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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, 2002
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
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: NONE
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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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12-b-2). Yes No _X_ ----- ---
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 8,2003
- ---------------------------------
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.
TABLE OF CONTENTS
2002 FORM 10-K
TEXAS GAS TRANSMISSION CORPORATION
PAGE
PART I
Item 1. Business.......................................................3
Item 2. Properties....................................................13
Item 3. Legal Proceedings.............................................13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................14
Item 7. Management's Narrative Analysis of the Results of Operations..14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......23
Item 8. Financial Statements and Supplementary Data...................24
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ......................................53
PART III
Item 14. Controls and Procedures........................................53
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..53
PART I
ITEM 1. BUSINESS.
GENERAL
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).
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 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, Ohio; and the Evansville and Indianapolis,
Indiana metropolitan areas. Texas Gas also has indirect market access to the
Northeast through interconnections with unaffiliated pipelines.
On February 20, 2003, Williams announced its intention to sell its
interest in Texas Gas.
TRANSPORTATION AND SALES
At December 31, 2002, Texas Gas' system, having a mainline delivery
capacity of approximately 2.8 billion cubic feet (Bcf) of gas per day, was
composed of approximately 5,800 miles of mainline, storage, and branch
transmission pipelines and 31 compressor stations having a sea-level-rated
capacity totaling approximately 556,000 horsepower.
Texas Gas owns and operates natural gas storage reservoirs in nine
underground storage fields located in Indiana and Kentucky. The storage capacity
of Texas Gas' certificated storage fields is approximately 178 Bcf of gas, of
which approximately 55 Bcf is working 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 during the winter season to be
repaid in-kind during the following summer season. A small amount of storage gas
is also used to provide "Summer No-Notice" (SNS) transportation service,
designed primarily to meet the needs of summer-season electrical power
generation facilities. SNS customers may temporarily draw from Texas Gas'
storage gas in the summer, to be repaid during the same 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 2002, Texas Gas transported gas to customers in Louisiana, Arkansas,
Mississippi, Tennessee, Kentucky, Indiana, Illinois and Ohio and indirectly to
customers in the Northeast. Texas Gas transported gas for 100 distribution
companies and municipalities for resale to residential, commercial and
industrial end users. Texas Gas provided transportation services to
approximately 15 industrial customers located along its system. At December 31,
2002, Texas Gas had transportation contracts with approximately 550 shippers.
Transportation shippers include distribution companies, municipalities,
intrastate pipelines, direct industrial users, electrical generators, marketers
and producers. Texas Gas' largest customer, Proliance Energy, LLC (Proliance),
accounted for approximately 18% of total operating revenue. Only one other
customer, Atmos Energy, with approximately 12%, accounted for over 10% of total
operating revenue in 2002. 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, short-term firm 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,
2002 2001 2000
------------ -------------- --------------
Transportation Volumes 669.5 709.8 737.8
Average Daily Transportation Volumes 1.8 1.9 2.0
Average Daily Firm Reserved Capacity 2.2 2.1 2.1
REGULATION
Texas Gas is subject to regulation by the Federal Energy Regulatory
Commission (FERC) under the Natural Gas Act (NGA) of 1938 and under the Natural
Gas Policy Act (NGPA) of 1978, and as such, its rates and charges for the
transportation of natural gas in interstate commerce, the extension, enlargement
or abandonment of jurisdictional facilities, and its accounting, among other
things, are subject to regulation. Texas Gas holds certificates of public
convenience and necessity issued by the FERC authorizing ownership and operation
of all pipelines, facilities and properties considered jurisdictional for which
certificates are required under the NGA.
Texas Gas is also subject to the Natural Gas Pipeline Safety Act of 1968,
as amended by Title I of the Pipeline Safety Act of 1979, which regulates safety
requirements in the design, construction, operation and maintenance of
interstate natural gas pipelines.
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 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 Shippers'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 went
into effect on August 1, 2002 and refunds of approximately $37.5 million were
made on September 16, 2002. Texas Gas had provided an adequate reserve for
amounts including interest, which were refunded to customers. Additionally, on
July 15, 2002, Texas Gas filed an offer of settlement with the Indicated
Shippers to resolve all remaining issues in the case. The FERC issued an order
on October 10, 2002, approving the settlement. No additional refunds are due as
a result of the settlement with the Indicated Shippers. In the third quarter of
2002, as a result of the settlement, Texas Gas recorded additional revenues of
$0.3 million and reduced depreciation expense by $5.7 million to implement
provisions of the settlement.
For discussion of other regulatory matters affecting Texas Gas, see Note B
of Notes to 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 B of Notes to Financial Statements contained in Item 8
hereof.
COMPETITION
Texas Gas competes primarily with other interstate pipelines in the
transportation of natural gas, and natural gas competes with other forms of
energy available to Texas Gas' customers, including electricity, coal, and fuel
oils. The principal elements of competition among pipelines are rates, terms of
service, access to supply basins, and flexibility and reliability of service. In
addition, the FERC's continuing efforts to increase competition in the natural
gas industry are having the effect of increasing the natural gas transportation
options of Texas Gas' traditional customer base. As a result, segmentation and
capacity release have created an active secondary market, which is increasingly
competitive with Texas Gas.
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 pursue new markets
to replace those turning back capacity and to remarket any unsold capacity.
During 2002, Texas Gas remarketed the majority of the capacity that was turned
back and expects to either renegotiate or otherwise remarket the capacity
subject to turnback in 2003. Texas Gas anticipates that it will continue to be
able to remarket most future capacity subject to turnback, although competition
may cause the remarketed capacity to be sold at lower rates and or for shorter
terms.
On February 9, 2000, the FERC issued a final rule, Order 637, in which the
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. 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. Texas Gas filed a contested offer of settlement on May
14, 2002. On August 27, 2002, the FERC issued its "Order on Order Nos. 637,
587-G, and 587-L" which accepted many of the provisions of the May 14 settlement
of required modifications as specified in the body of the August 27, 2002 order.
Ordering paragraph A directed Texas Gas to file actual tariff sheets, including
modifications, within thirty days of the issuance of the order while ordering
paragraph B prohibited Texas Gas from placing the tariff sheets into effect
before further order of the FERC. Texas Gas made the required compliance filing
on September 30, 2002. Texas Gas and several other parties requested rehearing
and/or clarification of the August 27, 2002 order. On December 24, 2002 the FERC
issued its "Order on Rehearing" which granted rehearing in part and denied
rehearing in part and directed Texas Gas to file revised tariff sheets. Texas
Gas made the required compliance filing on January 23, 2003, and at least one
party has protested the filing. The FERC has not yet issued an order on either
compliance filing directing Texas Gas to place any of the Order No. 637 tariff
sheets into effect.
In response to the evolving marketplace, and in accordance with Order 637,
Texas Gas instituted two new services in 2000 designed to be more responsive to
today's competitive markets. First, in June 2000, Texas Gas initiated service
under its SNS Rate Schedule. SNS is a seasonal service designed to provide
sufficient pipeline and storage flexibility to meet the needs of certain
summertime shippers. While designed with the growing power generation market in
mind, the service is available to any shipper. Additionally, in November 2000,
Texas Gas began providing service under its Short-term Firm (STF) Rate Schedule.
STF provides various contractual term and pricing options for shippers who may
desire to contract for capacity on a short-term basis (i.e., for any length of
time less than one year), or for contract demand levels that vary within the
year. STF incorporates seasonal pricing provisions, and the prices may also be
term differentiated within the season such that shorter-term contracts may be
required to pay higher prices.
Additionally, during 2000, Texas Gas received authority from the FERC to
implement negotiated rates language in its approved tariff. Negotiated rates
authority permits Texas Gas and its customers to negotiate pricing provisions
that may deviate from the specific pricing structure in the tariff. Negotiated
rates arrangements must be disclosed and filed with the FERC.
Rate Schedules SNS and STF, as well as the negotiated rates tariff, are
designed to assist Texas Gas in managing the future effects of capacity
turnback, as well as positioning Texas Gas to be able to effectively meet the
needs of its customers in the more competitive marketplace.
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, and licenses or consents on and across
property owned by others. Texas Gas' compressor stations, with appurtenant
facilities, are located on lands owned in fee by Texas Gas. Texas Gas owns its
main office building and other facilities located in Owensboro, Kentucky.
Storage facilities are either owned or contracted for under long-term leases.
EMPLOYEE RELATIONS
Texas Gas had 651 employees as of December 31, 2002. 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 Union Council of the United Food and Commercial
Workers International Union, Local 187C, represents 117 of Texas Gas' 383 field
employees. The current collective bargaining agreement between Texas Gas and
Local 187 expires on April 30, 2004.
During 2002, Williams announced plans to strengthen its balance sheet
through a number of efforts such as asset sales and cost reductions including a
downsizing of its work force. As a result of these actions, Texas Gas reduced
its work force by approximately 140 employees through an enhanced-benefit early
retirement option to certain employee groups, and severance and by approximately
91 employees through the transfer of employees to Williams' assets that were
sold.
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 may participate in these plans.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this annual report, excluding historical
information, include forward-looking statements --statements that discuss Texas
Gas' expected future results based on current and pending business operations.
Texas Gas makes these forward-looking statements in reliance on the safe harbor
protections provided under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by words such as
"anticipates," "believes," "could," "continues," "estimates," "expects,"
"forecasts," "might," "planned," "potential," "projects," "scheduled" or similar
expressions. Although Texas Gas believes these forward-looking statements are
based on reasonable assumptions, statements made regarding future results are
subject to a number of assumptions, uncertainties and risks that could cause
future results to be materially different from the results stated or implied in
this document.
Events in 2002 significantly impacted the risk environment businesses face
and raised a level of uncertainty in the capital markets. Beliefs and
assumptions as to what constitutes appropriate levels of capitalization and
fundamental value have changed abruptly. The financial collapse of the energy
industry combined with the meltdown of the telecommunications industry are both
new realities that have had and will likely continue to have specific impacts on
all companies, including Texas Gas.
RISK FACTORS
You should carefully consider the following risk factors in addition to
the other information in this annual report. Each of these factors could
adversely affect Texas Gas' business, operating results, and financial condition
as well as adversely affect the value of an investment in Texas Gas' securities.
WILLIAMS' STRATEGY TO STRENGTHEN ITS BALANCE SHEET AND IMPROVE LIQUIDITY
DEPENDS ON WILLIAMS' ABILITY TO DIVEST SUCCESSFULLY CERTAIN ASSETS.
