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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, 2005

OR

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES

EXCHANGE ACT OF 1934    For the transition period from _______________ to _______________

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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes__  No X

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Not applicable

Texas Gas Transmission, LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.

TABLE OF CONTENTS

Form 10Q

TEXAS GAS TRANSMISSION, LLC

PART I – FINANCIAL INFORMATION

3

Item 1.  Financial Statements

3

Note 1:  Corporate Structure

7

Note 2:  Accounting Policies

7

Note 3:  Commitments and Contingencies

9

Note 4:  Financing

10

Note 5.  Employee Benefits

11

Note 6.  Related Parties

11

Item 2.  Management’s Narrative Analysis of the Results of Operations

12

Results of Operations

12

Capital Resources and Liquidity

12

Forward-Looking Statements

12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

13

Item 4.  Controls and Procedures

13

PART II – OTHER INFORMATION

14

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

TEXAS GAS TRANSMISSION, LLC

CONDENSED STATEMENTS OF FINANCIAL POSITION

(Thousands of Dollars)

(Unaudited)

TEXAS GAS TRANSMISSION, LLC

CONDENSED STATEMENTS OF FINANCIAL POSITION

(Thousands of Dollars)

(Unaudited)

TEXAS GAS TRANSMISSION, LLC

CONDENSED STATEMENTS OF OPERATIONS

(Thousands of Dollars)

(Unaudited)

TEXAS GAS TRANSMISSION, LLC

CONDENSED STATEMENTS OF CASH FLOWS

(Thousands of Dollars)

 (Unaudited)

TEXAS GAS TRANSMISSION, LLC

Notes to Unaudited Condensed Financial Statements

Note 1:  Corporate Structure

Texas Gas Transmission, LLC (Texas Gas) is a wholly owned subsidiary of Boardwalk Pipelines, LLC, (Boardwalk). Boardwalk is a wholly owned subsidiary of Boardwalk Pipelines Holding Corp. (Holding Corp.), which is wholly owned by Loews Corporation (Loews).  

Basis of Presentation

The accompanying condensed financial statements of Texas Gas were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  In the opinion of management, the accompanying condensed financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of March 31, 2005 and December 31, 2004 and the Condensed Statements of Operations for the three months ended March 31, 2005 and 2004 and changes in cash flows for the three months ended March 31, 2005 and 2004.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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, goodwill, property and equipment and other long-lived assets, charge-in-lieu-of income taxes, workers' compensation insurance, pensions and other post-retirement and employment benefits and contingent liabilities. It 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.

Note 2:  Accounting Policies

Regulatory Accounting

Texas Gas is regulated by the Federal Energy Regulatory Commission (FERC) and is subject to the provisions of SFAS No. 71.  Accordingly, it has recorded assets and liabilities on its Statements of Financial Position resulting from the effects of the ratemaking process, which would not be recorded under GAAP for non-regulated entities.  Regulatory assets represent costs incurred that have been deferred because future recovery in customer rates is probable.  Regulatory liabilities generally represent probable future reductions in revenue or refunds to customers.  Texas Gas’ continued ability to meet the criteria for application of SFAS No. 71 may be affected in the future by competitive forces and restructuring in the natural gas industry.  In the event that SFAS No. 71 no longer applied to all, or a separable portion, of its operations, the related regulatory assets and liabilities would be written off unles s an appropriate regulatory recovery mechanism is provided.  None of our regulatory assets as of March 31, 2005 and  December 31, 2004 were earning a return.

The amounts recorded as regulatory assets and liabilities in the Texas Gas’ Statements of Financial Position as of March 31, 2005 and December 31, 2004, are summarized as follows (shown in thousands):

The table above includes amounts related to unamortized debt expense and unamortized discount on long-term debt.  While these amounts are not regulatory assets or regulatory liabilities as defined by SFAS No. 71, they are a critical component of Texas Gas’ embedded cost of debt utilized in our rate proceedings.   Certain amounts in the table are reflected as a negative, or a reduction, to be consistent with the manner in which we record these items in its regulatory books of account.  

Asset Retirement Obligations

Asset retirement obligations exist for certain of Texas Gas’ utility assets; however, the fair value of the obligations cannot be determined because the end of the utility system life is not determinable with the degree of accuracy necessary to currently establish a liability for the obligations.

Depreciation rates for utility plant are approved by the FERC.  The approved depreciation rates are comprised of two types; one based on economic service life (capital recovery) and one based on net costs of removal (negative salvage). Therefore, Texas Gas accrues estimated net costs of removal of long-lived assets through negative salvage expense. Accordingly, it has collected a certain amount in rates representing estimated net costs of removal, which do not represent a legal obligation. It has reclassified $30.3 million and $29.7 million as of March 31, 2005 and December 31, 2004, respectively, in the accompanying Statements of Financial Position as Provision for other asset retirement.

In March 2005, the Financial Accounting Standards Board issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, which clarifies when an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation and will be effective for fiscal years ending after December 15, 2005, with earlier adoption encouraged.  Texas Gas is reviewing this interpretation to determine what, if any, effect this will have on its financial statements.

