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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 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
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: (502) 926-8686
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No____
State the aggregate market value of the voting stock held by
nonaffiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days
prior to the date of filing. None
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 1,000 shares
as of February 20, 1996
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
TABLE OF CONTENTS
1995 FORM 10-K
TEXAS GAS TRANSMISSION CORPORATION
Page
Part I
Item 1. Business...................................................... 3
Item 2. Properties.................................................... 7
Item 3. Legal Proceedings............................................. 7
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 7
Item 7. Management's Narrative Analysis of the Results of Operations.. 8
Item 8. Financial Statements and Supplementary Data................... 10
Item 9. Disagreements on Accounting and Financial Disclosure.......... 37
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................ 37
Part I
Item 1. Business.
GENERAL
Effective May 1, 1995, Texas Gas Transmission Corporation (the Company)
became a wholly owned subsidiary of The Williams Companies, Inc.
(Williams). Prior to May 1, 1995, the Company was a wholly owned
subsidiary of Transco Gas Company, which was wholly owned by Transco
Energy Company (Transco). As used herein, the term Williams refers to The
Williams Companies, Inc. together with its wholly owned subsidiaries,
unless the context otherwise requires.
In December 1994, Transco and Williams entered into a merger agreement
pursuant to which Williams would acquire the entire equity interest of
Transco. Pursuant to the merger agreement, on January 18, 1995, Williams
agreed to purchase for cash approximately 60 percent of Transco's
outstanding common stock as a first step in the acquisition. The exchange
of the remainder of the outstanding shares of Transco common stock for
Williams common stock occurred on May 1, 1995. On that date, Transco paid
as a dividend to Williams all of Transco's interest in the Company.
The Company is an interstate natural gas transmission company which
owns and operates a natural gas pipeline system originating in the
Louisiana Gulf Coast area and in East Texas and running generally north
and east through Louisiana, Arkansas, Mississippi, Tennessee, Kentucky,
Indiana and into Ohio, with smaller diameter lines extending into
Illinois. The Company's direct market area encompasses eight states in
the South and Midwest, and includes the Memphis, Tennessee; Louisville,
Kentucky; Cincinnati and Dayton, Ohio; and Indianapolis, Indiana
metropolitan areas. The Company also has indirect market access to the
Northeast through interconnections with unaffiliated pipelines.
TRANSPORTATION AND SALES
At December 31, 1995, the Company's system, having a mainline delivery
capacity of approximately 2.7 billion cubic feet (Bcf) of gas per day, was
composed of approximately 6,000 miles of mainline and branch transmission
pipelines and 32 compressor stations having a sea-level-rated capacity
totaling approximately 548,000 horsepower.
The Company owns and operates natural gas storage reservoirs in ten
underground storage fields located on or near its pipeline system and/or
market areas. The storage capacity of the Company's certificated storage
fields is approximately 177 Bcf of gas. As part of its implementation of
FERC Order 636, the Company has been allowed to retain its storage gas, in
part to meet operational balancing needs on its system, and in part to
meet the requirements of the Company's "no-notice" transportation service,
which allows the Company's customers to temporarily draw from the
Company's storage gas to be repaid in-kind during the following summer
season. A large portion of the gas delivered by the Company to its market
area is used for space heating, resulting in substantially higher daily
requirements during winter months.
In 1995, the Company transported gas to customers in Louisiana,
Arkansas, Mississippi, Tennessee, Kentucky, Indiana, Illinois and Ohio and
to Northeast customers served indirectly by the Company. Gas was
transported for 130 distribution companies and municipalities for resale
to residential, commercial and industrial users. Transportation services
were provided to approximately 200 industrial customers and processing
plants located along the system. At December 31, 1995, the Company had
transportation contracts with approximately 625 shippers. Transportation
shippers include distribution companies, municipalities, intrastate
pipelines, direct industrial users, electrical generators, marketers and
producers. The largest customer of the Company in 1995, Transcontinental
Gas Pipe Line Corporation, an affiliate of the Company, accounted for
approximately 10.7 percent of total operating revenues. No other
customers accounted for more than ten percent of total operating revenues.
The Company's firm transportation agreements are generally long-term
agreements with various expiration dates and account for the major portion
of the Company's business. Additionally, the Company offers interruptible
transportation and storage services under agreements that are generally
short term.
EXPANSION PROJECTS
The Company has no major expansion projects planned for 1996.
OPERATING STATISTICS
In 1992, the Federal Energy Regulatory Commission (FERC) issued its
Order 636 which required interstate pipelines to restructure their tariffs
to eliminate traditional on-system sales services. In addition, FERC
Order 636 required implementation of various changes in forms of service,
including unbundling of gathering, transmission and storage services;
terms and conditions of service; rate design; gas supply realignment cost
recovery; and other major rate and tariff revisions. The Company's
restructured tariff under FERC Order 636 became effective on November 1,
1993. Certain aspects of the Company's FERC Order 636 restructuring are
under appeal.
The following table summarizes the Company's total system delivery
data, which excludes unbundled sales, for the periods shown (expressed in
trillion British thermal units [TBtu]):
Year Ended December 31,
System deliveries: 1995 1994 1993
Sales - - 52.8
Long-haul transportation 635.7 618.8 534.0
Total mainline deliveries 635.7 618.8 586.8
Short-haul transportation 57.6 188.6 214.0
Total system deliveries 693.3 807.4 800.8
Average Daily Transportation
Volumes (TBtu): 1.9 2.2 2.0
Average Daily Firm Reserved
Capacity (TBtu): 2.0 2.1 2.0
The Company's facilities are divided into five rate zones. Generally,
gas delivered in the northern four zones is classified as long-haul
transportation. Gas delivered under interruptible agreements in the
southern most zone is classified as short-haul transportation. The
revenues associated with short-haul transportation volumes are not
material to the Company.
The termination of gas sales in 1994 was attributable to the Company's
implementation of FERC Order 636. The increase in mainline transportation
volumes resulted primarily from increased throughput in connection with
restructured services resulting from the implementation of FERC Order 636
and increased service to other interstate natural gas pipelines.
REGULATORY MATTERS
The Company is subject to regulation by the FERC under the Natural
Gas Act of 1938 and under the Natural Gas Policy Act of 1978, and as such,
its rates and charges for transportation of natural gas in interstate
commerce, the extension, enlargement or abandonment of facilities, and its
accounting, among other things, are subject to regulation. As necessary,
the Company files with the FERC changes in its transportation and storage
rates and charges designed to allow it to recover fully its costs of
providing service to its interstate system customers, including a
reasonable rate of return.
The Company is also subject to regulation by the Department of
Transportation under the Natural Gas Pipeline Safety Act of 1968 with
respect to safety requirements in the design, construction, operation and
maintenance of its interstate gas transmission facilities.
Regulatory Matters
The Company's rates are established primarily through the FERC
ratemaking process. Key determinants in the ratemaking process are (1)
costs of providing service, (2) allowed rate of return, including the
equity component of the Company's 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 September 30, 1994, the Company filed a general rate case (Docket
No. RP94-423) which became effective April 1, 1995, subject to refund. A
proposed settlement was filed with the FERC on September 29, 1995, and was
approved by the FERC on February 20, 1996. Refunds, for which the Company
has provided a reserve, are expected to be made to customers in the second
quarter of 1996.
For discussion of other regulatory matters affecting the Company,
see Note C of Notes to Financial Statements contained in Item 8 hereof.
Environmental Matters
The Company is subject to extensive federal, state and local
environmental laws and regulations which affect the Company's operations
related to the construction and operation of its pipeline facilities. For
a complete discussion of this issue, see Note C of Notes to Financial
Statements contained in Item 8 hereof.
COMPETITION
Competition for natural gas transportation has intensified in recent
years due to customer access to other pipelines, rate competitiveness
among pipelines and customers' desire to have more than one supplier. The
FERC's stated purpose for its Order 636 was to improve the competitive
structure of the natural gas pipeline industry. Future utilization of the
Company's pipeline capacity will depend on competition from other
pipelines and alternative fuels, the general level of natural gas demand
and weather conditions. Several of the ultimate consumers within the
Company's markets have the ability to switch to alternate fuels; to date,
however, losses due to fuel switching have not been significant. The
Company estimates its maximum potential loss to fuel switching is less
than one quarter of total deliveries.
