UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-4169
TEXAS GAS TRANSMISSION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-0405152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3800 Frederica Street, Owensboro, Kentucky 42301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 926-8686
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No_
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 1,000 shares as of November
10, 1995
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) and
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
INDEX
Page
Number
Part I. Financial Information
Item 1. Financial Statements.................................. 3
Post-acquisition and Pre-acquisition Operations:
Condensed Balance Sheets at
September 30, 1995 and December 31, 1994 ...............4-5
Condensed Statements of Income
For the Three Months Ended September 30, 1995 and 1994 ...6
For the Period January 18, 1995 to September 30, 1995,
For the Period January 1, 1995 to January 17, 1995 and
For the Nine Months Ended September 30, 1994 ............7
Condensed Statements of Cash Flows
For the Period January 18, 1995 to September 30, 1995,
For the Period January 1, 1995 to January 17, 1995 and
For the Nine Months Ended September 30, 1994 .............8
Notes to Condensed Financial Statements...................9-14
Item 2. Management's Narrative Analysis of
the Results of Operations......................... 15-16
Part II. Other Information
Item 6.Exhibits and Reports on Form 8-K .......................17
Signatures.....................................................18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Company or group of companies for which report is filed:
TEXAS GAS TRANSMISSION CORPORATION
The condensed financial statements included herein have been prepared by
Texas Gas Transmission Corporation (the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of the Company's management, however, all adjustments, consisting only of the
pushdown of the purchase price paid by Williams as described in Note A and
normal and recurring adjustments, necessary for a fair presentation of the
financial position as of the date and results of operations for the periods
included herein have been made and the disclosures contained herein are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial
statements, notes thereto and management's discussion contained in the
Company's 1994 Annual Report on Form 10-K and the Company's 1995 First and
Second Quarter Reports on Form 10-Q.
<PAGE>
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 condensed financial
statements which affects the comparability of the post-acquisition and pre-
acquisition financial position, results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
September 30, December 31,
ASSETS 1995 1994
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 352 $ 912
Receivables:
Trade 2,214 8,227
Affiliates 2,738 15,616
Other 1,586 1,011
Advances to affiliates 87,131 27,963
Transportation and exchange gas receivable 2,847 8,451
Costs recoverable from customers:
Gas purchase 1,970 9,270
Gas supply realignment 29,491 26,710
Other 8,549 22,451
Inventories 14,418 15,183
Deferred income tax benefits 11,101 -
Other 2,636 3,535
Total current assets 165,033 139,329
Advances to Affiliates 125,981 124,981
Investments, at Cost 1,772 1,631
Property, Plant and Equipment, at cost:
Natural gas transmission plant 905,837 873,407
Less -- Accumulated depreciation and
amortization 15,817 217,580
Property, plant and equipment, net 890,020 655,827
Other Assets:
Gas stored underground 104,728 90,653
Costs recoverable from customers 71,459 14,254
Other 15,769 28,031
Total other assets 191,956 132,938
Total Assets $1,374,762 $1,054,706
</TABLE>
The accompanying condensed notes are an integral part of these condensed
financial statements.
<PAGE>
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 condensed financial
statements which affects the comparability of the post-acquisition and pre-
acquisition financial position, results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
<S> <C> <C>
Current Liabilities:
Payables:
Trade $ 6,788 $ 8,979
Affiliates 16,950 3,219
Other 5,548 14,517
Advances from affiliates - 1,769
Transportation and exchange gas payable 5,563 5,856
Accrued liabilities 53,043 41,247
Accrued gas supply realignment costs 18,006 -
Costs refundable to customers 1,061 11,443
Deferred income taxes - 2,742
Reserve for regulatory and rate matters 30,599 9,734
Total current liabilities 137,558 99,506
Long-Term Debt 252,377 246,442
Other Liabilities and Deferred Credits:
Income taxes refundable to customers 5,108 6,827
Deferred income taxes 134,649 41,911
Postretirement benefits other than
pensions 52,945 -
Other 52,710 47,295
Total other liabilities and deferred
credits 245,412 96,033
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 739,414 584,712
Retained earnings - 28,012
Total stockholder's equity 739,415 612,725
Total Liabilities and Stockholder's
Equity $1,374,762 $1,054,706
</TABLE>
The accompanying condensed notes are an integral part of these condensed
financial statements.
