UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 May 12,
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
March 31, 1995 and December 31, 1994...................... 4-5
Condensed Statements of Income
For the Period January 18, 1995 to March 31, 1995,
For the Period January 1, 1995 to January 17, 1995 and
For the Three Months Ended March 31, 1994 ................ 6
Condensed Statements of Cash Flows
For the Period January 18, 1995 to March 31, 1995,
For the Period January 1, 1995 to January 17, 1995 and
For the Three Months Ended March 31, 1994 ................ 7
Notes to Condensed Financial Statements...................... 8-13
Item 2. Management's Narrative Analysis of
the Results of Operations..............................14-18
Part II. Other Information
Item 6.Exhibits and Reports on Form 8-K ........................ 19
Signatures...................................................... 20
<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.
<PAGE>
The acquisition of the Company and its parent company, Transco Energy 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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
Post-Acquisition Pre-Acquisition
March 31, December 31,
ASSETS 1995 1994
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 79 $ 885
Receivables:
Trade 32,507 8,227
Affiliates 4,323 15,616
Other 806 1,038
Advances to affiliates 42,128 27,963
Transportation and exchange gas
receivable 5,661 8,451
Costs recoverable from customers:
Gas purchase 8,910 9,270
Gas supply realignment 47,730 26,710
Other 23,218 22,451
Inventories 14,552 15,183
Other 1,922 3,535
Total current assets 181,836 139,329
Advances to Affiliates 125,000 124,000
Investments, at Cost 2,156 2,552
Property, Plant and Equipment, at cost:
Natural gas transmission plant 881,097 873,407
Less -- Accumulated depreciation and
amortization 9,503 217,580
Property, plant and equipment, net 871,594 655,827
Other Assets:
Gas stored underground 93,772 90,653
Other 79,665 42,345
Total other assets 173,437 132,998
Total Assets $1,354,023 $1,054,706
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<PAGE>
The acquisition of the Company and its parent company, Transco Energy 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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
Post-Acquisition Pre-Acquisition
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
<S> <C> <C>
Current Liabilities:
Payables:
Trade $ 3,609 $ 8,979
Affiliates 8,834 3,219
Other 10,423 14,517
Advances from affiliates 1,840 1,769
Transportation and exchange gas
payable 4,102 5,856
Accrued liabilities 53,285 41,247
Accrued gas supply realignment costs 40,000 -
Costs refundable to customers 16,364 11,443
Deferred income taxes 2,823 2,742
Reserve for regulatory and rate matters 16,447 16,258
Total current liabilities 157,727 106,030
Long-Term Debt 252,984 246,442
Other Liabilities and Deferred Credits:
Income taxes refundable to customers 5,198 6,827
Deferred income taxes 120,458 41,911
Other 79,597 40,771
Total other liabilities and deferred
credits 205,253 89,509
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 726,251 584,712
Retained earnings 11,807 28,012
Total stockholder's equity 738,059 612,725
Total Liabilities and Stockholder's
Equity $1,354,023 $1,054,706
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<PAGE>
The acquisition of the Company and its parent company, Transco Energy 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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF INCOME
(Thousands of Dollars)
<CAPTION>
Post-Acquisition Pre-Acquisition
For the Period
For the Period January 1, For the Three
January 18, 1995 1995 to Months Ended
to March 31, January 17, March 31,
1995 1995 1994
<S> <C> <C> <C>
Operating Revenues:
Gas sales $ 14,272 $ 3,239 $ 42,925
Gas transportation 66,810 15,932 90,668
Other 396 130 645
Total operating revenues 81,478 19,301 134,238
Operating Costs and Expenses:
Cost of gas sold 14,160 3,188 41,898
Cost of transportation of gas by
others 8,039 2,134 17,290
Operation and maintenance 11,009 2,433 12,894
Administrative and general 12,820 3,058 17,359
Provision for executive severance
benefits - 6,772 -
Depreciation and amortization 9,503 1,779 9,807
Taxes other than income taxes 2,953 721 3,816
Total operating costs and expenses 58,484 20,085 103,064
Operating Income 22,994 (784) 31,174
Other (Income) Deductions:
Interest expense 4,634 1,122 6,447
Interest income (2,410) (560) (2,467)
Miscellaneous other deductions 488 84 769
Total other (income) deductions 2,712 646 4,749
Income Before Income Taxes 20,282 (1,430) 26,425
Provision for Income Taxes 8,475 1,884 10,462
Net Income (Loss) $ 11,807 $ (3,314) $ 15,963
