, 1999, Texas Gas adopted Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." The SOP requires that all start-up costs be
expensed as incurred. There was no financial impact to Texas
Gas' results of operations or financial position from the
adoption of SOP 98-5.
Reclassifications
Certain reclassifications have been made in the 1998 and
1997 financial statements to conform to the 1999 presentation.
C. Contingent Liabilities and Commitments
Regulatory and Rate Matters and Related Litigation
FERC Order 637
On February 9, 2000, the FERC issued a final rule, Order 637,
in response to the comments received on the Notice of Proposed
Rulemaking (NOPR) and Notice of Inquiry (NOI). The FERC
adopts in Order 637 certain policies that it finds are
necessary to adjust its current regulatory model to the needs
of the evolving markets, but determines that any fundamental
changes to its regulatory policy, which changes were raised
and commented on in the NOPR and NOI, will be considered after
further study and evaluation of the evolving marketplace.
Most significantly, in Order 637, the FERC (i) revises its
pricing policy to waive, for a two-year period, the maximum
price ceilings for short-term releases of capacity of less
than one year, and (ii) permits pipelines to file proposals to
implement seasonal rates for short-term services and term-
differentiated rates, subject to certain requirements
including the requirement that a pipeline be limited to
recovering its annual revenue requirement under those rates.
FERC Order 636
Effective November 1, 1993, Texas Gas restructured its
business to implement the provisions of FERC Order 636, which,
among other things, required pipelines to unbundle their
merchant role from their transportation services. FERC Order
636 also provides that pipelines should be allowed the
opportunity to recover all prudently incurred transition costs
which, for Texas Gas, are primarily related to gas supply
realignment (GSR) costs and unrecovered purchased gas costs.
Certain aspects of Texas Gas' FERC Order 636 restructuring are
under appeal.
In September 1995, Texas Gas received FERC approval of a
settlement agreement which resolves all issues regarding Texas
Gas' recovery of GSR costs. To date, Texas Gas has paid $76.2
million and collected $66.4 million, plus interest, related to
GSR. Texas Gas expects to pay no more than $80 million for
GSR costs, primarily as a result of contract terminations, and
has provided reserves for the remaining GSR costs it may be
required to pay, as well as a regulatory asset for the
estimated future amounts recoverable.
General Rate Issues
On April 30, 1997, Texas Gas filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. In March 1998, Texas Gas filed an offer of
settlement. Pursuant to the provisions of the settlement, the
settlement became effective November 14, 1998, and a filing to
implement the settlement was made on November 30, 1998.
Refunds representing the difference between collected rates
and the settlement rates, including interest, of $17.2 million
were distributed to customers on January 13, 1999. The FERC
issued a letter order on September 15, 1999, which accepted
Texas Gas' final refund report as being in satisfactory
compliance with the settlement. Accordingly, Texas Gas
included in the third quarter of 1999 a total of $7.4 million
in operating income in recognition of the final resolution of
its pending rate case issues.
Royalty Claims and Producer Litigation
In connection with Texas Gas' renegotiations of supply
contracts with producers to resolve take-or-pay and other
contract claims, Texas Gas has entered into certain
settlements which may require the indemnification by Texas Gas
of certain claims for royalties which a producer may be
required to pay as a result of such settlements. Texas Gas
has been made aware of demands on producers for additional
royalties and may receive other demands which could result in
claims against Texas Gas pursuant to the indemnification
provision in its settlements. Indemnification for royalties
will depend on, among other things, the specific lease
provisions between the producer and the lessor and the terms
of the settlement between the producer and Texas Gas.
Pursuant to such an indemnity, in January 1998, Texas Gas
reimbursed a producer for approximately $1.7 million in costs
paid to settle a take-or-pay royalty claim. On June 1, 1999,
Texas Gas filed to recover approximately $1.3 million (75%) of
the costs pursuant to the provisions of FERC Order 528. The
FERC approved the filing, subject to conditions, which allows
for a surcharge on all mainline throughput beginning July 1,
1999, to run through a twelve-month period. Texas Gas has
provided reserves for the estimated settlement costs of other
royalty claims and litigation.