<PAGE>
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 condensed financial
statements which affects the comparability of the post-acquisition and pre-
acquisition financial position, results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
For the Three For the Three
Months Ended Months Ended
September 30, 1995 September 30, 1994
<S> <C> <C>
Operating Revenues:
Gas sales $ 10,445 $ 21,045
Gas transportation 54,692 54,556
Other 589 322
Total operating revenues 65,726 75,923
Operating Costs and Expenses:
Cost of gas sold 10,403 20,970
Cost of transportation of gas by others 9,050 9,925
Operation and maintenance 15,476 14,930
Administrative and general 12,677 11,896
Depreciation and amortization 11,151 10,250
Taxes other than income taxes 3,445 2,653
Total operating costs and expenses 62,202 70,624
Operating Income 3,524 5,299
Other (Income) Deductions:
Interest expense 5,857 6,976
Interest income (3,382) (3,363)
Miscellaneous other deductions 744 143
Total other (income) deductions 3,219 3,756
Income Before Income Taxes 305 1,543
Provision for Income Taxes 816 773
Net Income (Loss) $ (511) $ 770
</TABLE>
The accompanying condensed notes are an integral part of these condensed
financial statements.
<PAGE>
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 condensed financial
statements which affects the comparability of the post-acquisition and pre-
acquisition financial position, results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
For the Period
For the Period January 1, For the Nine
January 18, 1995 1995 to Months Ended
to September 30, January 17, September 30,
1995 1995 1994
<S> <C> <C> <C>
Operating Revenues:
Gas sales $ 36,788 $ 3,239 $ 94,434
Gas transportation 181,416 15,932 208,755
Other 1,866 130 1,449
Total operating revenues 220,070 19,301 304,638
Operating Costs and Expenses:
Cost of gas sold 36,570 3,188 92,800
Cost of transportation of gas
by others 27,574 2,134 38,201
Operation and maintenance 40,536 2,433 42,780
Administrative and general 39,568 3,086 44,674
Provision for severance benefits - 6,772 -
Depreciation and amortization 30,392 1,779 31,129
Taxes other than income taxes 10,014 721 10,015
Total operating costs and expenses 184,654 20,113 259,599
Operating Income (Loss) 35,416 (812) 45,039
Other (Income) Deductions:
Interest expense 16,194 1,122 20,582
Interest income (8,956) (560) (8,737)
Miscellaneous other deductions 1,233 56 475
Total other (income) deductions 8,471 618 12,320
Income (Loss) Before Income Taxes 26,945 (1,430) 32,719
Provision for Income Taxes 12,409 1,884 13,227
Net Income (Loss) $ 14,536 $ (3,314) $ 19,492
</TABLE>
The accompanying condensed notes are an integral part of these condensed
financial statements.
<PAGE>
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 condensed financial
statements which affects the comparability of the post-acquisition and pre-
acquisition financial position, results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Post-Acquisition Pre-Acquisition
For the Period
For the Period January 1, For the Nine
January 18, 1995 1995 to Months Ended
to September 30, January 17, September 30,
1995 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 14,536 $ (3,314) $ 19,492
Adjustments to reconcile to cash
provided from operations:
Depreciation and depletion 30,392 1,779 31,129
Provision for deferred income taxes (12,867) (695) 8,661
Changes in receivables sold (8,100) (14,806) (11,527)
Changes in receivables 31,834 2,113 34,633
Changes in inventories 648 118 (346)
Changes in other current assets 34,625 2,048 (18,329)
Changes in accounts payable (4,708) (3,607) (16,100)
Changes in accrued liabilities 7,166 4,913 (18,166)
Other, including changes in non-
current assets and liabilities 12,649 5,490 (5,839)
Net cash provided (used) by operating
activities 106,175 (5,961) 23,608
FINANCING ACTIVITIES:
Proceeds from long-term debt - - 150,000
Payment of long-term debt - - (150,000)
Dividends and returns of capital (15,000) - (17,490)
Other -- net 112 59 77
Net cash provided (used) by financing
activities (14,888) 59 (17,413)
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of AFUDC (25,583) (1,898) (30,430)
Proceeds from sales 1,725 (21) 2,286
Advances to affiliates, net (68,020) 7,852 22,777
Net cash provided (used) by investing
activities (91,878) 5,933 (5,367)
Increase (Decrease) in Cash and Cash
Equivalents (591) 31 828
Cash and Cash Equivalents at Beginning
of Period 943 912 319
Cash and Cash Equivalents at End of
Period $ 352 $ 943 $ 1,147
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 11,639 $ 4,856 $ 17,361
Income taxes, net 21,865 (7,395) 21,190
</TABLE>
The accompanying condensed notes are an integral part of these condensed
financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A. General
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.
