Back to GetFilings.com
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, 1997
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, 1998
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE
FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
TABLE OF CONTENTS
1997 FORM 10-K
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
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 ................................... 8
Item 7. Management's Narrative Analysis of the Results of
Operations ............................................ 8
Item 8. Financial Statements and Supplementary Data ............. 12
Item 9. Disagreements on Accounting and Financial Disclosure..... 34
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ........................................... 34
Part I
Item 1. Business.
GENERAL
Effective May 1, 1997, Texas Gas Transmission Corporation
and its wholly owned subsidiary, TGT Enterprises, Inc.,
(collectively, the Company) became a wholly owned subsidiary
of Williams Interstate Natural Gas Systems, Inc., which is a
wholly owned subsidiary of The Williams Companies, Inc.
(Williams). Prior to May 1, 1997, the Company was a wholly
owned subsidiary of Williams. As used herein, Williams refers
to The Williams Companies, Inc., together with its wholly
owned subsidiaries, unless the context otherwise requires.
Effective May 1, 1995, the Company became a wholly owned
subsidiary of Williams. Prior to that date, the Company was a
wholly owned subsidiary of Transco Gas Company, which was a
wholly owned subsidiary of Transco Energy Company (Transco).
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, 1997, 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 a majority of its storage
gas which it uses, in part to meet operational balancing needs
on its system, in part to meet the requirements of the
Company's firm and interruptible storage customers, 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 1997, 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 110
distribution companies and municipalities for resale to
residential, commercial and industrial users. Transportation
services were provided to approximately 20 industrial
customers located along the system. At December 31, 1997, the
Company had transportation contracts with approximately 588
shippers. Transportation shippers include distribution
companies, municipalities, intrastate pipelines, direct
industrial users, electrical generators, marketers and
producers. The largest customer of the Company in 1997,
Proliance Energy, accounted for approximately 12.4 percent of
total operating revenues. No other customers accounted for
more than 10 percent of total operating revenues during 1997.
The Company's firm transportation and storage 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
transportation volumes for the periods shown (expressed in
trillion British thermal units [TBtu]):
Year Ended December 31,
1997 1996 1995
Transportation Volumes 773.6 794.5 693.3
Average Daily Transportation Volumes: 2.1 2.2 1.9
Average Daily Firm Reserved Capacity: 2.2 2.1 2.0
REGULATORY MATTERS
The Company is subject to regulation by the Federal Energy
Regulatory Commission (FERC) under the Natural Gas Act of 1938
(Natural Gas Act) and under the Natural Gas Policy Act of 1978
(NGPA), 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, including
depreciation rates, (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 April 30, 1997, the Company filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. This rate case reflects a requested annual revenue
increase of approximately $70.9 million, based on filed rates,
primarily attributable to increases in the utility rate base,
operating expenses and rate of return and related taxes.
The Company, FERC staff, and intervenors have reached a
proposed settlement of the case which was filed with the FERC
on March 20, 1998. The Company has provided an adequate
reserve for amounts, including interest, which may be refunded
to customers.
For discussion of other regulatory matters affecting the
Company, see Note C of Notes to Consolidated 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 Consolidated Financial
Statements contained in Item 8 hereof.
COMPETITION
The FERC continues to regulate interstate natural gas
pipeline companies pursuant to the Natural Gas Act and the
NGPA. However, competition has led to a buyers' market in the
natural gas industry for both the commodity and pipeline
capacity. This market is characterized by a shifting customer
base from local distribution companies to marketers and
producers and an increased reliance by customers on capacity
obtained through the release market. Low growth in demand,
excess supply, and an over-abundance of annual pipeline
capacity have all contributed to the current situation. In
addition, future load growth is expected to occur primarily in
price-sensitive markets which will limit gas price increases
to the price of competing fuels. This problem is compounded
by the fact that large volumes of natural gas reserves found
in western Canada, previously confined to low growth,
competitive areas of North America, appear now to be headed
for the Chicago, Illinois area and the Northeast portion of
the United States where there is already adequate pipeline
capacity and growing supply access due to increased drilling
activity in the Gulf of Mexico states.