On February 20, 2003, Williams announced its intention to sell an
additional $2.25 billion in assets, properties and investments including Texas
Gas. At December 31, 2002, Williams had debt obligations of $3.8 billion that
will mature between now and March 2004. Because Williams' cash flow from
operations will be insufficient alone to repay all such debt and Williams'
access to capital markets is limited, in part as a result of the loss of its
investment grade ratings, Williams will depend on its sales of assets to
generate sufficient net cash proceeds to enable the payment of maturing
obligations.
Williams' secured credit facilities limit its ability to sell certain
assets and require generally that one-half of all net proceeds from asset sales
be applied (a) to repayment of certain long-term debt, (b) to cash
collateralization of designated letters of credit, and (c) to reduction of the
lender commitments under the secured facilities. The timing of and the net cash
proceeds realized from such sales are dependent on locating and successfully
negotiating sales with prospective buyers, regulatory approvals, industry
conditions, and lender consents. If the realized cash proceeds are insufficient
or are materially delayed, Williams might not have sufficient funds on hand to
pay maturing indebtedness, including advances from Texas Gas which are payable
upon demand or to implement its strategy.
BECAUSE TEXAS GAS NO LONGER MAINTAINS INVESTMENT GRADE CREDIT RATINGS,
COUNTERPARTIES MIGHT REQUIRE IT TO PROVIDE INCREASING AMOUNTS OF CREDIT SUPPORT
WHICH WOULD RAISE THE COST OF DOING BUSINESS.
Texas Gas' transactions will require greater credit assurances, both to be
given from, and received by, Texas Gas to satisfy credit support requirements.
Additionally, certain market disruptions or a further downgrade of Texas Gas'
credit rating might further increase its cost of borrowing or further impair its
ability to access one or any of the capital markets. Such disruptions could
include:
o further economic downturns;
o capital market conditions generally;
o terrorist attacks or threatened attacks on our facilities or those of
other energy companies; or
o the overall health of the energy industry, including the bankruptcy
of energy companies.
RISKS RELATED TO THE REGULATION OF TEXAS GAS' BUSINESS
TEXAS GAS' GAS SALES, TRANSMISSION, AND STORAGE OPERATIONS ARE SUBJECT TO
GOVERNMENT REGULATIONS AND RATE PROCEEDINGS THAT COULD HAVE AN ADVERSE IMPACT ON
ITS ABILITY TO RECOVER THE COSTS OF OPERATING ITS PIPELINE FACILITIES.
Texas Gas' interstate gas sales, transmission, and storage operations are
subject to the FERC's rules and regulations in accordance with the Natural Gas
Act of 1938 and the Natural Gas Policy Act of 1978. The FERC's regulatory
authority extends to:
o transportation and sale for resale of natural gas in interstate commerce;
o rates and charges;
o construction;
o acquisition, extension or abandonment of services or facilities;
o accounts and records;
o depreciation and amortization policies; and
o operating terms and conditions of service.
The FERC has taken certain actions to strengthen market forces in the
natural gas pipeline industry that has led to increased competition throughout
the industry. In a number of key markets, interstate pipelines are facing
competitive pressure from other major pipeline systems, enabling local
distribution companies and end users to choose a transmission provider based on
economic and other considerations. Texas Gas' ability to compete in the natural
gas pipeline industry is impacted by its ability to offer competitively priced
services and to successfully implement efficient and effective operational
systems, such as its service delivery system, that must also meet applicable
regulatory requirements.
In 2000, the FERC issued Order No. 637, which sets forth revisions to its
policies governing the regulation of interstate natural gas pipelines that it
finds necessary to adjust its current regulatory model to the needs of evolving
markets. The FERC, however, determined that any fundamental changes to its
regulatory policy will be considered after further study and evaluation of the
evolving marketplace. Order No. 637 revised the FERC's pricing policy to waive
through September 30, 2002, the maximum price ceilings for short-term releases
of capacity of less than one year and to permit pipelines to file proposals to
implement seasonal rates for short-term services and term-differentiated rates.
Certain parties requested rehearing of Order No. 637 and eventually appealed
certain issues to the District of Columbia Circuit Court of Appeals. The D.C.
Circuit remanded as to certain issues, and on October 31, 2002, the FERC issued
its order on remand. Rehearing requests for that order are now pending with the
FERC. Given the extent of the FERC's regulatory power, Texas Gas cannot give any
assurance regarding the likely regulations under which it will operate its
natural gas transmission and storage business in the future or the effect of
regulation on its financial position and results of operations.
The FERC has proposed to broaden its regulations that restrict relations
between jurisdictional natural gas companies, or "jurisdictional companies," and
marketing affiliates. In addition, the proposed rules would limit communications
between jurisdictional companies and all other companies engaged in energy
activities. The rulemaking is pending at the FERC and the precise scope and
effect of the rule is unclear. If adopted as proposed, the rule could affect the
way Texas Gas manages its gas transmission activities.
RISKS RELATED TO ENVIRONMENTAL MATTERS
TEXAS GAS COULD INCUR MATERIAL LOSSES IF IT IS HELD LIABLE FOR THE
ENVIRONMENTAL CONDITION OF ANY OF ITS ASSETS.
Texas Gas is generally responsible for all on-site liabilities associated
with the environmental condition of its facilities and assets, which it has
acquired or developed, regardless of when the liabilities arose and whether they
are known or unknown. In addition, in connection with certain acquisitions and
sales of assets, Texas Gas might obtain, or be
required to provide, indemnification against certain environmental liabilities.
If Texas Gas incurs a material liability, or the other party to a transaction
fails to meet its indemnification obligations to Texas Gas, it could suffer
material losses.
ENVIRONMENTAL REGULATION AND LIABILITY - TEXAS GAS' BUSINESS WILL BE
SUBJECT TO ENVIRONMENTAL LEGISLATION IN ALL JURISDICTIONS IN WHICH IT OPERATES,
AND ANY CHANGES IN SUCH LEGISLATION COULD NEGATIVELY AFFECT ITS RESULTS OF
OPERATIONS.
Texas Gas' operations are subject to extensive environmental regulation
pursuant to a variety of federal, state and municipal laws and regulations. Such
environmental legislation imposes, among other things, restrictions, liabilities
and obligations in connection with the generation, handling, use, storage,
transportation, treatment and disposal of hazardous substances and waste and in
connection with spills, releases and emissions of various substances into the
environment. Environmental legislation also requires that Texas Gas' facilities,
sites and other properties associated with its operations be operated,
maintained, abandoned and reclaimed to the satisfaction of applicable regulatory
authorities. Existing environmental regulations could also be revised or
reinterpreted, new laws and regulations could be adopted or become applicable to
Texas Gas or its facilities, and future changes in environmental laws and
regulations could occur. The federal government and several states recently have
proposed increased environmental regulation of many industrial activities,
including increased regulation of air quality, water quality and solid waste
management.
Compliance with environmental legislation could require significant
expenditures, including expenditures for compliance with the Clean Air Act and
similar legislation, for clean up costs and damages arising out of contaminated
properties, and for failure to comply with environmental legislation and
regulations which might result in the imposition of fines and penalties. The
steps Texas Gas takes to bring certain of its facilities into compliance could
be prohibitively expensive, and Texas Gas might be required to shut down or
alter the operation of those facilities, which might cause it to incur losses.
Further, Texas Gas' regulatory rate structure and its contracts with
clients might not necessarily allow it to recover capital costs incurred to
comply with new environmental regulations. Also, Texas Gas might not be able to
obtain or maintain from time to time all required environmental regulatory
approvals for certain development projects. If there is a delay in obtaining any
required environmental regulatory approvals or if Texas Gas fails to obtain and
comply with them, the operation of its facilities could be prevented or become
subject to additional costs. Should Texas Gas fail to comply with all applicable
environmental laws, it might be subject to penalties and fines imposed by
regulatory authorities. Although Texas Gas does not expect that the costs of
complying with current environmental legislation will have a material adverse
effect on its financial condition or results of operations, no assurance can be
made that the costs of complying with environmental legislation in the future
will not have such an effect.
RISKS RELATING TO ACCOUNTING POLICIES
POTENTIAL CHANGES IN ACCOUNTING POLICIES FOR THE ENERGY INDUSTRY MIGHT
CAUSE TEXAS GAS TO REVISE ITS FINANCIAL ACCOUNTING AND/OR DISCLOSURE IN THE
FUTURE, WHICH MIGHT CHANGE THE WAY ANALYSTS MEASURE TEXAS GAS' BUSINESS OR
FINANCIAL PERFORMANCE.
Recently discovered accounting irregularities in various industries have
forced regulators and legislators to take a renewed look at accounting
practices, financial disclosures, companies' relationships with their
independent auditors and other accounting practices. Because it is still unclear
what laws or regulations will develop, Texas Gas cannot predict the ultimate
impact of any future changes in accounting regulations or practices in general
with respect to public companies or the energy industry or in Texas Gas'
operations specifically. In addition, the Financial Accounting Standards Board
(FASB), the FERC or the SEC could enact new accounting standards that might
impact how Texas Gas is required to record revenues, expenses, assets and
liabilities.
RISKS RELATING TO TEXAS GAS' INDUSTRY
THE LONG-TERM FINANCIAL CONDITION OF TEXAS GAS' GAS TRANSMISSION BUSINESS
IS DEPENDENT ON THE CONTINUED AVAILABILITY OF NATURAL GAS RESERVES.
The development of additional natural gas reserves requires significant
capital expenditures by others for exploration and development drilling and the
installation of production, gathering, storage, transportation and other
facilities that permit natural gas to be produced and delivered to Texas Gas'
pipeline system. Low prices for natural gas, regulatory limitations, or the lack
of available capital for these projects could adversely affect the development
of additional reserves and production, gathering, storage and pipeline
transmission and import and export of natural gas supplies.
GAS TRANSMISSION ACTIVITIES INVOLVE NUMEROUS RISKS THAT MIGHT RESULT IN
ACCIDENTS AND OTHER OPERATING RISKS AND COSTS.
There are inherent in Texas Gas' gas transmission properties a variety of
hazards and operating risks, such as leaks, explosions and mechanical problems
that could cause substantial financial losses. In addition, these risks could
result in loss of human life, significant damage to property, environmental
pollution, impairment of Texas Gas' operations and substantial losses. In
accordance with customary industry practice, Texas Gas maintains insurance
against some, but not all, of these risks and losses. The occurrence of any of
these events not fully covered by insurance could have a material adverse effect
on Texas Gas' financial position and results of operations. The location of
pipelines near populated areas, including residential areas, commercial business
centers and industrial sites, could increase the level of damages resulting from
these risks.