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<PAGE>
The acquisition of the Company and its parent company, Transco Energy 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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<CAPTION>
Post-Acquisition Pre-Acquisition
For the Period
For the Period January 1, For the Three
January 18, 1995 1995 to Months Ended
to March 31, January 17, March 31,
1995 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 11,807 $ (3,314) $ 15,963
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 9,849 1,856 10,252
Deferred income taxes 1,428 (695) (3,845)
Nonrecoverable producer settlements - - (512)
Decrease (increase) in:
Receivables (3,678) (9,078) 10,548
Transportation and exchange gas
receivable 1,240 1,551 916
Inventories 514 117 (226)
Deferred gas costs 5,466 256 2,412
Regulatory assets 1,503 1,379 (11,077)
Other current assets 1,200 413 795
Increase (decrease) in:
Payables (2,327) (1,523) (25,148)
Transportation and exchange gas
payable (164) (1,590) 4,724
Accrued liabilities 3,774 6,199 (292)
Reserve for regulatory and rate
matters 153 36 15,962
Other current liabilities 4,711 210 3,913
Other, net (1,674) (1,809) 5,953
Net cash from operating activities 33,802 (5,992) 30,338
Cash Flows From Financing Activities:
Advances from affiliates, net 13 59 (2)
Dividends on common stock - - (10,835)
Net cash from financing activities 13 59 (10,837)
Cash Flows From Investing Activities:
Property, plant and equipment,
net of equity AFUDC (11,872) (1,905) (5,509)
Advances to affiliates, net (23,016) 7,852 (14,040)
Other, net 236 17 166
Net cash from investing activities (34,652) 5,964 (19,383)
Net Increase (Decrease) in Cash and
Cash Equivalents (837) 31 118
Cash and Cash Equivalents at Beginning
of Period 916 885 292
Cash and Cash Equivalents at End
of Period $ 79 $ 916 $ 410
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount
capitalized) $ - $ 4,856 $ 4,832
Income taxes, net - (7,395) 8,537
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
A. CORPORATE STRUCTURE AND CONTROL
AND BASIS OF PRESENTATION
Corporate Structure and Control
Prior to May 1, 1995, Texas Gas Transmission Corporation (the Company) was a
wholly owned subsidiary of Transco Gas Company (TGC), which is a wholly owned
subsidiary of Transco Energy Company (Transco). Effective May 1, 1995,
Transco became a wholly owned subsidiary of The Williams Companies, Inc.
(Williams) (see discussion below). As used herein, the term Williams refers
to The Williams Companies, Inc. and its wholly owned subsidiaries; Transco
refers to Transco Energy Company and its wholly owned subsidiaries; the term
TGMC refers to Transco Gas Marketing Company, a wholly owned subsidiary of
Transco, and its wholly owned subsidiary companies; and the term TGPL refers
to Transcontinental Gas Pipe Line Corporation, a wholly owned subsidiary of
TGC, 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 (Merger Agreement)
pursuant to which Williams agreed to commence a cash tender offer to acquire
up to 24.6 million shares, or approximately 60%, of the outstanding shares of
Transco's common stock for $17.50 per share. The cash offer would then be
followed by a stock merger (Merger) in which shares of Transco's common stock
not purchased in the tender offer would be exchanged for 0.625 of a share of
Williams' common stock and 0.3125 attached Williams' preferred stock purchase
rights.
Pursuant to the Merger Agreement, on January 18, 1995, Williams accepted for
payment 24.6 million shares of Transco's common stock for $17.50 per share as
the first step in acquiring the entire equity interest of Transco. The
conversion of the remainder of the outstanding shares of Transco's common
stock to Williams' common stock was approved by a majority of Transco's
stockholders on April 28, 1995. The conversion occurred at the effective date
of the Merger which was May 1, 1995.
On May 1, 1995, Transco paid as a dividend to Williams all of Transco's
interests in its principal operating subsidiaries, including the Company.
<PAGE>
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.
As a subsidiary of Transco, the Company had engaged in transactions with
Transco and other Transco subsidiaries, characteristic of group operations.
For consolidated cash management purposes, the Company had made interest-
bearing advances to Transco. These advances were represented by demand notes
payable to the Company. Those amounts that the Company anticipated Transco
would repay in the next twelve months were classified as current assets, while
the remainder were classified as noncurrent. According to Transco's general
corporate policy, the interest rate on intercompany demand notes is 1 1/2%
below the prime rate of Citibank, N.A.