Environmental Matters
As of December 31, 1999, Texas Gas had a reserve of
approximately $1.5 million for estimated costs associated with
environmental assessment and remediation, including
remediation associated with the historical use of
polychlorinated biphenyls and hydrocarbons. This estimate
depends upon a number of assumptions concerning the scope of
remediation that will be required at certain locations and the
cost of remedial measures to be undertaken. Texas Gas is
continuing to conduct environmental assessments and is
implementing a variety of remedial measures that may result in
increases or decreases in the total estimated costs.
Texas Gas currently is either named as a potentially
responsible party or has received an information request
regarding its potential involvement at certain Superfund and
state waste disposal sites. The anticipated remediation
costs, if any, associated with these sites have been included
in the reserve discussed above.
Texas Gas is also subject to the federal Clean Air Act
(CAA) and the CAA Amendments of 1990 (Amendments) which added
significant provisions to the existing federal CAA. The
Amendments require the Environmental Protection Agency (EPA)
to promulgate new regulations pertaining to mobile sources,
air toxics, areas of ozone non-attainment, and acid rain.
Texas Gas operates facilities in some areas designated as non-
attainment for the current ozone standard and is aware that
the EPA may designate additional non-attainment areas during
2000 which may potentially impact Texas Gas operations.
Emission control modifications of compression equipment
located at facilities required to comply with current federal
CAA provisions, the Amendments, and State Implementation Plans
for NOx reductions are estimated to cost in the range of $6
million to $14 million by May 2003 and will be recorded as
additions to property, plant and equipment as the facilities
are added. If EPA designates additional new non-attainment
areas in 2000 which impact Texas Gas' operations, the cost of
additions to property, plant and equipment is expected to
increase; however, Texas Gas is unable at this time to
estimate with any certainty the cost of additions that may be
required. Moreover, new regulations pertaining to Hazardous
Air Pollutants (HAPs) are anticipated to be promulgated by
November 2000 which will require emission controls in addition
to the controls mentioned above. Texas Gas cannot predict the
costs with any certainty at this time resulting from the
installation of these controls. The effective compliance date
for the HAPs regulations and installation of associated
controls is anticipated to be November 2003.
Texas Gas considers environmental assessment and
remediation costs and costs associated with compliance with
environmental standards to be recoverable through rates, as
they are prudent costs incurred in the ordinary course of
business. The actual costs incurred will depend on the actual
amount and extent of contamination discovered, the final
cleanup standards mandated by the U.S. Environmental
Protection Agency or other governmental authorities, and other
factors.
Other Legal Issues
In 1998, the United States Department of Justice informed
Williams that Jack Grynberg, an individual, had filed claims
in the United States District Court for the District of
Colorado under the False Claims Act against Williams and
certain of its wholly owned subsidiaries
including Texas Gas. Mr. Grynberg has also filed claims
against approximately 300 other energy companies and alleges
that the defendants violated the False Claims Act in
connection with the measurement and purchase of hydrocarbons.
The relief sought is an unspecified amount of royalties
allegedly not paid to the federal government, treble damages,
a civil penalty, attorneys' fees, and costs. On April 9,
1999, the United States Department of Justice announced that
it was declining to intervene in any of the Grynberg qui tam
cases, including the actions filed against the Williams
entities in the United States District Court for the District
of Colorado. On October 21, 1999, the Panel on Multi-District
Litigation transferred all of the Grynberg qui tam cases,
including the ones filed against Williams, to the United
States District Court for the District of Wyoming for pre-
trial purposes.
Summary of Contingent Liabilities and Commitments
While no assurances may be given, Texas Gas does not
believe that the ultimate resolution of the foregoing matters,
taken as a whole based on advice from counsel and after
consideration of amounts accrued, insurance coverage,
potential recovery from customers or other indemnification
arrangements, will have a materially adverse effect on Texas
Gas' future financial position, results of operations or cash
flow requirements.