OTHER RISKS
RECENT TERRORIST ACTIVITIES AND THE POTENTIAL FOR MILITARY AND OTHER
ACTIONS COULD ADVERSELY AFFECT TEXAS GAS' BUSINESS.
The continued threat of terrorism and the impact of retaliatory military
and other action by the United States and its allies might lead to increased
political, economic and financial market instability and volatility in prices
for natural gas, which could affect the market for Texas Gas' gas transmission
operations. In addition, future acts of terrorism could be directed against
companies operating in the United States, and it has been reported that
terrorists might be targeting domestic energy facilities. While Texas Gas is
taking steps that it believes are appropriate to increase the security of its
energy assets, there is no assurance that Texas Gas can completely secure its
assets or to completely protect them against a terrorist attack. These
developments have subjected Texas Gas' operations to increased risks and,
depending on their ultimate magnitude, could have a material adverse effect on
its business. In particular, Texas Gas might experience increased capital or
operating costs to implement increased security for its energy assets.
The insurance industry has also been disrupted by these events. As a
result, the availability of insurance covering risks that Texas Gas and its
competitors typically insure against might decrease. In addition, the insurance
that Texas Gas is able to obtain might have higher deductibles, higher premiums
and more restrictive policy terms.
ITEM 2. PROPERTIES.
See "Item 1. Business."
ITEM 3. LEGAL PROCEEDINGS.
For a discussion of Texas Gas' current legal proceedings, see Note B of
Notes to Financial Statements contained in Item 8 hereof.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of March 8, 2003, 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.
GENERAL
The following discussion and analysis of results of operations, financial
condition and liquidity should be read in conjunction with the consolidated
financial statements and notes thereto included within Item 8.
CRITICAL ACCOUNTING POLICIES
REGULATORY ACCOUNTING
Texas Gas is regulated by the FERC. Statement of Financial Accounting
Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation," provides that rate-regulated public utilities account for and
report regulatory assets and liabilities consistent with the economic effect of
the way in which regulators establish rates if the rates established are
designed to recover the costs of providing the regulated service and if the
competitive environment makes it reasonable to assume that such rates can be
charged and collected. Accounting for businesses that are regulated and apply
the provisions of SFAS No. 71 can differ from the accounting requirements for
non-regulated businesses. Transactions that are recorded differently as a result
of regulatory accounting requirements include the capitalization of an equity
return component on regulated capital projects, employee related benefits, and
other costs and taxes included in, or expected to be included in, future rates.
As a rate-regulated entity, Texas Gas' management has determined that it is
appropriate to apply the accounting prescribed by SFAS No. 71 and accordingly,
the accompanying financial statements include the effects of the types of
transactions described above that result from regulatory accounting
requirements.
REVENUE SUBJECT TO REFUND
Key determinants in the ratemaking process are (i) volume throughput
assumptions, (ii) costs of providing service, including depreciation expense and
(iii) allowed rate of return, including the equity component of a pipeline's
capital structure and related income taxes.
The FERC regulatory processes and procedures govern the tariff rates that
Texas Gas is permitted to charge to customers for interstate transportation of
natural gas. Accordingly, certain revenues collected by Texas Gas may be subject
to possible refunds upon final orders in pending rate cases with the FERC. Texas
Gas records estimates of rate refund reserves considering Texas Gas' and other
third-party's regulatory proceedings, advice of counsel and estimated total
exposure, as discounted and risk weighted, as well as collection and other
risks. At December 31, 2002, Texas Gas had no pending rate case proceedings and
no potential rate refunds.
CONTINGENT LIABILITIES
Texas Gas records liabilities for estimated loss contingencies when it
believes a loss is probable and the amount of the loss can be reasonably
estimated. Revisions to contingent liabilities are reflected in income in the
period in which different facts or information become known or circumstances
change that affect previous assumptions with respect to the likelihood or amount
of loss. Liabilities for contingent losses are based upon management's
assumptions and estimates, advice of legal counsel or other third parties
regarding the probable outcomes of the matter. Should the outcome differ from
the assumptions and estimates, revisions to the liabilities for contingent
losses would be required.
IMPAIRMENT OF LONG-LIVED ASSETS
Texas Gas evaluates long-lived assets for impairment when events or
changes in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable. When such a determination has been
made, management's estimate of undiscounted future cash flows attributable to
the assets is compared to the carrying value of the assets to determine whether
an impairment has occurred. If an impairment of the carrying value has occurred,
the amount of the impairment recognized in the financial statements is
determined by estimating the fair value of the assets and recording a loss for
the amount that the carrying value exceeds the estimated fair value.
Judgments and assumptions are inherent in management's estimate of
undiscounted future cash flows used to determine recoverability of an asset and
the estimate of an asset's fair value used to calculate the amount of impairment
to recognize. The use of alternate judgments and/or assumptions could result in
the recognition of different levels of impairment charges in the financial
statements.
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 consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
WILLIAMS' RECENT EVENTS
In 2002, Williams faced many challenges including credit and liquidity
constraints following the deterioration of its sector of the energy industry in
the wake of the Enron collapse and the assumption of payment obligations and
performance on guarantees associated with its former telecommunications
subsidiary, Williams Communications Group, Inc. (WCG). With the deterioration of
the energy industry, the credit rating agencies requirements for investment
grade companies became more stringent. Williams' credit rating was lowered below
an investment grade rating in the middle of 2002. During 2002 and more recently,
Williams has sold a significant amount of assets and/or businesses and outlined
plans to sell more assets to satisfy maturing debt obligations and strengthen
its short-term liquidity position. In regards to the short-term, Williams, at
December 31, 2002, has maturing notes payable and long-term debt totaling
approximately $3.8 billion (which includes certain contractual fees and deferred
interest associated with an underlying debt) through the first quarter of 2004.
During December 2001 and the first quarter of 2002, Williams announced
plans to strengthen its balance sheet and support retention of its investment
grade ratings. The plans 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. Towards these plans and in satisfaction of continued liquidity demands,
Williams completed debt issuances and sold one of its regulated interstate
pipelines.
During the second quarter, Williams experienced liquidity constraints, 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 remained investment grade for the balance of the
quarter.
Williams experienced a substantial net loss for the second quarter of 2002
resulting primarily from a segment loss incurred by its energy marketing and
trading segment. In July 2002, the major rating agencies downgraded Williams'
unsecured long-term debt 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
obtained two secured facilities totaling $1.3 billion and amended its existing
credit agreement, which expires in July 2005, to make it secured. These
facilities include pledges of certain assets and contain financial ratios and
other covenants that must be maintained. If such provisions of these agreements
are not adhered to, then Williams' lenders can declare all amounts outstanding
to be immediately due and payable. 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. Williams also sold assets
during 2002 and is pursuing the sale of other assets to enhance liquidity.
As part of the effort to reduce future operating expenses, certain
employee positions are being eliminated through organizational changes. In the
third and fourth quarters, Texas Gas accrued $2.25 million of severance costs
applicable to 97 employees whose positions have been eliminated.
On February 20, 2003, Williams outlined its planned business strategy for
the next several years and believes it to be a comprehensive response to the
events which have impacted the energy sector and Williams during 2002. The plan
focuses on retaining a strong, but smaller, portfolio of natural gas businesses
and bolstering Williams' liquidity through more asset sales, limited levels of
financing at the subsidiary level and additional reductions in its operating
costs. The plan is designed to provide Williams with a clear strategy to address
near-term and medium-term liquidity issues and further de-leverage the company
with the objective of returning to investment grade status by 2005, while
retaining businesses with favorable returns and opportunities for growth in the
future. As part of this plan, Williams expects to generate proceeds, net of
related debt, of nearly $4 billion from asset sales during 2003, including
approximately $2.5 billion in newly announced offerings combined with those
assets already under contract or in negotiations for sale. The specific assets
and the timing of such sales are dependent on various factors, including
negotiations with prospective buyers, regulatory approvals, industry conditions,
lender consents to sales of collateral and the short-and long-term liquidity
requirements of Williams.
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. Williams has announced its intention to further
reduce its 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 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. Additionally, a recent FERC
settlement, among other things, places certain restrictions on WEM&T's ability
to enter into new transportation agreements that would increase the
transportation capacity that it currently holds on certain affiliated natural
gas pipelines.
At December 31, 2002, Williams has maturing notes payable and long-term
debt totaling approximately $3.8 billion (which includes certain contractual
fees and deferred interest associated with an underlying debt) through the first
quarter of 2004. Williams has indicated that available liquidity to meet these
requirements and fund a reduced level of capital expenditures will be dependent
on several factors, including the cash flows of retained businesses, the amount
of proceeds raised from the sale of assets and the price of natural gas. Future
cash flows from operations may also be affected by the timing and nature of the
sale of assets. Because of recent asset sales, anticipated asset sales and
available secured credit facilities, Williams has indicated that it currently
believes that it has the financial resources and liquidity to meet future cash
requirements through the first quarter of 2004. In the event that Williams'
financial condition does not improve or becomes worse, or if it fails to
complete assets sales and reduce its commitment to its energy marketing and risk
management business, Williams may have to consider other options including the
possibility of seeking protection in a bankruptcy proceeding.
On February 20, 2003, Williams announced its intention to sell its
interest in Texas Gas.
FINANCIAL ANALYSIS OF OPERATIONS
This analysis discusses financial results of Texas Gas' operations for
the years 2000 through 2002. Variances due to changes in price and volume have
little impact on revenues, because under Texas Gas' rate design methodology, the
majority of overall cost of service is recovered through firm capacity
reservation charges in its transportation rates.
2002 COMPARED TO 2001
Operating revenues increased $15.1 million, or 6 percent, primarily
attributable to a $10.2 million reversal of deferred revenues resulting from a
favorable issue resolution related to Texas Gas' rate case settlement and an
increase in revenues from Park and Loan services. Total deliveries were 669.5
Tbtu and 709.8 Tbtu for the years of 2002 and 2001, respectively.
Operating costs and expenses increased $0.5 million primarily due to a
$3.5 million accrual for a disputed regulatory issue, $2.5 million in severance
costs resulting from cost reduction efforts, $1.8 million for the write off of
cancelled capital projects, $1.6 million due to the write off of unrecoverable
aviation related costs, and $4.3 million in higher taxes, other than incomes
taxes, due to the favorable settlement of tax issues in 2001 which resulted in
the reversal of tax accruals related to the outstanding tax issues. The increase
in operating costs and expenses was mostly offset by $8.0 million in lower
depreciation expense due to lower depreciation rates approved in Texas Gas' rate
case settlement, $1.8 million from an environmental insurance settlement, and
$3.0 million lower employee related expenses due to the reduction in the number
of employees.
