UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 1,000 SHARES AS OF
-----
AUGUST 13, 2002
- ----------------------------
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(A) AND
(B) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
TEXAS GAS TRANSMISSION CORPORATION
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets - Assets ....................................... 3
Balance Sheets - Liabilities and Stockholder's Equity ... 4
Statements of Income........................................... 5
Statements of Cash Flows ..................................... 6
Condensed Notes to Financial Statements ............ 7
Item 2. Management's Narrative Analysis of the Results of Operations... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................18
SIGNATURE............................................................... 19
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Texas Gas Transmission Corporation
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be achieved. Such statements
are made in reliance on the "safe harbor" protections provided under the Private
Securities Reform Act of 1995. Additional information about issues that could
lead to material changes in performance is contained in Texas Gas Transmission
Corporation's 2001 Annual Report on Form 10-K and 2002 First Quarter Report on
Form 10-Q.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2002 2001
-------------------- -------------------
Current Assets:
Cash and cash equivalents $ 32 $ 86
Receivables:
Accounts receivable - TGT Enterprises, Inc. 1,069 7,003
Other affiliates 1,305 278
Other 2,522 1,470
Gas Receivables:
Transportation and exchange 1,238 1,627
Storage 101 -
Advances to affiliates 49,686 66,299
Inventories 14,194 13,950
Deferred income taxes 12,758 20,492
Costs recoverable from customers 22,282 17,261
Gas stored underground 3,486 3,486
Prepaid and other expenses 2,180 1,551
-------------- ---------------
Total current assets 110,853 133,503
-------------- ---------------
Property, Plant and Equipment, at cost:
Natural gas transmission plant 1,109,487 1,096,620
Other natural gas plant 173,014 167,137
-------------- ---------------
1,282,501 1,263,757
Less -- Accumulated depreciation and amortization 212,689 202,479
-------------- ---------------
Property, plant and equipment, net 1,069,812 1,061,278
-------------- ---------------
Other Assets:
Gas stored underground 121,605 118,883
Costs recoverable from customers 35,209 37,641
Prepaid pension 32,834 35,612
Other 10,646 9,602
-------------- ---------------
Total other assets 200,294 201,738
-------------- ---------------
Total Assets $ 1,380,959 $ 1,396,519
============== ===============
The accompanying condensed notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(THOUSANDS OF DOLLARS,
EXCEPT FOR SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
--------------------- ------------------
Current Liabilities:
Payables:
Trade $ 2,563 $ 5,685
Affiliates 8,297 32,822
Other 1,773 10,139
Gas Payables:
Transportation and exchange 30,144 15,437
Storage 8,320 16,005
Accrued income taxes due affiliate 7,427 18,915
Accrued taxes other 13,807 11,708
Accrued interest 6,557 6,557
Accrued payroll and employee benefits 30,545 34,732
Other accrued liabilities 7,776 9,105
Reserve for regulatory and rate matters 36,909 31,107
-------------- ---------------
Total current liabilities 154,118 192,212
-------------- ---------------
Long-Term Debt 249,982 250,174
-------------- ---------------
Other Liabilities and Deferred Credits:
Deferred income taxes 180,899 172,892
Postretirement benefits other than pensions 27,019 30,101
Pension plan costs 32,835 35,612
Other 33,338 29,948
-------------- ---------------
Total other liabilities and deferred credits 274,091 268,553
-------------- ---------------
Commitments and Contingencies
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 630,608 630,608
Retained earnings 72,159 54,971
-------------- ---------------
Total stockholder's equity 702,768 685,580
-------------- ---------------
Total Liabilities and Stockholder's Equity $ 1,380,959 $ 1,396,519
============== ===============
The accompanying condensed notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Operating Revenues:
Gas transportation $ 50,286 $ 46,248 $ 128,742 $ 130,535
