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 June 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 August
11, 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
June 30, 1995 and December 31, 1994....................... 4-5
Condensed Statements of Income
For the Three Months Ended June 30, 1995 and 1994 ........ 6
For the Period January 18, 1995 to June 30, 1995,
For the Period January 1, 1995 to January 17, 1995 and
For the Six Months Ended June 30, 1994.................... 7
Condensed Statements of Cash Flows
For the Period January 18, 1995 to June 30, 1995,
For the Period January 1, 1995 to January 17, 1995 and
For the Six Months Ended June 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 Quarter
Report on Form 10-Q.
<PAGE>
The acquisition of the Companyby 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)
(Unaudited)
<CAPTION>
Post-Acquisition Pre-Acquisition
June 30, December 31,
ASSETS 1995 1994
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 101 $ 912
Receivables:
Trade 21,472 8,227
Affiliates 11,596 15,616
Other 675 1,011
Advances to affiliates 52,704 27,963
Transportation and exchange gas receivable 3,245 8,451
Costs recoverable from customers:
Gas purchase 2,247 9,270
Gas supply realignment 31,348 26,710
Other 14,910 22,451
Inventories 14,692 15,183
Deferred income tax benefits 9,044 -
Other 1,858 3,535
Total current assets 163,892 139,329
Advances to Affiliates 125,981 124,981
Investments, at Cost 1,764 1,631
Property, Plant and Equipment, at cost:
Natural gas transmission plant 880,476 873,407
Less -- Accumulated depreciation and
amortization 10,888 217,580
Property, plant and equipment, net 869,588 655,827
Other Assets:
Gas stored underground 108,305 90,653
Costs recoverable from customers 73,501 14,254
Other 16,857 28,031
Total other assets 198,663 132,938
Total Assets $ 1,359,888 $1,054,706
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Post-Acquisition Pre-Acquisition
June 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1995 1994
<S> <C> <C>
Current Liabilities:
Payables:
Trade $ 2,840 $ 8,979
Affiliates 23,060 3,219
Other 2,558 14,517
Advances from affiliates 1,777 1,769
Transportation and exchange gas payable 10,647 5,856
Accrued liabilities 45,028 41,247
Accrued gas supply realignment costs 18,851 -
Costs refundable to customers 1,443 11,443
Deferred income taxes - 2,742
Reserve for regulatory and rate matters 20,288 9,734
Total current liabilities 126,492 99,506
Long-Term Debt 252,693 246,442
Other Liabilities and Deferred Credits:
Income taxes refundable to customers 5,236 6,827
Deferred income taxes 126,960 41,911
Postretirement benefits other than
pensions 57,957 -
Other 51,963 47,295
Total other liabilities and deferred
credits 242,116 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 723,539 584,712
Retained earnings 15,047 28,012
Total stockholder's equity 738,587 612,725
Total Liabilities and Stockholder's
Equity $1,359,888 $1,054,706
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Post-Acquisition Pre-Acquisition
For the Three For the Three
Months Ended Months Ended
June 30, 1995 June 30,1994
<S> <C> <C>
Operating Revenues:
Gas sales $ 12,071 $ 30,464
Gas transportation 59,914 63,531
Other 881 482
Total operating revenues 72,866 94,477
Operating Costs and Expenses:
Cost of gas sold 12,007 29,932
Cost of transportation of gas by others 10,485 10,986
Operation and maintenance 14,051 14,956
Administrative and general 13,568 14,994
Depreciation and amortization 9,738 11,072
Taxes other than income taxes 3,616 3,546
Total operating costs and expenses 63,465 85,486
Operating Income 9,401 8,991
Other (Income) Deductions:
Interest expense 5,703 7,159
Interest income (3,164) (2,907)
Miscellaneous other (income) deductions 504 (12)
Total other (income) deductions 3,043 4,240
Income Before Income Taxes 6,358 4,751
Provision for Income Taxes 3,118 1,992
Net Income $ 3,240 $ 2,759
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Post-Acquisition Pre-Acquisition
For the
For the Period
Period January 1, For the Six
January 18, 1995 1995 to Months Ended
to June 30, January 17, June 30,
1995 1995 1994
<C> <S> <S> <S>
Operating Revenues:
Gas sales $ 26,343 $ 3,239 $ 73,389
Gas transportation 126,724 15,932 154,199
Other 1,277 130 1,127
Total operating revenues 154,344 19,301 228,715
Operating Costs and Expenses:
Cost of gas sold 26,167 3,188 71,830
Cost of transportation of gas by
others 18,524 2,134 28,276
Operation and maintenance 25,060 2,433 27,850
Administrative and general 26,891 3,086 32,778
Provision for executive severance
benefits - 6,772 -
Depreciation and amortization 19,241 1,779 20,879
Taxes other than income taxes 6,569 721 7,362
Total operating costs and expenses 122,452 20,113 188,975
Operating Income 31,892 (812) 39,740
Other (Income) Deductions:
Interest expense 10,337 1,122 13,606
Interest income (5,574) (560) (5,374)
Miscellaneous other deductions 489 56 332
Total other (income) deductions 5,252 618 8,564
Income (Loss) Before Income Taxes 26,640 (1,430) 31,176
Provision for Income Taxes 11,593 1,884 12,454
Net Income (Loss) $ 15,047 $ (3,314) $ 18,722
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<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.
<TABLE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Post-Acquisition Pre-Acquisition
For the
For the Period
Period January 1, For the Six
January 18, 1995 1995 to Months Ended
to June 30, January 17, June 30,
1995 1995 1994
<C> <S> <S> <S>
Cash Flows From Operating Activities:
Net income (loss) $ 15,047 $ (3,314) $ 18,722
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Depreciation and amortization 20,010 1,856 21,767
Deferred income taxes (8,898) (695) 318
Decrease (increase) in:
Receivables 190 (9,078) 12,772
Transportation and exchange gas
receivable 3,656 1,551 6,716
Inventories 374 117 199
Deferred gas costs 4,966 256 2,239
Regulatory assets 20,406 1,379 (21,197)
Other current assets 1,264 413 1,322
Increase (decrease) in:
Payables 3,266 (1,523) (34,939)
Transportation and exchange gas
payable 6,382 (1,590) (1,699)
Accrued liabilities 16,818 6,199 (16,882)
Reserve for regulatory and rate
matters 380 36 21,903
Other current liabilities (10,209) 210 4,822
Other, net (25,182) (1,816) 7,348
Net cash from operating activities 48,470 (5,999) 23,411
Cash Flows From Financing Activities:
Advances from affiliates, net (51) 59 83
Dividends on common stock - - (17,490)
Long-term debt - repayment - - (150,000)
- borrowing - - 150,000
Net cash from financing activities (51) 59 (17,407)
Cash Flows From Investing Activities:
Property, plant and equipment,
net of AFUDC (18,295) (1,898) (15,710)
Advances to affiliates, net (33,593) 7,852 10,591
Other, net 2,627 17 (63)
Net cash from investing activities (49,261) 5,971 (5,182)
Net Increase (Decrease) in Cash and Cash
Equivalents (842) 31 822
Cash and Cash Equivalents at Beginning of
Period 943 912 319
Cash and Cash Equivalents at End of
Period $ 101 $ 943 $ 1,141
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest (net of amount
capitalized) $ 6,797 $ 4,856 $ 12,247
Income taxes, net 10,770 (7,395) 23,274
The accompanying condensed notes are an integral part of these condensed
financial statements.
</TABLE>
<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 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 accepted for payment
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 Quarter Report 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 $220 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 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 six 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 - 114,129
Post-Acquisition
Balance, January 18, 1995 - 723,539
Net income 15,047 -
Balance, June 30, 1995 $ 15,047 $ 723,539
Included in property, plant and equipment at June 30, 1995 is an aggregate
of approximately $394 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. The
Company's Condensed Balance Sheet as of June 30, 1995 and Condensed Statement
of Income for the period January 18, 1995 to June 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 six months ended June 30, 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. 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. Certain parties have challenged
the Company's right to fully recover its GSR costs.