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 continuing to work diligently to replace any
and all markets made available by capacity turnback, as well
as to pursue new markets. During 1997, the Company remarketed
all capacity that was turned back without significant
discounting and has either renegotiated, extended, or renewed
contracts for over 90 percent of the capacity subject to
turnback in 1998. The Company anticipates that it will
continue to be able to remarket all future capacity subject to
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 942 employees as of December 31, 1997.
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 Consolidated 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 182 of
the Company's 435 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,
availability and cost of capital, changes in laws and
regulations to which the Company is subject, including tax,
environmental and employment laws and regulations, and the
cost and effects of legal and administrative claims and
proceedings against the Company or which may be brought
against the Company; (ii) risks and uncertainties related to
the impact of future federal and state regulation of business
activities, including allowed rates of return, and the
resolution of other matters discussed herein; 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 Consolidated 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, 1997, all of the outstanding
shares of the Company's common stock are owned by Williams
Interstate Natural Gas Systems, Inc., a wholly owned
subsidiary of Williams. 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 Consolidated 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, 1997, 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.
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.
Year 2000 Compliance
Williams has initiated an enterprise-wide project to
address the year 2000 compliance issue for all technology
hardware and software, external interfaces with customers and
suppliers, operations process control, automation and
instrumentation systems, and facility items. The assessment
phase of this project as it relates to the Company should be
substantially complete by the end of the first quarter of
1998. Necessary conversion and replacement activities will
begin in 1998 and continue through mid-1999. Testing of
systems has begun and will continue throughout the process.
Williams has initiated a formal communications process with
other companies with which Williams' systems interface or rely
on to determine the extent to which those companies are
addressing their year 2000 compliance. Where necessary,
Williams will be working with those companies to mitigate any
material adverse effect on Williams.
Williams expects to utilize both internal and external
resources to complete this process. Existing resources will
be redeployed and previously planned system replacements will
be accelerated during this time. Costs incurred for new
software and hardware purchases will be capitalized and other
costs will be expensed as incurred. The Company considers
costs associated with the year 2000 compliance to be prudent
costs incurred in the ordinary course of business and,
therefore, recoverable through rates. While the total costs
of this project are still being evaluated, the Company
estimates that external costs, excluding previously planned
system replacements, necessary to complete the project within
the schedule described will be immaterial. The costs of the
project and the completion dates are based on management's
best estimates, which were derived utilizing numerous
assumptions of future events, including the continued
availability of certain resources, third party year 2000
compliance modification plans, and other factors. There can
be no guarantee that these estimates will be achieved, and
actual results could differ materially from these estimates.
Financial Analysis of Operations
The Company's gas sales result from requirements to meet
its pre-Order 636 gas purchase commitments, which are managed
by the Company's gas marketing affiliate, Williams Energy
Services Company, as exclusive agent for the Company.
Although the sales and purchase commitments remain in the
Company's name, their management and any associated profit or
loss is solely the responsibility of the agent. Therefore,
the resulting sales and purchases have no impact on the
Company's results of operations.
1997 Compared to 1996
Operating income was $2.9 million higher for the year ended
December 31, 1997, than for 1996. The increase in operating
income was primarily attributable to favorable resolutions in
1997 of certain contractual and regulatory issues and
efficiency gains, substantially offset by favorable 1996
adjustments to rate refund accruals and lower revenue from gas
processing. Compared to 1996, net income was $3.0 million
lower, due primarily to lower interest on advances to Williams
and higher effective income tax rates, partially offset by the
changes to operating income discussed above.
Operating revenues decreased $41.4 million primarily
attributable to lower gas sales, lower gas processing revenues
and lower transportation revenues attributable to lower costs
passed through to customers as provided in the Company's
rates. System deliveries were 773.6 TBtu and 794.5 TBtu for
the years ended December 31, 1997 and 1996, respectively,
which also contributed to lower revenues.
Operating costs and expenses decreased $44.3 million
primarily attributable to lower costs of gas sold, lower costs
of gas transportation and efficiency gains. Costs of gas
transportation are passed through to customers and decreased
partially due to the suspension of the surcharge for the
collection of gas supply realignment costs applicable to firm
transportation, as discussed in Note C of Notes to
Consolidated Financial Statements contained in Item 8 hereof.
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.