Gas storage 493 595 1,268 1,172
Other 1,048 1,356 2,022 2,703
----------- ----------- ----------- -----------
Total operating revenues 51,827 48,199 132,032 134,410
----------- ----------- ----------- -----------
Operating Costs and Expenses:
Cost of gas transportation 1,166 1,191 2,339 2,394
Operation and maintenance 11,766 11,055 20,962 23,566
Administrative and general 12,156 10,778 24,706 23,299
Depreciation and amortization 11,736 11,418 22,956 22,837
Taxes other than income taxes 3,738 2,984 8,299 7,397
----------- ----------- ----------- -----------
Total operating costs and expenses 40,562 37,426 79,262 79,493
----------- ----------- ----------- -----------
Operating Income 11,265 10,773 52,770 54,917
----------- ----------- ----------- -----------
Other (Income) Deductions:
Interest expense 5,318 5,318 10,496 10,683
Interest income from affiliates (277) (948) (547) (2,217)
Gain on sale of equipment - - (1,323) -
Miscellaneous other (income)
deductions, net (325) (71) (1,036) 236
------------ ----------- ------------ -----------
Total other deductions 4,716 4,299 7,590 8,702
----------- ----------- ----------- -----------
Income Before Income Taxes 6,549 6,474 45,180 46,215
Provision for Income Taxes 2,613 2,646 17,992 18,415
----------- ----------- ----------- -----------
Net Income $ 3,936 $ 3,828 $ 27,188 $ 27,800
=========== =========== =========== ===========
The accompanying condensed notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
2002 2001
-------------- ---------------
OPERATING ACTIVITIES:
Net income $ 27,188 $ 27,800
Adjustments to reconcile to cash provided from operations:
Depreciation and amortization 22,956 22,837
Provision for deferred income taxes 15,741 7,787
Gain on sale of equipment (1,323) -
Changes in operating assets and liabilities:
Receivables (764) 1,293
Receivable - TGT Enterprises, Inc. 5,934 -
Inventories (244) 773
Affiliates (25,552) (2,963)
Other current assets (4,577) 129
Accrued income taxes due affiliate (11,488) (19,606)
Payables and accrued liabilities (8,956) (5,670)
Reserve for regulatory and rate matters 5,802 14,677
Other, including changes in noncurrent assets and liabilities (910) 7,781
--------------- -------------
Net cash provided by operating activities 23,807 54,838
--------------- -------------
FINANCING ACTIVITIES:
Dividends (10,000) (25,000)
-------------- -------------
Net cash used in financing activities (10,000) (25,000)
-------------- -------------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of allowance for funds used
during construction (30,662) (21,524)
Proceeds from sales and salvage values,
net of costs of removal 188 (834)
Advances to affiliates, net 16,613 (7,650)
-------------- -------------
Net cash used in investing activities (13,861) (30,008)
-------------- -------------
Decrease in cash and cash equivalents (54) (170)
Cash and cash equivalents at beginning of period 86 261
-------------- -------------
Cash and cash equivalents at end of period $ 32 $ 91
============== =============
The accompanying condensed notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
A. CORPORATE STRUCTURE AND CONTROL AND BASIS OF PRESENTATION
CORPORATE STRUCTURE AND CONTROL
Texas Gas Transmission Corporation (Texas Gas) is wholly owned by
Williams Gas Pipeline Company, LLC (WGP), which is a wholly owned subsidiary of
The Williams Companies, Inc. (Williams).
BASIS OF PRESENTATION
The financial statements have been prepared from the books and records of
Texas Gas without audit. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The accompanying unaudited financial statements include all
adjustments, both normal recurring and others, which, in the opinion of Texas
Gas' management, are necessary to present fairly its financial position at June
30, 2002, and results of operations and cash flows for the three and six months
ended June 30, 2002 and 2001. These financial statements should be read in
conjunction with the financial statements, notes thereto and management's
narrative analysis contained in Texas Gas' 2001 Annual Report on Form 10-K and
Texas Gas' 2002 First Quarter Report on Form 10-Q.
Certain reclassifications have been made in the 2001 financial statements
to conform to the 2002 presentation.
