1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-4169
TEXAS GAS TRANSMISSION CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 61-0405152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 FREDERICA STREET, OWENSBORO, KENTUCKY 42301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (270) 926-8686
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 1,000 SHARES AS OF MARCH 31,
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.
TEXAS GAS TRANSMISSION CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income ................................... 3
Consolidated Balance Sheets - Assets ................................ 4
Consolidated Balance Sheets - Liabilities and Stockholder's Equity... 5
Consolidated Statements of Cash Flows .............................. 6
Condensed Notes to Financial Statements ............................ 7
Item 2. Management's Narrative Analysis of the Results of Operations .... 13
Item 4. Controls and Procedures........................................... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 18
Item 6. Exhibits and Reports on Form 8-K .................................. 18
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Texas Gas Transmission Corporation
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be achieved. Such statements
are made in reliance on the "safe harbor" protections provided under the Private
Securities Reform Act of 1995. Additional information about issues that could
lead to material changes in performance is contained in Texas Gas Transmission
Corporation's 2002 Annual Report on Form 10-K.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2003 2002
------------- -------------
Operating Revenues:
Gas transportation $ 82,889 $ 78,456
Gas storage 557 775
Other 695 974
----------- -----------
Total operating revenues 84,141 80,205
----------- -----------
Operating Costs and Expenses:
Cost of gas transportation 1,172 1,173
Operation and maintenance 9,281 9,196
Administrative and general 7,787 12,550
Depreciation and amortization 10,711 11,220
Taxes other than income taxes 3,884 4,561
----------- -----------
Total operating costs and expenses 32,835 38,700
----------- -----------
Operating Income 51,306 41,505
----------- -----------
Other (Income) Deductions:
Interest expense 4,882 5,178
Interest income from affiliates (1,168) (270)
Gain on sale of equipment (30) (1,323)
Miscellaneous other (income) net (478) (711)
------------ ------------
Total other deductions 3,206 2,874
----------- -----------
Income before Income Taxes 48,100 38,631
Provision for Income Taxes 19,090 15,379
----------- -----------
Net Income $ 29,010 $ 23,252
=============== =============
The accompanying condensed notes are an integral part of these consolidated
financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
------------- -------------
Current Assets:
Cash and cash equivalents $ 162 $ 277
Receivables:
Trade 27,262 25,705
Affiliates 1,156 2,386
Other 2,521 3,843
Gas Receivables:
Transportation and exchange 1,604 1,392
Storage 23,901 6,601
Advances to affiliates 108,155 63,143
Inventories 13,456 13,580
Deferred income taxes 15,200 14,724
Costs recoverable from customers 147 2,853
Gas stored underground 3,922 3,922
Prepaid and other expenses 2,356 3,407
------------ --------------
Total current assets 199,842 141,833
------------ --------------
Property, Plant and Equipment, at cost:
Natural gas transmission plant 1,111,046 1,113,648
Other natural gas plant 153,433 154,141
------------- --------------
1,264,479 1,267,789
Less-Accumulated depreciation 216,860 209,821
and amortization ------------- --------------
Property, plant and equipment, net 1,047,619 1,057,968
------------- --------------
Other Assets:
Gas stored underground 82,287 110,458
Costs recoverable from customers 37,345 37,951
Prepaid pension 28,346 28,411
Other 8,012 7,969
------------- ---------------
Total other assets 155,990 184,789
------------- ---------------
Total Assets $ 1,403,451 $ 1,384,590
============= ===============
The accompanying condensed notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS,
EXCEPT FOR SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2003 2002
--------------- ---------------
Current Liabilities:
Payables:
Trade $ 3,345 $ 2,017
Affiliates 11,586 9,936
Other 1,156 6,961
Gas Payables:
Transportation and exchange 3,367 1,312
Storage 6,241 24,214
Accrued income taxes due affiliate 18,670 16,210
Accrued taxes other 12,051 12,817
Accrued interest 7,979 6,557
Accrued payroll and employee benefits 20,817 27,025
Other accrued liabilities 14,796 11,765
-------------- ---------------
Total current liabilities 100,008 118,814
-------------- ---------------