As discussed in the Company's 1994 Annual Report on Form 10-K, 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 conversion of the remainder of the outstanding
shares of Transco common stock to 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.
Basis of Presentation
The condensed financial statements have been prepared from the books and
records of the Company without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed financial statements should be read in conjunction with the
financial statements, notes thereto and management's narrative analysis
contained in the Company's 1994 Annual Report on Form 10-K and the Company's
1995 First and Second Quarter Reports on Form 10-Q.
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 Transco, including the Company,
based on their estimated fair values. The accompanying financial statements
reflect the pushdown of the estimated purchase price. Retained earnings and
accumulated depreciation and amortization were eliminated on this date, and
the Company's assets and liabilities were adjusted to their estimated fair
values. The estimated purchase price allocation to the Company primarily
consisted of an allocation of approximately $245 million to property, plant
and equipment, which will be amortized over the useful lives of these assets,
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.
<PAGE>
Shown below is the effect of the acquisition on retained earnings and paid-
in capital for the nine months of 1995.
Retained Earnings Paid-In Capital
Pre-Acquisition
Balance, December 31, 1994 $ 28,012 $ 584,712
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 - 128,529
Post-Acquisition
Balance, January 18, 1995 - 737,939
Net income 14,536 -
Dividends and returns of capital (14,649) (351)
Dissolution of affiliate 113 1,826
Balance, September 30, 1995 $ - $ 739,414
Included in property, plant and equipment at September 30, 1995 is an
aggregate of approximately $418 million related to amounts in excess of the
original cost of the regulated facilities, which is being amortized over the
estimated useful lives of these assets at approximately $11 million per year.
Current Federal Energy Regulatory Commission (FERC) policy does not permit the
Company to recover through its rates amounts in excess of original cost.
Williams is continuing to evaluate its purchase price allocation. The
Company's Condensed Balance Sheet as of September 30, 1995 and Condensed
Statement of Income for the period January 18, 1995 to September 30, 1995 have
been prepared based on an allocation of the purchase price pending the
completion of studies and other information necessary for the final purchase
price allocation. Accordingly, the amounts presented are subject to change,
but any differences in the final purchase price allocation are not expected to
have a material effect on the Company's condensed financial statements.
The accompanying condensed 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 Condensed Statement of Income and Condensed Statement of Cash Flows
for the nine months ended September 30, 1995 have been segregated into a pre-
acquisition period ending January 17, 1995 and a post-acquisition period
beginning January 18, 1995.
The Company charges against paid-in capital that portion of any common
dividend declarations which exceed the retained earnings balance. Such
charges are deemed to be a return of capital.
Certain reclassifications have been made in the 1994 financial statements
to conform to the 1995 presentation.
<PAGE>
B. Contingent Liabilities and Commitments
Regulatory and Rate Matters and Related Litigation
FERC Order 636
As discussed in the Company's 1994 Annual Report on Form 10-K, the Company
restructured its business to implement the provisions of FERC Order 636,
effective November 1, 1993. FERC Order 636 provides that pipelines should be
allowed the opportunity to recover all prudently incurred transition costs
which, for the Company, are primarily related to gas supply realignment (GSR)
costs and unrecovered purchased gas costs.
On September 18, 1995, the Company received FERC approval of a settlement
agreement which resolves all issues regarding the Company's recovery of GSR
costs. The settlement provides that the Company will recover 100% of its GSR
costs up to $50 million, will share in costs incurred between $50 million and
$80 million and will absorb any GSR costs above $80 million. Under the
settlement, all challenges to these costs, on the grounds of imprudence or
otherwise, will be withdrawn and no future challenges will be filed.
Through September 30, 1995, the Company has paid approximately $52 million
for GSR costs, primarily as a result of contract terminations, and has
recorded a liability of approximately $28 million for its estimated remaining
GSR costs. The Company has recovered approximately $41 million in GSR costs
and, in accordance with the terms of its settlement, has recorded a regulatory
asset of approximately $29 million for the estimated future recovery of its
GSR costs, which will be collected from customers over the next two years.