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. According to Williams' general corporate policy, the interest
rate on intercompany demand notes is the London Interbank Offered Rate on the
first day of the month plus 0.45%.
The acquisition by Williams has been accounted for using the purchase method
of accounting. Accordingly, a preliminary 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 100% of the estimated purchase price, even though
Williams owned only 60% of Transco at March 31, 1995, due to the certainty of
Williams closing on the remaining 40% on May 1, 1995. 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
a $200 million allocation 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 postretirement benefits other than pensions and pension benefits.
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 first quarter 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 - 116,841
Post-Acquisition
Balance, January 18, 1995 - 726,251
Net income 11,807 -
Balance, March 31, 1995 $ 11,807 $ 726,251
Included in property, plant and equipment at March 31, 1995 is an aggregate of
$391 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 $10 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. Therefore,
the Company's Condensed Balance Sheet as of March 31, 1995 and Condensed
Statement of Income for the period January 18, 1995 to March 31, 1995 have
been prepared based on a preliminary 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
three months ended March 31, 1995 have been segregated into a pre-acquisition
period ending January 17, 1995 and a post-acquisition period beginning January
18, 1995.
Certain reclassifications have been made in the 1994 financial statements to
conform to the 1995 presentation.
<PAGE>
B. REGULATORY AND RATE MATTERS
There have been no new reportable developments from those described in the
1994 Annual Report on Form 10-K other than described below.
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)
contract termination costs, GSR pricing differential costs incurred pursuant
to the Company's monthly gas auction process and unrecovered purchased gas
costs. Therefore, the Company believes that any transition costs incurred
should be recovered from its customers, subject only to the costs and other
risks associated with the difference between the time such costs are incurred,
and the time when those costs may be recovered from customers. As such, the
Company has recorded regulatory assets for the expected future recovery of its
estimated transition costs. The Company files for recovery of these costs as
such costs are paid. Certain parties are, however, challenging the Company's
right to fully recover its GSR costs. Settlement proceedings are pending at
the FERC.
The Company currently estimates its GSR costs under FERC Order 636 to be
approximately $90 million. As of March 31, 1995, the Company had paid $48.6
million of such costs, as discussed below in "Gas Supply Realignment Costs,"
and has recorded a liability of approximately $40 million as the amount of
estimated remaining gas supply realignment costs.
Pursuant to FERC Order 636, the Company terminated its Purchased Gas
Adjustment (PGA) clause on November 1, 1993. The Company's right to file for
future recovery, via additional direct billings, of certain costs in dispute
has been extended until the later of October 31, 1995 or 90 days after the
final nonappealable resolution of any litigation, arbitration or
administrative proceeding. During 1994, the Company made filings to recover
$12.3 million of pre-November 1, 1993 unrecovered purchased gas costs.
Another filing was made in March 1995 to recover an additional $6.5 million of
pre-November 1, 1993 unrecovered purchased gas costs as allowed by the FERC
extension order.
Although no assurances can be given, the Company does not believe the
implementation of FERC Order 636 will have a material adverse effect on its
financial position, results of operations or net cash flows.
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 new rate
case reflects 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.
Settlement proceedings are on-going with the FERC staff and interveners.
<PAGE>
Gas Supply Realignment Costs
During 1993, as part of the Company's restructuring under FERC Order 636, the
Company engaged in negotiations which resulted in the successful termination
of approximately 90% of the Company's deliverability under its non-market-
responsive gas purchase contracts. Gas purchased under its remaining non-
market-responsive contracts is being resold at a monthly auction pursuant to
FERC Order 636. The Company continues to pay to the supplier the actual
contract price and is entitled to file for full recovery of the difference
between said contract price and the auction price as GSR costs under FERC
Order 636.
Through March 31, 1995, the Company had paid a total of $48.6 million for GSR
costs, primarily as a result of the contract terminations. Pursuant to FERC
Order 636, the Company may file to recover 100% of these costs as GSR costs.
Certain parties are, however, challenging the Company's right to fully recover
its GSR costs. Settlement proceedings are pending at the FERC.
Through the first quarter of 1995, the Company had made filings to recover
$45.8 million, plus interest, of GSR costs pursuant to the transition cost
recovery provisions of FERC Order 636 and the Company's FERC-approved Gas
Tariff. Ninety percent of the Company's GSR costs is expected to be
recovered via demand surcharges on its firm transportation rates. The
remaining 10% of GSR costs is expected to be recovered from interruptible
transportation service. The Company makes quarterly filings to allow recovery
of these amounts as such costs are paid.