Long-Term Debt 249,678 249,781
-------------- ---------------
Other Liabilities and Deferred Credits:
Deferred income taxes 213,592 206,039
Postretirement benefits other than
pensions 25,532 26,432
Pension plan costs 28,346 28,411
Other 25,606 23,434
-------------- ---------------
Total other liabilities and
deferred credits 293,076 284,316
-------------- ---------------
Commitments and Contingencies (Note 2)
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 130,080 101,070
-------------- ---------------
Total stockholder's equity 760,689 731,679
-------------- ---------------
Total Liabilities and Stockholder's
Equity $1,403,451 $ 1,384,590
============== ===============
The accompanying condensed notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2003 2002
------------- ---------------
OPERATING ACTIVITIES:
Net income $ 29,010 $ 23,252
Adjustments to reconcile to cash (used in)
provided from operations:
Depreciation and amortization 10,711 11,220
Provision for deferred income taxes 7,077 16,461
Gain on sale of equipment (30) (1,323)
Changes in operating assets and liabilities:
Receivables (17,747) (3,779)
Receivable - TGT Enterprises, Inc. - (6,703)
Inventories 124 (337)
Affiliates 2,880 (28,165)
Other current assets 3,757 (1,388)
Accrued income taxes due affiliate 2,460 (14,526)
Payables and accrued liabilities (22,916) (16,177)
Other, including changes in noncurrent
assets and liabilities 30,256 1,511
------------- --------------
Net cash (used in) provided by 45,582 (19,954)
operating activities ------------- --------------
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of allowance for
funds used during construction (685) (19,773)
Advances to affiliates, net (45,012) 39,641
------------- -------------
Net cash provided (used in) (45,697) 19,868
investing activities ------------- -------------
Increase (decrease) in cash and cash equivalents (115) (86)
Cash and cash equivalents at beginning of period 277 86
------------- -------------
Cash and cash equivalents at end of period $ 162 $ -
============== =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (exclusive of amount capitalized) $ 3,463 $ 9,781
Income taxes (refund) paid $ (530) $ 3
The accompanying condensed notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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 April 14, 2003, Williams announced that it signed a definitive
agreement to sell Texas Gas to Loews Pipeline Holding Corporation, a unit of
Loews Corporation, for $1.045 billion, which includes $795 million in cash to be
paid to Williams and $250 million in debt that will remain with Texas Gas. The
sale is expected to close within 60 days, subject to standard closing conditions
and completion of Hart-Scott-Rodino review.
The unaudited financial statements have been prepared from the books and
records of Texas Gas. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The condensed unaudited consolidated financial statements include all
adjustments both normal, recurring and others which, in the opinion of Texas
Gas' management, are necessary to present fairly its financial position at March
31, 2003, and results of operations and cash flows for the three months ended
March 31, 2003 and 2002. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in Texas Gas' 2002 Annual Report on Form 10-K.
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. Estimates and assumptions which, in the opinion of management,
are significant to the underlying amounts included in the financial statements
and for which it would be reasonably possible that future events or information
could change those estimates include: 1) revenues subject to refund; 2)
litigation-related contingencies; 3) environmental remediation obligations; and
4) impairment assessments of long-lived assets.
Operating income may vary by quarter. Based on the current rate
structure, Texas Gas experiences higher operating income in the first and fourth
quarters as compared to the second and third quarters.
Effective January 1, 2003, Texas Gas adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." 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. Texas Gas has not recorded liabilities for its pipeline
transmission assets, since a reasonable estimate of the fair value of the
retirement obligations for these assets cannot be made, as the remaining life of
these assets is not currently determinable. Accordingly, the impact of adopting
the statement did not have a material effect on Texas Gas' financial position or
results of operations. Had the statement been adopted at the beginning of 2002,
the impact to Texas Gas' operating income and net income would have been
immaterial.