SEASONAL VARIATION
Operating income may vary by quarter. Based on current rate structure,
Texas Gas experiences higher operating income in the first and fourth quarters
as compared to the second and third quarters.
B. COMMITMENTS AND CONTINGENCIES
REGULATORY AND RATE MATTERS AND RELATED LITIGATION
FERC ORDER 637
On February 9, 2000, the Federal Energy Regulatory Commission (FERC)
issued a final rule, Order 637, in which FERC adopted certain policies that it
finds are necessary to adjust its current regulatory model to the needs of the
evolving markets, but determined that any fundamental changes to its regulatory
policy will be considered after further study and evaluation of the evolving
marketplace. Order 637 revises the FERC's 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 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. Texas Gas submitted
an Order 637 compliance filing on August 15, 2000, which contained pro forma
tariff sheets designed to comply with certain directives in the order regarding
the conduct of daily business transactions. A technical conference was held on
May 24, 2001, to initiate informal discussions with all parties regarding Order
637 compliance for Texas Gas. A contested offer of settlement was filed on May
14, 2002 by Texas Gas.
GENERAL RATE ISSUES
On April 28, 2000, Texas Gas filed a general rate case (Docket No.
RP00-260) which became effective November 1, 2000, subject to refund. Texas Gas
proposed in this rate case to implement value-based, term-differentiated
seasonal rates for short-term services effective November 1, 2000, as permitted
by FERC Order 637. On May 31, 2000, the FERC issued its "Order Accepting and
Suspending Tariff Sheets Subject to Refund, Rejecting Other Tariff Sheets, and
Establishing Hearing and Settlement Procedures" and established administrative
procedures for the case. Although the case was set for hearing, the hearing was
held in abeyance pending the filing of additional information related to the
value-based rate proposal for short-term firm transportation service. Texas Gas
made that supplemental filing on June 30, 2000. On October 27, 2000, the FERC
issued an order on that supplemental filing referring all issues in the case for
hearing. The participants engaged in informal settlement negotiations to attempt
to resolve all issues without a formal hearing. On August 14, 2001, Texas Gas
submitted an offer of settlement proposing to dispose of all issues outstanding
in the proceedings. Only one group of participants (Indicated Shippers)
protested the settlement. On September 26, 2001, the Administrative Law Judge
severed the Indicated Shippers, and certified the settlement to the FERC as
uncontested for the remaining parties. On March 4, 2002, the FERC issued an
order approving the settlement and severing the Indicated Shippers from the
settlement provisions. On June 17, 2002, the FERC issued an order denying the
Indicated shipper's request for rehearing of the March 4, 2002 order. The
settlement became effective 31 days after that order when no party filed any
further requests for rehearing. Thus, the settlement's prospective rates will go
into effect on August 1, 2002 and refunds of approximately $38 million are
anticipated to be made in mid-September. Texas Gas has provided an adequate
reserve for amounts, including interest, which may be refunded to customers.
Adjustments to income will be made in the third quarter 2002, which are
anticipated to result in operating profit of $15 million to $17 million.
Additionally, on July 15, 2002, Texas Gas filed an offer of settlement with the
Indicated Shippers to resolve all remaining issues in the case. No additional
refunds will be due as a result of the settlement with the Indicated Shippers if
that offer of settlement is approved.
UNIFORM STANDARDS OF CONDUCT FOR TRANSMISSION PROVIDERS
On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking
(NOPR) proposing to adopt uniform standards of conduct for transmission
providers. The proposed rules define transmission providers as interstate
natural gas pipelines and public utilities that own, operate or control electric
transmission facilities. The proposed standards would regulate the conduct of
transmission providers with their energy affiliates. The FERC proposes to define
energy affiliates broadly to include any transmission provider affiliate that
engages in or is involved in transmission (gas or electric) transactions, or
manages or controls transmission capacity, or buys, sells, trades or administers
natural gas or electric energy or engages in financial transactions relating to
the sale or transmission of natural gas or electricity. Current rules regulate
the conduct of Texas Gas and its natural gas marketing affiliates. The FERC
invited interested parties to comment on the NOPR. On April 25, 2002, the FERC
issued its staff analysis of the NOPR and the comments received. The staff
analysis proposes redefining the definition of energy affiliates to exclude
affiliated transmission providers. On May 21, 2002, the FERC held a public
conference concerning the NOPR and the FERC invited the submission of
addtitional comments. If adopted, these new standards would require the adoption
of new compliance measures by Texas Gas.