The Company's market-responsive gas purchase contracts are being separately
managed by its marketing affiliate, TGMC.
Reserve for Regulatory and Rate Matters
The Company has established reserves for its outstanding regulatory and rate
matters which it believes are adequate to provide for any costs incurred or
refunds to be made in regard to the resolution of its regulatory and rate
issues. Although no assurances can be given, the Company believes that the
resolution of these matters will not have a material adverse effect on its
financial position, results of operations or net cash flows.
<PAGE>
C. LEGAL PROCEEDINGS
There have been no new reportable developments from those described in the
1994 Annual Report on Form 10-K other than described below.
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 any future amounts. Although
no assurances can be given, the Company believes that the resolution of this
issue will not have a material adverse effect on its financial position,
results of operations or net cash flows.
<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 a $200 million allocation 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 March 31, 1995 includes an aggregate of $391 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 $10 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 comparison of the full first
quarters of the current and prior years, with disclosure of material variances
due to the acquisition.
Financial Analysis of Operations
Three Months Ended March 31, 1995 Compared to
Three Months Ended March 31, 1994
Operating and Net Income
Operating income was $9 million lower for the three months ended March 31,
1995 than for the three months ended March 31, 1994. The decrease in
operating income was primarily due to a 1995 pre-acquisition provision for
executive severance benefits of $7 million related to the merger and higher
amortization expense of $2 million due to the estimated purchase price
allocation to property, plant and equipment. Compared to 1994, net income was
$7 million lower due to the same reasons discussed above and the lack of tax
benefits associated with the provision for executive severance benefits.
Operating Revenues
Operating revenues decreased $33 million primarily due to lower merchant sales
of $24 million, primarily due to the loss of two customers and lower gas
prices. As discussed in Note B, the Company's gas sales have no impact on its
results of operations. Lower transportation rates, due partially to lower
cost of transportation of gas by others, and, to a lesser extent, lower
transportation throughput, also contributed to decreased operating revenues.
<PAGE>
System Deliveries
Mainline deliveries were 188.9 Bcf and 192.2 Bcf for the first quarter 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.
Operating Costs and Expenses
Operating expenses decreased $24 million primarily due to lower merchant gas
purchases of $23 million and lower transportation of gas by others expense of
$7 million, which were partially offset by a 1995 pre-acquisition provision
for executive severance benefits of $7 million related to the merger and
higher amortization expense of $2 million due to the estimated purchase price
allocation to property, plant and equipment on January 18, 1995.
Competition
Future utilization of the Company's pipeline capacity will depend on
competition from other pipelines and alternative fuels, the general level of
natural gas demand and weather conditions. The Company believes that under
FERC Order 636, with SFV rates, its rate structure will continue to remain
competitive and surcharges for recovery of its total transition costs will not
make its rates noncompetitive in its market as competitor pipelines are
believed to have transition costs also to be recovered in their rates. The
Company and its primary market area competitors (ANR Pipeline Company,
Panhandle Eastern Pipe Line Company, Trunkline Gas Company, Texas Eastern
Transmission Corporation, Columbia Gas Transmission Corporation, Tennessee Gas
Pipeline Company and Midwestern Gas Transmission Company) all employ SFV rate
design for firm transportation as mandated by FERC Order 636.
The end-use markets of several of the Company's customers have the ability to
switch to alternative fuels. To date, however, losses from fuel switching
have not been significant.
There are various factors which may effect the Company's actual operating
results, including, but not limited to, competition from other pipelines, its
rate design structure, cost management and, to a lesser extent, fluctuations
in its throughput which may result from a number of factors, including
weather. The Company's interim operating results are impacted by customers'
ability to reserve firm transportation levels on a seasonal basis; which,
combined with Straight Fixed Variable (SFV) rate design, results in lower
operating income in the second and third quarters of the year. While the use
of SFV rate design limits the Company's opportunity to earn incremental
revenues through increased throughput, it also minimizes the Company's
fluctuations in revenue due to variations in throughput.
<PAGE>
Capital Resources and Liquidity
Financing
On May 1, 1995, Transco paid as a dividend to Williams all of Transco's
interests in its principal operating subsidiaries, including the Company.