Certain reclassifications have been made in the 2002 financial statements
to conform to the 2003 presentation.
2. CONTINGENT LIABILITIES AND COMMITMENTS
RATE AND REGULATORY MATTERS
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 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.
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 in July of 2002 to implement provisions of
the settlement.
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
stockholder's 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 and a final rule is expected to be promulgated by
the FERC in the next several months.
FERC COMPLIANCE PLAN
On March 13, 2003, Williams and certain subsidiaries entered into a
settlement agreement with the FERC resolving issues resulting from a FERC
investigation into the relationship between Transcontinental Gas Pipe Line
Corporation (Transco), an affiliate of Pipeline, and Transco's marketing
affiliates. Although Texas Gas was not involved in the investigation and is not
a party to the settlement agreement, Williams agreed that certain of its
interstate natural gas pipeline subsidiaries, including Texas Gas, will be
subject to the terms of a compliance plan designed to ensure compliance with the
terms of the settlement agreement and the FERC's rules governing the
relationship of interstate natural gas pipelines and their marketing affiliates.
If Texas Gas is sold, as expected, it will not be subject to this FERC
compliance plan.
LEGAL PROCEEDINGS
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 known royalty claims and
litigation.
OTHER LEGAL ISSUES
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly owned subsidiaries including Texas Gas. Mr. Grynberg
has also filed claims against approximately 300 other energy companies and
alleges that the defendants violated the False Claims Act in connection with the
measurement, 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 dismissed. On September 17, 2002, the plaintiffs
filed a motion for class certification. The Williams entities joined with other
defendants in contesting certification of the class. On April 10, 2003, the
court denied plaintiffs' motion for class certification. The motion to dismiss
for lack of personal jurisdiction 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 a 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.
ENVIRONMENTAL MATTERS
As of March 31, 2003, Texas Gas had an accrued liability of approximately
$1.1 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.
SUMMARY
Litigation, arbitration, regulatory matters and environmental matters are
subject to inherent uncertainties. Were an unfavorable ruling to occur, there
exists the possibility of a material adverse impact on the net income of the
period in which the ruling occurs. Management, including internal counsel,
currently believes that the ultimate resolution of the foregoing matter, taken
as a whole and after consideration of amounts accrued, insurance coverage,
recovery from customers or other indemnification arrangements, will not have a
materially adverse effect upon Texas Gas future financial position.
3. DEBT AND FINANCING ARRANGEMENTS
Williams and certain of its subsidiaries, including Texas Gas, are
parties to a revolving credit agreement (Credit Agreement), under which Texas
Gas can borrow up to $200 million if the funds available under the Credit
Agreement have not been borrowed by Williams or other subsidiaries. The Credit
Agreement expires in July 2005. Interest rates vary with current market
conditions based on the base rate of Citibank N.A., three-month certificates of
deposit of major United States money market banks, federal funds rate or the
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 $200 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 March 31, 2003, the commitments
from participating banks had been reduced to $400 million, the borrowing
capacity available to Texas Gas was $200 million and Texas Gas had no
outstanding borrowings under this agreement. Texas Gas' pipeline 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.
4. STOCK-BASED COMPENSATION
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 following table illustrates the effect on Texas Gas' net income if Texas Gas
had applied the fair value recognition provisions of SFAS No. 123,"Accounting
for Stock-Based Compensation" (in thousands).
Three months
Ended March 31,
2003 2002
---------------- ---------------
Net income, as reported $ 29,010 $ 23,252
Add:
Stock based employee compensation
(income)expense included in the
Consolidated Statement of Income,
net of related tax effects (12) 31
Deduct:
Total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 178 265
---------------- ---------------
Pro forma net income $ 28,820 $ 23,018
================ ===============
Pro forma amounts for 2003 include compensation expense from awards made
in 2002 and 2001. Pro forma amounts for 2002 include compensation expense from
certain awards made in 1999 and compensation expense from awards made in 2002
and 2001.
