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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, 1996
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, 1997
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
1996 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..............11
Item 9. Disagreements on Accounting and Financial Disclosure.....36
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................36
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 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.
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, 1996, the Company's system, having a
mainline delivery capacity of approximately 2.8 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 549,000 horsepower.
The Company owns and operates natural gas storage
reservoirs in 10 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. The Company owns its own storage gas which it
uses, 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 1996, 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 133
distribution companies and municipalities for resale to
residential, commercial and industrial users. Transportation
services were provided to approximately 102 industrial
customers located along the system. At December 31, 1996, the
Company had transportation contracts with approximately 559
shippers. Transportation shippers include distribution
companies, municipalities, intrastate pipelines, direct
industrial users, electrical generators, marketers and
producers. During 1996, the Company did not have any customer
which 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.
OPERATING STATISTICS
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: 1996 1995 1994
Long-haul transportation 736.0 635.7 618.8
Short-haul transportation 58.5 57.6 188.6
Total system deliveries 794.5 693.3 807.4
Average Daily Transportation
Volumes (TBtu): 2.2 1.9 2.2
Average Daily Firm Reserved
Capacity (TBtu): 2.1 2.0 2.1
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.
REGULATORY MATTERS
The Company is subject to regulation by the Federal
Energy Regulatory Commission (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.
In September 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 in September 1995, and was approved by the FERC on
February 20, 1996. Refunds of approximately $23.2 million,
including interest, for which the Company had provided a
reserve, were made to customers in April 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. In 1992, the FERC
issued its Order 636, the stated purpose of which 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, the
general level of natural gas demand and weather conditions.
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.
The Company is working diligently to replace any and all
markets lost due to capacity turnback, as well as to pursue
new markets. During 1996, the Company increased firm service
to one of its largest customers and extended the service
agreement through the third quarter of the year 2000. All
capacity turned back in 1996 has been fully subscribed, and
the Company anticipates that it will continue to be able to
remarket future capacity turnback.
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 975 employees as of December 31, 1996.
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 percent of the
Company's employees elected to retire in 1995 under an early
retirement program offered by the Company.
The International Chemical Workers Council of the United
Food and Commercial Workers Union Local 187 represents 186 of
the Company's 443 field operating employees. The current
collective bargaining agreement between the Company and Local
187 expires on October 31, 1998.
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.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding
historical information, include forward-looking statements.
Although the Company believes such forward-looking statements
are based on reasonable assumptions, no assurance can be given
that every objective will be reached. Such statements are
made in reliance on the safe harbor protections provided under
the Private Securities Litigation Reform Act of 1995.
As required by such Act, the Company hereby identifies
the following important factors that could cause actual
results to differ materially from any results projected,
forecasted, estimated or budgeted by the Company in forward-
looking statements: (i) risks and uncertainties related to
changes in general economic conditions in the United States,
changes in laws and regulations to which the Company is
subject, including tax, environmental and employment laws and
regulations, the cost and effects of legal and administrative
claims and proceedings against the Company or which may be
brought against the Company and conditions of the capital
markets utilized by the Company to access capital to finance
operations; (ii) risks and uncertainties related to the
impact of future federal and state regulation of business
activities, including allowed rates of return; and (iii)
risks and uncertainties related to the ability to develop
expanded markets as well as maintain existing markets. In
addition, future utilization of pipeline capacity will depend
on energy prices, competition from other pipelines and
alternate fuels, the general level of natural gas demand and
weather conditions, among other things. Further, gas prices
which directly impact transportation and operating profits may
fluctuate in unpredictable ways.
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, 1996, 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
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, 1996, 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 40 years, the estimated remaining
useful lives of the assets at the date of acquisition, at
approximately $11 million per year. Current FERC policy does
not permit 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. The financial analysis presented below represents
a pro forma year-to-date comparison of the current and prior
years, with disclosure of material variances due to the
acquisition.
Effect of Inflation
The Company generally has experienced increased costs in
recent years due to the effect of inflation on the cost of
labor, materials and supplies, and property, plant and
equipment. A portion of the increased labor and materials and
supplies cost can directly affect income through increased
maintenance and operating costs. The cumulative impact of
inflation over a number of years has resulted in increased
costs for current replacement of productive facilities. The
majority of the Company's property, plant and equipment and
inventory is subject to ratemaking treatment, and under
current FERC practices, recovery is limited to historical
costs. While amounts in excess of historical cost are not
recoverable under current FERC practices, the Company believes
it will be allowed to recover and earn a return based on
increased actual cost incurred when existing facilities are
replaced. Cost based regulation along with competition and
other market factors limit the Company's ability to price
services or products based upon inflation's effect on costs.