Financial Condition and Liquidity
Through the years, the Company has consistently maintained
its financial strength and experienced strong operational
results. Williams' ownership of the Company 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.
The Company filed a Form S-3 Registration Statement with
the SEC on May 16, 1997, to register debt securities of $200
million to be offered for sale on a delayed or continuous
basis. On July 15, 1997, the Company sold $100 million of 7
1/4% Debentures due July 15, 2027. The Debentures have no
sinking funds and may be called at any time, at the Company's
option, in whole or in part, at a specified redemption price,
plus accrued and unpaid interest to the date of redemption.
Proceeds from the sale of the Debentures were used to retire
the Company's 9 5/8% Notes, which matured on July 15, 1997.
The Company is a participant in Williams' cash management
program. The advances due the Company by Williams are
represented by demand notes payable. 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 0.325%.
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, 1997 and 1996, $29.6 million and
$24.2 million, respectively, of such receivables were sold.
The Company's capital expenditures for the years ended
December 31, 1997 and 1996, were $74.5 million and $50.1
million, respectively.
On July 21, 1997, the Company filed an application with
the FERC to authorize construction, installation and operation
of a 4,600 horsepower compressor engine and associated
facilities at its Haughton Compressor Station in Louisiana.
The Company received an order on March 17, 1998, issuing a
certificate authorizing the construction and operation of
facilities. The project is expected to cost approximately $6
million, and the Company proposes to have the facilities in
service by November 1, 1998.
The Company's debt as a percentage of total capitalization
at December 31, 1997 and 1996, was 28.1% and 27.0%,
respectively.
On April 30, 1997, the Company filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. This rate case reflects a requested annual revenue
increase of approximately $70.9 million, based on filed rates,
primarily attributable to increases in the utility rate base,
operating expenses and rate of return and related taxes.
The Company, FERC staff, and intervenors have reached a
proposed settlement of the case which was filed with the FERC
on March 20, 1998. The Company has provided an adequate
reserve for amounts, including interest, which may be refunded
to customers.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT AUDITORS
Texas Gas Transmission Corporation
The Board of Directors
We have audited the accompanying consolidated balance
sheets of Texas Gas Transmission Corporation as of December
31, 1997 and 1996, and the related consolidated statements of
income, retained earnings and paid-in capital and cash flows
for the years ended December 31, 1997 and 1996, and the
periods from January 1, 1995 to January 17, 1995, and from
January 18, 1995 to December 31, 1995. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated 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
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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Texas Gas Transmission Corporation
at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years ended December 31,
1997 and 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 13, 1998
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, December 31,
ASSETS 1997 1996
Current Assets:
Cash and temporary cash investments $ 235 $ 115
Receivables:
Trade 2,937 8,415
Affiliates 284 1,409
Other 3,835 2,136
Advances to affiliates 93,500 147,144
Inventories 15,531 15,081
Deferred income taxes 18,179 4,945
Costs recoverable from customers 16,311 26,620
Gas stored underground 11,115 11,115
Other 1,690 1,311
Total current assets 163,617 218,291
Advances to Affiliates - 25,000
Investments, at cost 1,224 1,339
Property, Plant and Equipment, at cost:
Natural gas transmission plant 885,763 823,927
Other natural gas plant 136,891 134,969
1,022,654 958,896
Less - Accumulated depreciation
and amortization 98,649 65,265
Property, plant and equipment, net 924,005 893,631
Other Assets:
Gas stored underground 97,984 100,709
Costs recoverable from customers 45,504 54,817
Other 24,809 13,313
Total other assets 168,297 168,839
Total Assets $1,257,143 $1,307,100
The accompanying notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, December 31,
1997 1996
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Payables:
Trade $ 2,558 $ 4,850
Affiliates 11,939 41,954
Other 8,302 9,252
Gas payables:
Transportation and exchange 1,173 3,306
Storage 13,343 2,086
Accrued liabilities 78,201 70,531
Costs refundable to customers 1,649 1,626
Reserve for regulatory and rate matters 11,319 -
Total current liabilities 128,484 133,605
Long-Term Debt 251,433 253,611
Other Liabilities and Deferred Credits:
Deferred income taxes 150,113 143,288
Postretirement benefits other than
pensions 35,683 43,765
Other 49,040 47,951
Total other liabilities and
deferred credits 234,836 235,004
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 636,046 678,146
Retained earnings 6,343 6,733
Total stockholder's equity 642,390 684,880
Total Liabilities and
Stockholder's Equity $1,257,143 $1,307,100
The accompanying notes are an integral part of these
consolidated 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 consolidated financial statements which
affects the comparability of the post-acquisition and pre-
acquisition results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
Pre-
Post-Acquisition Acquisition
For the For the
Period Period
January 18, January 1,
For the Year Ended 1995 to 1995 to
December 31, December 31, January 17,
1997 1996 1995 1995
Operating Revenues:
Gas transportation $291,209 $300,792 $268,844 $ 15,932
Gas sales 25,413 56,700 51,774 3,239
Other 1,715 2,286 2,285 130
Total operating revenues 318,337 359,778 322,903 19,301
Operating Costs and Expenses:
Cost of gas transportation 31,314 39,289 41,139 2,134
Cost of gas sold 25,454 56,013 51,328 3,188
Operation and maintenance 62,340 65,014 58,232 2,433
Administrative and general 57,551 61,685 57,517 3,086
Provision for severance benefits - - - 6,772
Depreciation and amortization 42,538 41,531 38,863 1,779
Taxes other than income taxes 15,019 15,015 13,732 721
Total operating costs and
expenses 234,216 278,547 260,811 20,113
Operating Income (Loss) 84,121 81,231 62,092 (812)
Other (Income) Deductions:
Interest expense 20,026 20,923 23,520 1,122
Interest income (7,220) (12,450) (12,534) (560)
Miscellaneous other (income)
deductions - net (274) 606 238 56
Total other deductions 12,532 9,079 11,224 618
Income (Loss) Before Income Taxes 71,589 72,152 50,868 (1,430)
Provision for Income Taxes 28,370 25,972 22,542 1,884
Net Income (Loss) $ 43,219 $ 46,180 $ 28,326 $ (3,314)
The accompanying notes are an integral part of these
consolidated 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 consolidated financial statements which
affects the comparability of the post-acquisition and pre-
acquisition results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
AND PAID-IN CAPITAL
(Thousands of Dollars)
Retained Paid-in
Earnings Capital
Pre-Acquisition
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 -
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
Add (deduct):
Net Income 43,219 -
Dividends on common stock
and returns of capital (43,609) (42,100)
Balance, December 31, 1997 $ 6,343 $636,046
The accompanying notes are an integral part of these
consolidated 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 consolidated financial statements which affects
the comparability of the post-acquisition and pre-acquisition
results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Pre-
Post-Acquisition Acquisition
For the For the
Period Period
January 18, January 1,
For the Year Ended 1995 to 1995 to
December 31, December 31, January 17,
1997 1996 1995 1995
OPERATING ACTIVITIES:
Net income (loss) $ 43,219 $ 46,180 $ 28,326 $ (3,314)
Adjustments to reconcile to cash
provided from operations:
Depreciation and amortization 42,538 41,531 38,863 1,779 (Benefit) provision for deferred
income taxes (6,408) 12,778 (11,262) (695)
Changes in receivables sold 5,400 (2,900) 100 (14,806)
Changes in receivables (1,620) 2,775 19,220 2,113
Changes in inventories (450) (374) 359 118
Changes in other current assets 10,959 13,265 35,265 2,048
Changes in accounts payable (3,242) (13,483) 10,545 (3,607)
Changes in accrued liabilities 27,799 (48,656) 2,964 4,913
Other, including changes in non-
current assets and
liabilities (29,378) 33,970 29,132 5,490
Net cash provided by
(used in) operating
activities 88,817 85,086 153,512 (5,961)
FINANCING ACTIVITIES:
Proceeds from long-term debt 99,031 - - -
Payment of long-term debt (100,000) - - -
Dividends and returns of capital (85,709) (102,080) (30,000) -
Other -- net (8,173) - 112 59
Net cash (used in) provided by
financing activities (94,851) (102,080) (29,888) 59
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures,
net of AFUDC (74,549) (50,091) (33,042) (1,898)
Proceeds from sales and
salvage values, net
of costs of removal 2,059 849 1,878 (21)
Advances to affiliates, net 78,644 66,145 (93,197) 7,852
Net cash provided by
(used in) investing
activities 6,154 16,903 (124,361) 5,933
Increase (decrease) in cash
and cash equivalents 120 (91) (737) 31
Cash and cash equivalents at
beginning of period 115 206 943 912
Cash and cash equivalents at
end of period $ 235 $ 115 $ 206 $ 943
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the
period for:
Interest (net of amount
capitalized) $ 21,806 $ 23,426 $ 20,750 $ 4,856
Income taxes (refunds), net 33,944 9,431 27,085 (7,395)
The accompanying notes are an integral part of these
consolidated financial statements.