When restructured tariffs became effective under FERC Order 636, 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. While the Company has not
currently experienced any major capacity turnback, the Company, like other
pipelines, is evaluating the consequences of potential demand reductions
on system utilization and cost structure to remaining customers. The
Company expects it will be able to remarket any capacity which becomes
available on its system.
OWNERSHIP OF PROPERTY
The Company's 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 the Company's system is
constructed and maintained pursuant to rights-of-way, easements, permits,
licenses or consents on and across property owned by others. The majority
of the Company's compressor stations, with appurtenant facilities, are
located in whole or in part on lands owned in fee by the Company, with a
few sites held under long-term leases or permits issued or approved by
public authorities. Storage facilities are either owned or contracted for
under long-term leases.
EMPLOYEE RELATIONS
The Company had 990 employees as of December 31, 1995. Certain of
those employees were covered by a collective bargaining agreement. A
favorable relationship existed between management and labor during the
period.
As discussed in Note F of Notes to Financial Statements contained in
Item 8 hereof, approximately 9% of the Company's employees elected to
retire in 1995 under an early retirement program offered by the Company.
The International Chemical Workers Local 187 represents 192 of the
Company's 453 field operating employees. The current collective
bargaining agreement between the Company and Local 187 expires on October
31, 1996.
The Company has a non-contributory pension plan and various other plans
which provide regular active employees with group life, hospital and
medical benefits as well as disability benefits and savings benefits.
Officers and directors who are full-time employees may participate in
these plans.
Item 2. Properties.
See "Item 1. Business."
Item 3. Legal Proceedings.
For a discussion of the Company's current legal proceedings, see Note C
of Notes to Financial Statements contained in Item 8 hereof.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) and (b) As of December 31, 1995, all of the outstanding shares of
the Company's common stock are owned by The Williams Companies, Inc. The
Company's common stock is not publicly traded and there exists no market
for such common stock.
Item 7. Management's Narrative Analysis of the Results of Operations
Introduction
As discussed in Note A of Notes to Financial Statements contained in
Item 8 hereof, the Company was acquired by Williams through a merger of a
Williams' subsidiary and Transco, effective May 1, 1995. Williams became
a majority owner of Transco effective January 18, 1995, at which date the
estimated effects of the acquisition were pushed down and recorded on the
books and records of the Company. The purchase price allocation to the
Company primarily consisted of an allocation of approximately $257 million
to property, plant and equipment and adjustments to deferred taxes based
upon the book basis of the net assets recorded as a result of the
acquisition. Property, plant and equipment at December 31, 1995, includes
an aggregate of approximately $430 million related to amounts in excess of
the original cost of regulated facilities, as a result of the Williams'
and prior acquisitions. This amount is being amortized over the estimated
remaining useful lives of the assets at approximately $11 million per
year. Current FERC policy does not permit the Company to recover through
its rates amounts in excess of original cost.
The pushdown of the acquisition affects the comparability of the
Company's pre- and post-acquisition results of operations and financial
position. The following analysis represents a pro forma year-to-date
comparison of the current and prior years, with disclosure of material
variances due to the acquisition.
Financial Analysis of Operations - 1995 Compared to 1994
The Company, in late 1993, implemented seasonal contract demands as a
component of its FERC Order 636 menu of services, which results in lower
operating income during the second and third quarters than in the first
and fourth quarters of each year.
Operating income was $8.5 million lower for the year ended December 31,
1995, than for 1994. The decrease in operating income was primarily due
to a 1995 pre-acquisition provision for severance benefits of $6.8 million
related to the merger and $3.6 million of increased operations and
maintenance expenses, partially offset by lower labor and insurance costs
due to the reorganization and resulting synergies with Williams. Compared
to 1994, net income was $7.5 million lower for the same reasons and the
lack of tax benefits associated with the provision for severance benefits.
Operating revenues decreased $68 million, primarily due to lower
merchant sales of $54 million. Primarily as a result of the Company's
agency agreement with a gas marketing affiliate, gas sales have no impact
on the Company's results of operations. A decrease in transportation
revenues also contributed to the decrease in operating revenues. The
decrease in transportation revenues is mainly attributable to a decline in
interruptible transportation revenues.
Operating expenses decreased $59.5 million primarily due to lower
merchant gas purchases of $52.7 million, lower other gas purchases of $7.4
million, lower transportation of gas by others of $8.8 million and lower
administrative and general expenses of $1.9 million, which were partially
offset by the $6.8 million pre-acquisition provision discussed above. The
decrease in administrative and general expenses was due to restructuring
following Williams' acquisition of the Company.
Mainline deliveries were 635.7 TBtu and 618.8 TBtu for the years ended
December 31, 1995 and 1994, respectively. Short-haul deliveries decreased
significantly; however, the revenues associated with short-haul
transportation are not material to the Company.
Financial Condition and Liquidity
As discussed in Note A, on May 1, 1995, Transco paid as a dividend to
Williams all of Transco's interest in the Company. Williams has indicated
that it intends to maintain and expand the existing core business of the
Company and to promptly pursue new business opportunities made available
as a result of the merger. Through the years, the Company has
consistently maintained its financial strength and experienced strong
operational results. The Company expects that its acquisition by Williams
will further enhance its financial and operational strength, as well as
allow the Company to take advantage of new opportunities for growth. If
necessary, the Company also expects to be able to access public and
private capital markets to finance its capital requirements.
In February 1995, Transco's $450 million working capital line used for
consolidated cash management purposes was replaced by an $800 million
credit agreement under which the Company may borrow up to $200 million.
Interest rates vary with current market conditions. As of December 31,
1995, the Company had no amounts outstanding under this facility.
Effective May 1, 1995, the Company began participation in Williams'
cash management program. On that date, the balance of the advance due
from Transco was transferred by Transco to Williams. These advances are
represented by demand notes payable to the Company. Those amounts that
the Company anticipates Williams will repay in the next twelve months are
classified as current assets, while the remainder are classified as
noncurrent. The interest rate on intercompany demand notes is the London
Interbank Offered Rate on the first day of the month plus 0.45%.
In May 1995, the Company entered into a program with a bank to sell up
to $35 million of trade receivables with limited recourse. As of December
31, 1995, $27.1 million of trade receivables were held by the investor.
The Company's capital expenditures for the years ended December 31,
1995 and 1994, were $34.0 million and $39.7 million, respectively.
The Company's debt as a percentage of total capitalization at December
31, 1995 and 1994, was 25.6% and 28.7%, respectively.
In September 1994, the Company filed a general rate case (Docket No.
RP94-423) which was effective April 1, 1995. A proposed settlement was
filed with the FERC on September 29, 1995, and was approved by the FERC on
February 20, 1996. Refunds, for which the Company has provided a reserve,
are expected to be made to customers in the second quarter of 1996.
Item 8. Financial Statements and Supplementary Data
REPORTS OF INDEPENDENT AUDITORS
Texas Gas Transmission Corporation
The Board of Directors
We have audited the accompanying balance sheet of Texas Gas
Transmission Corporation as of December 31, 1995, and the related
statements of income, retained earnings and paid-in capital and cash flows
for the periods from January 1, 1995 to January 17, 1995, and from January
18, 1995 to December 31, 1995. 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 audit. The
balance sheet as of December 31, 1994, and the statements of income,
retained earnings and paid-in capital, and cash flows for each of the two
years in the period ended December 31, 1994, were audited by other
auditors whose report dated February 20, 1995, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatements. 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 audit
provides 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, 1995, and the results of its
operations and its cash flows for the periods from January 1, 1995 to
January 17, 1995, and from January 18, 1995 to December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 9, 1996
To Texas Gas Transmission Corporation:
We have audited the accompanying balance sheet of Texas Gas
Transmission Corporation (a Delaware corporation) as of December 31, 1994,
and the related statements of income, retained earnings and paid-in
capital and cash flows for each of the two years in the period then ended.