Operating income was $14.6 million, or 16 percent, higher for the year
ended December 31, 2002, than for the year ended December 31, 2001. The increase
in operating income was due primarily to the higher revenues from the settlement
of regulatory issues related to Texas Gas' rate case mentioned above.
Net income increased $11.0 million, or 24 percent, primarily due to the
higher operating income discussed above, $1.1 million for the gain on the sale
of certain equipment, a $1.1 million reduction in costs from a receivable
financing agreement that was cancelled in the third quarter of 2002, and lower
interest expense resulting from the settlement of the rate case. This increase
was partially offset by lower interest income resulting from the lower advances
to WGP due primarily to the payout of refunds to customers.
2001 COMPARED TO 2000
Operating revenues decreased $10.6 million, or 4 percent, primarily due to
lower tracked costs, which are passed through to customers, lower revenues from
traditional firm services primarily due to turnback capacity remarketed at
discounted rates and/or for shorter contract terms, partially offset by higher
revenues from new services. Total deliveries were 709.8 trillion British thermal
units (TBtu) and 737.8 TBtu for the years December 31, 2001 and 2000,
respectively.
Operating costs and expenses decreased $8.1 million, or 3 percent, mainly
attributable to a $5.1 million decrease in administrative and general costs
primarily resulting from the 2000 office consolidation of Texas Gas and Williams
Gas Pipeline Central, Inc., an affiliate, and lower tracked costs which are
passed through to customers. The decrease in administrative and general costs
was partially offset by higher charitable contributions. The cost of gas
transportation decreased $2.6 million primarily due to a decrease in tracked
costs and certain other normal operating activities. Ad valorem and use tax
decreased $2.6 million due primarily to favorable settlements of outstanding
prior year tax issues.
Operating income was $2.5 million, or 3 percent, lower for the year ended
December 31, 2001, than for 2000. The decrease in operating income was due
primarily to $10.6 million in lower revenues, partially offset by $5.1 million
in lower administrative and general costs, a $2.6 million decrease in the cost
of gas transportation, and $2.6 million in lower ad valorem and use taxes, which
is included in taxes other than income taxes.
Net income decreased $7.1 million, or 14 percent, primarily due to the
reasons discussed above and a $1.9 million increase in interest expense due
primarily to interest on rate refund reserves related to Texas Gas' current rate
case (Docket RP00-260). Interest income from affiliates decreased $1.7 million
due primarily to lower rates on an interest bearing note balance between Texas
Gas and WGP.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net at December 31, 2002, includes
approximately $347 million related to amounts in excess of the original cost of
regulated facilities, as a result of the Williams' 1995 and prior acquisitions
of Texas Gas. The original amount of $430 million is being depreciated 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 operating and
maintenance 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 materials and
supplies is subject to rate-making 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 the increased actual costs
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 to ensure recovery of inflation's effect on costs.
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 the credit agreement (discussed below) and, if required, by
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 December 31, 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 (Credit Agreement), under which Texas Gas can
borrow up to $200 million to the extent 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., federal funds rate or the
London Interbank Offered Rate (LIBOR). 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
commitments from participating banks in the Credit Agreement will be reduced to
$400 million, and with further asset sales could be reduced below that amount,
but Texas Gas will continue to have borrowing capacity up to the lesser of $200
million or the amount that Williams would be able to borrow to the extent the
funds available under the Credit Agreement have not been borrowed by Williams or
other participating subsidiaries or that otherwise would be required to remain
available to Williams. At December 31, 2002, the commitment from participating
banks had been reduced to $463 million, the borrowing capacity available to
Texas Gas was $200 million, and Texas Gas had no outstanding borrowings under
this agreement. Texas Gas' assets have not been pledged to secure any
indebtedness of Williams or its other affiliates, either under the Credit
Agreement or pursuant to any other credit facility of Williams and its other
affiliates.
As a participant in Williams' cash management program, Texas Gas makes
advances to and receives advances from Williams through Texas Gas' parent
company, WGP. At December 31, 2002, the advances due Texas Gas by WGP totaled
$65.1 million. The advances are represented by demand notes. The interest rate
on intercompany demand notes is the LIBOR on the first day of the month plus an
applicable margin based on Texas Gas' current credit ratings as determined by
Moody's Investor Service and Standard & Poor's. Due to recent asset sales,
anticipated asset sales in the future and available secured borrowing
facilities, Williams believes that it will continue to have the financial
resources and liquidity to repay these advances made by WGP which in turn allows
WGP to repay Texas Gas.
In the event that Williams' financial condition does not improve or
becomes worse, or if it fails to realize sufficient proceeds from the remaining
planned asset sales, it may have to consider other options including the
possibility of seeking protection in a bankruptcy proceeding. Texas Gas cannot
predict with certainty what impact such action, if it were to occur, would have
on it. Under the equitable doctrine of substantive consolidation, a bankruptcy
court may consolidate and pool the assets and liabilities of a subsidiary with
those of its parent. Texas Gas cannot provide assurance that Williams, WGP or
their creditors would not attempt to advance substantive consolidation claims in
the event of a Williams bankruptcy proceeding or, if advanced, how a bankruptcy
court would resolve the issue. If a bankruptcy court were to allow the
substantive consolidation of Texas Gas' assets and liabilities in the context of
a bankruptcy filing, Texas Gas' financial condition, operations and ability to
meet its obligations would be materially adversely affected.
On August 1, 2002, the FERC issued a Notice of Proposed Rule Making (NOPR)
that proposes restrictions on various types of cash management program employed
by companies in the energy industry, such as 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 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. Texas Gas participated in comments
filed in this proceeding on August 28, 2002, by the Interstate Natural Gas
Association of America. On September 25, 2002, the FERC convened a technical
conference to discuss issues raised in the comments filed by parties in this
proceeding.
Through July 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 the sold receivables. The sale of receivables program
expired on July 25, 2002, and by the end of August 2002, Texas Gas completed the
repurchase of approximately $10 million of trade accounts 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 Investors Service,
Standard & Poor's and Fitch Ratings (rating agencies). During 2002, the rating
agencies reduced Texas Gas' credit ratings on
its senior unsecured long-term debt, as follows:
Moody's Investors Service .................................Baa1 to B3
Standard & Poor's .......................................BBB+ to B+
Fitch Ratings..............................................BBB+ to BB-
Currently Moody's Investor's Service and Standard and Poor's have Texas
Gas' credit ratings on "negative outlook" and "negative watch", respectively.
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 strengthen its financial position. With the
reduced credit ratings, Texas Gas expects interest rates on future financings
will be higher than they otherwise would have been.
CAPITAL EXPENDITURES
Texas Gas' capital expenditures, net of retirements and salvage, for 2002
and 2001 were $27.4 million and $108.4 million, respectively. Capital
expenditures for 2003 are expected to approximate $23 million.
GENERAL RATE ISSUES
As discussed in Note B of the Notes to Financial Statements, on April 28,
2000, Texas Gas filed a general rate case (Docket No. RP00-260) which became
effective November 1, 2000, subject to refund. 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 Shippers' 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 went
into effect on August 1, 2002, and refunds of approximately $37.5 million were
made on September 16, 2002. Texas Gas had provided an adequate reserve for
amounts, including interest, which were refunded to customers.
CONTRACTUAL OBLIGATIONS
The table below summarizes some of the more significant contractual obligations
and commitments by period (in millions).
Total
Long-Term Capital Contractual
Period Debt Commitments Obligations
- ------------------- ---------------- -------------------- -------------------
- ------------------- ---------------- -------------------- -------------------
2003 $ - $ 4.0 $ 4.0
2004 150.0 - 150.0
2005 - - -
2006 - - -
2007 - - -
After 2007 100.0 - 100.0
---------------- -------------------- -------------------
---------------- -------------------- -------------------
Total $ 250.0 4.0 $ 254.0
================ ==================== ===================
CONCLUSION
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.
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, 2002,
had a carrying value of $249.8 million and a fair value of $238.4 million. The
weighted-average interest rate of Texas Gas' long-term debt is 8.08%. Texas Gas'
$150 million (8 5/8%) and $100 million (7 1/4%) long-term debt issues mature in
2004 and 2027, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Texas Gas Transmission Corporation
We have audited the accompanying balance sheets of Texas Gas Transmission
Corporation as of December 31, 2002 and 2001, and the related statements of
income, cash flows, and retained earnings and paid-in-capital for each of the
three years in the period ended December 31, 2002. These 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 financial position of Texas Gas Transmission
Corporation at December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States.