TEXAS GAS TRANSMISSION CORPORATION AND SUBISIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Corporate Structure and Control, Nature of Operations and
Basis of Presentation
Corporate Structure and Control
Effective May 1, 1997, Texas Gas Transmission Corporation
and its wholly owned subsidiary, TGT Enterprises, Inc.,
(collectively, the Company) became a wholly owned subsidiary
of Williams Interstate Natural Gas Systems, Inc., which is a
wholly owned subsidiary of The Williams Companies, Inc.
(Williams). Prior to May 1, 1997, the Company was a wholly
owned subsidiary of Williams. As used herein, Williams refers
to The Williams Companies, Inc., together with its wholly
owned subsidiaries, unless the context otherwise requires.
Effective May 1, 1995, the Company became a wholly owned
subsidiary of 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).
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.
Included in property, plant and equipment at December 31,
1997, 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 consolidated 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
Consolidated Statement of Income and Consolidated 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. The Company is a
participant in Williams' cash management program. The
advances due the Company by Williams are represented by demand
notes payable. 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 0.325%. Net interest income on advances to or from
affiliated companies was $7.0 million, $12.0 million and $11.9
million for the years ended December 31, 1997, 1996 and 1995,
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 $5.2
million, $5.6 million and $11.3 million for the years ended
December 31, 1997, 1996 and 1995, 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.
Included in the Company's gas sales revenues for the years
ended December 31, 1997, 1996 and 1995, is $5.7 million, $22.4
million and $17.4 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, 1997, 1996 and 1995, are amounts
applicable to transportation for affiliates as follows
(expressed in thousands):
Year Ended December 31,
1997 1996 1995
Williams Energy Services Company/Transco
Gas Marketing Company $3,183 $ 2,245 $ 2,626
Transcontinental Gas Pipe Line
Corporation 4,305 17,460 36,439
$7,488 $19,705 $39,065
Included in the Company's cost of gas sold for the years
ended December 31, 1997, 1996 and 1995, is $19.7 million,
$31.5 million and $25.6 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.
For federal income tax reporting, the Company is included
in the consolidated federal income tax return of Williams. It
is Williams' policy to charge or credit each subsidiary with
an amount equivalent to its federal income tax expense or
benefit as if each subsidiary filed a separate return.
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, 1997, 1996 and 1995, was $0.7 million, $0.4
million and $0.2 million, respectively. The allowance for equity
funds for the years ended December 31, 1997, 1996 and 1995,
was $1.6 million, $0.7 million and $0.4 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, in
part to meet the requirements of the Company's firm and
interruptible storage customers, 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 a receivable or payable in
the accompanying balance sheets. Settlement of imbalances
requires agreement between the pipeline and shippers as to
allocations of volumes to specific transportation contracts
and timing of delivery of gas based on operational conditions.
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.
Adoption of Accounting Standards
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after
December 15, 1997. These pronouncements will not materially
change the Company's financial reporting and disclosures.
Reclassifications
Certain reclassifications have been made in the 1996 and
1995 financial statements to conform to the 1997 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.
In July 1996, the United States Court of Appeals for the
District of Columbia issued an order which in part affirmed
and in part remanded FERC Order 636. 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, is not
subject to appeal and 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 collected through demand surcharges on
the Company's firmtransportation rates; the remaining 10
percent should be recovered from its interruptible trans-
portation service. Effective July 1, 1997, the FERC
allowed the Company to suspend its GSR surcharge applicable
to firm transportation (FT) services due to the full recovery
of incurred GSR costs allocated to firm services. The GSR cost
increment included in the interruptible transportation rates,
as well as no-notice and FT overrun rates, remains in effect.