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 generally accepted auditing
standards. 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 as of December 31, 1994, and the results of its
operations and its cash flows for each of the two years in the period then
ended, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1995
REPORT OF MANAGEMENT
Financial Statements
Management is responsible for the information presented in this
annual report. The financial statements have been prepared in accordance
with generally accepted accounting principles. Certain estimated amounts
are included in the financial statements, and these amounts are based on
currently available information and management's judgment of current
conditions and circumstances. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the financial statements.
Ernst & Young LLP, independent auditors, have rendered an opinion on
the current year financial statements based upon an audit conducted in
accordance with generally accepted auditing standards.
Internal Control
The Company maintains a system of internal control over financial
reporting, which is designed to provide reasonable assurance to the
Company's management and board of directors regarding the preparation of
reliable financial statements. The system includes a documented
organizational structure with division of responsibility and established
policies and procedures, including a code of conduct, which are
communicated throughout the Company. Internal auditors monitor the
operation of the internal control system and report findings and
recommendations to management and the board of directors. Actions are
taken by management to correct control deficiencies as they are
identified. The Williams board of directors, through its audit committee
composed of directors who are not officers or employees of the Company,
provide oversight to the financial reporting process, the adequacy of the
internal control system and the internal audit function.
Even an effective internal control system has inherent limitations and
can, therefore, provide only reasonable assurance regarding the
preparation of financial statements. Further, the effectiveness of an
internal control system over time can vary with changes in conditions.
As of December 31, 1995, the Company assessed its system of internal
control, including the Company's control environment, risk-assessment
processes, control policies and procedures, information systems, and
monitoring programs. Based on this assessment, the Company believes that
its system of internal control provided reasonable assurance for the
preparation of reliable annual financial statements as of December 31,
1995.
The acquisition of the Company by The Williams Companies, Inc. was
accounted for using the purchase method of accounting. Accordingly, the
purchase price was "pushed down" and recorded in the accompanying
financial statements which affects the comparability of the post-
acquisition and pre-acquisition financial position, results of operations
and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(Thousands of Dollars)
Post-Acquisition Pre-Acquisition
December 31, December 31,
ASSETS 1995 1994
Current Assets:
Cash and temporary cash investments $ 206 $ 912
Receivables:
Trade 6,798 8,227
Affiliates 1,546 15,616
Other 1,150 1,009
Advances to affiliates 113,289 27,963
Transportation and exchange gas
receivable 3,113 8,452
Costs recoverable from customers:
Gas purchase 1,729 9,270
Gas supply realignment 15,730 26,710
Other 10,912 22,451
Inventories 14,707 15,183
Deferred income tax benefits 12,744 -
Other 2,636 3,536
Total current assets 184,560 139,329
Advances to Affiliates 125,000 124,981
Investments, at Cost 5,848 1,631
Property, Plant and Equipment, at cost:
Natural gas transmission plant 782,473 717,848
Other natural gas plant 143,356 155,559
925,829 873,407
Less - Accumulated depreciation and
amortization 26,643 217,580
Property, plant and equipment, net 899,186 655,827
Other Assets:
Gas stored underground 103,421 90,653
Costs recoverable from customers 73,879 14,254
Other 6,223 28,031
Total other assets 183,523 132,938
Total Assets $1,398,117 $1,054,706
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was
accounted for using the purchase method of accounting. Accordingly, the
purchase price was "pushed down" and recorded in the accompanying
financial statements which affects the comparability of the post-
acquisition and pre-acquisition financial position, results of operations
and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(Thousands of Dollars)
Post-Acquisition Pre-Acquisition
December 31, December 31,
1995 1994
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Payables:
Trade $ 6,857 $ 8,979
Affiliates 20,566 3,219
Other 20,733 14,517
Advances from affiliates - 1,769
Transportation and exchange gas payable 8,031 5,856
Accrued liabilities 52,250 41,247
Accrued gas supply realignment costs 16,717 -
Costs refundable to customers 4,618 11,443
Deferred income taxes - 5,323
Reserve for regulatory and rate matters 25,576 9,734
Total current liabilities 155,348 102,087
Long-Term Debt 255,860 246,442
Other Liabilities and Deferred Credits:
Income taxes refundable to customers 4,979 6,827
Deferred income taxes 138,308 39,330
Postretirement benefits other than pensions 54,400 -
Other 43,984 47,295
Total other liabilities and deferred
credits 241,671 93,452
Contingent Liabilities and Commitments - -
Stockholder's Equity:
Common stock, $1.00 par value, 1,000
shares authorized, issued and outstanding 1 1
Premium on capital stock and other paid-in
capital 740,446 584,712
Retained earnings 4,791 28,012
Total stockholder's equity 745,238 612,725
Total Liabilities and Stockholder's
Equity $1,398,117 $1,054,706
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was
accounted for using the purchase method of accounting. Accordingly, the
purchase price was "pushed down" and recorded in the accompanying
financial statements which affects the comparability of the post-
acquisition and pre-acquisition financial position, results of operations
and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF INCOME
(Thousands of Dollars)
Post-Acqusition Pre-Acquisition
For the For the
Period Period
January 18, January 1, For the For the
1995 to 1995 to Year Ended Year Ended
December 31, January 17, December 31, December 31,
1995 1995 1994 1993
Operating Revenues:
Gas sales $ 51,774 $ 3,239 $ 116,079 $ 247,946
Gas transportation 268,844 15,932 291,869 215,210
Other 2,285 130 2,278 2,303
Total operating revenues 322,903 19,301 410,226 465,459
Operating Costs and Expenses:
Cost of gas sold 51,328 3,188 114,653 158,890
Cost of transportation of
gas by others 41,139 2,134 52,064 54,622
Operation and maintenance 58,232 2,433 57,081 54,803
Administrative and general 57,517 3,086 60,537 63,729
Provision for severance
benefits - 6,772 - -
Depreciation and amortization 38,863 1,779 41,076 38,330
Taxes other than income taxes 13,732 721 13,066 13,075
Total operating costs and
expenses 260,811 20,113 338,477 383,449
Operating Income (Loss) 62,092 (812) 71,749 82,010
Other (Income) Deductions:
Interest expense 23,520 1,122 27,481 25,578
Interest income (12,534) (560) (12,013) (10,616)
Miscellaneous other
deductions 238 56 740 1,436
Total other (income)
deductions 11,224 618 16,208 16,398
Income (Loss) Before Income
Taxes 50,868 (1,430) 55,541 65,612
Provision for Income Taxes 22,542 1,884 23,062 26,555
Net Income (Loss) $ 28,326 $ (3,314) $ 32,479 $ 39,057
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was
accounted for using the purchase method of accounting. Accordingly, the
purchase price was "pushed down" and recorded in the accompanying
financial statements which affects the comparability of the post-
acquisition and pre-acquisition financial position, results of operations
and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF RETAINED EARNINGS
AND PAID-IN CAPITAL
(Thousands of Dollars)
Retained Paid-in
Earnings Capital
Pre-Acquisition
Balance, December 31, 1992 $ 18,191 $584,712
Add (deduct):
Net income 39,057 -
Cash dividends on common stock (34,725) -
Balance, December 31, 1993 22,523 584,712
Add (deduct):
Net income 32,479 -
Cash dividends on common stock (26,990) -
Balance, December 31, 1994 28,012 584,712
Add (deduct):
Net loss (3,314) -
Balance, January 17, 1995 24,698 584,712
Acquisition adjustment to eliminate
retained earnings (24,698) 24,698
Acquisition adjustment to record
assets and liabilities at fair value - 135,561
Post-Acquisition
Balance, January 18, 1995 - 744,971
Add (deduct):
Net income 28,326 -
Cash dividends on common stock
and returns of capital (23,649) (6,351)
Dissolution of affiliate 114 1,826
Balance, December 31, 1995 $ 4,791 $740,446
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was accounted
for using the purchase method of accounting. Accordingly, the purchase price
was "pushed down" and recorded in the accompanying financial statements which
affects the comparability of the post-acquisition and pre-acquisition
financial position, results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Post-Acqusition Pre-Acquisition
For the For the
Period Period
January 18, January 1, For the For the
1995 to 1995 to Year Ended Year Ended
December 31, January 17, December 31, December 31,
1995 1995 1994 1993
OPERATING ACTIVITIES:
Net income (loss) $ 28,326 $ (3,314) $ 32,479 $ 39,057
Adjustments to reconcile to cash
provided from operations:
Depreciation and depletion 38,863 1,779 41,076 38,330
Provision for deferred income
taxes (11,262) (695) 26,985 (8,207)
Changes in receivables sold 100 (14,806) (3,428) (9,700)
Changes in receivables 19,220 2,113 32,370 28,619
Changes in inventories 359 118 (459) (355)
Changes in other current assets 35,265 2,048 (18,327) (14,746)
Changes in accounts payable 10,545 (3,607) (24,210) (8,627)
Changes in accrued liabilities 2,964 4,913 (62,793) (43,253)
Other, including changes in non-
current assets and liabilities 29,132 5,490 (10,559) 21,434
Net cash provided (used) by
operating activities 153,512 (5,961) 13,134 42,552
FINANCING ACTIVITIES:
Proceeds from long-term debt - - 150,000 -
Payment of long-term debt - - (150,000) -
Dividends and returns of capital (30,000) - (26,990) (34,725)
Other -- net 112 59 193 150
Net cash provided (used)
by financing activities (29,888) 59 (26,797) (34,575)
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of AFUDC (33,042) (1,898) (39,413) (30,837)
Proceeds from sales 1,878 (21) 2,893 4,219
Advances to affiliates, net (93,197) 7,852 50,776 18,366
Net cash provided (used)
by investing activities (124,361) 5,933 14,256 (8,252)
Increase (Decrease) in Cash and
Cash Equivalents (737) 31 593 (275)
Cash and Cash Equivalents at
Beginning of Period 943 912 319 594
Cash and Cash Equivalents at
End of Period $ 206 $ 943 $ 912 $ 319
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for:
Interest (net of amount
capitalized) $ 20,750 $ 4,856 $ 25,432 $ 28,654
Income taxes, net 27,085 (7,395) 14,714 6,433
The accompanying notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. Corporate Structure and Control, Nature of Operations and Basis of
Presentation
Corporate Structure and Control
Effective May 1, 1995, Texas Gas Transmission Corporation (the Company)
became a wholly owned subsidiary of The Williams Companies, Inc.