Williams has indicated that it intends to maintain and expand the existing
core businesses of Transco, including the Company, and to promptly pursue new
business opportunities made available as a result of the merger. In order to
prepare for these opportunities, the following actions were 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, TGPL, the Company,
and Citibank, N.A. as agent and the Banks named therein under which the
Company may borrow up to $200 million.
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. According to Williams' general corporate policy, the interest
rate on intercompany demand notes is the London Interbank Offered Rate on the
first day of the month plus 0.45%.
Through the years, the Company has consistently maintained its financial
strength and experienced strong operational results. The Company expects that
Transco's merger with 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.
Cash Flows and Capitalization
Net cash inflows from operating activities for the three months ended March
31, 1995 were $3 million below the three months ended March 31, 1994,
primarily as a result of the January 1995 termination of the program to sell
receivables, partially offset by a reduction in cash outflows for payables,
the payment of GSR costs in the first quarter of 1994 and the collection
through rates of GSR costs in the first quarter of 1995.
Net cash flows from financing activities for the three months ended March 31,
1995 increased $11 million from the three months ended March 31, 1994, due to
a decrease in dividends paid.
Net cash outflows from investing activities for the three months ended March
31, 1995 were $9 million greater than the three months ended March 31, 1994,
primarily due to an increase in capital expenditures and an increase in cash
advanced to Transco under Transco's cash management program.
<PAGE>
The Company's capital expenditures for the first three months of 1995 were $14
million, including $13 million for maintenance of current facilities and $1
million for market expansion projects. Capital expenditures for the first
three months of 1994 were $6 million, including $3 million for maintenance of
current facilities and $3 million for market expansion projects.
The Company participated in a program with Transco to sell trade receivables
without recourse. This program was terminated in January 1995, with the
expectation that at some future time Williams will replace it with a new
receivables program.
The Company's debt as a percentage of total capitalization at March 31, 1995
and December 31, 1995 was 26% and 29%, respectively.
In February 1995, Standard & Poor's Corporation and Moody's Investors Service
upgraded the Company's debt securities from BB and Ba2 to BBB and Baa1,
respectively. A security rating is not a recommendation to buy, sell or hold
securities; it may be subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated independently
of any other rating.
Gas Supply Realignment Cost Recoveries
Through March 31, 1995, the Company had paid a total of $48.6 million for GSR
costs, primarily as a result of contract terminations. Pursuant to FERC Order
636, the Company may file to recover 100% of these costs as GSR costs.
Certain parties are, however, challenging the Company's right to fully recover
its GSR costs. Settlement proceedings are pending at the FERC.
Through the first quarter of 1995, the Company had made filings to recover
$45.8 million, plus interest, of GSR costs pursuant to the transition cost
recovery provisions of FERC Order 636 and the Company's FERC-approved Gas
Tariff. Ninety percent of the Company's GSR costs is expected to be
recovered via demand surcharges on its firm transportation rates. The
remaining 10% of GSR costs is expected to be recovered from interruptible
transportation service. The Company makes quarterly filings to allow recovery
of these amounts as such costs are paid.
Other Future Capital Requirements and Contingencies
There have been no new reportable developments from those described in the
1994 Annual Report on Form 10-K or in the Notes to Condensed Financial
Statements contained in Item 1 other than described below.
A Transportation Cost Adjustment (TCA) was made effective with the approval of
the Company's general rate case, Docket No. RP93-106, on October 21, 1994. As
the Company has filed a new rate case, Docket No. RP94-423, effective April 1,
1995, a refund of the overrecovered TCA amounts relating to the previous rate
case will be required during the second quarter of 1995. The Company
estimates the refund will be in the range of $10 million to $15 million, for
which a reserve has been established.
<PAGE>
Conclusion
Although no assurances can be given, the Company currently believes that the
aggregate of cash flows from operating activities supplemented, when
necessary, by repayments of funds advanced to Williams, will provide the
Company with sufficient liquidity to meet its capital requirements. If
necessary, the Company also expects to be able to access public and private
capital markets to finance its capital requirements.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K
The Company filed Form 8-K, Current Report
dated April 18, 1995, stating that it is replacing Arthur
Andersen LLP with Ernst & Young LLP, the independent public
accountants of The Williams Companies, Inc.
<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: May 12, 1995 BY: /s/ G. D. Lauderdale
------------------------------
G. D. Lauderdale
Senior Vice President
and General Manager
DATE: May 12, 1995 BY: /s/ E. J. Ralph
------------------------------
E. J. Ralph
Vice President of Finance
and Controller
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