D. Income Taxes
Following is a summary of the provision for income
taxes for the years ended December 31, 1999, 1998, and 1997
(expressed in thousands):
For the Year Ended December 31,
1999 1998 1997
Current provision:
Federal $15,249 $16,288 $28,637
State 2,383 3,361 6,141
17,632 19,649 34,778
Deferred provision (benefit):
Federal 13,230 8,085 (5,274)
State 2,845 1,738 (1,134)
16,075 9,823 (6,408)
Income tax provision $33,707 $29,472 $28,370
Reconciliations from the income tax provision at the
statutory rate to Texas Gas' income tax provision are as
follows (expressed in thousands):
For the Year Ended December 31,
1999 1998 1997
Provision at statutory rate $30,118 $26,033 $25,056
Increases in taxes resulting from:
State income taxes 3,398 3,314 3,255
Other, net 191 125 59
Income tax provision $33,707 $29,472 $28,370
Significant components of deferred tax liabilities and
assets as of December 31, 1999 and 1998, are as follows
(expressed in thousands):
1999 1998
Deferred tax liabilities:
Costs refundable to customers - fuel $ 4,438 $ 2,507
Property, plant and equipment:
Tax over book depreciation, net of gains 72,920 63,721
Other basis differences 105,766 104,060
Other 5,903 5,659
Total deferred tax liabilities 189,027 175,947
Deferred tax assets:
Costs recoverable from customers:
Gas supply realignment 272 266
Transportation 686 272
Accrued employee benefits 14,627 13,150
Producer settlement costs 563 415
Reserve for rate refund - 2,690
Miscellaneous deferrals 1,057 3,586
Gas stored underground - additional tax basis 2,687 2,464
Debt related items 2,936 3,308
Other 8,367 8,039
Total deferred tax assets 31,195 34,190
Net deferred tax liabilities $157,832 $141,757
E. Financing
At December 31, 1999 and 1998, long-term debt issues were
outstanding as follows (expressed in thousands):
1999 1998
Debentures:
7 1/4% due 2027 $100,000 $100,000
Notes:
8 5/8% due 2004 150,000 150,000
250,000 250,000
Unamortized debt premium, net 860 1,160
Total long-term debt $250,860 $251,160
Texas Gas filed a Form S-3 Registration Statement with the
Securities and Exchange Commission on May 16, 1997, to
register debt securities of $200 million to be offered for
sale on a delayed or continuous basis. On July 15, 1997,
Texas Gas sold $100 million of 7 1/4% Debentures due July 15,
2027. The Debentures have no sinking fund requirements and
may be called at any time, at Texas Gas' option, in whole or
in part, at a specified redemption price, plus accrued and
unpaid interest to the date of redemption.
Texas Gas' debentures and notes have restrictive covenants
which provide that neither Texas Gas nor any subsidiary may
create, assume or suffer to exist any lien upon any property
to secure any indebtedness unless the debentures and notes
shall be equally and ratably secured.
Texas Gas is a participant with other Williams subsidiaries
in a $1 billion credit agreement under which Texas Gas may
borrow up to $200 million, subject to borrowings by other
affiliated companies. Interest rates vary with current market
conditions. To date, Texas Gas has no amounts outstanding
under this facility.
F. Employee Benefit Plans
Retirement Plan
Substantially all of Texas Gas' employees are covered under
a non-contributory, defined benefit retirement plan
(Retirement Plan) offered by Texas Gas. Texas Gas' general
funding policy is to contribute amounts deductible for federal
income tax purposes. Due to its fully funded status, Texas
Gas has not been required to fund the Retirement Plan since
1986.
In connection with a 1998 restructuring of Texas Gas' field
operations area, Texas Gas offered a special voluntary
retirement program with enhanced benefits. The program was
offered to all field employees who had five or more years of
service and were age 50 on or before June 30, 1998. There
were 85 employees who elected to retire, effective July 1,
1998, under this special retirement program.
The following table presents the changes in benefit
obligations and plan assets for pension benefits for the years
indicated. It also presents a reconciliation of the funded
status of these benefits to the amount recognized in the
Consolidated Balance Sheet at December 31 of each year
indicated.
1999 1998
Change in benefit obligation:
Benefit obligation at beginning of year $ 75,514 $ 68,714
Service cost 3,955 4,133
Interest cost 5,624 6,097
Amendments 5,607 (16,414)
Settlement/curtailment gain - (23,738)
Special termination benefit cost - 16,660
Actuarial (gain) loss (18,372) 48,170
Benefits paid (1,082) (28,108)
Benefit obligation at end of year 71,246 75,514
Change in plan assets:
Fair value of plan assets at beginning of year 120,202 132,262
Actual return on plan assets 23,490 16,048
Benefits paid (1,082) (1,744)
Settlement benefits paid - (26,364)
Fair value of plan assets at end of year 142,610 120,202
Funded status 71,364 44,688
Unrecognized net actuarial gain (34,216) (3,497)
Unrecognized prior service credit (9,415) (16,325)
Prepaid benefit cost $ 27,733 $ 24,866
Prepaid pension costs related to the Retirement Plan have
been classified as other assets in the accompanying balance
sheets.
