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, 1998
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 9, 1998
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 AND SUBSIDIARY
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - Assets.................... 3
Consolidated Balance Sheets - Liabilities and
Stockholder's Equity.................................. 4
Consolidated Statements of Income....................... 5
Consolidated Statements of Cash Flows................... 6
Condensed Notes to Consolidated Financial Statements.... 7
Item 2. Management's Narrative Analysis of the Results of
Operations............................................ 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................ 14
Signatures ...................................................... 15
Certain matters discussed in this report, excluding historical
information, include forward-looking statements. Although Texas
Gas Transmission Corporation believes such forward-looking
statements are based on reasonable assumptions, no assurance can
be given that every objective will be achieved. Such statements
are made in reliance on the "safe harbor" protections provided
under the Private Securities Reform Act of 1995. Additional
information about issues that could lead to material changes in
performance is contained in Texas Gas Transmission Corporation's
Annual Report on Form 10-K.
<PAGE>
Item 1. Financial Statements
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
<S> <C> <C>
Current Assets:
Cash and temporary cash investments $ 251 $ 235
Receivables:
Trade 8,370 2,937
Affiliates 435 284
Other 9,284 3,835
Advances to affiliates 102,392 93,500
Inventories 15,555 15,531
Deferred income taxes 15,420 18,179
Costs recoverable from customers 11,857 16,311
Gas stored underground 11,115 11,115
Other 1,020 1,690
Total current assets 175,699 163,617
Investments, at cost 1,233 1,224
Property, Plant and Equipment, at cost:
Natural gas transmission plant 1,031,376 1,022,654
Less -- Accumulated depreciation and
amortization 107,327 98,649
Property, plant and equipment, net 924,049 924,005
Other Assets:
Gas stored underground 86,978 97,984
Costs recoverable from customers 49,569 45,504
Other 28,564 24,809
Total other assets 165,111 168,297
Total Assets $1,266,092 $1,257,143
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1998 1997
<S> <C> <C>
Current Liabilities:
Payables:
Trade $ 2,558 $ 2,558
Affiliates 23,384 11,939
Other 3,400 8,302
Gas Payables:
Transportation and exchange 1,530 1,173
Storage 453 13,343
Accrued liabilities 42,904 51,517
Accrued taxes 31,528 21,776
Accrued interest 7,979 6,557
Reserve for regulatory and rate matters 16,824 11,319
Total current liabilities 130,560 128,484
Long-Term Debt 251,366 251,433
Other Liabilities and Deferred Credits:
Deferred income taxes 152,082 150,113
Postretirement benefits other than
pensions 38,485 35,683
Other 49,522 49,040
Total other liabilities and deferred
credits 240,089 234,836
Contingent Liabilities and Commitments - -
Stockholder's Equity:
Common stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding 1 1
Premium on capital stock and other paid-in
capital 636,046 636,046
Retained earnings 8,030 6,343
Total stockholder's equity 644,077 642,390
Total Liabilities and Stockholder's
Equity $1,266,092 $1,257,143
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
<S> <S> <S>
Operating Revenues:
Gas transportation $ 87,041 $ 96,390
Gas sales 4,178 10,720
Other 570 829
Total operating revenues 91,789 107,939
Operating Costs and Expenses:
Cost of gas transportation 6,075 10,459
Cost of gas sold 4,097 10,789
Operation and maintenance 12,015 14,333
Administrative and general 13,108 15,214
Depreciation and amortization 10,529 10,518
Taxes other than income taxes 4,136 4,191
Total operating costs and expenses 49,960 65,504
Operating Income 41,829 42,435
Other (Income) Deductions:
Interest expense 5,296 5,015
Interest income (1,347) (2,359)
Miscellaneous other deductions (income) 212 (61)
Total other deductions 4,161 2,595
Income Before Income Taxes 37,668 39,840
Provision for Income Taxes 14,981 15,850
Net Income $ 22,687 $ 23,990
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 22,687 $ 23,990
Adjustments to reconcile to cash
provided from operations:
Depreciation and amortization 10,529 10,518
Provision for deferred income taxes 4,728 816