NEGOTIATED RATE POLICIES AND PRACTICES
On July 17, 2002, the FERC issued a Notice of Inquiry to seek comments on
its negotiated rate policies and practices. The FERC states that it is
undertaking a review of the recourse rate as a viable alternative and safeguard
against the exercise of market power of interstate gas pipelines, as well as the
entire spectrum of issues related to its negotiated rate program. The FERC has
requested that interested parties respond to various questions related to the
FERC's negotiated rate policies and practices. Texas Gas has negotiated certain
rates under the FERC's existing negotiated rate program.
CASH MANAGEMENT PROGRAMS
On August 1, 2002, the FERC issued a NOPR that proposes restrictions on
the type of cash management program employed by Williams and its subsidiaries,
including Texas Gas. In addition to stricter guidelines regarding the accounting
for and documentation of cash management or cash pooling programs, the FERC
proposal, if made final, would preclude public utilities, natural gas companies
and oil pipeline companies from participating in such programs unless the parent
company and its FERC-regulated affiliate maintain investment-grade credit
ratings and that the FERC-regulated affiliate maintains stockholders equity of
at least 30 percent of total capitalization. Williams' and Texas Gas' current
credit ratings are not investment grade. The FERC is seeking public comments by
August 22, 2002.
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 that 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. Texas Gas may
file to recover 75 percent of any such amounts it may be required to pay
pursuant to indemnifications for royalties under the provisions of FERC Order
528. Texas Gas has provided reserves for the estimated settlement costs of other
royalty claims and litigation.
ENVIRONMENTAL MATTERS
As of June 30, 2002, Texas Gas had a reserve of approximately $1.3
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, hazardous air
pollutants, areas of ozone non-attainment, and acid rain. Texas Gas operates one
facility in an area designated as non-attainment for the current ozone standard
(1 hour standard) and is aware that during 2002 the EPA may designate additional
areas as non-attainment based on implementation of the revised ozone standard (8
hour standard). Additional areas designated as non-attainment under the revised
standard 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 nitrogen oxide (NOx) reductions are estimated to cost in the range of
$6 million to $14 million by 2005 and will be recorded as additions to property,
plant and equipment as the facilities are added. If the EPA designates
additional new non-attainment areas 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, regulations pertaining to Hazardous
Air Pollutants (HAPs) are anticipated to be promulgated during 2002, which may
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 during
2005; however, an extension of this date may result due to the delay associated
with promulgating these rules.
Texas Gas considers environmental assessment, 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 EPA 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 action 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 those filed against
Williams, to the United States District Court for the District of Wyoming for
pre-trial purposes. Motions to dismiss the complaints, filed by various
defendants including Williams were denied by the court on May 18, 2001.
On May 2, 2000 a flash fire occurred at Texas Gas' Greenville,
Mississippi compressor station injuring six contract employees and one Texas Gas
employee. One contract employee died while in the hospital. A lawsuit was filed
against Texas Gas on behalf of the deceased contract employee and several other
contract employees that were injured; however, damages were not specified. On
October 4 and 5, 2001 a mediation was held involving Texas Gas, its insurance
carriers (through its contractor Bluewater Construction Inc. (Bluewater)), and
Plaintiffs. Settlement was reached with all named plaintiffs. A final contract
employee alleging injuries from the same accident has filed separately against
Texas Gas. This plaintiff was included in the original litigation, and then
withdrew. Informal settlement negotiations are continuing with this plaintiff.