Since compensation expense from stock options is recognized over the
future years' vesting period for pro forma disclosure purposes and additional
awards are generally made each year, pro forma amounts may not be representative
of future years' amounts.
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS
(FILED PURSUANT TO GENERAL INSTRUCTION H)
As discussed in Texas Gas (Williams) Form 10-K for the year ended
December 31, 2002, events in 2002 and the last half of 2001 significantly
impacted Williams' operations, both past and future. On February 20, 2003,
Williams outlined its planned business strategy for the next several years which
management believes to be a comprehensive response to the events, which have
impacted the energy sector and Williams. 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 Williams
and subsidiary levels 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 and the first quarter of 2004.
During the first quarter of 2003, Williams had received $680 million in net
proceeds from the sales of assets and businesses. In April 2003, Williams
announced that it had signed definitive agreements for the sales of the Texas
Gas pipeline system, Williams' general partnership interest and limited partner
investment in Williams Energy Partners, and certain natural gas exploration and
production properties in Kansas, Colorado, New Mexico and Utah. All of these
newly announced sales are expected to close in the second quarter. Sales
anticipated to close in the second quarter are expected to generate net proceeds
of approximately $2.0 billion. As previously announced, Williams intends to
reduce its commitment to the Energy Marketing & Trading business, which could be
realized by entering into a joint venture with a third party or through the sale
of a portion or all of the marketing and trading portfolio. Through March 31,
2003, Williams Energy Marketing and Trading (WEM&T) has sold or announced sales
of contracts totaling approximately $215 million.
As of March 31, 2003, Williams has maturing notes payable and long-term
debt through first-quarter 2004 totalling approximately $3.5 billion, which
includes certain contractual fees and deferred interest associated with an
underlying debt. Williams anticipates the cash on hand, the asset sales
mentioned above, additional asset sales, and refinancing of a portion of these
obligations will enable Williams to meet its liquidity needs over that
period.
On February 20, 2003, Williams announced its intention to sell Texas
Gas. On April 14, 2003, Williams announced that it had signed a definitive
agreement to sell Texas Gas to Loews Pipeline Holding Corporation, a unit of
Loews Corporation, for $1.045 billion, which includes $795 million in cash to be
paid to Williams and $250 million in debt that will remain with Texas Gas. The
sale is expected to close in May 2003, subject to standard closing conditions
and completion of Hart-Scott-Rodino review.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Operating Income was $9.8 million higher for the three months ended March
31, 2003, than for the three months ended March 31, 2002. The increase in
operating income was due primarily to higher operating revenues and lower
administrative and general operating expenses.
Operating revenues increased by $3.9 million primarily attributable to
higher transportation revenues resulting from a colder winter than the
comparable period in 2002. Total deliveries were 214.6 Tbtu and 199.7 Tbtu for
the first quarter of 2003 and 2002, respectively.
Operating costs and expenses decreased $5.9 million primarily
attributable to lower administrative and general expense of $4.8 million. The
decrease in administrative and general expense was due primarily to a reduction
in accrued benefit liabilities.
Net income increased $5.8 million primarily due to the reasons discussed
above and a $0.9 increase in interest income from affiliates due to higher cash
advances to WGP, partially offset by a $1.3 million gain on the sale of certain
equipment in 2002.
CAPITAL RESOURCES 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
and, if required, by borrowings under the credit agreement (discussed below) and
advances from WGP.
Texas Gas has an effective registration statement on file with the
Securities and Exchange Commission. At March 31, 2003, $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. 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 revolving 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 a result of the completion of certain asset sales by
Williams, the commitments from participating banks in the Credit Agreement have
been reduced to $400 million as of March 31, 2003, 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 March
31, 2003, 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. Upon the sale of Texas Gas to
Loews, this Credit Agreement will not be available to Texas Gas.