Note 3:  Commitments and Contingencies

Regulatory, Rate Matters and Related Litigation

Storage Expansion Project

Requests for additional storage capacity have exceeded the physical capabilities of Texas Gas’ system, thereby prompting it to expand its storage facilities.  On February 11, 2005, Texas Gas received FERC approval to begin expanding its western Kentucky storage complex for service to two customers beginning November 1, 2005.  Texas Gas estimates this project will cost approximately $21.7 million and will allow the additional withdrawal of 82,000 MMBtu per day.  Texas Gas has incurred $7.6 million costs on this project through March 31, 2005.

General Rate Case

On April 29, 2005, Texas Gas filed a general rate case. The rate case reflects a requested increase in annual cost of service from $258 million to $300 million, primarily attributable to increases in the utility rate base, operating expenses, and rate of return and related taxes.  The rates will become effective on November 1, 2005, subject to refund in the event lower rates are finally established in the rate case.

FERC Notice of Inquiry (Docket No. RM05-2-000)

On November 22, 2004, the FERC issued a Notice of Inquiry (Docket No. RM05-2-000) seeking comments on its policy regarding selective discounting by natural gas pipeline companies. Specifically, the FERC asked whether the FERC’s practice of permitting pipelines to adjust their ratemaking throughput downward in rate cases to reflect discounts given by pipelines for competitive reasons is appropriate when the discount is given to meet competition from another natural gas pipeline. Potential alternatives appear to include (1) leaving the current discount adjustment policy unchanged, (2) eliminating the discount adjustment for gas-on-gas competition, (3) increasing the burden of proof on pipelines to obtain a discount adjustment by eliminating the presumption applicable to non-affiliate discounts, (4) eliminating the discount adjustment relating to long-term contracts, (5) increasing pipeline reporting requirements or further stiffening the pipeline standards of conduct related to discounting, or (6) prohibiting all affiliate discounts. Texas Gas responded in support of the current FERC discounting policies. Considering the wide array of possible outcomes to this matter, Texas Gas is currently unable to project the impact of this issue on either its financial condition or its results of operations, if any.

Environmental and Safety Matters

Texas Gas is subject to federal, state, and local environmental laws and regulations in connection with the operation and remediation of various operating sites. It accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.

 As of March 31, 2005 Texas Gas had an accrued liability of approximately $4.1 million for estimated probable costs associated with environmental assessment and remediation. 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 considers environmental assessment, remediation costs, and costs associated with compliance with environmental standards to be 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 and may be more or less than the amount of the reserve.

GSR Settlement

Effective November 1, 1993, Texas Gas restructured its business to implement the provisions of FERC Order 636, which, among other things, required pipelines to unbundle their merchant role from their transportation services.  FERC Order 636 also provided that pipelines should be allowed the opportunity to recover a portion of prudently incurred

transition costs which, for Texas Gas, were primarily related to gas supply realignment (GSR) costs and unrecovered purchased gas costs.

GSR collections pursuant to the settlement ended in 2004.  On November 19, 2004, Texas Gas filed a final GSR reconciliation report with the FERC and revised tariff sheets to remove the GSR recovery mechanism from its rates.   On December 10, 2004, the FERC issued a letter order accepting the report.  As a result, Texas Gas recognized $3.3 million of revenue and a $1.8 million expense adjustment related to the settlement during the fourth quarter of 2004.  Per the settlement, Texas Gas refunded $0.4 million during March 2005 to customers.

Mineral Interest in Storage Field

In the purchase agreement between Boardwalk and The Williams Company (Williams) for the acquisition of Texas Gas in 2003, Williams agreed to indemnify Texas Gas for any liabilities or obligations in connection with certain litigation or potential litigation including, among others, the following previously disclosed matter:

·

A claim by certain parties 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.  In December 2003, a lawsuit was filed against Texas Gas in Muhlenberg County, Kentucky seeking unspecified damages related to this claim.  

As a result, Williams is defending this action on behalf of Texas Gas.  On April 18, 2005, in the first phase of this lawsuit, the court entered an order granting partial summary judgment against Texas Gas related to the vesting of legal title to the disputed acreage.  Williams continues to defend Texas Gas as the lawsuit moves into its next phase.  Because Williams has retained responsibility for this claim, it is not likely to have a material affect upon our future financial condition or results of operations.

Other Legal Matters

Texas Gas is party to various legal actions arising in the normal course of business. Management believes that the disposition of outstanding legal actions will not have a material adverse impact on its financial position or results of operations.

Note 4:  Financing

Texas Gas’ long-term debt issues were outstanding as follows (expressed in thousands):

Texas Gas’ debentures and notes have restrictive covenants which provide that, with certain exceptions, 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.  All its obligations are unsecured.

Note 5.  Employee Benefits

Substantially all of Texas Gas’ employees are covered under a non-contributory, defined benefit 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.  As of March 31, 2005, no contributions had been made for the current year. Texas Gas also provides life insurance and health care plans which accord postretirement medical benefits to certain retired Texas Gas employees.