To date, the Company has paid $76.2 million and collected $65.8
million, plus interest, related to GSR. The Company expects to
pay no more than $80 million for GSR costs, primarily as a result
of contract terminations, and has provided reserves for the
remaining GSR costs it may be required to pay, as well as a
regulatory asset for the estimated future amounts
recoverable.
General Rate Issues
On April 30, 1997, the Company filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. This rate case reflects a requested annual revenue
increase of approximately $70.9 million, based on filed rates,
primarily attributable to increases in the utility rate base,
operating expenses and rate of return and related taxes.
The Company, FERC staff, and intervenors have reached a
proposed settlement of the case which was filed with the FERC
on March 20, 1998. The Company has provided an adequate
reserve for amounts, including interest, which may be refunded
to customers.
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.
Pursuant to such an indemnity, in January 1998, the Company
reimbursed a producer for approximately $1.7 million in costs
paid to settle a take-or-pay royalty claim. 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.
Environmental Matters
As of December 31, 1997, the Company had a reserve of
approximately $2.1 million for estimated costs associated with
environmental assessment and remediation, including
remediation associated with the historical use of
polychlorinated biphenyls and hydrocarbons. This estimate
depends upon a number of assumptions concerning the scope of
remediation that will be required at certain locations and the
cost of remedial measures to be undertaken. 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 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 U.S. Environmental
Protection Agency or other governmental authorities, and other
factors.
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 years ended December 31, 1997 and 1996, the period
January 18, 1995 to December 31, 1995, and the period January
1, 1995 to January 17, 1995 (expressed in thousands):
Pre-
Post-Acquisition Acquisition
For the For the
Period Period
January 18, January 1,
For the Year Ended 1995 to 1995 to
December 31, December 31, January 17,
1997 1996 1995 1995
Curent provision:
Federal $ 28,637 $ 11,054 $ 26,039 $ 2,049
State 6,141 2,139 7,765 530
34,778 13,193 33,804 2,579
Deferred (benefit) provision:
Federal (5,274) 10,517 (9,269) (572)
State (1,134) 2,262 (1,993) (123)
(6,408) 12,779 (11,262) (695)
Income tax provision $ 28,370 $ 25,972 $ 22,542 $ 1,884
Reconciliations from the income tax provision at the
statutory rate to the Company's income tax provision are as
follows (expressed in thousands):
Pre-
Post-Acquisition Acquisition
For the For the
Period Period
January 18, January 1,
For the Year Ended 1995 to 1995 to
December 31, December 31, January 17,
1997 1996 1995 1995
Provision (benefit) at
statutory rate $ 25,056 $ 25,253 $ 17,804 $ (501)
Increases in taxes resulting
from:
State income taxes 3,255 2,860 4,373 295
Compensation expense in
excess of tax deductible
amounts - - - 2,073
Provision adjustment to
prior years tax return - (2,271) - -
Other, net 59 130 365 17
Income tax provision $ 28,370 $ 25,972 $ 22,542 $ 1,884
Significant components of deferred tax liabilities and
assets as of December 31, 1997 and 1996, are as follows
(expressed in thousands):
1997 1996
Deferred tax liabilities:
Costs refundable to customers:
Gas supply realignment $ - $ 1,909
Fuel 1,198 3,222
Property, plant and equipment:
Tax over book depreciation, net of gains 56,221 50,006
Other basis differences 103,984 104,261
Other 5,332 4,795
Total deferred tax liabilities 166,735 164,193
Deferred tax assets:
Costs recoverable from customers:
Gas supply realignment 962 -
Transportation 1,422 1,243
Accrued employee benefits 9,949 5,998
Producer settlement costs 412 1,104
Reserve for rate refund 5,623 -
Miscellaneous deferrals 2,800 4,254
Gas stored underground--additional tax basis 2,465 3,130
Debt related items 3,779 4,453
Other 7,389 5,668
Total deferred tax assets 34,801 25,850
Net deferred tax liabilities $131,934 $138,343
E. Financing
Long-term Debt
At December 31, 1997 and 1996, long-term debt issues were
outstanding as follows (expressed in thousands):
1997 1996
Debentures:
7 1/4% due 2027 $100,000 $ -
Notes:
9 5/8% due 1997 - 100,000
8 5/8% due 2004 150,000 150,000
250,000 250,000
Unamortized debt premium 1,433 3,611
Total long-term debt $251,433 $253,611
The Company filed a Form S-3 Registration Statement with
the SEC on May 16, 1997, to register debt securities of $200
million to be offered for sale on a delayed or continuous
basis. On July 15, 1997, the Company sold $100 million of 7
1/4% Debentures due July 15, 2027. The Debentures have no
sinking funds and may be called at any time, at the Company's
option, in whole or in part, at a specified redemption price,
plus accrued and unpaid interest to the date of redemption.