/s/ Ernst & Young LLP
Houston, Texas
March 5, 2003
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------- -------------- -------------
Operating Revenues:
Gas transportation $ 260,662 $ 244,124 $ 255,181
Gas storage 2,317 2,674 2,516
Other 3,695 4,787 4,459
----------- ----------- -----------
Total operating revenues 266,674 251,585 262,156
----------- ----------- -----------
Operating Costs and Expenses:
Cost of gas transportation 8,192 4,293 6,903
Operation and maintenance 43,197 49,186 48,024
Administrative and general 52,989 46,746 51,824
Depreciation and amortization 37,806 45,821 44,781
Taxes other than income taxes 16,033 11,712 14,335
----------- ----------- -----------
Total operating costs and expenses 158,217 157,758 165,867
----------- ----------- -----------
Operating Income 108,457 93,827 96,289
----------- ----------- -----------
Other (Income) Deductions:
Interest expense 20,490 21,678 19,805
Interest income from affiliates (1,468) (3,434) (5,149)
Gain on sale of equipment (1,140) - (3,712)
Miscellaneous other income, net (2,171) (32) (322)
----------- ----------- -----------
Total other deductions 15,711 18,212 10,622
----------- ----------- -----------
Income before Income Taxes 92,746 75,615 85,667
Provision for Income Taxes 36,647 30,484 33,420
----------- ----------- -----------
Net Income $ 56,099 $ 45,131 $ 52,247
================ ================ ==============
See accompanying notes.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(THOUSANDS OF DOLLARS)
DECEMBER 31, DECEMBER 31,
ASSETS 2002 2001
------------------ -------------------
Current Assets:
Cash and cash equivalents $ 277 $ 86
Receivables:
Accounts receivable - Trade 25,705 -
Accounts receivable - TGT Enterprises, Inc. - 7,003
Other affiliates 2,386 278
Other 3,843 1,470
Gas receivables:
Transportation and exchange 1,392 1,627
Storage 6,601 -
Advances to affiliates 63,143 66,299
Inventories 13,580 13,950
Deferred income taxes 14,724 20,492
Costs recoverable from customers 2,853 17,261
Gas stored underground 3,922 3,486
Prepaid and other expenses 3,407 1,551
--------------- --------------
Total current assets 141,833 133,503
--------------- --------------
Property, Plant and Equipment, at cost:
Natural gas transmission plant 1,113,648 1,096,620
Other natural gas plant 154,141 167,137
--------------- -------------
1,267,789 1,263,757
Less - Accumulated depreciation and
amortization 209,821 202,479
--------------- -------------
Property, plant and equipment, net 1,057,968 1,061,278
--------------- ------------
Other Assets:
Gas stored underground 110,458 118,883
Costs recoverable from customers 37,951 37,641
Prepaid pension 28,411 35,612
Other 7,969 9,602
--------------- --------------
Total other assets 184,789 201,738
--------------- --------------
Total Assets $ 1,384,590 $ 1,396,519
=============== ==============
See accompanying notes.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(THOUSANDS OF DOLLARS,
EXCEPT FOR SHARE DATA)
DECEMBER 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2002 2001
------------------- ------------------
Current Liabilities:
Payables:
Trade $ 2,017 $ 5,685
Affiliates 9,936 32,822
Other 6,961 10,139
Gas payable
Transportation and exchange 1,312 15,437
Storage 24,214 16,005
Accrued income taxes due affiliate 16,210 18,915
Accrued taxes other 12,817 11,708
Accrued interest 6,557 6,557
Accrued payroll and employee benefits 27,025 34,732
Other accrued liabilities 11,765 9,105
Reserve for regulatory and rate matters - 31,107
------------- --------------
Total current liabilities 118,814 192,212
------------- --------------
Long-Term Debt 249,781 250,174
------------- --------------
Other Liabilities and Deferred Credits:
Deferred income taxes 206,039 172,892
Postretirement benefits other than pensions 26,432 30,101
Pension plan costs 28,411 35,612
Other 23,434 29,948
------------- -------------
Total other liabilities and deferred credits 284,316 268,553
------------- --------------
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 101,070 54,971
------------- --------------
Total stockholder's equity 731,679 685,580
------------- --------------
Total Liabilities and Stockholder's Equity $ 1,384,590 $ 1,396,519
============= ==============
See accompanying notes.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
---------------- ---------------- ------------
Operating Activities:
Net income $ 56,099 $ 45,131 $ 52,247
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 37,806 45,821 44,781
Provision (benefit) for deferred
income taxes 38,915 1,102 (6,534)
Gain) on sale of equipment (1,140) - (3,712)
Changes in operating assets and liabilities:
Receivables (34,444) 4,175 (5,634)
Receivable - TGT Enterprises, Inc. 7,003 1,411 (2,204)
Inventories 370 1,175 502
Other current assets 7,998 1,481 4,672
Accrued income taxes due affiliate (2,705) (4,926) 19,746
Payables and accrued liabilities (17,566) 18,176 (19,929)
Reserve for regulatory and rate matters (31,107) 20,634 10,473
Other, including changes in non-
current assets and liabilities (26,746) (1,585) 14,307
----------- ----------- -----------
Net cash provided by operating activities 34,483 132,595 108,715
------------ ----------- -----------
Financing Activities:
Dividends (10,000) (25,000) (52,000)
----------- ----------- -----------
Net cash used in financing activities (10,000) (25,000) (52,000)
----------- ----------- -----------
Investing Activities:
Property, plant and equipment:
Capital expenditures, net of allowance for
funds used during construction (27,448) (108,353) (65,894)
Advances to affiliates, net 3,156 583 9,002
Proceeds from sale of long-term investments - - 172
----------- ---------------- -------------
Net cash used in investing activities (24,292) (107,770) (56,720)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 191 (175) (5)
Cash and cash equivalents at beginning of period 86 261 266
----------- ----------- -----------
Cash and cash equivalents at end of period $ 277 $ 86 $ 261
=========== =========== ===========
- -----------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 22,171 $ 19,714 $ 19,539
Income taxes, net 434 34,243 20,208
Noncash contribution of equipment - - 3,562
See accompanying notes.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF RETAINED EARNINGS
AND PAID-IN CAPITAL
(THOUSANDS OF DOLLARS)
RETAINED PAID-IN
EARNINGS CAPITAL
Balance, December 31, 1999 $ 34,593 $ 627,046
Add (deduct):
Net income 52,247 -
Dividends on common stock (52,000) -
Capital Contributions - 3,562
----------- ----------
Balance, December 31, 2000 34,840 630,608
----------- ----------
Add (deduct):
Net income 45,131 -
Dividends on common stock (25,000) -
----------- ----------
Balance, December 31, 2001 54,971 630,608
----------- -----------
Add (deduct):
Net income 56,099 -
Dividends on common stock (10,000) -
----------- -------------
Balance, December 31, 2002 $ 101,070 $ 630,608
=========== =============
See accompanying notes.
TEXAS GAS TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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).
On February 20, 2003, Williams announced its intention to sell its
interest in Texas Gas.
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 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, Ohio; and the Evansville and Indianapolis,
Indiana metropolitan areas. Texas Gas also has indirect market access to the
Northeast through interconnections with unaffiliated pipelines.
REGULATORY ACCOUNTING
Texas Gas is regulated by the Federal Energy Regulatory Commission (FERC).
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation," provides that rate-regulated public
utilities account for and report regulatory assets and liabilities consistent
with the economic effect of the way in which regulators establish rates if the
rates established are designed to recover the costs of providing the regulated
service and if the competitive environment makes it reasonable to assume that
such rates can be charged and collected. Accounting for businesses that are
regulated and apply the provisions of SFAS No. 71 can differ from the accounting
requirements for non-regulated businesses. Transactions that are recorded
differently as a result of regulatory accounting requirements include the
capitalization of an equity return component on regulated capital projects,
employee related benefits, and other costs and taxes included in, or expected to
be included in, future rates. As a rate-regulated entity, Texas Gas follows the
accounting prescribed by SFAS No. 71 and the accompanying financial statements
include the effects of the types of transactions described above that result
from regulatory accounting requirements.
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 B for
a discussion of Texas Gas' rate matters).
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 at the time of the acquisition. 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,
net at December 31, 2002, is approximately $347 million related to amounts in
excess of the original cost of regulated facilities as a result of Williams' and
prior acquisitions. The original amount of $430 million is being depreciated
over 40 years, the estimated useful lives of these 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.
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 reported amounts of assets,
liabilities, revenues, expenses and disclosure of contingent assets and
liabilities. On an ongoing basis, Texas Gas evaluates its estimates, including
those related to revenues subject to refund, bad debts, materials and supplies
obsolescence, investments, intangible assets and goodwill, property and
equipment and other long-lived assets, income taxes, workers' insurance,
pensions and other post-retirement and employment benefits and contingent
liabilities. Texas Gas bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results could differ from such estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents are stated at cost plus accrued interest, which
approximates fair value. Cash equivalents are highly liquid investments with an
original maturity of three months or less.
ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Accounts receivable are stated at the historical carrying amount net of
reserves or write-offs. Due to its customer base, Texas Gas has not historically
expensed recurring credit losses in connection with its receivables. As a
result, Texas Gas establishes an allowance for doubtful accounts receivable on a
case-by-case basis when it believes the required payment of specific amounts
owed is unlikely to occur. Uncollectible accounts receivable are written off
when a settlement is reached for an amount that is less than the outstanding
historical balance. This allowance was approximately $0.6 million and $0.6
million at December 31, 2002 and 2001, respectively.
ADVANCES TO AFFILIATES
As a participant in Williams' cash management program, Texas Gas makes
advances to and receives advances from Williams through WGP. The advances are
represented by demand notes. Advances are stated at the historical carrying
amounts. Interest income is recognized when chargeable and collectibility is
reasonable assured.
SECURITIZATIONS AND TRANSFERS OF FINANCIAL INSTRUMENTS
Through July 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 the sold receivables. The sale of receivables program
expired on July 25, 2002, and by the end of August 2002, Texas Gas completed the
repurchase of approximately $10 million of trade accounts previously sold.
MATERIALS AND SUPPLIES
Materials and supplies are carried at the lower of average cost or market
less an allowance for obsolescence. Such allowance was $0.7 million at December
31, 2002. Texas Gas did not have an allowance for obsolescence at December 31,
2001.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is provided primarily on the straight-line method at FERC
prescribed rates, including negative salvage, over estimated useful lives
(generally 40 to 50 years). 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.
Depreciation expense for the years ended December 31, 2002, 2001, and 2000, was
$37.8 million, $43.7 million and $42.7 million, respectively.
The lower depreciation expense in 2002 is due primarily to lower
depreciation rates, retroactive to November 1, 2000, approved in Texas Gas'
general rate case. See Note B.
The carrying values of these assets are also based on estimates,
assumptions and judgments relative to capitalized costs, useful lives and
salvage values. These estimates, assumptions and judgments reflect FERC
regulations, as well as historical experience and expectations regarding future
industry conditions and operations.
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. A
small amount of storage gas is also used to provide "Summer No-Notice" (SNS)
transportation service, designed primarily to meet the needs of summer-season
electrical power generation facilities. SNS customers may temporarily draw from
Texas Gas' storage gas in the summer, to be repaid during the same summer
season. In accordance with FERC Order 581, that portion of gas stored
underground which exceeds Texas Gas' system management requirements, as approved
by the FERC, has been classified as a current asset in the accompanying balance
sheets.
IMPAIRMENT OF LONG-LIVED ASSETS
Texas Gas evaluates long-lived assets for impairment when events or
changes in circumstances indicate, in management's judgment, that the carrying
value of such assets may not be recoverable. When such a determination has been
made, management's estimate of undiscounted future cash flows attributable to
the assets is compared to the carrying value of the assets to determine whether
an impairment has occurred. If an impairment of the carrying value has occurred,
the amount of impairment recognized in the financial statements is determined by
estimating the fair value of the assets and recording a loss for the amount that
the carrying value exceeds the estimated fair value.
GAS RECEIVABLES/PAYABLES
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. Gas
receivables/payables are valued at Texas Gas' historical cost of gas in storage.