On June 8, 2001, 14 Williams entities, including Texas Gas, were named as
defendants in a nationwide class action lawsuit which has been pending against
other defendants, generally pipeline and gathering companies, for more than one
year. The plaintiffs allege that the defendants, including the Williams
defendants, have engaged in mismeasurement techniques that distort the heating
content of natural gas, resulting in an alleged underpayment of royalties to the
class of producer plaintiffs. In September 2001, the plaintiffs voluntarily
dismissed two of the 14 Williams entities named as defendants in the lawsuit. In
November 2001, Williams, along with other Coordinating Defendants, filed a
motion to dismiss under Rules 9b and 12b of the Kansas Rules of Civil Procedure.
In January 2002, most of the Williams defendants, along with a group of
Coordinating Defendants, filed a motion to dismiss for lack of personal
jurisdiction. The court has not yet ruled on these motions. In the next several
months, the Williams entities will join with other defendants in contesting
certification of the plaintiff class.
SUMMARY OF COMMITMENTS AND CONTINGENCIES
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.
C. ADOPTION OF ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses accounting and reporting standards
for goodwill and other intangible assets. Under the provisions of this
statement, goodwill and intangible assets with indefinite useful lives are no
longer amortized, but will be tested annually for impairment. Texas Gas applied
the new rules beginning January 1, 2002. Because Texas Gas has no goodwill, and
intangible assets are amortized at rates approved by the FERC through regulatory
proceedings, there was no impairment upon adoption.
In second-quarter 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements," requires that gains and losses from
extinguishment of debt only be classified as extraordinary items in the event
that they meet the criteria of Accounting Principles Board Opinion No. 30. SFAS
No. 44, "Accounting for Intangible Assets of Motor Carriers," established
accounting requirements for the effects of transition to the Motor Carriers Act
of 1980 and is no longer required now that the transitions have been completed.
Finally, the amendments to SFAS No. 13 require certain lease modifications that
have economic effects which are similar to sale-leaseback transactions be
accounted for as sale-leaseback transactions. The provisions of SFAS No. 145
related to the rescission of SFAS No. 4 are to be applied in fiscal years
beginning after May 15, 2002, while the provisions related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. All other provisions of
the Statement are effective for financial statements issued on or after May 15,
2002. There was no initial impact of SFAS No. 145 on Texas Gas' results of
continued operations and financial position. Future gains and losses from debt
extinguishments will continue to be accounted for in accordance with FERC
regulations.
Also in second-quarter 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only when the
liability is incurred. The provisions of the Statement are effective for exit or
disposal activities that are initiated after December 31, 2002. The effect of
this standard on Texas Gas' results of operations and financial position is
being evaluated.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
(FILED PURSUANT TO GENERAL INSTRUCTION H)
RECENT EVENTS
As a result of credit issues facing Williams and the assumption of
payment obligations and performance on guarantees associated with Williams
Communications Group, Inc. (WCG), a former affiliate of Williams, Williams
announced plans during the first quarter of 2002 to strengthen its balance sheet
and support retention of its investment grade ratings. The plan included
reducing capital expenditures during the balance of 2002, future sales of assets
to generate proceeds to be used to reduce outstanding debt and the lowering of
expenses, in part through an enhanced-benefit early retirement program which
concluded during the second quarter.
During the second quarter, Williams experienced liquidity issues, the
effect of which limited Williams Energy Marketing & Trading's (WEM&T) ability to
manage market risk and exercise hedging strategies as market liquidity
deteriorated. During May 2002, major rating agencies lowered their credit
ratings on Williams' unsecured long-term debt; however, the ratings still were
maintained as investment grade for the balance of the quarter.