Changes in receivables sold (6,300) (400)
Changes in receivables (4,583) 1,804
Changes in inventories (24) (283)
Changes in other current assets 315 7,755
Changes in accounts payable (4,902) (5,417)
Changes in accrued liabilities (74) 11,700
Other, including changes in noncurrent
assets and liabilities 18,112 (23,542)
Net cash provided by operating
activities 40,488 26,941
FINANCING ACTIVITIES:
Dividends and returns of capital (21,000) (25,162)
Net cash (used in) financing
activities (21,000) (25,162)
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of AFUDC (11,194) (9,451)
Proceeds from sales and salvage
values, net of costs of removal 614 159
Advances to affiliates, net (8,892) 8,123
Net cash (used in) investing
activities (19,472) (1,169)
Increase in cash and cash equivalents 16 610
Cash and cash equivalents at beginning
of period 235 115
Cash and cash equivalents at end
of period $ 251 $ 725
</TABLE>
The accompanying condensed notes are an integral part of these
consolidated financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION AND SUBSIDIARY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Corporate Structure and Control, Nature of Operations and
Basis of Presentation
Corporate Structure and Control
Texas Gas Transmission Corporation and its wholly owned
subsidiary, TGT Enterprises, Inc., (collectively, the Company) is
wholly owned by Williams Gas Pipeline Company, formerly Williams
Interstate Natural Gas Systems, Inc., which is a wholly owned
subsidiary of The Williams Companies, Inc. (Williams). Prior to
May 1, 1997, the Company was a wholly owned subsidiary of
Williams.
Seasonal Variation
Operating income may vary by quarter. Based on current rate
structure, the Company experiences higher operating income in the
first and fourth quarters as compared to the second and third
quarters.
Basis of Presentation
The consolidated financial statements have been prepared from
the books and records of the Company without audit, pursuant to
the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted. The accompanying unaudited
consolidated financial statements include all adjustments, both
normal recurring and others, which, in the opinion of the
Company's management, are necessary to present fairly its
financial position at March 31, 1998 and December 31, 1997, and
results of operations and cash flows for the three months ended
March 31, 1998 and 1997. These consolidated financial statements
should be read in conjunction with the financial statements,
notes thereto and management's narrative analysis contained in
the Company's 1997 Annual Report on Form 10-K.
The Company was acquired in 1995 by Williams. The acquisition
was accounted for using the purchase method of accounting.
Accordingly, an allocation of the purchase price was assigned to
the assets and liabilities of the Company, based on their
estimated fair values. The accompanying consolidated financial
statements reflect the pushdown of the purchase price allocation
(amounts in excess of book value) to the Company. Included in
property, plant and equipment at March 31, 1998 is an aggregate
of approximately $430 million related to amounts in excess of the
original cost of the regulated facilities as a result of the
Williams' and prior acquisitions. This amount is being amortized
over 40 years, the estimated useful lives of these assets at the
date of acquisition, at approximately $11 million per year.
Current Federal Energy Regulatory Commission (FERC) policy does
not permit the Company to recover through its rates amounts in
excess of original cost.
<PAGE>
Certain reclassifications have been made in the 1997 financial
statements to conform to the 1998 presentation.
B. Contingent Liabilities and Commitments
Regulatory and Rate Matters and Related Litigation
FERC Order 636
Effective November 1, 1993, the Company restructured its
business to implement the provisions of FERC Order 636, which,
among other things, required pipelines to unbundle their merchant
role from their transportation services. FERC Order 636 also
provides that pipelines should be allowed the opportunity to
recover all prudently incurred transition costs which, for the
Company, are primarily related to gas supply realignment (GSR)
costs and unrecovered purchased gas costs. Certain aspects of the
Company's FERC Order 636 restructuring are under appeal.