REVENUE RECOGNITION
Revenues for sales of products are recognized in the period of delivery
and revenues from the transportation of gas are recognized in the period the
service is provided 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.
REPAIR AND MAINTENANCE COSTS
Texas Gas accounts for repair and maintenance costs under the guidance of
FERC regulations. The FERC identifies installation, construction and replacement
costs that are to be capitalized. All other costs are expensed as incurred.
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.
CAPITALIZED INTEREST
The allowance for funds used during construction represents the cost of
funds applicable to the 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 the years
ended December 31, 2002, 2001 and 2000, was $0.9 million, $0.6 million and $0.7
million, respectively. The allowance for equity funds used during construction
for the years ended December 31, 2002, 2001 and 2000, was $2.4 million, $1.3
million and $1.5 million, respectively. The allowance for borrowed funds used
during construction reduces interest expense and the allowance for equity funds
is included in miscellaneous other income.
COMMON STOCK DIVIDENDS AND RETURNS OF CAPITAL
Texas Gas charges against paid-in capital that portion of any common
dividend declaration that exceeds the retained earnings balance. Such excesses
are deemed to be returns of capital.
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 generally 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. The plans are described more fully in Note D.
The following table illustrates the effect on net income if Texas Gas had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
compensation.
YEARS ENDED DECEMBER 31,
------------------------
2002 2001 2000
-------------- ------------- -------------
(Thousands of Dollars)
Net income, as reported $56,099 $45,131 $52,247
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of tax
926 692 1,962
-------------- ------------- -------------
-------------- ------------- -------------
Pro forma net income $55,173 $44,439 $50,285
============== ============= =============
Pro forma amounts for 2002 include compensation expense from Williams
awards made in 2002 and 2001 and compensation expense from certain Williams
awards made in 1999.
Pro forma amounts for 2001 include compensation expense from certain
Williams awards made in 1999 and compensation expense from Williams awards made
in 2001.
Pro forma amounts for 2000 include compensation expense from certain
Williams awards made in 1999 and the total compensation expense from Williams
awards made in 2000, as these awards fully vested in 2000 as a result of
accelerated vesting provisions.
The pro forma net income effects of applying SFAS 123 recognition of
compensation expense provided for the periods shown above may not be
representative of the effects on reported net income for future years.
The fair value of each award was estimated using the Black-Scholes options
pricing model. See Note D for the assumptions used in the calculation of fair
value.
CASH FLOWS FROM OPERATING ACTIVITIES
Texas Gas uses the indirect method to report cash flows from operating
activities, which requires adjustments to net income to reconcile to net cash
flows provided by operating activities.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards (FASB) issued SFAS No. 143, "Accounting
for Asset Retirement Obligations". This Statement addresses financial accounting
and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs and amends SFAS No.
19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". The
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made, and that the associated asset retirement
costs be capitalized as part of the carrying amount of the long-lived asset. The
Statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002 with the impact of adoption to be reported as a
cumulative effect of change in accounting principle.
Texas Gas adopted the new rules on asset retirement obligations on
January 1, 2003, but was not required by the new rules to record a liability for
asset retirement obligations. A reasonable estimate of the fair value of the
retirement obligations for its pipeline transmission assets cannot be made as
the remaining life of these assets is not currently determinable.
In the second quarter of 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 APB 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, "Accounting for Leases," 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 this Statement
related to the rescission of SFAS No. 4 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
operations and financial position.
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)." Under this Statement, a liability
for a cost associated with an exit or disposal activity is recognized at fair
value when the liability is incurred rather than at the date of an entity's
commitment to an exit plan. The provisions of the Statement are effective for
exit or disposal activities that are initiated after December 31, 2002; hence,
initial adoption of this Statement on January 1, 2003, did not have any impact
on Texas Gas' results of operations or financial position.
The FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which is effective for fiscal years ending after
December 15, 2002. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to permit two additional transition methods for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation from the intrinsic method under APB Opinion No. 25, "Accounting for
Stock Issued to Employees". The prospective method of transition under SFAS No.
123 is an option to the entities that adopt the recognition provisions under
this statement in a fiscal year beginning before December 15, 2003. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements concerning
the method of accounting used for stock-based employee compensation and the
effects of that method on reported results of operations. Under SFAS No. 148,
pro forma disclosures will be required in a specific tabular format in the
"Summary of Significant Accounting Policies". Texas Gas has adopted the
disclosure requirements of this statement effective December 31, 2002. The
adoption had no effect on the Texas Gas' consolidated financial position or
results of operations. Texas Gas continues to account for its stock-based
compensation plans under APB Opinion No. 25. See "Employee Stock Based Awards"
in this note.
The FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others." This Interpretation requires the initial
recognition at fair value of guarantees issued or modified after December 31,
2002, and expands the disclosure requirements for guarantees. Initial adoption
of this Interpretation did not have any impact on Texas Gas' results of
operations or financial position.
The FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 requires companies with a variable interest in a variable
interest entity to apply this guidance to that entity as of the beginning of the
first interim period beginning after June 15, 2003 for existing interests and
immediately for new interests. The application of the guidance could result in
the consolidation of a variable interest entity. As of December 31, 2002, the
Texas Gas has no variable interest entities as defined by FIN No. 46.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2001 and 2000 financial
statements to conform to the 2002 presentation.
B. COMMITMENTS AND CONTINGENCIES
REGULATORY AND RATE MATTERS AND RELATED LITIGATION
FERC ORDER 637
On February 9, 2000, the FERC issued a final rule, Order 637, in which the
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. 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. Texas Gas filed a contested offer settlement on May
14, 2002. On August 27, 2002, the FERC issued its "Order on Order Nos. 637,
587-G, and 587-L" which accepted many of the provisions of the May 14 settlement
of required modifications as specified in the body of the August 27, 2002 order.
Ordering paragraph A directed Texas Gas to file actual tariff sheets, including
modifications, within thirty days of the issuance of the order while ordering
paragraph B prohibited Texas Gas from placing the tariff sheets into effect
before further order of the FERC. Texas Gas made the required compliance filing
on September 30, 2002. Texas Gas and several other parties requested rehearing
and/or clarification of the August 27, 2002 order. On December 24, 2002 the FERC
issued its "Order on Rehearing" which granted rehearing in part and denied
rehearing in part and directed Texas Gas to file revised tariff sheets. Texas
Gas made the required compliance filing on January 23, 2003, and at least one
party has protested the filing. The FERC has not yet issued an order on either
compliance filing directing Texas Gas to place any of the Order No. 637 tariff
sheets into effect.
GENERAL RATE CASE (DOCKET NO. RP00-260)
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 Shippers' 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 went
into effect on August 1, 2002 and refunds of approximately $37.5 million were
made on September 16, 2002. Texas Gas had provided an adequate reserve for
amounts, including interest, which were refunded to customers. Additionally, on
July 15, 2002, Texas Gas filed an offer of settlement with the Indicated
Shippers to resolve all remaining issues in the case. The FERC issued an order
on October 10, 2002 approving the settlement. No additional refunds are due as a
result of the settlement with the Indicated Shippers. In the third quarter of
2002, as a result of the settlement, Texas Gas recorded additional revenues of
$0.3 million and reduced its estimated reserve for rate refunds by an equal
amount. Texas Gas also recorded $10.2 million of revenues and reduced
depreciation expense by $5.7 million to implement provisions of the settlement.
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM01-10-000)
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 additional
comments. If adopted, these new standards would require the adoption of new
compliance measures by Texas Gas.
NOTICE OF INQUIRY (DOCKET NO. PL02-6-000)
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. Texas Gas has
negotiated certain rates under the FERC's existing negotiated rate program, and
participated in comments filed in this proceeding by Williams in support of the
FERC's existing negotiated rate program.
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM02-14-000)
On August 1, 2002, the FERC issued a Notice of Proposed Rule Making (NOPR)
that proposes restrictions on various types of cash management program employed
by companies in the energy industry such as 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 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. Texas Gas participated in comments
filed in this proceeding on August 28, 2002, by the Interstate Natural Gas
Association of America. On September 25, 2002, the FERC convened a technical
conference to discuss issues raised in the comments filed by parties in this
proceeding.
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 has
provided reserves for the estimated settlement costs of other royalty claims and
litigation.
ENVIRONMENTAL AND SAFETY MATTERS
As of December 31, 2002, Texas Gas had an accrued liability 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 liability
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 one facility in
an area designated as non-attainment for the current ozone standard (one hour
standard) and is aware that during 2004 the EPA may designate additional areas
as non-attainment based on implementation of the revised ozone standard (eight
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. Additionally, the EPA is expected to promulgate
new rules regarding hazardous air pollutants in 2003 and 2004, which may impose
controls in addition to the control described 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 2006.
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.
In January 2003, the U.S. Department of Transportation Office of Pipeline
Safety issued a Notice of Proposed Rulemaking entitled "Pipeline Integrity
Management in High Consequence Areas". The proposed rule incorporates the
requirements of the Pipeline Safety Improvement Act of 2002 that was enacted in
December 2002. It would require gas pipeline operators to develop integrity
management programs for transmission pipelines that could affect high
consequence areas in the event of pipeline failure, including a baseline
assessment and periodic reassessments to be completed within specified
timeframes. The final rule is expected to be issued in late 2003. Texas Gas at
this time cannot predict the exact costs that would be required under the
proposed rule. The costs of the baseline assessment are anticipated to be
incurred over the next ten years. Texas Gas considers the costs associated with
compliance with the proposed rule to be prudent costs incurred in the ordinary
course of business and, therefore, recoverable through its rates.
OTHER LEGAL ISSUES
In 1998, the United State 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, royalty valuation 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. On October 9, 2002, the court granted a motion
to dismiss Grynberg's royalty valuation claims. Grynberg's measurement claims
remain pending against Williams and the other defendants.
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.), and plaintiffs. Settlement
was reached with all named plaintiffs. One 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, fourteen 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' counsel
voluntarily dismissed two of the fourteen Williams entities named as defendants
in the lawsuit. In November 2001, the Williams defendants, along with other
coordinating defendants, filed a motion to dismiss on non-jurisdictional
grounds. 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. On August 19, 2002, the defendants' motion to dismiss on
non-jurisdictional grounds was denied. On September 17, 2002, the plaintiffs
filed a motion for class certification. The Williams entities joined with other
defendants in contesting certification of the plaintiff class and this issue,
along with the personal jurisdiction motion remains pending.
On February 10, 2003, Texas Gas received a claim from certain parties
(Claimants) for back rental associated with their alleged ownership of a partial
mineral interest in a tract of land in a gas storage field owned by Texas Gas.