Financial Analysis of Operations
1996 Compared to 1995
Operating income was $20.0 million higher for the year
ended December 31, 1996, than for 1995. The increase in
operating income was primarily attributable to higher
transportation revenues due to new rates that became effective
on April 1, 1995, and a rate case settlement which resulted in
a first quarter 1996 adjustment to regulatory accruals. The
effect of higher 1996 operating and maintenance expenses was
offset by the first quarter 1995 provision for severance
benefits that resulted from the acquisition by Williams.
Compared to 1995, net income was $21.2 million higher due to
the same reasons discussed above and lower interest expense
resulting from lower interest on refund accruals. The lack of
tax benefits associated with the 1995 provision for severance
benefits resulted in a higher effective tax rate in 1995 than
in 1996.
Operating revenues increased $17.6 million primarily
attributable to higher transportation revenues due to new
rates that became effective on April 1, 1995, and a rate case
settlement which resulted in a first quarter 1996 adjustment
to regulatory accruals. System deliveries were 794.5 TBtu and
693.3 TBtu for the years ended December 31, 1996 and 1995,
respectively, which also contributed to increased revenues.
Operating costs and expenses decreased $2.4 million
primarily attributable to the first quarter 1995 provision for
severance benefits that resulted from the acquisition by
Williams, partially offset by higher costs related to pipeline
maintenance projects.
1995 Compared to 1994
Operating income was $10.5 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. System
deliveries were 693.3 TBtu and 807.4 TBtu for the years ended
December 31, 1995 and 1994, respectively.
Operating costs and expenses decreased $57.5 million
primarily due to lower merchant gas purchases of $52.7
million, lower other gas purchases of $7.4 million and lower
cost of transportation of gas by others of $8.8 million, which
were partially offset by the $6.8 million pre-acquisition
provision discussed above.
Financial Condition and Liquidity
As discussed in Note A of Notes to Financial Statements
contained in Item 8 hereof, on May 1, 1995, Transco paid as a
dividend to Williams all of Transco's interest in the Company.
Williams intends to maintain and expand the existing core
business of the Company and to promptly pursue new business
opportunities made available to the Company. Through the
years, the Company has consistently maintained its financial
strength and experienced strong operational results. The
Company's acquisition by Williams further enhances its
financial and operational strength, as well as allows the
Company to take advantage of new opportunities for growth.
The Company expects to access public and private capital
markets, as needed, to finance its own capital requirements.
The Company is a participant with other Williams
subsidiaries in a $1 billion credit agreement under which the
Company may borrow up to $200 million, subject to borrowings
by other affiliated companies. Interest rates vary with
current market conditions. To date, the Company has no
amounts outstanding under this facility.
For financial statement reporting purposes, a $100 million
current debt obligation has been classified as noncurrent
based on the Company's intent and ability to refinance on a
long-term basis. Although the amount available under the $1
billion credit agreement is sufficient to meet this
obligation, the Company plans to issue new long-term debt by
July 15, 1997, to replace its maturing debt.
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 0.35%.
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, 1996 and 1995, $24.2 million and
$27.1 million, respectively, of such receivables were sold.
The Company's capital expenditures for the years ended
December 31, 1996 and 1995, were $50.1 million and $34.0
million, respectively.
The Company's debt as a percentage of total capitalization
at December 31, 1996 and 1995, was 27.0% and 25.6%,
respectively.
In September 1994, the Company filed a general rate case
(Docket No. RP94-423) which was effective April 1, 1995,
subject to refund. A proposed settlement was filed with the
FERC in September 1995, and approved by the FERC on February
20, 1996. Refunds of approximately $23.2 million, including
interest, for which the Company had provided a reserve, were
made to customers in April 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, 1996 and 1995, and
the related statements of income, retained earnings and paid-
in capital and cash flows for the year ended December 31,
1996, and 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 audits. The
statements of income, retained earnings and paid-in capital,
and cash flows for 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 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
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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Texas Gas Transmission Corporation at December 31,
1996 and 1995, and the results of its operations and its cash
flows for the year ended December 31, 1996, and 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 7, 1997
To Texas Gas Transmission Corporation:
We have audited the accompanying statements of income,
retained earnings and paid-in capital and cash flows of Texas
Gas Transmission Corporation (a Delaware corporation) for the
year ended December 31, 1994. 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.