Ninety percent of the cost recovery will be collected via demand surcharges on
the Company's firm transportation rates; the remaining 10% will be recovered
from the interruptible transportation service.
The settlement also extends the Company's pricing differential mechanism
to November 1, 1996, and beyond that date for GSR contracts in litigation as
of that date. This mechanism allows the Company to recover purchased gas
costs incurred under remaining GSR contracts in excess of amounts recovered
through the sale of such gas at auction. Except for any contracts in
litigation, the Company anticipates that all of its remaining GSR contracts
will expire or be negotiated for termination by November 1, 1996.
Additionally, the Company's transition costs include unrecovered purchased
gas costs for periods prior to November 1, 1993, pursuant to FERC Order 636.
The Company expects to incur up to $18.8 million, subject to the final
settlement of certain potential costs placed in escrow pending settlement of
litigation. On October 11, 1995, the Company received FERC approval of its
proposed settlement with customers, which requires the Company to absorb up to
$1.3 million of these costs. If no request for rehearing is filed with the
FERC, the settlement will become effective November 10, 1995, after which date
refunds of any overcollections from customers will be made.
<PAGE>
General Rate Issues
On September 30, 1994, the Company filed a general rate case (Docket No.
RP94-423) which became effective April 1, 1995, subject to refund. This rate
case reflected a requested annual revenue increase of approximately $66.9
million, based on filed rates, primarily attributable to increases in the
utility rate base, operating expenses and rate of return and related taxes. A
proposed settlement was filed with the FERC on September 29, 1995. The
settlement is anticipated to be effective in the fourth quarter of 1995, with
refunds, for which the Company has provided a reserve, being made to customers
in the first quarter of 1996.
During 1994 and 1995, the Company made filings to reflect changes in costs
of transportation by others, pursuant to the Transportation Cost Adjustment
tracker provisions of its approved tariff. Pursuant to that tariff, on May
31, 1995, the Company refunded $13.3 million of overcollected transportation
costs.
In July 1994, and in rehearing in September 1994, the FERC issued an order
accepting a filing made by the Company to resolve its transportation and
exchange imbalances pre-dating its implementation of FERC Order 636.
Following the parties' agreement as to the allocations, reconciled imbalances
will be repaid in cash, or through receipt or delivery of gas, as permitted by
operating conditions, by the end of 1995.
FERC Order 94-A
In 1983, the FERC issued FERC Order 94-A, which permitted producers to
collect certain production-related gas costs from pipelines on a retroactive
basis. The FERC subsequently issued orders allowing pipelines, including the
Company, to direct bill their customers for such production-related costs
through fixed monthly charges based on a customer's historical purchases. In
1990, the United States Court of Appeals for the District of Columbia
overturned the FERC's authorization for pipelines to directly bill production-
related costs to customers based on gas purchased in prior periods and
remanded the matter to the FERC to determine an appropriate recovery
mechanism. In April 1992, the Company filed a settlement with the FERC
providing for full recovery of its FERC Order 94-A costs through a
reallocation of amounts previously collected from customers. In February
1993, the FERC issued an order approving the settlement.
In January 1994, the FERC found that it had committed a legal error in
allowing the previously mentioned direct bill of FERC Order 94-A costs. The
effect of this order, as issued, would be to require the Company to absorb
$5.4 million of such costs, for which the Company has provided a reserve. The
Company filed for, and was denied, rehearing of this order by the FERC. In
November 1994, the Company settled its FERC Order 94-A costs with its
customers, except for $9.2 million payable by the Company. The Company
continues to believe that it is entitled to full recovery of these FERC-
ordered costs and has filed a court appeal. In January 1995, the Company
filed a joint motion with Columbia, the party due the remaining refunds, to
extend the time for making refunds until the Court rules.
<PAGE>
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 provisions in its settlements. Indemnification for royalties
will depend on, among other things, the specific lease provisions between the
producer and the lessor and the terms of the settlement between the producer
and the Company. The Company may file to recover 75% of any such amounts it
may be required to pay pursuant to indemnifications for royalties under the
provisions of FERC Order 528. The Company has provided reserves for the
estimated settlement costs of its royalty claims and litigation.