Texas Gas had condemned the relevant mineral interest in the tract when the
storage field was developed. Claimants contend that one of the leases for which
they, or their predecessors in title, were paid in the condemnation was invalid
because it was actually owned by separate entity then controlled by Claimants or
their predecessors. Texas Gas believes that the Claimants and the separate
entity are estopped to assert any claim to the mineral interest in the tract and
that Texas Gas has valid defenses against such claim.
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, 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.
OTHER COMMITMENTS
COMMITMENTS FOR CONSTRUCTION
Texas Gas has commitments for construction and acquisition of property,
plant and equipment of approximately $4 million at December 31, 2002.
C. FINANCING
At December 31, 2002 and 2001, long-term debt issues were outstanding as
follows (expressed in thousands):
2002 2001
--------------------------------------------
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 (discount) premium, net (219) 174
-------------- -------------
Total long-term debt $ 249,781 $ 250,174
============= =============
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 and
notes 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.
Williams and certain of its subsidiaries, including Texas Gas, are parties
to a $700 million credit agreement (Credit Agreement), under which Texas Gas can
borrow up to $200 million to the extent 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., federal funds rate or the
London Interbank Offered Rate (LIBOR). 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
commitments from participating banks in the Credit Agreement will be reduced to
$400 million, and with further asset sales could be reduced below that amount,
but Texas Gas will continue to have borrowing capacity up to the lesser of $200
million or the amount that Williams would be able to borrow to the extent the
funds available under the Credit Agreement have not been borrowed by Williams or
other participating subsidiaries or that otherwise would be required to remain
available to Williams. At December 31, 2002, the commitment from participating
banks had been reduced to $463 million the borrowing capacity available to Texas
Gas was $200 million, and Texas Gas had no outstanding borrowings under this
agreement. Texas Gas' assets have not been pledged to secure any indebtedness of
Williams or its other affiliates, either under the Credit Agreement or pursuant
to any other credit facility of Williams and its other affiliates.
D. 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.
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 Balance Sheet at December 31 of each year indicated (expressed in
thousands).
2002 2001
-------------- -------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 102,437 $ 93,951
Service cost 4,334 4,354
Interest cost 6,668 7,065
Plan amendments 524 -
Actuarial (gain) loss (10,114) 764
Benefits paid (687) (3,697)
Special termination benefits 3,458 -
Settlement benefits paid (12,965) -
------------ ----------
Benefit obligation at end of year 93,655 102,437
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of year 122,672 137,761
Actual return on plan assets (15,242) (11,392)
Benefits paid (13,652) (3,697)
----------- -----------
Fair value of plan assets at end of year 93,778 122,672
----------- -----------
Funded status 123 20,235
Unrecognized net actuarial loss 33,301 22,185
Unrecognized prior service credit (5,013) (6,808)
----------- -----------
Prepaid benefit cost $ 28,411 $ 35,612
=========== ===========
Net pension benefit expense consists of the following:
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------- -------------- -------------
Components of net periodic pension expense:
Service cost $ 4,334 $ 4,354 $ 3,844
Interest cost 6,668 7,065 6,514
Expected return on plan assets (10,598) (14,258) (12,791)
Amortization of prior service credit (1,270) (1,304) (1,303)
Special termination benefit cost 3,458 - -
Settlement charge 4,609 - -
Regulatory asset accrual (7,201) 4,143 3,736
------------ ---------- ----------
Net periodic pension expense $ - $ - $ -
=========== =========== ============
The following are the weighted-average assumptions utilized as of December
31 of the year indicated:
2002 2001 2000
--------- ----------- ----------
Discount rate 7.00% 7.50% 7.50%
Expected return on plan assets 8.50% 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 Williams' postretirement health care plan of
$5.4 million in 2002, $5.2 million in 2001 and $6.0 million in 2000. Texas Gas'
latest settled rate case with the FERC (Docket No. RP00-260) allows recovery of
$5.3 million annually, including amortization of previously deferred
postretirement benefit costs. Net postretirement benefit expense related to
Texas Gas' participation in the Williams' plan is $5.3 million for 2002, $5.1
million for 2001 and $5.9 million for 2000, including $3.6 million, $6.1 million
and $2.6 million of amortization of a regulatory asset, respectively. The
regulatory asset represents unrecovered costs from prior years, including the
unamortized transition obligation under 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, 2002
and 2001 was $28.6 million and $32.2 million, respectively. This asset is being
amortized concurrent with the recovery of these costs through rates. The
regulatory asset balance should be recovered through rates in approximately 8
years.
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. Awards may be granted
for no consideration other than prior and future services or based on certain
financial performance targets being achieved. The purchase price per share for
stock options and the grant price for stock appreciation rights may not be less
than the market price of the underlying stock on the date of grant. Stock
options generally become exercisable in one-third increments each year from the
anniversary of the grant or after three or five years, subject to accelerated
vesting if certain future stock prices or if specific financial performance
targets are achieved. Stock options expire ten years after grant.
A summary of stock options granted to employees of Texas Gas under the
plans is shown in the following table (options in thousands):
------------------------ ------------------------- ------------------------
2002 2001 2000
------------------------ ------------------------- ------------------------
----------- ------------ ------------ ------------ ----------- ------------
Options Weighted Options Weighted Options Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
----------- ------------ ------------ ------------ ----------- ------------
Outstanding - beginning of year 1,737 $ 26.39 1,457 $ 26.58 1,456 $ 22.97
Granted 575 6.08 237 37.96 190 45.98
Exercised (6) (9.83) (81) 14.62 (126) 18.64
Forfeited/expired (48) 8.23 (16) 36.18 (2) 44.77
Adjustment for WCG spin-off (1) - - 145 - - -
Employee transfers, in 63 25.16 20 24.08 74 26.19
Employee transfers, out (298) 27.14 (25) 24.20 (135) 21.96
----------- ------------ ------------ ------------ ----------- ------------
Outstanding - end of year 2,023 $ 20.96 1,737 $ 26.39 1,457 $ 26.57
=========== ============ ============ ============ =========== ============
=========== ============ ============ ============ =========== ============
Exercisable at year end 1,370 $ 26.04 1,412 $ 24.46 1,380 $ 25.97
=========== ============ ============ ============ =========== ============
- -----------
(1) Effective with the spin-off of Williams Communications Group (WCG) on
April 23, 2001, by Williams, the number of unexercised Williams stock
options and the exercise prices were adjusted to preserve the intrinsic
value of the stock options that existed prior to the spin-off.
The following summary provides information about stock options granted to
employees of Texas Gas that are outstanding and exercisable at December 31, 2002
(options in thousands):
------------------------------------------ --------------------------
Stock Options Stock Options Exercisable
Outstanding
------------------------------------------ --------------------------
----------- ------------- ---------------- ----------- --------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Exercise Contractual Exercise
Prices Options Price Life (yrs) Options Price
----------- ------------- ---------------- ----------- --------------
----------- ------------- ---------------- ----------- --------------
$2.58 423 2.58 9.9 - -
$8.55 to $15.32 335 13.07 3.0 335 13.07
$15.71 to $42.29 1,265 29.18 5.8 1,035 30.24
----------- ------------- ---------------- ----------- --------------
----------- ------------- ---------------- ----------- --------------
2,023 $ 20.96 5.7 1,370 $ 26.04
=========== ============= ================ =========== ==============
The estimated fair value at date of grant of stock options granted to
employees of Texas Gas in 2002, 2001 and 2000, using the Black-Scholes option
pricing model, is as follows:
2002 2001 2000
-------- -------- ------
Weighted-average grant date fair value of options
for Williams common stock granted during the year .... $2.77 $10.93 $15.44
====== ====== ======
Assumptions:
Dividend yield................................................ 1.0% 1.9% 1.5%
Volatility ...................................................... 56% 35% 31%
Risk-free interest rate........................................ 3.6% 4.8% 6.5%
Expected life (years)......................................... 5.0 5.0 5.0
OTHER
Williams maintains various defined contribution plans covering
substantially all employees. Texas Gas' costs related to these plans were $4.4
million in 2002, $3.2 million in 2001 and $2.8 million in 2000.
The International Chemical Workers Union Council of the United Food and
Commercial Workers International Union Local 187C represents 18% of Texas Gas'
total employees. The current collective bargaining agreement between Texas Gas
and Local 187C expires on April 30, 2004.
During 2002, Williams announced plans to strengthen its balance sheet
through a number of efforts such as asset sales and cost reductions including a
downsizing of its work force. As a result of these actions, Texas Gas reduced
its work force by approximately 140 employees through an enhanced-benefit early
retirement option to certain employee groups, and severance and by approximately
91 employees through the transfer of employees to Williams' assets that were
sold.
E. INCOME TAXES
Following is a summary of the provision for income taxes for the years
ended December 31, 2002, 2001, and 2000 (expressed in thousands):
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------- ------------- -----------
Current (benefit) provision:
Federal $ (1,867) $ 24,180 $ 33,052
State (401) 5,202 6,902
------------ ----------- ------------
(2,268) 29,382 39,954
------------ ----------- -----------
Deferred provision (benefit):
Federal 32,373 905 (5,385)
State 6,542 197 (1,149)
----------- ----------- -----------
38,915 1,102 (6,534)
----------- ----------- -----------
Income tax provision $ 36,647 $ 30,484 $ 33,420
=========== =========== ===========
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,
2002 2001 2000
----------- ------------ -----------
Provision at statutory rate $ 32,461 $ 26,465 $ 29,983
Increases in taxes resulting from:
State income taxes 3,991 3,506 3,740
Other, net 195 513 (303)
----------- ----------- -----------
Income tax provision $ 36,647 $ 30,484 $ 33,420
=========== =========== ===========
Significant components of deferred tax liabilities and assets as of
December 31, 2002 and 2001, are as follows (expressed in thousands):
2002 2001
----------------- ----------------
Deferred tax liabilities:
Property, plant and equipment $ 220,020 $ 196,236
Recoverable contract reformation costs 2,925 2,925
------------ -------------
Total deferred tax liabilities 222,945 199,161
Deferred tax assets:
Other accrued taxes 2,339 3,869
Accrued payroll, pension and other benefits 19,380 24,867
Estimated rate refund liability - 12,310
Deferred income 97 3,527
Other liabilities 9,814 2,188
------------ -------------
Total deferred tax assets 31,630 46,761
------------- -------------
Net deferred tax liabilities $ 191,315 $ 152,400
========= =========
F. FINANCIAL INSTRUMENTS
The following methods and assumptions were used by Texas Gas in estimating
its fair-value disclosures for financial instruments:
CASH AND SHORT-TERM FINANCIAL ASSETS: For cash and short-term financial
assets, the carrying amount is a reasonable estimate of fair value due to the
short maturity of those instruments.