Ongoing settlement discussions in the Company's GSR filings have resulted
in the filing of a settlement agreement in July 1995, which would resolve 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 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. The filed settlement is pending at the FERC.
Through June 30, 1995, the Company has paid approximately $50 million for
GSR costs, primarily as a result of contract terminations, and has recorded a
liability of approximately $30 million for its estimated remaining GSR costs.
The Company currently files for recovery of these costs as such costs are
paid. The Company has recovered approximately $40 million in GSR costs, and,
in accordance with the terms of the proposed settlement, the Company has
recorded a regulatory asset of approximately $30 million for the estimated
future recovery of its GSR costs. Ninety percent of the cost recovery is
collected via demand surcharges on the Company's firm transportation rates;
the remaining 10% is recovered from interruptible transportation service.
Additionally, the Company's transition costs include unrecovered purchased
gas costs for periods prior to November 1, 1993, pursuant to FERC Order 636.
To date, the Company has made filings to recover approximately $18.8 million
of such costs. The Company's right to file for future recovery of certain
costs 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. Negotiations are ongoing with customers to reach a
final settlement on the recovery of these transition costs.
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 ongoing with the FERC staff and interveners.
<PAGE>
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.
On July 29, 1994, and in rehearing on September 16, 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.
1
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.
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.
<PAGE>
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 any future amounts.
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 June 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.
The Company has used lubricating oils containing polychlorinated biphenyls
(PCBs) and, although the use of such oils was discontinued in the 1970's, has
discovered residual PCB contamination in equipment and soils at certain gas
compressor station sites. The Company continues to work closely with the
Environmental Protection Agency (EPA) and state regulatory authorities
regarding PCB issues and has programs to assess and remediate such conditions
where they exist, the costs of which are a significant portion of the $5
million to $7 million range discussed above.
The Company has either been named as a potentially responsible party (PRP)
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
<PAGE>
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
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 June 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 June 30, 1995, there
were no outstanding amounts 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 $220 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 June 30, 1995 includes an
aggregate of approximately $394 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 year-to-date comparison of the
current and prior years, with disclosure of material variances due to the
acquisition.
Financial Analysis of Operations
Six Months Ended June 30, 1995 Compared to
Six Months Ended June 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 inthe first and
fourth quarters of each year.
Operating income was $9 million lower for the six months ended June 30,
1995 than for the six months ended June 30, 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. Compared to 1994, net
income was $7 million lower for the same reason and the lack of tax benefits
associated with the provision for executive severance benefits.
Operating revenues decreased $55 million primarily due to lower merchant
sales of $41 million. 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 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.
Operating expenses decreased $46 million primarily due to lower merchant
gas purchases of $40 million and lower transportation of gas by others expense
of $8 million, which were partially offset by the $7 million pre-acquisition
provision discussed above.
<PAGE>
Mainline deliveries were 321.5 TBtu and 329.9 TBtu for the six 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 businesses of Transco, including 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 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.
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 June 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. 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%.
On May 30, 1995, the Company entered into a program to sell up to $35
million of trade receivables without recourse. As of June 30, 1995, there
were no outstanding amounts under this facility.
The Company's capital expenditures for the first six months of 1995 and
1994 were $20 million and $16 million, respectively.
The Company's debt as a percentage of total capitalization at June 30,
1995 and December 31, 1994 was 25.5% and 29%, respectively.
On September 30, 1994, the Company filed a general rate case (Docket No. RP94-
423) which was effective April 1, 1995. Rates have been collected, subject to
refund, since that date. 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 may ultimately be required.
<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: August 11, 1995 BY: /s/ G. D. Lauderdale
------------------ ----------------------------
G. D. Lauderdale
Senior Vice President
and General Manager
DATE: August 11, 1995 BY: /s/ E. J. Ralph
------------------ ----------------------------
E. J. Ralph
Vice President of Finance
and Controller
<PAGE>
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