Subsequent to the end of the second quarter, Williams announced that it
would have a substantial net loss for the quarter. In addition, the Williams
board of directors reduced the Williams common stock dividend for the third
quarter from the prior level of 20 cents per share to 1 cent per share. The
major rating agencies downgraded Williams' credit ratings to below investment
grade reflecting the uncertainty associated with Williams' energy trading
business, short-term cash requirements facing Williams and the increased level
of debt Williams had incurred to meet the WCG payment obligations and
guarantees. Concurrent with these events, Williams was unable to complete a
renewal of its unsecured short-term bank facility which expired on July 24,
2002. Subsequently, Williams did obtain two secured facilities totaling $1.3
billion and amended its existing $700 million credit agreement to a secured
basis. These borrowing facilities include pledges of certain assets and contain
financial ratios and other covenants that must be maintained. If such provisions
of the agreements are not maintained, then amounts outstanding can become due
immediately and payable. Williams believes that these financings and the
proceeds received from recent asset sales have significantly improved Williams'
liquidity for the balance of the year. In addition, Williams is pursuing the
sale of other assets to enhance liquidity. The sales are anticipated to close
during the second half of 2002.
The energy trading sector has experienced deteriorating conditions
because of credit and regulatory concerns, and these have significantly reduced
WEM&T's ability to attract new business. In late July 2002, Williams' management
decided to continue to reduce Williams' commitment and exposure to its energy
marketing and risk management business. This reduction could be realized by
entering into a joint venture arrangement with a third party or a sale of a
portion or all of the marketing and trading portfolio. WEM&T, as well as several
unaffiliated energy trading companies, are Texas Gas customers. Texas Gas cannot
predict at this time to what extent its business may be impacted by the
deteriorating conditions in the energy trading sector, however, generally such
companies have continued to perform their contractual commitments to Texas Gas.
FINANCIAL ANALYSIS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2001
Operating income was $2.1 million lower for the six months ended June 30,
2002, than for the six months ended June 30, 2001. The decrease in operating
income was due primarily to lower operating revenues, partially offset by lower
operation and maintenance costs.
Operating revenues decreased $2.3 million primarily attributable to lower
transportation revenues resulting from lower volumes due to a warmer winter.
Total deliveries were 348.3 Tbtu and 348.9 Tbtu for the six months of 2002 and
2001, respectively. The decrease in throughput was partially offset by an
increase in transportation volumes to processing plants. In 2001, transportation
volumes to processing plants decreased dramatically due to the spike in natural
gas prices. Generally, transportation of this gas is for a relatively short
distance; therefore, the revenue associated with this transportation is minimal.
Operating costs and expenses decreased $0.2 million primarily
attributable to lower operation and maintenance costs of $2.6 million partially
offset by $1.4 million of increased general and administrative costs. The
decrease in operation and maintenance costs was due primarily to an insurance
settlement received in 2002 and the timing of the occurrence of these expenses.
The increase in general and administrative costs was due primarily to increased
benefit costs.
Net income decreased $0.6 million primarily due to the reasons discussed
above and a $1.7 million decrease in interest income from affiliates due to
lower advances to WGP and lower interest rates on these advances, partially
offset by a $1.3 million gain on the sale of certain equipment.
FINANCIAL CONDITION AND LIQUIDITY
METHOD OF FINANCING
Texas Gas funds its capital requirements with cash flows from operating
activities by accessing capital markets, by repayments of funds advanced to WGP,
by borrowings under a credit agreement (discussed below) and, if required,
advances from WGP. Historically, Texas Gas also funded its capital requirements
through a sale of receivables program. In July 2002, Texas Gas' sale of
receivables program expired and was not renewed.
Texas Gas has an effective registration statement on file with the
Securities and Exchange Commission. At June 30, 2002, $100 million of shelf
availability remains under this registration statement which may be used to
issue debt securities. Interest rates and market conditions will affect amounts
borrowed, if any, under this arrangement. With the downgrade in Texas Gas'
credit ratings (discussed below), interest rates on future financings will be
higher, but Texas Gas believes any additional financing arrangements, if
required, can be obtained from the capital markets on terms that are
commensurate with its current credit ratings.