ADVANCES TO AFFILIATES: As discussed in Note G, advances to affiliates,
which are represented by demand notes, 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,
2002 and 2001.
The carrying amount and estimated fair values of Texas Gas' financial
instruments as of December 31, 2002 and 2001, are as follows (expressed in
thousands):
CARRYING FAIR
AMOUNT VALUE
------------------------ --------------------
2002 2001 2002 2001
------------ --------- ---------- ---------
Financial Assets:
Cash and short-term financial assets $ 277 $ 7,089 $ 277 $ 7,089
Advances from affiliates 63,143 66,299 63,143 66,299
Financial Liabilities:
Long-term debt 249,781 250,174 238,725 257,220
As a participant in Williams' cash management program, Texas Gas makes
advances to and receives advances from Williams through Texas Gas' parent
company, WGP. At December 31, 2002, the advances due Texas Gas by WGP totaled
$65.1 million. The advances are represented by demand notes. The interest rate
on intercompany demand notes is the LIBOR on the first day of the month plus an
applicable margin based on Texas Gas' current credit ratings as determined by
Moody's Investor Service and Standard & Poor's. Due to recent asset sales,
anticipated asset sales in the future and available secured borrowing
facilities, Williams has indicated that it currently believes that it will
continue to have the financial resources and liquidity to repay these advances
made by WGP which in turn allows WGP to repay Texas Gas.
In the event that Williams' financial condition does not improve or
becomes worse, or if it fails to realize sufficient proceeds from the remaining
planned asset sales, it may have to consider other options including the
possibility of seeking protection in a bankruptcy proceeding. Texas Gas cannot
predict with certainty what impact such action, if it were to occur, would have
on it. Under the equitable doctrine of substantive consolidation, a bankruptcy
court may consolidate and pool the assets and liabilities of a subsidiary with
those of its parent. Texas Gas cannot provide assurance that Williams, WGP or
their creditors would not attempt to advance substantive consolidation claims in
the event of a Williams bankruptcy proceeding or, if advanced, how a bankruptcy
court would resolve the issue. If a bankruptcy court were to allow the
substantive consolidation of Texas Gas' assets and liabilities in the context of
a bankruptcy filing, Texas Gas' financial condition, operations and ability to
meet its obligations would be materially adversely affected.
SALE OF RECEIVABLES
Through July 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 the sold receivables. The sale of receivables program
expired on July 25, 2002, and by the end of August 2002, Texas Gas completed the
repurchase of approximately $10 million of trade accounts previously sold. The
sales of these receivables resulted in a charge to results of operations of
approximately $0.2 million, $1.3 million and $1.2 million in 2002, 2001 and
2000, respectively.
G. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
MAJOR CUSTOMERS
Operating revenues received from Proliance Energy, LLC and Atmos Energy,
the two major customers of Texas Gas, were $48.5 million and $31.8 million in
2002, $58.6 million and $30.8 million in 2001 and $57.3 million and $28.0
million in 2000, respectively.
RELATED PARTIES
As a subsidiary of Williams, Texas Gas engages in transactions with
Williams and other Williams subsidiaries characteristic of group operations.
Effective April 1, 2000, the general office and management team of
Williams Gas Pipeline Central (Central), an affiliate, was combined with Texas
Gas' general office and management team in Owensboro, KY. On November 15, 2002,
Williams sold Central to Southern Star Central Corp. (Southern Star). As a
result of the sale, approximately 100 Texas Gas general office and management
team employees transferred to Central. In addition to the transferred employees,
Southern Star and Williams entered into a Transition Services Agreement with
Southern Star pursuant to which Williams agreed to provide certain transitional
services to Central for a period of six to twelve months after closing. Certain
transitional services are being performed by Texas Gas. Texas Gas will also
continue leasing to Central part of Texas Gas' main office building and other
facilities located in Owensboro, KY. Net amounts charged to Central in 2002,
through November 15, were $9.5 million and $9.7 million for the full year 2001.
Net amounts charged to Central in 2000, including non-recurring charges related
to the move, were $7.2 million.
As a participant in Williams' cash management program, Texas Gas makes
advances to and receives advances from Williams through WGP. Advances are stated
at the historical carrying amounts. As of December 31, 2002 and 2001, Texas Gas
had advances to affiliates of $63 million and $66 million, respectively.
Advances to affiliates are due on demand. Williams has indicated that it
believes that it has the financial resources and liquidity to meet its future
debt obligations and other cash requirements through the first quarter of 2004,
including the advances from Texas Gas, through cash flows generated from asset
sales, anticipated asset sales in the future and available secured credit
facilities. In the event that Williams' future financial condition does not
improve or if it fails to complete these anticipated asset sales, Texas Gas'
credit risk exposure related to these advances may increase, and Texas Gas could
be at risk for some or all of the face value of the advances to affiliates.
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 $12.2 million, $11.0
million and $8.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Management considers the cost of these services to be 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' operating income.
Included in Texas Gas' other revenues for the years ended December 31,
2002, 2001 and 2000, is $0.3 million, $1.7 million and $1.2 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, 2002, 2001 and 2000, are amounts applicable to transportation for
affiliates as follows (expressed in thousands):
FOR THE YEAR ENDED DECEMBER 31,
2002 2001 2000
----------------------------------------------------------
Williams Energy Services Company $ 3,723 $ 2,856 $ 3,373
Transcontinental Gas Pipe Line Corporation 4,406 4,756 4,200
----------- ---------- ----------
$ 8,129 $ 7,612 $ 7,573
=========== ========== ==========
H. QUARTERLY INFORMATION (UNAUDITED)
The following summarizes selected quarterly financial data for 2002 and
2001 (expressed in thousands):
2002
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
Operating revenues $ 80,205 $ 51,827 $ 58,497 $ 76,145
Operating expenses 38,700 40,562 35,106 43,849
----------- ----------- ----------- ------------
Operating income 41,505 11,265 23,391 32,296
----------- ----------- ----------- -----------
Interest expense 5,178 5,318 5,046 4,948
Other income, net (2,304) (602) (1,480) (393)
------------ ----------- ----------- -----------
Income before income taxes 38,631 6,549 19,825 27,741
Provision for income taxes 15,379 2,613 7,690 10,965
----------- ----------- ----------- -----------
Net income $ 23,252 $ 3,936 $ 12,135 $ 16,776
=========== =========== =========== ===========
2001
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
Operating revenues $ 86,211 $ 48,199 $ 42,753 $ 74,422
Operating expenses 42,067 37,426 40,798 37,467
----------- ----------- ----------- -----------
Operating income 44,144 10,773 1,955 36,955
----------- ----------- ----------- -----------
Interest expense 5,365 5,318 5,476 5,519
Other income, net (962) (1,019) (1,089) (396)
------------ ------------ ------------ ------------
Income before income taxes 39,741 6,474 (2,432) 31,832
Provision for income taxes 15,769 2,646 (604) 12,673
----------- ----------- ------------ -----------
Net income $ 23,972 $ 3,828 $ (1,828) $ 19,159
=========== =========== ============ ===========
- -------------------
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 14. CONTROL AND PROCEDURES
An evaluation of the effectiveness of the design and operation of Texas
Gas' disclosure controls and procedures (as defined in Rule 13a-14 and 15d-14 of
the Securities Exchange Act) was performed within the 90 days prior to the
filing date of this report. This evaluation was performed under the supervision
and with the participation of Texas Gas' management, including Texas Gas' Chief
Executive Officer and Vice President and Treasurer. Based upon that evaluation,
Texas Gas' Chief Executive Officer and Vice President and Treasurer concluded
that these disclosure controls and procedures are effective.
There have been no significant changes in Texas Gas' internal controls or
other factors that could significantly affect internal controls since the
certifying officers' most recent evaluation of those controls.
PART IV
ITEM 15. 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
Balance Sheets at December 31, 2002 and 2001
Statements of Income for the years ended December 31, 2002, 2001, and 2000
Statements of Retained Earnings and Paid-In Capital for the years ended
December 31, 2002, 2001, and 2000
Statements of Cash Flows for the years ended December 31, 2002, 2001,
and 2000
Notes to 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 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).
10. MATERIAL CONTRACTS
10.1 First Amended and Restated Credit Agreement dated as of
October 31, 2002 among The Williams Companies, Inc., Northwest
Pipeline Corporation, Transcontinental Gas Pipe Line
Corporation and Texas Gas Transmission Corporation, as
Borrowers, the Banks named therein, JPMorgan Chase Bank and
Commerzbank AG, as Co-Syndication Agents, Credit Lyonnais New
York Branch, as Documentation Agent, Citicorp USA, Inc., as
Agent, and Salomon Smith Barney Inc., as Arranger (filed as
Exhibit 10.2 to The Williams Companies, Inc. Form 10-Q for the
quarter ended September 30, 2002 Commission File Number
1-4174).
*23.1 Consent of Independent Auditors.
* 24.1 Power of Attorney together with certified resolution.
99. ADDITIONAL EXHIBITS
*99.1 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, President and Chief Executive Officer of
Texas Gas Transmission Corporation
*99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 by
Richard D.Rodekohr, Vice President and Chief Financial Officer
of Texas Gas Transmission Corporation
(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/ JEFFREY P. HEINRICHS
------------------------------------------------------------
Jeffrey P. Heinrichs
Controller
Dated: MARCH 19, 2003
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/ STEVEN J. MALCOLM * Chairman of the Board
- --------------------------------
Steven J. Malcolm
/S/ J. DOUGLAS WHISENANT * Director, President and Chief Executive Officer
- --------------------------------
J. Douglas Whisenant (Principal Executive Officer)
/S/ H. DEAN JONES, II * Director
- --------------------------------
H. Dean Jones, II
/S/ RICHARD D. RODEKOHR * Vice President and Treasurer
- --------------------------------
Richard D. Rodekohr (Principal Financial Officer)
/S/ JEFFREY P. HEINRICHS * Controller
- --------------------------------
Jeffrey P. Heinrichs (Principal Accounting Officer)
*By: /S/ JEFFREY P. HEINRICHS
----------------------------------
Jeffrey P. Heinrichs
ATTORNEY-IN-FACT
Dated: MARCH 19 , 2003