Proceeds from the sale of the Debentures were used to retire
the Company's 9 5/8% Notes, which matured on July 15, 1997.
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, 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 following table sets forth the funded status of the
Retirement Plan at December 31, 1997 and 1996, and the prepaid
pension costs as of December 31, 1997 and 1996 (expressed in
thousands):
1997 1996
Actuarial present value of accumulated benefit obligation,
including vested benefits of $34,960 at December 31,
1997, and $32,320 at December 31, 1996 $(42,193) $(38,732)
Actuarial present value of projected benefit obligation $(68,714) $(62,881)
Plan assets at fair value 132,262 116,317
Plan assets in excess of projected benefit obligation 63,548 53,436
Unrecognized net gain (47,731) (43,713)
Unrecognized prior service cost (1,236) (1,331)
Prepaid pension costs $14,581 $ 8,392
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, 1997, 1996 and
1995 (expressed in thousands):
1997 1996 1995
Service cost-benefits earned during the period $ 3,016 $ 3,029 $ 2,383
Interest cost on projected benefit obligation 4,646 4,295 5,665
Actual return on plan assets (18,090) (17,791) (24,285)
Net amortization and deferral 4,239 5,699 16,357
Net periodic pension (income) cost (6,189) (4,768) 120
Regulatory deferral 6,189 4,768 (120)
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 1997, 1996 and
1995:
1997 1996 1995
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%
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
1997 and 1996 related to the Company's participation in the
Williams' plan is $10.7 million for each year, including $8.5
million and $6.9 million of amortization of a regulatory
asset, respectively. The regulatory asset represents
unrecovered costs from prior years, including the unamortized
transition obligation under SFAS No. 106, 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, 1997 and 1996 were $44 million and $52 million,
respectively. Based on the 1997 level of amortization, the
regulatory asset balance should be recovered through rates in
approximately 6 years.
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 components of the net
periodic postretirement benefit cost, net of regulatory
amortization, for the Company's plan which is included in the
accompanying financial statements for the year ended December
31, 1995 (expressed in thousands):
1995
Service cost-benefits earned during the period $ 2,255
Interest cost on accumulated postretirement benefit obligation 6,937
Actual return on plan assets (6,350)
Net amortization and deferral 4,024
Net periodic postretirement benefit cost 6,866
Regulatory recovery of unamortized costs 4,063
Net periodic postretirement benefit expense $ 10,929
The following table summarizes the various assumptions used
to determine net periodic postretirement benefit expense for
1995:
1995
Discount rate 7.75%
Rate of increase in future compensation levels 5.00%
Expected long-term rate of return on assets 7.00%
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 $2.6 million
in 1997, $2.5 million in 1996 and $2.5 million in 1995.
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: 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, 1997 and 1996.
The carrying amount and estimated fair values of the
Company's financial instruments as of December 31, 1997 and
1996, are as follows (expressed in thousands):
Carrying Fair
Amount Value
1997 1996 1997 1996
Financial Assets:
Cash and short-term financial assets $ 93,736 $147,285 $ 93,736 $147,285
Long-term notes receivable - 25,000 - 25,000
Financial Liabilities:
Long-term debt 251,433 253,611 267,810 265,934
Sale of Receivables
The Company sells, with limited recourse, certain
receivables. The limit under the revolving receivables
facility was $35 million at December 31, 1997 and 1996. The
Company received $19.5 million of proceeds in 1997, $13.9
million in 1996 and $27.7 million in 1995. At December 31,
1997 and 1996, $29.6 million and $24.2 million of such
receivables had been sold, respectively. Based on amounts
outstanding at December 31, 1997, the maximum contractual
credit loss under these arrangements is approximately $5
million, 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.