Williams and certain of its subsidiaries, including Texas Gas, are
parties to a $700 million credit agreement, under which Texas Gas can borrow up
to $200 million if the funds available under the credit agreement have not been
borrowed by Williams or other subsidiaries. The credit agreement expires in July
2005. Interest rates vary with current market conditions based on the base rate
of Citibank N.A., three-month certificates of deposit of major United States
money market banks, federal funds rate or the London Interbank Offered Rate. The
credit agreement contains restrictions which limit, under certain circumstances,
the issuance of additional debt, the attachment of liens on any assets and any
change of ownership of Texas Gas. As Williams completes certain asset sales, the
$700 million commitment from participating banks in the credit agreement will
ultimately be reduced to $400 million, but Texas Gas will continue to have
borrowing capacity up to $200 million if the funds available under the credit
agreement have not been borrowed by Williams or other subsidiaries. At June 30,
2002, $200 million of borrowing capacity was available to Texas Gas. At June 30,
2002, Texas Gas had no outstanding borrowings under this agreement.
As a participant in Williams' cash management program, Texas Gas has
advances to and/or from Williams through Texas Gas' parent company, WGP.
Advances 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
Texas Gas. At June 30, 2002, the advances due Texas Gas by WGP totaled $49.7
million. Because of recent asset sales, anticipated asset sales in the future
and recently negotiated secured borrowing facilities, Williams has indicated
that it currently believes that it continues to have the financial resources and
liquidity to repay advances to Texas Gas.
On August 1, 2002, the FERC issued a NOPR that proposes restrictions on
the type of cash management program employed by Williams and its subsidiaries,
including Texas Gas. In addition to stricter guidelines regarding the accounting
for and documentation of cash management or cash pooling programs, the FERC
proposal, if made final, would preclude public utilities, natural gas companies
and oil pipeline companies from participating in such programs unless the parent
company and its FERC-regulated affiliate maintain investment-grade credit
ratings and that the FERC-regulated affiliate maintains stockholders equity of
at least 30 percent of total capitalization. Williams' and Texas Gas' current
credit ratings are not investment grade. The FERC is seeking public comments by
August 22, 2002.
Texas Gas, through a wholly owned bankruptcy remote subsidiary, sold
certain trade accounts receivable to a special purpose entity (SPE) in a
securitization structure requiring annual renewal. Texas Gas acted as the
servicing agent for sold receivables and received a servicing fee approximating
the fair value of such services. The sale of receivables program was terminated
on July 25, 2002 and, by the end of August, Texas Gas will complete the
repurchase of approximately $10 million of trade accounts receivable previously
sold.
CREDIT RATINGS
Texas Gas has no guarantees of off-balance sheet debt to third parties
and maintains no debt obligations that contain provisions requiring accelerated
payment of the related obligations in the event of specified levels of declines
in Williams' or Texas Gas' credit ratings given by Moody's Investor's Service,
Standard & Poor's and Fitch Ratings (rating agencies).
In the second quarter and July 2002, the rating agencies reduced Texas
Gas' credit ratings on its senior unsecured long-term debt, as follows:
Moody's Investor's Services.......................................Baa1 to Ba2
Standard & Poor's.................................................BBB+ to B+
Fitch Ratings.....................................................BBB+ to BB-
The rating agencies have reduced Texas Gas' credit ratings due to
concerns about the sufficiency of Williams' operating cash flow in relation to
its debt as well as the adequacy of Williams' liquidity. The ratings remain
under review pending the execution of Williams' plan to stabilize its financial
position.
CAPITAL EXPENDITURES
As discussed above, Williams has announced plans to strengthen its
balance sheet, which includes reductions in Williams' 2002 estimated capital
spending program. As a Williams subsidiary, Texas Gas will participate in
Williams' plan to reduce capital spending, primarily by managing its 2002
capital spending program at a lower level than anticipated prior to Williams'
announcement.
Texas Gas' capital expenditures for the first six months of 2002 and 2001
were $30.7 million and $21.5 million, respectively. Capital expenditures for
2002 are expected to approximate $54.2 million.
Texas Gas' debt as a percentage of total capitalization at June 30, 2002
and December 31, 2001 was 26.2% and 26.7%, respectively.