(Williams). Prior to May 1, 1995, the Company was a wholly owned
subsidiary of Transco Gas Company, which was a wholly owned subsidiary of
Transco Energy Company (Transco). As used herein, the term Williams
refers to The Williams Companies, Inc. together with its wholly owned
subsidiaries, unless the context otherwise requires.
In December 1994, Transco and Williams entered into a merger agreement
pursuant to which Williams would acquire the entire equity interest of
Transco. Pursuant to the merger agreement, on January 18, 1995, Williams
agreed to purchase for cash approximately 60 percent of Transco's
outstanding common stock as a first step in the acquisition. The exchange
of the remainder of the outstanding shares of Transco common stock for
Williams common stock occurred on May 1, 1995. On that date, Transco paid
as a dividend to Williams all of Transco's interest in the Company.
Nature of Operations
The Company is an interstate natural gas transmission company which
owns and operates a natural gas pipeline system originating in the
Louisiana Gulf Coast area and in East Texas and running generally north
and east through Louisiana, Arkansas, Mississippi, Tennessee, Kentucky,
Indiana and into Ohio, with smaller diameter lines extending into
Illinois. The Company's direct market area encompasses eight states in
the South and Midwest, and includes the Memphis, Tennessee; Louisville,
Kentucky; Cincinnati and Dayton, Ohio; and Indianapolis, Indiana
metropolitan areas. The Company also has indirect market access to the
Northeast through interconnections with unaffiliated pipelines.
Basis of Presentation
The 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 the Company, based on their
estimated fair values. The accompanying financial statements reflect the
pushdown of the purchase price allocation (amounts in excess of book
value) to the Company. Retained earnings and accumulated depreciation and
amortization were eliminated on the date of acquisition, January 18, 1995,
and the Company's assets and liabilities were adjusted to their estimated
fair values. The purchase price allocation to the Company primarily
consisted of an allocation of approximately $257 million to property,
plant and equipment and adjustments to deferred taxes based upon the book
basis of the net assets recorded as a result of the acquisition. The
accounting for the effects of the acquisition included recognizing the
difference between the plan assets and the benefit obligations related to
pension benefits and postretirement benefits other than pensions. The
recognition of these amounts was offset by the recognition of regulatory
assets or liabilities of equal amounts, due to the expected future rate
recovery of these costs.
Included in property, plant and equipment at December 31, 1995, is an
aggregate of approximately $430 million related to amounts in excess of
the original cost of the regulated facilities as a result of the Williams'
and prior acquisitions. This amount is being amortized over the estimated
useful lives of these assets at approximately $11 million per year.
Current Federal Energy Regulatory Commission (FERC) policy does not permit
the Company to recover through its rates amounts in excess of original
cost.
The accompanying financial statements were prepared in accordance with
Securities and Exchange Commission guidelines. Therefore, as a result of
the change in control of the Company to Williams on January 18, 1995, the
Statement of Income and Statement of Cash Flows for the year ended
December 31, 1995, have been segregated into a pre-acquisition period
ending January 17, 1995 and a post-acquisition period beginning January
18, 1995.
Related Parties
As a subsidiary of Williams, the Company engages in transactions with
Williams and other Williams subsidiaries characteristic of group
operations. Prior to May 1, 1995, the Company participated in Transco's
consolidated cash management program and made interest-bearing advances to
Transco. Effective May 1, 1995, the Company began participation in
Williams' cash management program. On that date, the balance of the
advances due from Transco were transferred by Transco to Williams. These
advances are represented by demand notes payable to the Company. Those
amounts that the Company anticipates Williams will repay in the next
twelve months are classified as current assets, while the remainder are
classified as noncurrent. The interest rate on intercompany demand notes
is the London Interbank Offered Rate on the first day of the month plus
0.45%. Net interest income on advances to or from affiliated companies
was $11.9 million, $10.4 million and $9.4 million for the years ended
December 31, 1995, 1994 and 1993, respectively.
Both Williams and Transco have policies 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 $11.3 million, $7.1 million and $6.7 million for the years
ended December 31, 1995, 1994 and 1993, respectively. Management
considers the cost of these services reasonable.
Effective November 1, 1993, the Company contracted with a gas marketing
affiliate to become the Company's agent for the purpose of administering
all existing and future gas sales and market-responsive purchase
obligations, except for its auction gas transactions. Sales and purchases
under this agreement do not impact the Company's results of operations.
For the years ended December 31, 1995 and 1994, and the two months ended
December 31, 1993, the Company paid its gas marketing affiliates agency
fees of $0.7 million, $1.9 million and $0.7 million, respectively, for
these services.
Included in the Company's gas sales revenues for the years ended
December 31, 1995, 1994 and 1993, is $17.4 million, $42.2 million and $4.2
million, respectively, applicable to gas sales to the Company's gas
marketing affiliates.
Included in the Company's gas transportation revenues for the years
ended December 31, 1995, 1994 and 1993, are amounts applicable to
transportation for affiliates as follows (expressed in thousands):
Year Ended December 31,
1995 1994 1993
Williams Energy Services Company/Transco
Gas Marketing Company $ 2,626 $ 2,866 $ 2,609
Transcontinental Gas Pipe Line Corporation 36,439 35,705 33,913
$ 39,065 $ 38,571 $ 36,522
Included in the Company's cost of gas sold for the years ended December
31, 1995, 1994 and 1993, is $25.6 million, $58.5 million and $11.1
million, respectively, applicable to gas purchases from the Company's gas
marketing affiliates.
B. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenues for the sale of natural gas when
products have been delivered and for the transportation of natural gas
based upon contractual terms and the related transportation volumes
through month-end. Pursuant to FERC regulations, a portion of the
revenues being collected may be subject to refunds upon final orders in
pending rate cases. The Company has established reserves, where required,
for such cases (see Note C for a summary of pending rate cases before the
FERC).
Costs Recoverable from/Refundable to Customers
The Company 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 and
recovered or refunded through future rate or surcharge adjustments (see
Note C for a discussion of the Company's rate matters).
Property, Plant and Equipment
Depreciation is provided primarily on the straight-line method over
estimated useful lives. Gains or losses from the ordinary sale or
retirement of property, plant and equipment generally are credited or
charged to accumulated depreciation; other gains or losses are recorded in
net income.