In addition, two lawsuits have been filed against the Company in Louisiana,
seeking reimbursement of certain royalties allegedly incurred by the producers
on amounts previously paid the producers by the Company to settle past take-or-
pay disputes and to reform the gas purchase contract pursuant to an "excess
royalty" clause in a gas purchase contract. The amount in dispute is
estimated to be less than $10 million. The Company disputes the application
of the "excess royalty" clause to the particular royalties in question;
however, to the extent any obligation to reimburse the producers exists, it is
subject to the Company's ability to include such payments in its rates or cost
of service.
On March 3, 1995, Ergon, Inc. and Ergon Exploration, Inc. (Ergon) filed a
lawsuit against the Company in the U.S. District Court, West District
Louisiana, Case No. 95-0381, seeking approximately $45,000 in damages for gas
purchased in calendar year 1994, a declaratory judgment concerning the proper
construction of the pricing provisions of a gas purchase contract, unspecified
future damages and, alternatively, a reformation of or rescission of an
agreement amending the gas purchase contract. The Company is currently
recovering costs incurred under subject contract as GSR costs pursuant to FERC
Order 636 and anticipates continued recovery of future amounts consistent with
the GSR settlement discussed above.
Environmental Matters
Since 1989, the Company has had studies underway to test its facilities for
the presence of toxic and hazardous substances to determine to what extent, if
any, remediation may be necessary. On the basis of the findings to date, the
Company estimates that environmental assessment and remediation costs that
will be incurred over the next three to five years will total approximately $5
million to $7 million. As of September 30, 1995, the Company had a reserve
of approximately $6 million for these estimated costs. This estimate depends
upon a number of assumptions concerning the scope of remediation that will be
required at certain locations and the cost of remedial measures to be
undertaken. The Company is continuing to conduct environmental assessments
and is implementing a variety of remedial measures that may result in
increases or decreases in the total estimated costs.
<PAGE>
The Company has used lubricating oils containing polychlorinated biphenyls
(PCBs) and, although the use of such oils was discontinued in the 1970's,
has discovered residual PCB contamination in equipment and soils at certain
gas compressor station sites. The Company continues to work closely with the
Environmental Protection Agency 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 $5 million to $7
million range discussed above.
The Company has either been named as a potentially responsible party or
received an information request regarding its potential involvement at four
Superfund waste disposal sites and one state waste disposal site. The
anticipated remediation costs associated with these sites have been included
in the $5 million to $7 million range discussed above.
The Company considers environmental assessment and remediation costs and
costs associated with compliance with environmental standards to be
recoverable through rates, since they are prudent costs incurred in the
ordinary course of business. To date, the Company has been permitted recovery
of environmental costs incurred, and it is the Company's intent to continue
seeking recovery of such costs, as incurred, through rate filings. Therefore,
these estimated costs of environmental assessment and remediation 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 or other indemnification
arrangements, will have a materially adverse effect upon the Company's future
financial position, results of operations and cash flow requirements.
C. Banking Arrangements
In February 1995, the Company entered into an $800 million Revolving
Credit Agreement among Williams and certain of its subsidiaries, including the
Company, and Citibank, N.A. as agent and the Banks named therein, under which
the Company may borrow up to $200 million. Interest rates vary with current
market conditions. At September 30, 1995, the Company had no amounts
outstanding under this Agreement.
On May 30, 1995, the Company entered into a program to sell up to $35
million of trade receivables without recourse. As of September 30, 1995,
there was $18.9 million outstanding under this facility.
<PAGE>
Item 2. Management's Narrative Analysis of the Results of Operations
(Filed Pursuant to General Instruction H)
Introduction
As discussed in Note A, the Company has been acquired by Williams through
a merger of a Williams' subsidiary and Transco, effective May 1, 1995.
Williams became a majority owner of Transco effective January 18, 1995, at
which date the estimated effects of the acquisition were pushed down and
recorded on the books and records of the Company. The estimated purchase
price allocation to the Company primarily consisted of an allocation of
approximately $245 million to property, plant and equipment, which will be
amortized over the useful lives of these assets, 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 September 30, 1995 includes an
aggregate of approximately $418 million related to amounts in excess of the
original cost of regulated facilities, as a result of the Williams' and prior
acquisitions. This amount is being amortized over the estimated remaining
useful lives of the assets at approximately $11 million per year. Current
FERC policy does not permit the Company to recover through its rates amounts
in excess of original cost.