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
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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of Texas Gas Transmission
Corporation for the year ended December 31, 1994, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1995
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(Thousands of Dollars)
December 31, December 31,
ASSETS 1996 1995
Current Assets:
Cash and temporary cash investments $ 115 $ 206
Receivables:
Trade 8,415 6,798
Affiliates 1,409 1,546
Other 1,418 1,150
Advances to affiliates 147,144 113,289
Transportation and exchange gas
receivable 718 3,113
Costs recoverable from customers:
Gas purchase - 1,729
Gas supply realignment 8,640 15,730
Other 17,980 10,912
Inventories 15,081 14,707
Deferred income taxes 4,945 12,744
Gas stored underground 11,115 -
Other 1,311 2,636
Total current assets 218,291 184,560
Advances to Affiliates 25,000 125,000
Investments, at Cost 1,339 5,853
Property, Plant and Equipment, at cost:
Natural gas transmission plant 823,927 782,473
Other natural gas plant 134,969 143,356
958,896 925,829
Less - Accumulated depreciation and
amortization 65,265 26,643
Property, plant and equipment, net 893,631 899,186
Other Assets:
Gas stored underground 100,709 103,421
Costs recoverable from customers 54,817 73,879
Other 13,313 6,218
Total other assets 168,839 183,518
Total Assets $1,307,100 $1,398,117
The accompanying notes are an integral part of these financial
statements.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS
(Thousands of Dollars)
December 31, December 31,
1996 1995
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Payables:
Trade $ 4,850 $ 6,857
Affiliates 41,954 20,566
Other 9,252 20,733
Transportation and exchange gas payable 3,306 8,031
Accrued liabilities 68,784 52,250
Accrued gas supply realignment costs 3,833 16,717
Costs refundable to customers 1,626 4,618
Reserve for regulatory and rate matters - 25,576
Total current liabilities 133,605 155,348
Long-Term Debt 253,611 255,860
Other Liabilities and Deferred Credits:
Deferred income taxes 143,288 138,308
Postretirement benefits other than
pensions 43,765 54,400
Other 47,951 48,963
Total other liabilities and
deferred credits 235,004 241,671
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 678,146 740,446
Retained earnings 6,733 4,791
Total stockholder's equity 684,880 745,238
Total Liabilities and
Stockholder's Equity $1,307,100 $1,398,117
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
results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF INCOME
(Thousands of Dollars)
Post-Acquisition Pre-Acquisition
For the For the
Period Period
For the January 18, January 1, For the
Year Ended 1995 to 1995 to Year Ended
December 31, December 31, January 17, December 31,
1996 1995 1995 1994
Operating Revenues:
Gas sales $ 56,700 $ 51,774 $ 3,239 $116,079
Gas transportation 300,792 268,844 15,932 291,869
Other 2,286 2,285 130 2,278
Total operating revenues 359,778 322,903 19,301 410,226
Operating Costs and Expenses:
Cost of gas sold 56,013 51,328 3,188 114,653
Cost of gas transportation 39,289 41,139 2,134 52,064
Operation and maintenance 65,014 58,232 2,433 57,081
Administrative and general 61,685 57,517 3,086 60,537
Provision for severance
benefits - - 6,772 -
Depreciation and
amortization 41,531 38,863 1,779 41,076
Taxes other than income
taxes 15,015 13,732 721 13,066
Total operating costs
and expenses 278,547 260,811 20,113 338,477
Operating Income (Loss) 81,231 62,092 (812) 71,749
Other (Income) Deductions:
Interest expense 20,923 23,520 1,122 27,481
Interest income (12,450) (12,534) (560) (12,013)
Miscellaneous other
deductions - net 606 238 56 740
Total other deductions 9,079 11,224 618 16,208
Income (Loss) Before
Income Taxes 72,152 50,868 (1,430) 55,541
Provision for Income Taxes 25,972 22,542 1,884 23,062
Net Income (Loss) $ 46,180 $ 28,326 $ (3,314) $ 32,479
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
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, 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
Add (deduct):
Net Income 46,180 -
Dividends on common stock
and returns of capital (44,238) (62,300)
Balance, December 31, 1996 $ 6,733 $678,146
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 results
of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Post-Acquisition Pre-Acquisition
For the For the
Period Period
For the January 18, January 1, For the
Year Ended 1995 to 1995 to Year Ended
December 31, December 31, January 17, December 31,
1996 1995 1995 1994
OPERATING ACTIVITIES:
Net income (loss) $ 46,180 $ 28,326 $ (3,314) $ 32,479
Adjustments to reconcile
to cash provided from
operations:
Depreciation and
depletion 41,531 38,863 1,779 41,076
Provision (benefit)
for deferred
income taxes 12,778 (11,262) (695) 26,985
Changes in receivables
sold (2,900) 100 (14,806) (3,428)
Changes in receivables 2,775 19,220 2,113 32,370
Changes in inventories (374) 359 118 (459)
Changes in other current
assets 13,265 35,265 2,048 (18,327)
Changes in accounts
payable (13,483) 10,545 (3,607) (24,210)
Changes in accrued
liabilities (48,656) 2,964 4,913 (62,793)
Other, including changes
in non-current assets
and liabilities 33,970 29,132 5,490 (10,559)
Net cash provided by
(used in) operating
activities 85,086 153,512 (5,961) 13,134
FINANCING ACTIVITIES:
Proceeds from long-term debt - - - 150,000
Payment of long-term debt - - - (150,000)
Dividends and returns of
capital (102,080) (30,000) - (26,990)
Other -- net - 112 59 193
Net cash (used in)
provided by financing
activities (102,080) (29,888) 59 (26,797)
INVESTING ACTIVITIES:
Property, plant and
equipment:
Capital expenditures,
net of AFUDC (50,091) (33,042) (1,898) (39,413)
Proceeds from sales
and salvage values,
net of costs of removal 849 1,878 (21) 2,893
Advances to affiliates,
net 66,145 (93,197) 7,852 50,776
Net cash provided
by (used in)
investing activities 16,903 (124,361) 5,933 14,256
(Decrease) increase in cash
and cash equivalents (91) (737) 31 593
Cash and cash equivalents
at beginning of period 206 943 912 319
Cash and cash equivalents
at end of period $ 115 $ 206 $ 943 $ 912
Supplemental Disclosure
of Cash Flow Information:
Cash paid during
the period for:
Interest (net of amount
capitalized) $ 23,426 $ 20,750 $ 4,856 $ 25,432
Income taxes (refunds),
net 9,431 27,085 (7,395) 14,714
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,
1996, 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 40 years,
the estimated useful lives of these assets at the date of
acquisition, 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 0.35%. Net interest income on advances
to or from affiliated companies was $12.0 million, $11.9
million and $10.4 million for the years ended December 31,
1996, 1995 and 1994, 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 $5.6
million, $11.3 million and $7.1 million for the years ended
December 31, 1996, 1995 and 1994, 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 as discussed in Note B. Sales and purchases
under this agreement do not impact the Company's results of
operations. For the years ended December 31, 1996, 1995 and
1994, the Company paid to its gas marketing affiliates agency
fees of $0.7 million, $0.7 million and $1.9 million,
respectively, for these services.
Included in the Company's gas sales revenues for the years
ended December 31, 1996, 1995 and 1994, is $22.4 million,
$17.4 million and $42.2 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, 1996, 1995 and 1994, are
amounts applicable to transportation for affiliates as follows
(expressed in thousands):
Year Ended December 31,
1996 1995 1994
Williams Energy Services
Company/Transco Gas Marketing
Company $ 2,245 $ 2,626 $ 2,866
Transcontinental Gas Pipe Line
Corporation 17,460 36,439 35,705
$19,705 $39,065 $38,571
Included in the Company's cost of gas sold for the years
ended December 31, 1996, 1995 and 1994, is $31.5 million,
$25.6 million and $58.5 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 in anticipation of recovery
or refunds 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 book 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 have been shown in the accompanying balance
sheets as income taxes refundable to customers. The current
portion of this liability is included in costs refundable to
customers and the noncurrent portion is included in other
liabilities.
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
Since November 1, 1993, the only gas sales administered by
the Company have been volumes purchased under a limited number
of non-market-responsive gas purchase contracts which were
auctioned each month to the highest bidder. The Company filed
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. Effective
November 1, 1996, the auction sales and the related pricing
differential mechanism terminated in accordance with the
Company's GSR settlement (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, 1996, 1995 and 1994, was $0.4 million, $0.2
million and $0.3 million, respectively. The allowance for
equity funds for the years ended December 31, 1996, 1995 and
1994, was $0.7 million, $0.4 million and $0.5 million,
respectively.
Gas in Storage
The Company's storage gas is used for system management, 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 gas to be repaid in-kind during the
following summer season. In 1996, the Company adopted FERC
Order 581, which, among other things, addressed the accounting
requirements for gas stored underground. As a result of this
order, that portion of the Company's gas stored underground,
which exceeded its system management requirements, as approved
by the FERC, has been classified as a current asset 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.
Inventory Valuation
The cost of materials and supplies inventories is
determined using the average-cost method.
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 in cash equivalents any
short-term highly-liquid investments that have a maturity of
three months or less when acquired.
Common Stock Dividends and Returns of Capital
The Company charges against paid-in capital that portion of
any common dividend declaration which exceeds the retained
earnings balance. Such charges are deemed to be returns of
capital.
Impairments of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of." Adoption of the standard had no effect on
the Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made in the 1995 and
1994 financial statements to conform to the 1996 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. 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. Certain aspects of the
Company's FERC Order 636 restructuring are under appeal.