In July 1996, the United States Court of Appeals for the
District of Columbia issued an order which in part affirmed and
in part remanded FERC Order 636. On February 27, 1997, FERC
issued Order 636-C in response to the court's remand affirming
that pipelines may recover all of their GSR costs, but requiring
pipelines to individually propose the percentage of such costs to
be allocated to interruptible transportation services, instead of
a uniform 10 percent allocation. The Company's GSR settlement,
discussed below, is not subject to appeal and should be
unaffected by this Order. The Order also prospectively relaxed
the eligibility requirements for receiving no-notice service and
reduced the right of first refusal matching period from 20 years
to five years. FERC Order 636-C is still subject to potential
rehearing at the FERC.
In September 1995, the Company received FERC approval of a
settlement agreement which resolves all issues regarding the
Company's recovery of GSR costs. The settlement provides that
the Company will recover 100 percent of its GSR costs up to $50
million, will share in costs incurred between $50 million and $80
million and will absorb any GSR costs above $80 million. Under
the settlement, all challenges to these costs, on the grounds of
imprudence or otherwise, will be withdrawn and no future
challenges will be filed. Ninety percent of the cost recovery
is collected through demand surcharges on the Company's firm
transportation rates; the remaining 10 percent should be
recovered from its interruptible transportation service.
Effective July 1, 1997, the FERC allowed the Company to suspend
its GSR surcharge applicable to firm transportation (FT) services
due to the full recovery of incurred GSR costs allocated to firm
services. The GSR cost increment included in the interruptible
transportation rates, as well as no-notice and FT overrun rates,
remains in effect. To date, the Company has paid $76.2 million
and collected $66.0 million, plus interest, related to GSR. The
Company expects to pay less than $80 million for GSR costs,
primarily as a result of contract terminations, and has provided
reserves for the remaining GSR costs it may be required to pay,
as well as a regulatory asset for the estimated future amounts
recoverable.
<PAGE>
General Rate Issues
On April 30, 1997, the Company filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. This rate case reflects a requested annual revenue
increase of approximately $70.9 million, based on filed rates,
primarily attributable to increases in the utility rate base,
operating expenses and rate of return and related taxes. The
Company, FERC staff, and all intervenors but one have reached a
proposed settlement which was filed with the FERC on March 20,
1998. On April 28, 1998, the Presiding Administrative Law Judge
issued an order certifying the settlement to the FERC. The
Company believes it has provided an adequate reserve for amounts,
including interest, which may be refunded to customers.
Royalty Claims and Producer Litigation
In connection with the Company's renegotiations of supply
contracts with producers to resolve take-or-pay and other
contract claims, the Company has entered into certain settlements
which may require the indemnification by the Company of certain
claims for royalties which a producer may be required to pay as a
result of such settlements. The Company has been made aware of
demands on producers for additional royalties and may receive
other demands which could result in claims against the Company
pursuant to the indemnification provision in its settlements.
Indemnification for royalties will depend on, among other things,
the specific lease provisions between the producer and the lessor
and the terms of the settlement between the producer and the
Company. Pursuant to such an indemnity, in January 1998, the
Company reimbursed a producer for approximately $1.7 million in
costs paid to settle a take-or-pay royalty claim. The Company
may file to recover 75 percent of any such amounts it may be
required to pay pursuant to indemnifications for royalties under
the provisions of FERC Order 528. The Company has provided
reserves for the estimated settlement costs of its royalty claims
and litigation.
Environmental Matters
As of March 31, 1998, the Company had a reserve of
approximately $1.9 million for estimated costs associated with
environmental assessment and remediation, including remediation
associated with the historical use of polychlorinated biphenyls
and hydrocarbons. This estimate depends upon a number of
assumptions concerning the scope of remediation that will be
required at certain locations and the cost of remedial measures
to be undertaken. The Company is continuing to conduct
environmental assessments and is implementing a variety of
remedial measures that may result in increases or decreases in
the total estimated costs.