The pushdown of the acquisition affects the comparability of the Company's
pre- and post-acquisition results of operations and financial position. The
following analysis represents a pro forma year-to-date comparison of the
current and prior years, with disclosure of material variances due to the
acquisition.
Financial Analysis of Operations
Nine Months Ended September 30, 1995 Compared to
Nine Months Ended September 30, 1994
The Company, in late 1993, implemented seasonal contract demands as a
component of its FERC Order 636 menu of services, which results in lower
operating income during the second and third quarters than in the first and
fourth quarters of each year.
Operating income was $10 million lower for the nine months ended September
30, 1995 than for the nine months ended September 30, 1994. The decrease in
operating income was primarily due to a 1995 pre-acquisition provision for
severance benefits of $7 million related to the merger. Compared to 1994, net
income was $8 million lower for the same reason and the lack of tax benefits
associated with the provision for severance benefits.
Operating revenues decreased $65 million primarily due to lower merchant
sales of $52 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. Lower transportation demand revenues and lower
transportation throughput also contributed to decreased operating revenues.
Operating expenses decreased $55 million primarily due to lower merchant
gas purchases of $51 million, lower transportation of gas by others expense of
$8 million and lower administrative and general expenses of $2 million, which
were partially offset by the $7 million pre-acquisition provision discussed
above and higher depreciation expense of $1 million. The decrease in
administrative and general expenses was due to restructuring following
Williams acquisition of the Company.
<PAGE>
Mainline deliveries were 453 TBtu and 460 TBtu for the nine months of 1995
and 1994, respectively. Short-haul deliveries also decreased; however, the
revenues associated with short-haul transportation volumes are not material to
the Company.
Financial Condition and Liquidity
As discussed in Note A, on May 1, 1995, Transco paid as a dividend to
Williams all of Transco's interest in the Company. Williams has indicated
that it intends to maintain and expand the existing core business of the
Company and to promptly pursue new business opportunities made available
as a result of the merger. Through the years, the Company has consistently
maintained its financial strength and experienced strong operational results.
The Company expects that its acquisition by Williams will further enhance
its financial and operational strength, as well as allow the Company to take
advantage of new opportunities for growth. If necessary, the Company also
expects to be able to access public and private capital markets to finance
its capital requirements. In order to prepare for these opportunities, the
following actions have been taken.
In February 1995, Transco's $450 million working capital line used for
consolidated cash management purposes was replaced by an $800 million credit
agreement among Williams and certain of its subsidiaries, including the
Company, and Citibank, N.A. as agent and the Banks named therein under which
the Company may borrow up to $200 million. As of September 30, 1995, the
Company had no amounts outstanding under this facility.
Effective May 1, 1995, the Company began participation in Williams' cash
management program. On that date, the balance of the advances due from
Transco were transferred by Transco to Williams. These advances are
represented by demand notes payable to the Company. Those amounts that the
Company anticipates Williams will repay in the next twelve months are
classified as current assets, while the remainder are classified as
noncurrent. The interest rate on intercompany demand notes is the London
Interbank Offered Rate on the first day of the month plus 0.45%.
In May 1995, the Company entered into a program to sell up to $35 million
of trade receivables without recourse. As of September 30, 1995, there was
$18.9 million outstanding under this facility.
The Company's capital expenditures for the first nine months of 1995 and
1994 were $27 million and $33 million, respectively.
The Company's debt as a percentage of total capitalization at September
30, 1995 and December 31, 1994 was 25% and 29%, respectively.
On September 30, 1994, the Company filed a general rate case (Docket No.
RP94-423) which was effective April 1, 1995. A proposed settlement was filed
with the FERC on September 29, 1995. Rates have been collected, subject to
refund, since April 1, 1995. The Company has established a reserve for the
difference between collected rates and estimated settlement rates which it
believes is adequate for the refunds that will ultimately be required. The
settlement is anticipated to be effective in the fourth quarter of 1995, with
refunds being made to customers in the first quarter of 1996.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K
None
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TEXAS GAS TRANSMISSION CORPORATION
DATE: November 10, 1995 BY: /s/ G. D. Lauderdale
G. D. Lauderdale
Senior Vice President
and General Manager
DATE: November 10, 1995 BY: /s/ E. J. Ralph
E. J. Ralph
Vice President of Finance
and Controller
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