On July 16, 1996, the United States Court of Appeals for
the District of Columbia (D.C. Circuit Court) issued an order
which in part affirmed and in part remanded FERC Order 636.
However, the court stated that FERC Order 636 would remain in
effect until the FERC issued a final order on remand after
considering the remanded issues. With the issuance of this
decision, the stay on the appeals of individual pipeline's
restructuring cases will be lifted. Although no assurances
can be given as regards the appeals of the Company's
restructuring case, the effect of those appeals should be
limited since FERC Order 636 was largely upheld.
On February 27, 1997, FERC issued Order 636-C in response
to the court's remand affirming that pipelines may recover all
of their GSR costs, but requiring pipelines to individually
propose the percentage of such costs to be allocated to
interruptible transportation services, instead of a uniform 10
percent allocation. However, the Company's GSR settlement,
discussed below, which is not subject to appeal, should be
unaffected by this Order. The Order also prospectively
relaxed the eligibility requirements for receiving no-notice
service and reduced the right of first refusal matching period
from 20 years to five years. FERC Order 636-C is still
subject to potential rehearing at the FERC.
In September 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 percent 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. Ninety percent of the
cost recovery is being collected via demand surcharges on the
Company's firm transportation rates; the remaining 10 percent
should be recovered from its interruptible transportation
service.
Through December 31, 1996, the Company has paid $76.2
million and expects to pay no more than $80.0 million for GSR
costs, primarily as a result of contract terminations. The
Company has recovered approximately $58.6 million, plus
interest, in GSR costs and has recorded a regulatory asset of
approximately $8.6 million for the estimated future recovery
of its GSR costs, most of which will be collected from
customers prior to December 31, 1997.
Additionally, the Company's transition costs included
unrecovered purchased gas costs for periods prior to November
1, 1993, pursuant to FERC Order 636. In October 1995, the
Company received FERC approval of a settlement with its
customers, under which requirements the Company absorbed
approximately $0.7 million of these costs, which was
recognized as expense in 1995. Refunds of overrecovered
amounts totaling $4 million were issued in December 1995 and
January 1996.
General Rate Issues
In September 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 in September 1995, and approved by the FERC on February
20, 1996. Refunds of approximately $23.2 million including
interest, for which the Company had provided a reserve, were
made to customers in April 1996.
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 percent 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.
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 gas purchase contract was terminated and the lawsuit
dismissed, with prejudice, by court order issued December 2,
1996, pursuant to a settlement between the Company and Ergon.
Amounts paid Ergon to terminate the gas purchase contract are
included in the GSR costs discussed above.
Other Litigation
On July 18, 1996, an individual filed a lawsuit in the
United States District Court for the District of Columbia
against 70 natural gas pipelines and other gas purchasers or
former gas purchasers. All of Williams' natural gas pipeline
subsidiaries, including the Company, are named as defendants
in the lawsuit. The plaintiff claims, on behalf of the United
States under the False Claims Act, that the pipelines have
incorrectly measured the heating value or volume of gas
purchased by the defendants. The plaintiff claims that the
United States has lost royalty payments as a result of these
practices. The Williams' natural gas pipeline subsidiaries,
as well as other natural gas pipelines, intend to vigorously
defend against these claims.
Environmental Matters
As of December 31, 1996, the Company had a reserve of
approximately $4 million for estimated 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. 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 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 U. S. 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
reserve discussed above.
The Company currently is either named as a potentially
responsible party or has received an information request
regarding its potential involvement at certain Superfund and
state waste disposal sites. The anticipated remediation
costs, if any, associated with these sites have been included
in the reserve discussed above.
The Company considers environmental assessment and
remediation costs and costs associated with compliance with
environmental standards to be recoverable through rates, as
they are prudent costs incurred in the ordinary course of
business. The actual costs incurred will depend on the actual
amount and extent of contamination discovered, the final
cleanup standards mandated by the EPA or other governmental
authorities, and other factors. The Company's current rate
design incorporates the recovery of anticipated environmental
costs, and it is the Company's intent to continue seeking
recovery of such costs, as anticipated, through rate filings.
Therefore, the estimated recoveries 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, potential recovery from customers or other
indemnification arrangements, will have a materially adverse
effect on the Company's future financial position, results of
operations or cash flow requirements.