Income Taxes
Deferred income taxes are computed using the liability method and are
provided on all temporary differences between the financial basis and the
tax basis of the Company's assets and liabilities.
Liabilities to customers, resulting from net tax rate reductions
related to regulated operations and to be refunded to customers over the
average remaining life of natural gas transmission plant, have been shown
in the accompanying balance sheets as income taxes refundable to
customers, the current portion of which is included in costs refundable to
customers.
For federal income tax reporting, the Company is included in the
consolidated federal income tax return of Williams for the periods after
May 1, 1995. For prior reporting periods, the Company is included in the
consolidated federal income tax return of Transco.
It is Williams policy to charge or credit each subsidiary or subgroup
with an amount equivalent to its federal income tax expense or benefit as
if each subsidiary or subgroup filed a separate return. The Transco
policy was similar but varied in that benefits from each subsidiary's
losses and tax credits generally would be credited only when utilized on a
consolidated basis.
Gas Sales and Purchases
During 1993, as part of the Company's implementation of FERC Order 636,
the Company's gas sales and purchases were fundamentally restructured.
The only remaining sales administered by the Company are volumes purchased
under a limited number of non-market-responsive gas purchase contracts
which are auctioned each month to the highest bidder. The Company may
file to recover the price differential between the cost to buy the gas
under these gas purchase contracts and the price realized from the resale
of the gas at the auction as a gas supply realignment (GSR) cost pursuant
to FERC Order 636 (see Note C).
A gas marketing affiliate of the Company has been appointed as the
Company's exclusive agent for the purpose of administering all existing
and future purchases of gas under market-responsive gas purchase contracts
and the resale of these purchases.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Capitalized Interest
The allowance for funds used during construction represents the cost of
funds applicable to regulated natural gas transmission plant under
construction as permitted by FERC regulatory practices. The allowance for
borrowed funds used during construction and capitalized interest for the
years ended December 31, 1995, 1994 and 1993, was $0.2 million, $0.3
million and $0.2 million, respectively. The allowance for equity funds
for the years ended December 31, 1995, 1994 and 1993, was $0.4 million,
$0.5 million and $0.5 million, respectively.
Gas in Storage
As part of its implementation of FERC Order 636, the Company has been
allowed to retain its storage gas, in part to meet operational balancing
needs on its system, and in part to meet the requirements of the Company's
"no-notice" transportation service, which allows customers to temporarily
draw from the Company's storage gas to be repaid in-kind during the
following summer season. As a result, the Company's gas stored
underground has been classified in other noncurrent assets in the
accompanying balance sheets.
Gas Imbalances
In the course of providing transportation services to customers, the
Company 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 transportation and exchange
gas receivable or payable in the accompanying balance sheets. Settlement
of imbalances requires agreement between the pipelines and shippers as to
allocations of volumes to specific transportation contracts and timing of
delivery of gas based on operational conditions.
Allowances for Doubtful Receivables
Due to its customer base, the Company has not historically experienced
recurring credit losses in connection with its receivables. As a result,
receivables determined to be uncollectible are charged to expense in the
period of such determination. At December 31, 1995 and 1994, the Company
had no allowance for doubtful receivables.
Cash Flows from Operating Activities
The Company uses the indirect method to report cash flows from
operating activities, which requires adjustments to net income to
reconcile to net cash flows from operating activities. The Company
includes short-term highly-liquid investments that have a maturity of
three months or less when acquired in cash equivalents.
Common Stock Dividends and Returns of Capital
The Company charges against paid-in capital that portion of any common
dividend declarations which exceed the retained earnings balance. Such
charges are deemed to be returns of capital.
Impairments of Long-Lived Assets
The Financial Accounting Standards Board has issued a new accounting
standard, Statement of Financial Accounting Standards (SFAS) 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," effective for fiscal years beginning after
December 31, 1995. The standard, which will be adopted in the first
quarter of 1996, is not expected to have a material effect on the
Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made in the 1994 and 1993 financial
statements to conform to the 1995 presentation.
C. Contingent Liabilities and Commitments
Regulatory and Rate Matters and Related Litigation
FERC Order 636
Effective November 1, 1993, the Company 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. Certain aspects of the Company's FERC Order 636
restructuring are under appeal. FERC Order 636 also provides that
pipelines should be allowed the opportunity to recover all prudently
incurred transition costs which, for the Company, are primarily related to
GSR costs and unrecovered purchased gas costs.
On September 18, 1995, the Company received FERC approval of a
settlement agreement which resolves all issues regarding the Company's
recovery of GSR costs. The settlement provides that the Company will
recover 100% of its GSR costs up to $50 million, will share in costs
incurred between $50 million and $80 million and will absorb any GSR costs
above $80 million. Under the settlement, all challenges to these costs,
on the grounds of imprudence or otherwise, will be withdrawn and no future
challenges will be filed.
Through December 31, 1995, the Company has paid approximately $53.3
million for GSR costs, primarily as a result of contract terminations, and
has recorded a liability of approximately $26.7 million for its estimated
remaining GSR costs. The Company has recovered approximately $44.3
million, plus interest, in GSR costs and, in accordance with the terms of
its settlement, has recorded a regulatory asset of approximately $22.9
million for the estimated future recovery of its GSR costs, most of which
will be collected from customers over the next two years. Ninety percent
of the cost recovery will be collected via demand surcharges on the
Company's firm transportation rates; the remaining 10% should be recovered
from its interruptible transportation service.
The settlement also extends the Company's pricing differential recovery
mechanism to November 1, 1996, and beyond that date for GSR contracts in
litigation as of that date. This mechanism allows the Company to recover
purchased gas costs incurred under remaining GSR contracts in excess of
amounts recovered through the sale of such gas at auction. Except for any
contracts in litigation, the Company anticipates that all of its remaining
GSR contracts will expire or be negotiated for termination by November 1,
1996.
Additionally, the Company's transition costs include unrecovered
purchased gas costs for periods prior to November 1, 1993, pursuant to
FERC Order 636. The Company filed to recover up to $18.8 million, subject
to the final settlement of approximately $6.5 million of disputed costs
placed in escrow pending the outcome of two lawsuits. On October 11,
1995, the Company received FERC approval of a settlement with its
customers, which requires the Company to absorb a portion of these costs,
subject to the outcome of the litigation. Agreements to settle the
lawsuits were reached in December 1995 and both lawsuits were dismissed in
early 1996. The total cost of settling the lawsuits was less than $3.7
million, reducing the maximum amount required to be absorbed by the
Company to approximately $0.7 million. Refunds totaling $4.0 million were
issued in December 1995 and January 1996.
General Rate Issues
On September 30, 1994, the Company filed a general rate case (Docket
No. RP94-423) which became effective April 1, 1995, subject to refund. A
proposed settlement was filed with the FERC on September 29, 1995, and
approved by the FERC on February 20, 1996. Refunds, for which the Company
has provided a reserve, are expected to be made to customers in the
second quarter of 1996.
During 1994 and 1995, the Company made filings to reflect changes in
costs of transportation by others, pursuant to the Transportation Cost
Adjustment tracker provisions of its approved tariff. Pursuant to that
tariff, on May 31, 1995, the Company refunded $13.3 million of
overcollected transportation costs.
In July 1994, and in rehearing in September 1994, the FERC issued an
order accepting a filing made by the Company to resolve its transportation
and exchange imbalances pre-dating its implementation of FERC Order 636.
Following the parties' agreement as to the allocations, reconciled
imbalances were settled by the end of 1995.
FERC Order 94-A
In 1983, the FERC issued FERC Order 94-A, which permitted producers to
collect certain production-related gas costs from pipelines on a
retroactive basis. The FERC subsequently issued orders allowing
pipelines, including the Company, to direct bill their customers for such
production-related costs through fixed monthly charges based on a
customer's historical purchases. In 1990, the United States Court of
Appeals for the District of Columbia (D.C. Circuit Court) overturned the
FERC's authorization for pipelines to directly bill production-related
costs to customers based on gas purchased in prior periods and remanded
the matter to the FERC to determine an appropriate recovery mechanism. In
April 1992, the Company filed a settlement with the FERC providing for
full recovery of its FERC Order 94-A costs through a reallocation of
amounts previously collected from customers. In February 1993, the FERC
issued an order approving the settlement.