Net pension benefit expense consists of the following:
For the Year Ended December 31,
1999 1998 1997
Components of net periodic pension expense:
Service cost $ 3,955 $ 4,133 $ 3,016
Interest cost 5,624 6,097 4,646
Expected return on plan assets (11,143) (12,081) (11,580)
Amortization of prior service credit (1,303) (1,251) (95)
Recognized net actuarial gain - (31) (2,176)
Settlement/curtailment gain - (23,811) -
Special termination benefit cost - 16,660 -
Regulatory asset accrual 2,867 10,284 6,189
Net periodic pension expense $ - $ - $ -
The following are the weighted-average assumptions utilized
as of December 31 of the year indicated.
1999 1998 1997
Discount rate 8.00% 7.00% 7.25%
Expected return on plan assets 10.00% 10.00% 10.00%
Rate of compensation increase 5.00% 5.00% 5.00%
Texas Gas recognizes expense concurrent with the recovery
in rates. Since Texas Gas' Retirement Plan is fully funded,
Texas Gas is not currently recovering any amounts through
rates.
Postretirement Benefits Other than Pensions
Texas Gas is a participant in Williams' health care plan
which provides postretirement medical benefits to retired
employees who were employed full time, hired prior to January
1, 1996, and have met certain other requirements. Texas Gas
made contributions to the Williams' postretirement health care
plan of $6.2 million in 1999, $4.5 million in 1998 and $10.3
million in 1997. The settlement of Texas Gas' latest rate
case with the FERC (Docket No. RP97-344) allows recovery of
$5.9 million annually, including amortization of previously
deferred postretirement benefit costs. Net postretirement
benefit expense related to Texas Gas' participation in the
Williams' plan is $5.8 million for 1999, $5.0 million for 1998
and $10.7 million for 1997, including $3.0 million, $1.9
million and $8.5 million of amortization of a regulatory
asset, respectively. The regulatory asset represents
unrecovered costs from prior years, including the unamortized
transition obligation under Statement of Financial Accounting
Standard (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which was
recognized at the date of acquisition by Williams. The
regulatory asset balance as of December 31, 1999 and 1998 was
$40.9 million and $43.9 million, respectively. This asset is
being amortized concurrent with the recovery of these costs
through rates. Based on the 1999 level of amortization, the
regulatory asset balance should be recovered through rates in
approximately 14 years.
Other
Texas Gas maintains various defined contribution plans
covering substantially all employees. Texas Gas' costs related
to these plans were $2.7 million in 1999, $2.8 million in 1998
and $2.6 million in 1997.
G. Financial Instruments
The following methods and assumptions were used by Texas
Gas in estimating its fair-value disclosures for financial
instruments:
Cash and Advances to Affiliates: For short-term instruments,
the carrying amount is a reasonable estimate of fair value due
to the short maturity of those instruments. As discussed in
Note H, advances to affiliates, which are represented by
demand notes payable, earn a variable rate of interest which
is adjusted regularly to reflect current market conditions.
Long-Term Debt: All of Texas Gas' long-term debt is publicly
traded; therefore, estimated fair value is based on quoted
market prices at December 31, 1999 and 1998.
The carrying amount and estimated fair values of Texas Gas'
financial instruments as of December 31, 1999 and 1998, are as
follows (expressed in thousands):
Carrying Fair
Amount Value
1999 1998 1999 1998
Financial Assets:
Cash and advances to affiliates $ 74,031 $ 82,956 $ 74,031 $ 82,956
Financial Liabilities:
Long-term debt 250,860 251,160 247,130 270,628
Sale of Receivables
Texas Gas sells, with limited recourse, certain
receivables. The limit under the revolving receivables
facility was $35 million at December 31, 1999 and 1998. At
December 31, 1999 and 1998, $21.9 million and $19.6 million,
respectively, of such receivables had been sold. Based on
amounts outstanding at December 31, 1999, the maximum
contractual credit loss under these arrangements is
approximately $3.6 million, but the likelihood of loss is
remote.