D. Income Taxes
Following is a summary of the provision for income taxes
for the year ended December 31, 1996, the period January 18,
1995 to December 31, 1995, the period January 1, 1995 to
January 17, 1995, and the year ended December 31, 1994
(expressed in thousands):
Post-Acquisition Pre-Acquisition
For the For the
Period Period
For the January 18, January 1, For the
Year Ended 1995 to 1995 to Year Ended
December 31, December 31, January 17, December 31,
1996 1995 1995 1994
Current Provision (benefit):
Federal $ 11,054 $ 26,039 $ 2,049 $(3,645)
State 2,139 7,765 530 (278)
13,193 33,804 2,579 (3,923)
Deferred Provision (benefit):
Federal 10,517 (9,269) (572) 21,868
State 2,262 (1,993) (123) 5,117
12,779 (11,262) (695) 26,985
Income tax provision $ 25,972 $ 22,542 $ 1,884 $ 23,062
Reconciliations from the income tax provision at the
statutory rate to the Company's income tax provision are as
follows (expressed in thousands):
Post-Acquisition Pre-Acquisition
For the For the
Period Period
For the January 18, January 1, For the
Year Ended 1995 to 1995 to Year Ended
December 31, December 31, January 17, December 31,
1996 1995 1995 1994
Provision (benefit) at
statutory rate $ 25,253 $ 17,804 $ (501) $ 19,439
Increases in taxes
resulting from:
State income taxes 2,860 4,373 295 3,217
Compensation expense in
excess of tax deductible
amounts - - 2,073 -
Provision adjustment to
prior years tax return (2,271) - - -
Other, net 130 365 17 406
Income tax provision $ 25,972 $ 22,542 $ 1,884 $ 23,062
Significant components of deferred tax liabilities and
assets as of December 31 are as follows (expressed in
thousands):
1996 1995
Deferred tax liabilities:
Costs refundable to customers:
Gas purchases $ - $ 1,066
Gas supply realignment 1,909 -
Fuel 3,222 1,729
Property, plant and equipment:
Tax over book depreciation,
net of gains 50,006 44,049
Other basis differences 104,261 104,753
Other 4,795 4,740
Total deferred tax liabilities 164,193 156,337
Deferred tax assets:
Costs recoverable from customers:
Gas supply realignment - 2,239
Transportation 1,243 2,259
Accrued employee benefits 5,998 3,875
Producer settlement costs 1,104 1,143
Reserve for rate refund - 10,110
Miscellaneous deferrals 4,254 -
Gas stored underground--additional
tax basis 3,130 3,080
Debt related items 4,453 5,601
Other 5,668 2,466
Total deferred tax assets 25,850 30,773
Net deferred tax liabilities $138,343 $125,564
E. Financing
Long-term Debt
At December 31, 1996 and 1995, long-term debt issues were
outstanding as follows (expressed in thousands):
1996 1995
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 3,611 5,860
Total long-term debt $253,611 $255,860
For financial statement reporting purposes, a $100 million
current debt obligation has been classified as noncurrent
based on the Company's intent and ability to refinance on a
long-term basis. Although the amount available under the $1
billion credit agreement, as discussed below, is sufficient to
meet this obligation, the Company plans to issue new long-term
debt by July 15, 1997 to replace its maturing debt.
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.
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.
The Company is a participant with other Williams
subsidiaries in a $1 billion credit agreement under which the
Company may borrow up to $200 million, subject to borrowings
by other affiliated companies. Interest rates vary with
current market conditions. To date, the Company has no
amounts outstanding under this facility.
F. Employee Benefit Plans
Retirement Plan
Substantially all of the Company's employees are covered
under a non-contributory 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 fully funded 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, United States government securities,
corporate bonds 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.
The following table sets forth the funded status of the
Retirement Plan at December 31, 1996 and 1995, and the prepaid
pension costs as of December 31, 1996 and 1995, (expressed in
thousands):
1996 1995
Actuarial present value of accumulated
benefit obligation, including vested
benefits of $32,320 at December 31, 1996,
and $31,344 at December 31, 1995 $(38,732) $(33,557)
Actuarial present value of projected
benefit obligation $(62,881) $(54,259)
Plan assets at fair value 116,317 99,946
Plan assets in excess of projected benefit
obligation 53,436 45,687
Unrecognized net gain (43,713) (40,636)
Unrecognized prior service cost (1,331) (1,427)
Prepaid pension costs $ 8,392 $ 3,624
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 the
Company's net periodic pension cost, net of regulatory
deferrals, which is included in the accompanying financial
statements, for the years ended December 31, 1996, 1995 and
1994 (expressed in thousands):
1996 1995 1994
Service cost-benefits earned during
the period $ 3,029 $ 2,383 $ 4,175
Interest cost on projected benefit
obligation 4,295 5,665 5,993
Actual return on plan assets (17,791) (24,285) (3,431)
Net amortization and deferral 5,699 16,357 (7,185)
Net periodic pension cost (income) (4,768) 120 (448)
Regulatory deferral 4,768 (120) 448
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 1996 and 1995:
1996 1995
Discount rate 7.50% 7.25%
Rate of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate of
return on assets 10.00% 10.00%
The Company recognizes expense concurrent with the recovery
in rates. Since the Company's Retirement Plan is fully
funded, the Company is not currently recovering any amounts
through rates.