In January 1994, the FERC found that it had committed a legal error in
allowing the previously mentioned direct bill of FERC Order 94-A costs.
The effect of this order, as issued, would be to require the Company to
absorb $5.4 million of such costs, for which the Company provided a
reserve. The Company filed for, and was denied, rehearing of this order
by the FERC. In November 1994, the Company settled its FERC Order 94-A
costs with its customers, except for $9.2 million payable by the Company
to Columbia Gas Transmission Corporation (Columbia). In December 1995,
the Company and Columbia agreed to a settlement whereby the Company
refunded to Columbia the $9.2 million of FERC Order 94-A costs, plus
$2.7 million of related interest. The settlement required withdrawal of
petitions pending before the D. C. Circuit Court associated with FERC
Order 94-A and resolved all of the Company's FERC Order 94-A issues.
Royalty Claims and Producer Litigation
In connection with the Company's renegotiations of supply contracts
with producers to resolve take-or-pay and other contract claims, the
Company has entered into certain settlements which may require the
indemnification by the Company of certain claims for royalties which a
producer may be required to pay as a result of such settlements. The
Company has been made aware of demands on producers for additional
royalties and may receive other demands which could result in claims
against the Company 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 the Company. The
Company may file to recover 75% of any such amounts it may be required to
pay pursuant to indemnifications for royalties under the provisions of
FERC Order 528. The Company has provided reserves for the estimated
settlement costs of its royalty claims and litigation.
In addition, two lawsuits were filed against the Company in Louisiana,
seeking reimbursement of certain royalties allegedly incurred by the
producers on amounts previously paid the producers by the Company to
settle past take-or-pay disputes and to reform the gas purchase contract
pursuant to an "excess royalty" clause in a gas purchase contract. The
Company has settled the disputes for a total cost of approximately $3.7
million, and the lawsuits were dismissed with prejudice in early 1996.
Approximately 80% of the settlement costs were recovered in the Company's
rates as transition costs, pursuant to the Company's settlement regarding
its unrecovered purchased gas costs discussed above.
On March 3, 1995, Ergon, Inc. and Ergon Exploration (Ergon) filed a
lawsuit against the Company in the U.S. District Court, West District
Louisiana, seeking approximately $45,000 in damages for gas purchased in
calendar year 1994, a declaratory judgment concerning the proper
construction of the pricing provisions of a gas purchase contract,
unspecified future damages and, alternatively, a reformation of or
rescission of an agreement amending the gas purchase contract. The
Company is currently recovering costs incurred under subject contract as
GSR costs pursuant to FERC Order 636 and anticipates continued recovery of
future amounts consistent with the GSR settlement discussed above.
Environmental Matters
Since 1989, the Company has had studies underway to test its facilities
for the presence of toxic and hazardous substances to determine to what
extent, if any, remediation may be necessary. On the basis of the
findings to date, the Company estimates that environmental assessment and
remediation costs that will be incurred over the next two to three years
will total approximately $4 million to $10 million. As of December 31,
1995, the Company had a reserve of approximately $5.3 million for these
estimated costs. 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. The Company
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.
The Company has used lubricating oils containing polychlorinated
biphenyls (PCBs) and, although the use of such oils was discontinued
in the 1970's, has discovered residual PCB contamination in equipment and
soils at certain gas compressor station sites. The Company continues to
work closely with the Environmental Protection Agency (EPA) and state
regulatory authorities regarding PCB issues and has programs to assess and
remediate such conditions where they exist, the costs of which are a
significant portion of the $4 million to $10 million range discussed
above.
The Company currently is either named as a potentially responsible
party or has received an information request regarding its potential
involvement at two Superfund waste disposal sites and one state waste
disposal site. The anticipated remediation costs associated with these
sites have been included in the $4 million to $10 million range discussed
above.
The Company considers environmental assessment and remediation costs
and costs associated with compliance with environmental standards to be
recoverable through rates, since 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. To date, the Company has been permitted recovery of
environmental costs incurred, and it is the Company's intent to continue
seeking recovery of such costs, as incurred, through rate filings.
Therefore, the estimated recovery of environmental assessment and
remediation costs have been recorded as regulatory assets in the
accompanying balance sheets.
Summary of Contingent Liabilities and Commitments
While no assurances may be given, the Company does not believe that the
ultimate resolution of the foregoing matters, taken as a whole and after
consideration of amounts accrued, insurance coverage, recovery from
customers or other indemnification arrangements, will have a materially
adverse effect upon the Company's future financial position, results of
operations and cash flow requirements.
D. Income Taxes
Following is a summary of the provision for income taxes for the period
January 18, 1995 to December 31, 1995, the period January 1, 1995 to
January 17, 1995, and the years ended December 31, 1994 and 1993
(expressed in thousands):
Post-Acquisition Pre-Acquisition
For the Period For the Period
January 18, January 1, For the For the
1995 to 1995 to Year Ended Year Ended
December 31, January 17, December 31, December 31,
1995 1995 1994 1993
Current:
Federal $ 26,039 $ 2,049 $ (3,645) $ 18,330
State 7,765 530 (278) 3,662
33,804 2,579 (3,923) 21,992
Deferred:
Federal (9,269) (572) 21,868 3,753
State (1,993) (123) 5,117 810
(11,262) (695) 26,985 4,563
Income tax provision $ 22,542 $ 1,884 $ 23,062 $ 26,555
Reconciliations from the income tax provision at the statutory rate to
the income tax provision are as follows (expressed in thousands):
Post-Acquisition Pre-Acquisition
For the Period For the Period
January 18, January 1, For the For the
1995 to 1995 to Year Ended Year Ended
December 31, January 17, December 31, December 31,
1995 1995 1994 1993
Provision at statutory
rate $ 17,804 $ (501) $ 19,439 $ 22,964
Increases in taxes
resulting from:
State income taxes 4,373 295 3,217 2,928
Compensation expense
in excess of tax
deductible amounts - 2,073 - -
Other, net 365 17 406 663
Income tax provision $ 22,542 $ 1,884 $ 23,062 $ 26,555
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial purposes and the amounts used for income tax purposes.
Significant components of deferred tax liabilities and assets as of
December 31 are as follows (expressed in thousands):
Post-Acquisition Pre-Acquisition
1995 1994
Deferred tax liabilities:
Costs refundable to customers:
Gas purchases $ 1,066 $ 3,135
Gas supply realignment - 10,432
Fuel 1,729 5,913
Property, plant and equipment:
Tax over book depreciation, net of gains 44,049 40,199
Other basis differences 104,753 4,711
Accrued environmental costs 41 1,217
Other 4,699 1,122
Total deferred tax liabilities 156,337 66,729
Deferred tax assets:
Costs recoverable from customers:
Gas supply realignment 2,239 -
Transportation 2,259 4,082
Accrued employee benefits 3,875 3,604
Producer settlement costs 1,143 3,201
Reserve for rate refund 10,110 -
Deferred gas costs - 3,850
Gas stored underground--additional tax basis 3,080 2,859
Debt related items 5,601 2,175
Other 2,466 2,305
Total deferred tax assets 30,773 22,076
Net deferred tax liabilities $125,564 $ 44,653
E. Financing
Long-term Debt
At December 31, 1995 and 1994, long-term debt issues were outstanding
as follows (expressed in thousands):
Post-Acquisition Pre-Acquisition
1995 1994
Notes:
9 5/8% due 1997 $ 100,000 $ 100,000
8 5/8% due 2004 150,000 150,000
250,000 250,000
Unamortized debt premium (discount) 5,860 (3,558)
Total long-term debt $ 255,860 $ 246,442
The Company's debt was revalued to fair value at the date of
acquisition as part of the allocation of the purchase price following the
Company's acquisition by Williams. Fair value in excess of historical
face value reflects the Company's lower borrowing costs as a result of
improved external debt ratings.
In February 1995, Standard & Poor's Corporation and Moody's Investors
Service upgraded the Company's debt securities from BB and Ba2 to BBB and
Baa1, respectively. A security rating is not a recommendation to buy, sell
or hold securities; it may be subject to revision or withdrawal at any
time by the assigning rating organization. Each rating should be
evaluated independently of any other rating.