Net periodic benefit cost components are as follows (expressed in thousands):

Note 6.  Related Parties

Texas Gas makes advances to Boardwalk.  At March 31, 2005 and December 31, 2004, the advances due Texas Gas by Boardwalk totaled $180.8 million and $166.7 million, respectively.  The advances are represented by demand notes.  The interest rate on intercompany demand notes is the LIBOR on the first day of each three-month period plus one percent and is compounded monthly.

Loews provides certain management and other services to Texas Gas under a Services Agreement. For the periods ended March 31, 2005 and 2004, Texas Gas was charged $1.0 and $1.5 million, respectively.

Item 2.  Management’s Narrative Analysis of the Results of Operations

Texas Gas Transmission, LLC (Texas Gas) is a wholly owned subsidiary of Boardwalk Pipelines, LLC, (Boardwalk). Boardwalk is a wholly owned subsidiary of Boardwalk Pipelines Holding Corp. (Holding Corp.), which is wholly owned by Loews Corporation (Loews).  

Results of Operations

Operating revenues decreased $7.8 million for the period in 2005 compared to 2004, primarily due to unfavorable market conditions during the 2004-2005 winter season.  January and February of 2005 was 20% warmer than the comparable period in 2004 (based on degree days), resulting in excess capacity and a reduction in storage flexibility due to unusually high storage levels.  As a result, commodity based revenues were $0.7 million lower, storage and Park and Loan services were $1.8 million lower and demand revenues were $4.9 million lower.

Operating costs and expenses decreased $1.1 million, due primarily to lower employee benefit expenses of $1.1 million and $0.6 million lower corporate overhead costs.  These decreases were partially offset by $0.4 million higher property and franchise taxes.

Net income decreased $3.2 million during the period in 2005 compared to 2004 primarily due to the changes mentioned above. Total other deductions were $1.4 million lower for the period in 2005 than 2004 due to lower incremental debt which was offset by an increase in interest income due to higher cash balances and an increase in return on that balance.   Charge-in-lieu-of income tax expense is $2.0 million lower for the period in 2005 than 2004 due to the decrease in pre-tax income.  

Capital Resources and Liquidity

Texas Gas funds its operations and capital requirements with cash flows primarily from operating activities.  In addition, the notes payable from Boardwalk are demand notes which Texas Gas can demand to be repaid at any time.

Texas Gas’ capital expenditures for the first three months of 2005 and 2004 were $6.8 million and $2.1 million, respectively. Its capital expenditures for 2005 are expected to approximate $55.0 million and are expected to be funded through cash flows from operating activities.

Forward-Looking Statements

Investors are cautioned that certain statements contained in this Report as well as some statements in periodic press releases and some oral statements made by officials of Texas Gas are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (Act). Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions by Texas which may be provided by manageme nt are also forward-looking statements as defined by the Act.

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond Texas Gas’ control, that could cause actual results to differ materially from those anticipated or projected. These risks and uncertainties include, among others: 

·

Texas Gas’ transmission and storage operations are subject to government regulations and rate proceedings that could have an adverse impact on their ability to recover the costs of operating their pipeline facilities.

·

Texas Gas is subject to environmental and safety regulation in all jurisdictions in which it operates, and any changes in such regulations could negatively affect Texas Gas’ results of operations.

·

Gas transmission and storage activities involve numerous risks that might result in accidents and other operating risks and costs.

·

Terrorist activities and the potential for military and other actions could adversely affect Texas Gas’ business.

·

Increased competition could have a significant financial impact on Texas Gas.

·

New natural gas supply sources may fail to develop.

·

Texas Gas may not be able to maintain or replace gas transportation service and storage contracts at favorable rates as existing contracts expire.

·

A significant portion of Texas Gas’ revenues is from a small number of customers.

Developments in any of these areas, which are more fully described elsewhere in this Report, could cause Texas Gas’ results to differ materially from results that have been or may be anticipated or projected. Forward-looking statements speak only as of the date of this Report and Texas Gas expressly disclaims any obligation or undertaking to update these statements to reflect any change in Texas Gas’ expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Our market risk is limited to our long-term debt.  All interest on long-term debt is fixed in nature. Total long-term debt at March 31, 2005, had a carrying value of $347.8 million and a fair value of $349.3 million.  Total long-term debt at December 31, 2004, had a carrying value of $347.8 million and a fair value of $356.0 million.  

Item 4.  Controls and Procedures

Texas Gas maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed in reports filed or submitted under the federal securities laws, including this report, is recorded, processed, summarized and reported on a timely basis.  These disclosure controls and procedures are designed to ensure that information required to be disclosed under the federal securities laws is accumulated and communicated to its management on a timely basis to allow assessment of required disclosures.

Texas Gas’ principal executive officer and principal financial officer have conducted an evaluation of the disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, the principal executive officer and principal financial officer have each concluded that the disclosure controls and procedures are effective for their intended purpose.

There was no change in Texas Gas’ internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the internal control over its financial reporting.

PART II – OTHER INFORMATION

 Item 6.  Exhibits

The documents listed below are being filed on behalf of Texas Gas Transmission, LLC and are incorporated herein by reference from the documents indicated and made a part hereof.  Copies of the instruments below have been included herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.