Postretirement Benefits Other than Pensions
Effective January 1, 1996, the Company began participation
in Williams' health care plan which provides postretirement
medical benefits to retired employees who were employed full
time, hired prior to January 1, 1996, and have met certain
other requirements. Net postretirement benefit expense for
1996 related to the Company's participation in the Williams'
plan is $10.7 million, including $6.9 million of amortization
of a regulatory asset. The regulatory asset represents
unrecovered costs from prior years, including the unamortized
transition obligation under SFAS No. 106, which was recognized
at the date of acquisition by Williams. This asset is being
amortized concurrent with the recovery of these costs through
rates. As a result of the acquisition by Williams, the
Company recognized the unamortized transition obligation as a
regulatory asset. The regulatory asset balances as of
December 31, 1996 and 1995 were $52 million and $59 million,
respectively. Based on the 1996 level of amortization, the
regulatory asset balance should be recovered through rates in
approximately 9 years.
Effective January 1, 1997, Williams' health care plan was
amended to increase the cost-sharing provisions. This
amendment decreased the accumulated postretirement benefit
obligation related to the Company by approximately $9 million.
Prior to January 1, 1996, the Company maintained its own
plan which provided medical and life insurance benefits to
Company employees who retired under the Company's Retirement
Plan with at least five years of service. The plan was
contributory for medical benefits and for life insurance
benefits in excess of specified limits.
The following table sets forth the funded status of the
Company's plan at December 31, 1995, reconciled with the
accrued postretirement benefit cost included in the
accompanying balance sheet (expressed in thousands):
1995
Accumulated postretirement benefit obligation:
Retirees $(71,742)
Fully eligible active plan participants (818)
Other active plan participants (13,837)
(86,397)
Plan assets at fair value 40,089
Accumulated postretirement benefit obligation
in excess of plan assets (46,308)
Unrecognized net gain (12,274)
Prior service cost (2,202)
Accrued postretirement benefit cost $(60,784)
The following table sets forth the components of the net
periodic postretirement benefit cost, net of regulatory
amortization, which is included in the accompanying financial
statements for the years ended December 31, 1995 and 1994
(expressed in thousands):
1995 1994
Service cost-benefits earned during
the period $ 2,255 $ 2,985
Interest cost on accumulated post-
retirement benefit obligation 6,937 6,585
Actual return on plan assets (6,350) (583)
Amortization of transition obligation - 3,238
Net amortization and deferral 4,024 (1,400)
Net periodic postretirement
benefit cost 6,866 10,825
Regulatory recovery (deferral) of
unamortized costs 4,063 (543)
Net periodic postretirement
benefit expense $ 10,929 $ 10,282
The following table summarizes the various assumptions used
to determine the projected benefit obligation for 1995:
1995
Discount rate 7.25%
Rate of increase in future compensation levels 5.00%
Expected long-term rate of return on assets 6.00%
The medical benefits are funded for all retired Company
employees at a specified amount per quarter through a master
trust established under the provisions of section 501(c)(9) of
the Internal Revenue Code. The master trust is managed by
external investment organizations and consists primarily of
domestic and foreign common stocks, government bonds and
commercial paper.
Other
The Company maintains various defined contribution plans
covering substantially all employees. Company contributions
are based on employees' compensation and, in part, match
employee contributions. Since the acquisition, Company
contributions are invested primarily in Williams common stock.
The Company's contributions to these plans were $2.5 million
in 1996, $2.5 million in 1995 and $1.9 million in 1994.
G. 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, 1996 and 1995.
The carrying amount and estimated fair values of the
Company's financial instruments as of December 31, 1996 and
1995, are as follows (expressed in thousands):
Carrying Fair
Amount Value
1996 1995 1996 1995
Financial Assets:
Cash and short-term
financial assets $147,285 $113,508 $147,285 $113,508
Long-term notes receivable 25,000 125,000 25,000 125,000
Financial Liabilities:
Long-term debt 253,611 255,860 265,934 278,000
Sale of Receivables
The Company sells, with limited recourse, certain
receivables. The limit under the revolving receivables
facility was $35 million at December 31, 1996 and 1995. The
Company received $13.9 million of proceeds in 1996, $27.7
million in 1995 and $34.5 million in 1994. At December 31,
1996 and 1995, $24.2 million and $27.1 million of such
receivables had been sold, respectively. Based on amounts
outstanding at December 31, 1996, the maximum contractual
credit loss under these arrangements is approximately $4
million, but the likelihood of loss is remote.