On April 11, 1994, the Company sold $150 million of 8 5/8% Notes due
April 1, 2004. Proceeds from the sale of the Notes were used to retire
the Company's 10% Debentures that were to mature November 1, 1994.
The Company's debentures and notes have restrictive covenants which
provide that neither the Company 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.
Recapitalization Plan
Transco had in place a $450 million working capital line with a group
of fifteen banks and a $50 million reimbursement facility with a group of
five banks, for which the Company was guarantor in part. Both facilities
were terminated in January 1995, as a result of the acquisition by
Williams.
In February 1995, Transco's working capital line was replaced by an
$800 million credit agreement under which the Company may borrow up to
$200 million. Interest rates vary with current market conditions. At
December 31, 1995, the Company had no amounts outstanding under this
facility.
Sale of Receivables
The Company sold, with limited recourse, certain receivables. The
limit under this receivables facility was $35 million at December 31,
1995, and $40 million at December 31, 1994. The Company received $27.7
million of proceeds in 1995, $34.5 million in 1994 and $17.8 million in
1993. At December 31, 1995 and 1994, $27.1 million and $27 million of
such receivables has been sold, respectively. Based on amounts
outstanding at December 31, 1995 and December 31, 1994, the maximum
contractual credit loss under these arrangements is approximately $4
million each year, but the likelihood of loss is remote.
Significant Group Concentrations of Credit Risk
The Company's trade receivables are primarily due from local
distribution companies and other pipeline companies predominantly located
in the Midwestern United States. The Company's credit risk exposure in
the event of nonperformance by the other parties is limited to the face
value of the receivables. As a general policy, collateral is not required
for receivables, but customers' financial condition and credit worthiness
are evaluated regularly.
F. Employee Benefit Plans
Retirement Plan
Substantially all of the Company's employees are covered under a
retirement plan (Retirement Plan) offered by the Company. The benefits
under the Retirement Plan are determined by a formula based upon years of
service and the employee's highest average base compensation. The
Retirement Plan provides for vesting of employees' benefits after five
years of credited service. The Company's general funding policy is to
contribute amounts deductible for federal income tax purposes. Due to
its overfunded status, the Company has not been required to fund the
Retirement Plan since 1986. The Retirement Plan's assets are held in a
master trust, which is managed by external investment organizations and
consists primarily of domestic and foreign common and preferred stocks,
corporate bonds, United States government securities and commercial paper.
In connection with the Company's acquisition by Williams, the
Retirement Plan was amended effective March 8, 1995, to provide a
Voluntary Window Retirement Program with special retirement benefits for
those eligible members who elected to retire during the Window Period.
The Window Period began March 8, 1995, and ended April 17, 1995. The
special window retirement benefits were available only to those employees
who, as of May 1, 1995, were active members in the Retirement Plan, age 50
or older, credited with at least five years of service and elected during
the Window Period to retire. There were 107 employees who elected to
retire under the special retirement program.
The accounting for the effects of the acquisition by Williams included
the recognition of the difference between Retirement Plan assets and the
benefit obligations related to pensions, including the effects of the
special retirement program discussed above. The recognition of these
amounts was offset by an equal reduction to the Company's regulatory
liability to customers for prepaid pension costs.
Due to the acquisition by Williams, the 1995 Plan year end was amended
to December 31 from September 30. The funded status of the Retirement
Plan did not change materially from September 30, 1994 to December 31,
1994. The following table sets forth the funded
status of the Retirement Plan at December 31, 1995, and September 30,
1994, and the prepaid pension costs as of December 31, 1995 and 1994,
(expressed in thousands):
1995 1994
Actuarial present value of accumulated benefit obligation,
including vested benefits of $31,344 at January 1, 1996,
and $50,214 at October 1, 1994 $(33,557) $(52,381)
Actuarial present value of projected benefit obligation $(54,259) $(88,641)
Plan assets at fair value 99,946 102,992
Plan assets in excess of projected benefit obligation 45,687 14,351
Unrecognized net loss (gain) (40,636) 17,655
Unrecognized transition cost - (11,583)
Unrecognized prior service cost (1,427) 4,447
Prepaid pension costs $ 3,624 $ 24,870
Prepaid pension costs related to the Retirement Plan have been
classified as other assets in the accompanying balance sheets.
The following table sets forth the components of net pension cost for
the Retirement Plan, which is included in the accompanying financial
statements, for the years ended December 31, 1995, 1994 and 1993
(expressed in thousands):
1995 1994 1993
Service cost-benefits earned during
the period $ 2,383 $ 4,175 $ 3,867
Interest cost on projected benefit
obligation 5,665 5,993 4,687
Actual return on plan assets (24,285) (3,431) (13,595)
Net amortization and deferral 16,357 (7,185) 3,953
Net pension cost (income) $ 120 $ (448) $ (1,088)
Regulatory deferral of costs (income) (120) 448 1,088
Net pension expense $ - $ - $ -
The projected unit credit method is used to determine the actuarial
present value of the accumulated benefit obligation and the projected
benefit obligation. The following table summarizes the various
assumptions used to determine the projected benefit obligation for the
years 1995, 1994 and 1993:
1995 1994 1993
Discount rate 7.25% 7.50% 7.25%
Rate of increase in future
compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of
return on assets 10.00% 10.00% 10.00%
Pension costs are determined using the assumptions as of the beginning
of the Retirement Plan year. The funded status is determined using the
assumptions as of the end of the Retirement Plan year. The effects of the
restructuring are included in the funded status of the Retirement Plan
reported above.
On January 1, 1996, the Plan was restructured, as the result of a
Williams' study in which the Company participated, in order to adhere to a
new common benefit plan structure under Williams.
Postretirement Benefits Other than Pensions
The Company's Employee Welfare Benefit Plan provides medical and life
insurance benefits to Company employees who retire under the Company's
Retirement Plan with at least five years of service. The Employee Welfare
Benefit Plan is contributory for medical benefits and for life insurance
benefits in excess of specified limits.
The medical benefits are currently funded for all retired Company
employees at a specified amount per quarter through a trust established
under the provisions of section 501(c)(9) of the Internal Revenue Code.
In 1993, the Company adopted SFAS 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions," which requires the Company
to accrue, during the years that employees render the necessary service,
the estimated cost of providing postretirement benefits other than
pensions to those employees. At the January 1, 1993 date of adoption of
SFAS 106, the Company's postretirement benefits obligation (transition
obligation) was $68 million. Prior to the acquisition by Williams, the
transition obligation was being amortized over the remaining service life
of active participants. On the acquisition date, the Company immediately
recognized the difference between Employee Welfare Benefit Plan assets and
the benefit obligations of the Employee Welfare Benefit Plan, offset by an
increase in the Company's regulatory asset due to the expected future rate
recovery of these costs.
The following table sets forth the Employee Welfare Benefit Plan's
funded status at December 31, 1995 and 1994, reconciled with the accrued
postretirement benefit cost included in the accompanying balance sheets
(expressed in thousands):
1995 1994
Accumulated postretirement benefit obligation:
Retirees $(71,742) $(49,700)
Fully eligible active plan participants (818) (5,515)
Other active plan participants (13,837) (31,815)
(86,397) (87,030)
Plan assets at fair value 40,089 28,749
Accumulated postretirement benefit obligation
in excess of plan assets (46,308) (58,281)
Unrecognized net (gain) (12,274) (9,417)
Prior service cost (2,202) -
Unrecognized transition obligation - 61,516
Accrued postretirement benefit cost $(60,784) $ (6,182)
The following table sets forth the components of the net periodic
postretirement benefit cost, net of deferred costs, which is included in
the accompanying financial statements for the years ended December 31,
1995, 1994 and 1993 (expressed in thousands):
1995 1994 1993
Service cost-benefits earned during the period $ 2,255 $ 2,985 $ 2,430
Interest cost on accumulated postretirement
benefit obligation 6,937 6,585 6,325
Actual return on plan assets (6,350) (583) (2,548)
Amortization of transition obligation - 3,238 3,238
Net amortization and deferral 4,024 (1,400) 1,356
Net periodic postretirement benefit cost $ 6,866 $ 10,825 $ 10,801
Regulatory recovery (deferral) of costs 4,063 (543) (5,013)
Net periodic postretirement benefit expense $ 10,929 $ 10,282 $ 5,788
The annual expense is subject to change in future periods as a result
of, among other things, the passage of time, changes in participants,
changes in Employee Welfare Benefit Plan benefits and changes in
assumptions upon which the estimates are made.