Although no assurances can be given, Texas Gas currently believes that
the aggregate of cash flows from operating activities, supplemented, when
necessary, by repayments of funds advanced to WGP, advances or capital
contributions from Williams and borrowings under the credit agreement will
provide Texas Gas with sufficient liquidity to meet its capital requirements.
When necessary, Texas Gas also expects to access public and private markets on
terms commensurate with its current credit ratings to finance its capital
requirements.
GENERAL RATE ISSUES
On April 28, 2000, Texas Gas filed a general rate case (Docket No.
RP00-260) which became effective November 1, 2000, subject to refund. Texas Gas
proposed in this rate case to implement value-based, term-differentiated
seasonal rates for short-term services effective November 1, 2000, as permitted
by FERC Order 637. On May 31, 2000, the FERC issued its "Order Accepting and
Suspending Tariff Sheets Subject to Refund, Rejecting Other Tariff Sheets, and
Establishing Hearing and Settlement Procedures" and established administrative
procedures for the case. Although the case was set for hearing, the hearing was
held in abeyance pending the filing of additional information related to the
value-based rate proposal for short-term firm transportation service. Texas Gas
made that supplemental filing on June 30, 2000. On October 27, 2000, the FERC
issued an order on that supplemental filing referring all issues in the case for
hearing. The participants engaged in informal settlement negotiations to attempt
to resolve all issues without a formal hearing. On August 14, 2001, Texas Gas
submitted an offer of settlement proposing to dispose of all issues outstanding
in the proceedings. Only one group of participants (Indicated Shippers)
protested the settlement. On September 26, 2001, the Administrative Law Judge
severed the Indicated Shippers, and certified the settlement to the FERC as
uncontested for the remaining parties. On March 4, 2002, the FERC issued an
order approving the settlement and severing the Indicated Shippers from the
settlement provisions. On June 17, 2002, the FERC issued an order denying the
Indicated shipper's request for rehearing of the March 4, 2002 order. The
settlement became effective 31 days after that order when no party filed any
further requests for rehearing. Thus, the settlement's prospective rates will go
into effect on August 1, 2002 and refunds of approximately $38 million are
anticipated to be made in mid-September. Texas Gas has provided an adequate
reserve for amounts, including interest, which may be refunded to customers.
Adjustments to income will be made in the third quarter 2002, which are
anticipated to result in operating profit of $15 million to $17 million.
Additionally, on July 15, 2002, Texas Gas filed an offer of settlement with the
Indicated Shippers to resolve all remaining issues in the case. No additional
refunds will be due as a result of the settlement with the Indicated Shippers if
that offer of settlement is approved.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following instruments are included as exhibits to this
report. Those exhibits below incorporated by reference
herein are indicated as such by the information supplied
in the parenthetical thereafter. If no parenthetical
appears after an exhibit, copies of the instrument have
been included herewith.
(10) Material contracts
- 1 Consent and Fourth Amendment to Credit Agreement dated
as of July 31, 2002, to Credit Agreement dated July 25,
2000, among The Williams Companies, Inc. and certain of its
subsidiaries, including Texas Gas, the banks named therein,
the Co-Syndication Agents as named therein, the
Documentation Agent as named therein and Citibank, N.A., as
agent (Exhibit 10.12 to The Williams Companies, Inc. Form
10-Q for the quarterly period ended June 30, 2002 Commission
File Number 1-4174) (99) Additional Exhibits - 1
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 by
J. Douglas Whisenant, Chief Executive Officer of Texas Gas
Transmission Corporation
- 2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act of
2002 by Richard Rodekohr, Chief Financial Officer of Texas
Gas Transmission Corporation
(b) Reports on Form 8-K
None
S I G N A T U R E
Pursuant to the requirements 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
DATE: AUGUST 13, 2002 BY: /S/ S. W. HARRIS
---------------------------- ------------------------------------
S. W. Harris
Controller and Chief Accounting Officer