Significant Group Concentrations of Credit Risk
Texas Gas' trade receivables are primarily due from local
distribution companies and other pipeline companies
predominantly located in the Midwestern United States. Texas
Gas' credit risk exposure in the event of nonperformance by
the other parties is limited to the face value of the
receivables. As a general policy, collateral is not required
for receivables, but customers' financial condition and credit
worthiness are evaluated regularly.
H. Transactions with Major Customers and Affiliates
Major Customers
Texas Gas' only major customer for 1999, 1998 and 1997 was
ProLiance Energy, LLC. Revenues received from ProLiance
Energy, LLC were $36.5 million, $39.9 million, and $39.5
million for the years ended December 31, 1999, 1998 and 1997,
respectively, portions of which were included in the refund
reserves discussed in Note C.
Related Parties
As a subsidiary of Williams, Texas Gas engages in
transactions with Williams and other Williams subsidiaries
characteristic of group operations. As of December 31, 1999,
Texas Gas was a participant in Williams' cash management
program. The advances due Texas Gas by Williams were
represented by demand notes payable. Effective February 1,
2000, Texas Gas began participating in WGP's cash management
program. The advances due Texas Gas by WGP are represented by
demand notes payable. The interest rate on intercompany
demand notes is the London Interbank Offered Rate on the first
day of the month plus an applicable margin based on the
current Standard and Poor's Rating of the Borrower. Net
interest income on advances to or from affiliated companies
was $3.7 million, $4.8 million and $7.0 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
Williams has a policy of charging subsidiary companies for
management services provided by the parent company and other
affiliated companies. Amounts charged to expense relative to
management services were $6.7 million, $5.2 million and $5.2
million for the years ended December 31, 1999, 1998 and 1997,
respectively. Management considers the cost of these services
reasonable.
Texas Gas has contracted with a gas marketing affiliate to
be Texas Gas' agent for the purpose of administering all
existing and future gas sales and market-responsive purchase
obligations. Sales and purchases under this agreement do not
impact Texas Gas' results of operations.
Included in Texas Gas' gas sales revenues for the years
ended December 31, 1999, 1998 and 1997, is $0.6 million, $0.9
million and $5.7 million, respectively, applicable to gas
sales to Texas Gas' gas marketing affiliates.
Included in Texas Gas' gas transportation revenues for the
years ended December 31, 1999, 1998 and 1997, are amounts
applicable to transportation for affiliates as follows
(expressed in thousands):
For the Year Ended December 31,
1999 1998 1997
Williams Energy Services Company $ 1,592 $ 1,990 $ 3,183
Transcontinental Gas Pipe Line
Corporation 3,996 4,097 4,305
$ 5,588 $ 6,087 $ 7,488
Included in Texas Gas' cost of gas sold for the years ended
December 31, 1998 and 1997, is $12.4 million and $19.7
million, respectively, applicable to gas purchases from Texas
Gas' gas marketing affiliate. Texas Gas did not make gas
purchases from its gas marketing affiliate in 1999.
I. Stock-Based Compensation
Williams has several plans providing for common stock-based
awards to its employees and employees of its subsidiaries.
The plans permit the granting of various types of awards
including, but not limited to, stock options, stock
appreciation rights, restricted stock and deferred stock. The
purchase price per share for stock options may not be less
than the market price of the underlying stock on the date of
grant. Stock options generally become exercisable after three
or five years, subject to accelerated vesting if certain
future stock prices are achieved. Stock options expire ten
years after grant.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires that companies who continue to apply APB Opinion No.
25 disclose pro forma net income assuming that the fair-value
method in SFAS No. 123 had been applied in measuring
compensation cost. Pro forma net income for Texas Gas was
$50.3 million for 1999, $43.7 million for 1998 and $42.0
million for 1997. Reported net income was $52.3 million,
$44.9 million and $43.2 million for 1999, 1998 and 1997. Pro
forma amounts for 1999, 1998 and 1997 include the remaining
total compensation expense from the awards made in the prior
year, as these awards fully vested in 1999, 1998 and 1997,
respectively, as a result of the accelerated vesting
provisions. Since compensation expense from stock options is
recognized over the future years' vesting period, and
additional awards generally are made each year, pro forma
amounts may not be representative of future years' amounts.