The Company currently is either named as a potentially
responsible party or has received an information request
regarding its potential involvement at certain Superfund and
state waste disposal sites. The anticipated remediation costs,
if any, associated with these sites have been included in the
reserve discussed above.
<PAGE>
The Company considers environmental assessment and remediation
costs and costs associated with compliance with environmental
standards to be recoverable through rates, as they are prudent
costs incurred in the ordinary course of business. The actual
costs incurred will depend on the actual amount and extent of
contamination discovered, the final cleanup standards mandated by
the U.S. Environmental Protection Agency or other governmental
authorities, and other factors.
Summary of Contingent Liabilities and Commitments
While no assurances may be given, the Company does not believe
that the ultimate resolution of the foregoing matters, taken as a
whole and after consideration of amounts accrued, insurance
coverage, potential recovery from customers or other
indemnification arrangements, will have a materially adverse
effect on the Company's future financial position, results of
operations or cash flow requirements.
C. Adoption of Accounting Standard
The Financial Accounting Standards Board has issued Statement
of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information" and SFAS
No. 132, "Employer's Disclosures About Pension and Other Post
Retirement Benefits," both effective for fiscal years beginning
after December 15, 1997. SFAS Nos. 131 and 132 are disclosure
oriented; therefore, these pronouncements will not have an effect
on the Company's financial position, results of operations or
cash flow requirements.
<PAGE>
Item 2. Management's Narrative Analysis of the Results of
Operations (Filed Pursuant to General Instruction H)
Financial Analysis of Operations
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
The Company's gas sales result from requirements to meet its
pre-Order 636 gas purchase commitments, substantially all of
which are managed by the Company's gas marketing affiliate,
Williams Energy Services Company, as exclusive agent for the
Company. Although the sales and purchase commitments remain in
the Company's name, their management and any associated profit or
loss is solely the responsibility of the agent. Therefore, the
resulting sales and purchases have no impact on the Company's
results of operations.
Operating income was $0.6 million lower for the three months
ended March 31, 1998, than for the three months ended March 31,
1997. The decrease in operating income was due primarily to the
effect of favorable resolutions in 1997 of certain contractual
issues, substantially offset by lower operating and maintenance
expenses and lower general and administrative expenses. Compared
to 1997, net income was $1.3 million lower due to the reasons
discussed above and lower interest income due to lower advances
to Williams.
Operating revenues decreased $16.1 million primarily
attributable to lower gas sales, lower transportation costs
charged to the Company by others and passed through to customers
as provided in the Company's rates, and the effect of favorable
resolutions in 1997 of certain contractual issues. Total
deliveries were 219.9 Tbtu and 226.2 Tbtu for the first quarter
of 1998 and 1997, respectively.
Operating costs and expenses decreased $15.5 million
primarily attributable to lower cost of gas sold and lower cost
of gas transportation, both of which are passed through to
customers, as well as lower operation, maintenance, general and
administrative expenses.
Financial Condition and Liquidity
Through the years, the Company has consistently maintained its
financial strength and experienced strong operational results.
Williams' ownership of the Company further enhances its financial
and operational strength, as well as allows the Company to take
advantage of new opportunities for growth. The Company expects
to access public and private capital markets, as needed, to
finance its own capital requirements.
The Company is a participant with other Williams subsidiaries
in a $1 billion credit agreement under which the Company may
borrow up to $200 million, subject to borrowings by other
affiliated companies. Interest rates vary with current market
conditions. To date, the Company has no amounts outstanding
under this facility.
<PAGE>
The Company is a participant in Williams' cash management
program. The advances due the Company by Williams are
represented by demand notes payable. Those amounts that the
Company anticipates Williams will repay in the next twelve months
are classified as current assets; any remainder is classified as
noncurrent. The interest rate on intercompany demand notes is
the London Interbank Offered Rate on the first day of the month
plus an applicable margin based on the current Standard and
Poor's Rating of the Borrower.
The Company's capital expenditures for the first three months
of 1998 and 1997 were $11.2 and $9.5 million, respectively.