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 March 31, 2003, the advances due Texas Gas by WGP totaled
$108.2 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.
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 and a final rule is expected to be promulgated by
the FERC in the next several months.
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).
On May 2, 2003, Fitch Ratings raised Texas Gas' credit rating on its
senior unsecured long-term debt from BB- to BB. The ratings given by the other
rating agencies have not changed during 2003 and are as follows:
Moody's Investors Service ................................. B3
Standard & Poor's .............................................B+
Moody's Investors Service is currently reviewing Texas Gas for a possible
rating upgrade. The rating agencies previously 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 the
three months of 2003 and 2002 were $0.7 million and $19.7 million, respectively.
Capital expenditures for 2003 are expected to approximate $23 million.
GENERAL RATE ISSUES
As discussed in Note 2 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.
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 4. CONTROLS 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(c) and
15d-14(c) 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' President and Chief Executive Officer and Vice President and Treasurer.
Based upon that evaluation, Texas Gas' President and 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 II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See discussion in Note 2 of the Notes to Condensed Consolidated
Financial Statements included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following instruments are included as exhibits to this
report. Those exhibits below incorporated by reference herein
are indicated as such by the information supplied in the
parenthetical thereafter. If no parenthetical appears after
an exhibit, copies of the instrument have been included
herewith.
(99) Additional exhibits
- 1 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley Act of
2002 by J. Douglas Whisenant, President
and Chief Executive Officer of Texas
Gas Transmission Corporation
- 2 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of The Sarbanes-Oxley Act of
2002 by Richard Rodekohr, Vice President
and Treasurer of Texas Gas Transmission
Corporation
(b) Reports on Form 8-K.
None
SIGNATURE
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 (Registrant)
Dated: May 13, 2003 BY /S/ JEFFREY P. HEINRICHS
---------------------------------------------------
Jeffrey P. Heinrichs
Controller
(Principal Accounting Officer)
Certifications
I, J. Douglas Whisenant, President and Chief Executive Officer of
Texas Gas Transmission Corporation ("registrant") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the Circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have\
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 13, 2003 BY /S/ J. DOUGLAS WHISENANT
-------------------------------------------
J. Douglas Whisenant
President and Chief Executive Officer
Certifications
I, Richard Rodekohr, Vice President and Treasurer of Texas Gas Transmission
Corporation ("registrant") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading With respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: May 13, 2003 BY /S/ RICHARD RODEKOHR
-------------------------------------------
Richard D. Rodekohr
Vice President and Treasurer
EXHIBIT 99.1
THE FOLLOWING WRITTEN STATEMENT ACCOMPANIES THE ISSUER'S QUARTERLY REPORT ON
FORM 10-Q AND IS NOT FILED AS PROVIDED IN SEC RELEASE NOS. 33-8212, 34-47551 AND
IC-25967, DATED MARCH 21, 2003.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Texas Gas Transmission
Corporation (the "Company") on Form 10-Q for the period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, J. Douglas Whisenant, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/S/ J. DOUGLAS WHISENANT
J. Douglas Whisenant
President and Chief Executive Officer
(Principal Executive Officer)
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.2
THE FOLLOWING WRITTEN STATEMENT ACCOMPANIES THE ISSUER'S QUARTERLY REPORT ON
FORM 10-Q AND IS NOT FILED AS PROVIDED IN SEC RELEASE NOS. 33-8212, 34-47551 AND
IC-25967, DATED MARCH 21, 2003.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Texas Gas Transmission
Corporation (the "Company") on Form 10-Q for the period ending March 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Richard D. Rodekohr, Vice President and Treasurer of the Company,
and Principal Financial Officer of the company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information Contained in the Report fairly presents, in all
material respects, the Financial condition and result of operations of
the Company.
/S/ RICHARD D. RODEKOHR
Richard D. Rodekohr
Vice President and Treasurer
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.