H. Major Customers
Listed below are revenues received from the Company's major
customers in 1997, 1996, and 1995, portions of which are
included in the refund reserves discussed in Note C (expressed
in thousands). The Company did not have any major customer
which accounted for more than ten percent of total operating
revenues in 1996.
Pre-
Post-Acquisition Acquisition
For the For the
Period Period
January 18, January 1,
For the Year Ended 1995 to 1995 to
December 31, December 31, January 17,
1997 1996 1995 1995
Proliance Energy $39,454 $23,188 $ - $ -
Transcontinental Gas Pipe Line
Corporation (affiliate) 4,176 16,556 34,958 1,481
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 was
$42.0 million for 1997, $46.1 million for 1996 and $24.1
million for 1995, respectively. Reported net income was $43.2
million, $46.2 million and $25.0 million for 1997, 1996 and
1995, respectively. Pro forma amounts for 1997 include the
remaining total compensation expense from the awards made in
1996, as these awards fully vested in 1997 as a result of the
accelerated vesting provisions. Pro forma amounts for 1995
reflect total compensation expense from the awards made in
1995 as these awards fully vested in 1995 as a result of the
accelerated vesting provisions. Since compensation expense
from stock options is recognized over the future years'
vesting period, and additional awards generally are made each
year, pro forma amounts may not be representative of future
years' amounts.
Stock options granted to employees of the Company in 1997
and 1996 were 348,322 and 484,500 shares at a weighted average
grant date fair value of $5.98 and $3.92, respectively. At
December 31, 1997 and 1996, stock options outstanding were
1,343,949 and 1,102,140 shares, and stock options exercisable
were 996,627 and 586,922 shares, respectively.
J. Quarterly Information (Unaudited)
The following summarizes selected quarterly financial data
for 1997 and 1996 (expressed in thousands):
1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
Operating revenues $107,939 $ 63,615 $ 57,158 $ 89,625
Operating expenses 65,504 55,843 54,352 58,517
Operating income 42,435 7,772 2,806 31,108
Interest expense 5,015 5,009 4,880 5,122
Other income, net (2,420) (2,375) (1,795) (904)
Income (loss) before income
taxes 39,840 5,138 (279) 26,890
Provision for (benefit from)
income taxes 15,850 2,048 (233) 10,705
Net income (loss) $ 23,990 $ 3,090 $ (46) $ 16,185
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
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
Report of Independent Auditors on Consolidated Financial
Statements
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the
years ended December 31, 1997 and 1996, for the period
January 18, 1995 to December 31, 1995, and for the
period January 1, 1995 to January 17, 1995
Consolidated Statements of Retained Earnings
and Paid-In Capital for the years ended December 31,
1997 and 1996, for the period January 18, 1995 to
December 31, 1995, and for the period January 1, 1995
to January 17, 1995
Consolidated Statements of Cash Flows for the
years ended December 31, 1997 and 1996, for the period
January 18, 1995 to December 31, 1995, and for the
period January 1, 1995 to January 17, 1995
Notes to Consolidated 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 consolidated 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 15, 1997, between the Company
and The Bank of New York relating to 7 1/4% Debentures,
due 2027 (incorporated by reference to Exhibit 4.1
to Registration Statement No. 333-27359, dated May 16,
1997).
4.2 Indenture dated April 11, 1994, securing 8 5/8% Notes due
April 1, 2004 (incorporated by reference to Form 8-K
dated April 13, 1994 - File No. 1-4169).
*23 Consent of Independent Auditors
*24.1 Power of Attorney together with certified resolution.
*27.1 Financial Data Schedule for Texas Gas Transmission Corporation
for the year ended December 31, 1997.
(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/ S. W. Harris
S. W. Harris
Controller and Chief Accounting Officer
Dated: March 27, 1998
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/ Keith E. Bailey * Director
Keith E. Bailey
/s/ Gary D. Lauderdale * Director
Gary D. Lauderdale
*By: /s/ S. W. Harris Controller and Chief Accounting Officer
S. W. Harris
Dated: March 27, 1998