Capital expenditures for 1998 are expected to approximate $59.2
million. The Company's debt as a percentage of total
capitalization at March 31, 1998 and December 31, 1997 was 28.1%
for both periods.
On July 21, 1997, the Company filed an application with the
FERC to authorize construction, installation and operation of a
4,600 horsepower compressor engine and associated facilities at
its Haughton Compressor Station in Louisiana. The Company
received an order on March 17, 1998, issuing a certificate
authorizing the construction and operation of facilities. The
project is expected to cost approximately $6 million, which is
included in the 1998 capital expenditure estimate above. The
Company proposes to have the facilities in service by November 1,
1998.
On April 30, 1997, the Company filed a general rate case
(Docket No. RP97-344) effective November 1, 1997, subject to
refund. This rate case reflects a requested annual revenue
increase of approximately $70.9 million, based on filed rates,
primarily attributable to increases in the utility rate base,
operating expenses and rate of return and related taxes. The
Company, FERC staff, and all intervenors but one have reached a
proposed settlement which was filed with the FERC on March 20,
1998. On April 28, 1998, the Presiding Administrative Law Judge
issued an order certifying the settlement to the FERC. The
Company believes it has provided an adequate reserve for amounts,
including interest, which may be refunded to customers.
Williams has initiated an enterprise-wide project to address
the year 2000 compliance issue for all technology hardware and
software, external interfaces with customers and suppliers,
operations process control, automation and instrumentation
systems, and facility items. The assessment phase of this
project as it relates to the Company should be substantially
complete by the end of the second quarter of 1998. Necessary
conversion and replacement activities will begin in 1998 and
continue through mid-1999. Testing of systems has begun and will
continue throughout the process. Williams has initiated a formal
communications process with other companies with which Williams'
systems interface or rely on to determine the extent to which
those companies are addressing their year 2000 compliance. Where
necessary, Williams will be working with those companies to
mitigate any material adverse effect on Williams.
Williams expects to utilize both internal and external
resources to complete this process. Existing resources will be
<PAGE>
redeployed and previously planned system replacements will be
accelerated during this time. Costs incurred for new software
and hardware purchases will be capitalized and other costs will
be expensed as incurred. The Company considers costs associated
with the year 2000 compliance to be prudent costs incurred in the
ordinary course of business and, therefore, recoverable through
rates. While the total costs of this project are still being
evaluated, the Company estimates that the costs, excluding
previously planned system replacements, necessary to complete the
project within the schedule described will be immaterial. The
costs of the project and the completion dates are based on
management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued
availability of certain resources, third party year 2000
compliance modification plans, and other factors. There can be
no guarantee that these estimates will be achieved, and actual
results could differ materially from these estimates.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 27.1 Financial Data Schedule for Texas Gas
Transmission Corporation for the first
quarter ending March 31, 1998.
(b) Reports on Form 8-K
None
_____________________________
* Filed herewith
<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, 1998 BY: /s/ S. W. Harris
S. W. Harris
Controller and Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000097452
<NAME> TEXAS GAS TRANSMISSION CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 251
<SECURITIES> 0
<RECEIVABLES> 8,370
<ALLOWANCES> 0
<INVENTORY> 15,555
<CURRENT-ASSETS> 175,699
<PP&E> 1,031,376
<DEPRECIATION> 107,327
<TOTAL-ASSETS> 1,266,092
<CURRENT-LIABILITIES> 130,560
<BONDS> 251,366
0
0
<COMMON> 1
<OTHER-SE> 644,076
<TOTAL-LIABILITY-AND-EQUITY> 1,266,092
<SALES> 4,178
<TOTAL-REVENUES> 91,789
<CGS> 4,097
<TOTAL-COSTS> 22,187
<OTHER-EXPENSES> 14,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,296
<INCOME-PRETAX> 37,668
<INCOME-TAX> 14,981
<INCOME-CONTINUING> 22,687
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 22,687
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