For measurement purposes as of December 31, 1995, the annual rate of
increase in the per capita cost of covered health care benefits was
assumed to be 10.8% for retirees and 9.7% to 11.3% for active employees.
The rate was assumed to decrease gradually to 5% for the year 2006 and
remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. Increasing
the assumed health care cost trend rate by 1 percent in each year would
increase the aggregate of the service and interest cost components of the
postretirement benefit expense for the year 1996 by $1.6 million and the
accumulated postretirement benefit obligation as of December 31, 1996, by
$15.2 million.
Employee Welfare Benefit Plan assets are held by a master trust, which
is managed by external investment organizations and consists primarily of
domestic and foreign common stocks, commercial paper and government bonds.
The following table summarizes the various assumptions used to determine
the projected benefit obligation for the years 1995, 1994 and 1993:
1995 1994 1993
Discount rate 7.25% 7.75% 7.25%
Rate of increase in future
compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of
return on assets 6.00% 7.00% 7.00%
The Company recognizes expense concurrent with the recovery in rates.
Since the Company's Retirement Plan is overfunded, the Company is not
currently recovering any amounts through rates.
In December 1992, the FERC issued a Statement of Policy which allows
jurisdictional pipelines to recognize allowances for prudently incurred
costs of postretirement benefits other than pensions on an accrual basis
consistent with the accounting principles set forth in SFAS 106. The
Company believes that all costs of providing postretirement benefits other
than pensions to its employees are necessary and prudent operating
expenses and that such costs are recoverable in rates. The Company has
recognized and expects to continue to recognize these costs concurrent
with the receipt of revenues.
In April 1995, the Company placed into effect a general rate case,
which received final approval from the FERC on February 20, 1996, that
provides for postretirement benefit costs pursuant to SFAS 106 to be
collected in rates and for the establishment of a regulatory asset for the
difference between its postretirement benefits expense under SFAS 106 and
the amount it collects in its rates. Pursuant to its latest rate case
filing, the Company proposes to recover through rates the regulatory asset
over a 15-year period from January 1, 1996.
On January 1, 1996, as a result of adopting revised benefit plans, the
Company will no longer offer postretirement medical benefits to employees
hired after December 31, 1995.
G. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair-value disclosures for financial instruments:
Cash and Short-Term Financial Assets and Liabilities: For short-term
instruments, the carrying amount is a reasonable estimate of fair value
due to the short maturity of those instruments.
Long-Term Notes Receivable: The carrying amount for the long-term notes
receivable, which are shown as advances to affiliates in the accompanying
balance sheets, is a reasonable estimate of fair value. As discussed in
Note A, the notes earn a variable rate of interest which is adjusted
regularly to reflect current market conditions.
Long-Term Debt: All of the Company's long-term debt is publicly traded;
therefore, estimated fair value is based on quoted market prices at
December 31, 1995 and 1994.
The carrying amount and estimated fair values of the Company's
financial instruments as of December 31, 1995 and 1994, are as follows
(expressed in thousands):
Carrying Fair
Amount Value
1995 1994 1995 1994
Financial Assets:
Cash and short-term financial assets $113,508 $ 28,850 $113,508 $ 28,850
Long-term notes receivable 125,000 124,000 125,000 124,000
Financial Liabilities:
Short-term financial liabilities - 1,769 - 1,769
Long-term debt 255,860 246,442 278,000 238,825
H. Major Customers
Listed below are sales and transportation revenues received from the
Company's major customers in 1995, 1994 and 1993, portions of which are
included in the refund reserves discussed in Note C (expressed in
thousands):
Post-Acqusition Pre-Acquisition
For the Period
For the Period January 1, For the For the
January 18, 1995 1995 to Year Ended Year Ended
to December 31, January 17, December 31, December 31,
1995 1995 1994 1993
Indiana Gas Company, Inc. $ 23,456 $ 1,693 $ 35,712 $ 49,825
Transcontinental Gas Pipe
Line Corporation 34,958 1,481 35,705 33,913
Transcontinental Gas Pipe Line Corporation is an affiliate of the Company.
I. Quarterly Information (Unaudited)
The following summarizes selected quarterly financial data for 1995 and
1994 (expressed in thousands):
Pre-Acquisition Post-Acquisition
For the Period For the Period
January 1, January 18, 1995
1995 to 1995 to ---------------------------
January 17, March 31, Second Third Fourth
1995 1995 Quarter Quarter Quarter
Operating revenues $ 19,301 $ 81,478 $ 72,866 $ 65,726 $102,833
Operating expenses 20,113 58,484 64,019 62,847 75,461
Operating income (loss) (812) 22,994 8,847 2,879 27,372
Other (income) deductions:
Interest expense 1,122 4,634 5,703 5,857 7,326
Other (income), net (504) (1,922) (3,214) (3,283) (3,877)
Total other (income)
deductions: 618 2,712 2,489 2,574 3,449
Income (loss) before
income taxes (1,430) 20,282 6,358 305 23,923
Provision for income taxes 1,884 8,475 3,118 816 10,133
Net income (loss) $ (3,314) $ 11,807 $ 3,240 $ (511) $ 13,790
Pre-Acquisition
1994
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating revenues $134,238 $ 94,477 $ 75,923 $105,588
Operating expenses 103,489 85,486 70,624 78,878
Operating income 30,749 8,991 5,299 26,710
Other (income) deductions:
Interest expense 6,447 7,159 6,976 6,899
Other (income), net (2,123) (2,919) (3,220) (3,011)
Total other (income)
deductions 4,324 4,240 3,756 3,888
Income before income taxes 26,425 4,751 1,543 22,822
Provision for income taxes 10,462 1,992 773 9,835
Net income $ 15,963 $ 2,759 $ 770 $ 12,987
Item 9. Disagreements on Accounting and Financial Disclosure.
Not Applicable.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1.* Financial Statements
Included in Item 8, Part II of this Report
Reports of Independent Auditors on Financial Statements
Report of Management
Balance Sheets at December 31, 1995 and 1994
Statements of Income for the period January 18, 1995
to December 31, 1995, for the period January 1, 1995 to January 17,
1995 and for the years ended December 31, 1994 and 1993
Statements of Retained Earnings and Paid-In Capital
for the period January 18, 1995 to December 31, 1995, for the
period January 1, 1995 to January 17, 1995 and for the years ended
December 31, 1994 and 1993
Statements of Cash Flows for the period January 18, 1995 to
December 31, 1995, for the period January 1, 1995 to
January 17, 1995 and for the years ended December 31, 1994 and 1993
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 1987
Form 10-K - File No. 1-4169).
* 3.2 Copy of Bylaws of the Corporation
4.1 Indenture dated July 8, 1992, securing 9 5/8% Notes due
July 15, 1997 (incorporated by reference to
Form 8-K dated July 16, 1992 - File No. 1-4169).
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).
(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/ E. J. Ralph
E. J. Ralph,
Vice President, Treasurer,
Controller and Assistant Secretary
Dated: March 27, 1995
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/ Brian E. O'Neill * President and Chief Executive Officer
Brian E. O'Neill (Principal Executive Officer)
/s/ E. J. Ralph * Vice President, Treasurer, Controller, and
E. J. Ralph Assistant Secretary (Principal Financial
and Accounting Officer)
/s/ Keith E. Bailey * Director
Keith E. Bailey
/s/ Gary D. Lauderdale * Director
Gary D. Lauderdale
/s/ Kim R. Cocklin * Director
Kim R. Cocklin
/s/ Norris E. McDivitt * Director
Norris E. McDivitt
/s/ Lewis A. Posekany, Jr. * Director
Lewis A. Posekany, Jr.
*By: /s/ E. J. Ralph Vice President, Treasurer, Controller,
E. J. Ralph and Assistant Secretary
Dated: March 27, 1996