The Financial Accounting Standards Board has issued a new
accounting standard, SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities," effective for transactions occurring after
December 31, 1996. The adoption of this standard is not
expected to have a materially adverse impact on the Company's
future financial position, results of operations, or cash flow
requirements.
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.
H. Major Customers
The Company did not have any major customer which accounted
for more than ten percent of total operating revenues in 1996
or 1994. Listed below are sales and transportation revenues
received from the Company's major customer in 1995,
Transcontinental Gas Pipe Line Corporation, an affiliate of
the Company, portions of which are included in the refund
reserves discussed in Note C (expressed in thousands):
Post-Acquisition Pre-Acquisition
For the For the
Period Period
For the January 18, January 1, For the
Year Ended 1995 to 1995 to Year Ended
December 31, December 31, January 17, December 31,
1996 1995 1995 1994
Transcontinental Gas Pipe
Line Corporation $16,556 $34,958 $1,481 $35,705
I. Stock-Based Compensation
Williams has several plans providing for common stock-based
awards to its employees and employees of its subsidiaries.
The plans permit the granting of various types of awards
including, but not limited to, stock options, stock
appreciation rights, restricted stock and deferred stock. The
purchase price per share for stock options may not be less
than the market price of the underlying stock on the date of
grant. Stock options generally become exercisable after five
years, subject to accelerated vesting if certain future stock
prices are achieved. Stock options expire 10 years after
grant.
Williams' employee stock-based awards are accounted for
under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees" and related
interpretations. Williams' fixed plan common stock options do
not result in compensation expense because the exercise price
of the stock options equals the market price of the underlying
stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
requires that companies who continue to apply APB Opinion No.
25 disclose pro forma net income assuming that the fair-value
method in SFAS No. 123 had been applied in measuring
compensation cost. Pro forma net income for the Company,
beginning with 1995 employee stock-based awards was $46.1
million and $24.1 million for 1996 and 1995, respectively.
Reported net income was $46.2 million and $25.0 million for
1996 and 1995, respectively. Pro forma amounts for 1995
reflect total compensation expense from the awards made in
1995 as these awards fully vested as a result of the
accelerated vesting provisions. Pro forma amounts for 1996
reflect compensation expense that may not be representative of
future years amounts because the compensation expense from
stock options is recognized in future years over the vesting
period, and additional awards generally are made each year.
Stock options granted to employees of the Company in 1996
were 242,250 shares at a weighted average grant date fair
value of $7.84. At December 31, 1996, stock options
outstanding and options exercisable for employees of the
Company were 551,070 shares and 293,461 shares, respectively.
J. Quarterly Information (Unaudited)
The following summarizes selected quarterly financial data
for 1996 and 1995 (expressed in thousands):
Post-Acquisition
1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating revenues $122,970 $ 75,124 $64,383 $ 97,301
Operating expenses 82,908 64,269 62,490 68,880
Operating income 40,062 10,855 1,893 28,421
Interest expense 5,316 5,281 5,198 5,128
Other income, net (3,253) (3,089) (2,986) (2,516)
Income (loss) before
income taxes 37,999 8,663 (319) 25,809
Provision for income taxes 15,057 3,328 43 7,544
Net income (loss) $ 22,942 $ 5,335 $ (362) $ 18,265
Post-Acquisition
Pre-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 (loss) income (812) 22,994 8,847 2,879 27,372
Interest expense 1,122 4,634 5,703 5,857 7,326
Other income, net (504) (1,922) (3,214) (3,283) (3,877)
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 (loss) income $ (3,314) $ 11,807 $ 3,240 $ (511) $ 13,790
Item 9. Disagreements on Accounting and Financial Disclosure.
Not Applicable.
Part IV
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
Balance Sheets at December 31, 1996 and 1995
Statements of Income for the year ended
December 31, 1996, for the period January 18, 1995 to
December 31, 1995, for the period January 1, 1995 to
January 17, 1995 and for the year ended December 31, 1994
Statements of Retained Earnings and Paid-In
Capital for the year ended December 31, 1996, for the
period January 18, 1995 to December 31, 1995, for the
period January 1, 1995 to January 17, 1995 and for the
year ended December 31, 1994
Statements of Cash Flows for the year ended
December 31, 1996, for the period January 18, 1995 to
December 31, 1995, for the period January 1, 1995 to
January 17, 1995 and for the year ended December 31, 1994
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 (incorporated by reference
to Exhibit 3.2 of the 1995 Form 10-K - File No. 1-4169).
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, 1997
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.
/s/ Frank M. Semple * Director
Frank M. Semple
*By: /s/ E. J. Ralph Vice President, Treasurer, Controller,
E. J. Ralph and Assistant Secretary
Dated: March 27, 1997