A summary of stock options granted under the plans is shown
in the following table:
1999 1998 1997
Stock options granted 248,821 163,489 348,322
Stock options outstanding 1,455,808 1,397,913 1,343,949
Stock options exercisable 1,379,608 1,234,424 996,627
Weighted average grant date fair value $11.90 $8.19 $5.98
The fair value of the stock options was estimated at the
date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions: expected life of
the stock options of approximately five years; volatility of
the expected market price of Williams common stock of 28
percent (25 percent in 1998 and 23 percent in 1997); risk-free
interest rate of 5.6 percent (5.3 percent in 1998 and 6.1
percent in 1997); and a dividend yield of 1.5 percent (2.0
percent in 1998 and 2.4 percent in 1997).
J. Quarterly Information (Unaudited)
The following summarizes selected quarterly financial data
for 1999 and 1998 (expressed in thousands):
1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating revenues $ 88,368 $ 51,973 $ 52,402 $ 79,911
Operating expenses 42,132 40,894 39,296 48,808
Operating income 46,236 11,079 13,106 1/ 31,103
Interest expense 4,875 4,958 5,060 4,909
Other income, net (976) (1,026) (1,246) (1,080)
Income before income taxes 42,337 7,147 9,292 27,274
Provision for income taxes 16,844 2,859 3,429 10,575
Net income $ 25,493 $ 4,288 $ 5,863 $ 16,699
1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating revenues $ 91,789 $ 60,371 $ 53,299 $ 81,327
Operating expenses 49,960 50,615 46,208 49,578
Operating income 41,829 9,756 7,091 31,749
Interest expense 5,296 5,283 5,238 5,409
Other income, net (1,135) (1,541) (1,556) (948)
Income before income taxes 37,668 6,014 3,409 27,288
Provision for income taxes 14,981 2,389 1,368 10,734
Net income $ 22,687 $ 3,625 $ 2,041 $ 16,554
___________________
1/ Includes $7.4 million from the settlement of regulatory and
rate issues related to Texas Gas' RP97-344 rate case.
Operating income may vary by quarter. Based on current
rate structure, Texas Gas experiences higher income in the
first and fourth quarters as compared to the second and third
quarters.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not Applicable.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1.* Financial Statements
Included in Item 8, Part II of this Report
Report of Independent Auditors on Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Retained Earnings and Paid-In
Capital for the years ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements
Schedules are omitted because of the absence of conditions
under which they are required or because the required
information is given in the consolidated financial statements
or notes thereto.
(a) 3. Exhibits
3.1 Copy of Certificate of Incorporation of the Corporation
(Incorporated by reference to Exhibit 3.1 of the 1998
Form 10-K - File No. 1-4169).
3.2 Copy of Bylaws of the Corporation (incorporated by reference
to Exhibit 3.2 of the 1995 Form 10-K - File No. 1-4169).
4.1 Indenture dated July 15, 1997, between Texas Gas and The Bank
of New York relating to 7 1/4% Debentures, due 2027
(incorporated by reference to Exhibit 4.1 to Registration
Statement No. 333-27359, dated May 16, 1997).
4.2 Indenture dated April 11, 1994, securing 8 5/8% Notes due
April 1, 2004 (incorporated by reference to Form 8-K dated
April 13, 1994 - File No. 1-4169).
*23 Consent of Independent Auditors.
*24.1 Power of Attorney together with certified resolution.
*27.1 Financial Data Schedule for Texas Gas Transmission Corporation
for the year ended December 31, 1999.
(b) Reports on Form 8-K
None.
______________
* Filed herewith
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.
TEXAS GAS TRANSMISSION CORPORATION
By: /s/ S. W. Harris
S. W. Harris
Controller and Chief Accounting Officer
Dated: March 20, 2000
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.
/s/ Cuba Wadlington * President and Chief Executive Officer
Cuba Wadlington (Principal Executive Officer)
/s/ Nick A. Bacile * Vice President and Chief Financial Officer
Nick A. Bacile (Principal Executive Officer)
/s/ Keith E. Bailey * Director
Keith E. Bailey
/s/ David L. Young * Director
David L. Young
*By: /s/ S. W. Harris
S. W. Harris
Attorney-in-fact
Dated: March 20, 2000