1
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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:
(270) 926-8686
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required
to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No_
Indicate the number of shares outstanding of each of
the issuer's classes of common stock, as of the
latest practicable date. 1,000 shares as of November 13,
2000
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.
TEXAS GAS TRANSMISSION CORPORATION
TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets............................... 3
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. 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.......................... 14
Signature......................................................... 15
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Texas Gas Transmission Corpora-
tion 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 1999 Annual
Report on Form 10-K and 2000 First and Second Quarter Reports on Form 10-Q.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 232 $ 266
Receivables:
Trade 1,830 7,011
Affiliates 1,750 1,056
Other 911 219
Gas Receivables:
Transportation and exchange 3,884 1,300
Storage 8,713 93
Advances to affiliates 48,241 73,765
Inventories 15,673 15,627
Deferred income taxes 7,647 10,992
Costs recoverable from customers 12,160 13,714
Gas stored underground 5,600 10,409
Other 471 1,483
Total current assets 107,112 135,935
Investments, at cost 213 367
Property, Plant and Equipment, at cost:
Natural gas transmission plant 983,349 960,208
Other natural gas plant 152,792 149,602
1,136,141 1,109,810
Less - Accumulated depreciation and
amortization 151,686 146,245
Property, plant and equipment, net 984,455 963,565
Other Assets:
Gas stored underground 75,017 110,961
Costs recoverable from customers 46,991 48,482
Prepaid Pension 30,535 27,733
Other 9,278 10,661
Total other assets 161,821 197,837
Total Assets $ 1,253,601 $1,297,704
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 2000 1999
<S> <C> <C>
Current Liabilities:
Payables:
Trade $ 2,167 $ 3,160
Affiliates 6,029 10,071
Other 5,430 5,633
Gas Payables:
Transportation and exchange 4,099 15,387
Storage 6,367 13,453
Accrued taxes 33,081 21,964
Accrued interest 1,511 6,557
Accrued payroll and employee benefits 35,367 37,734
Reserve for regulatory and rate matters 36 -
Other accrued liabilities 6,770 11,661
Total current liabilities 100,857 125,620
Long-Term Debt 250,618 250,860
Other Liabilities and Deferred Credits:
Deferred income taxes 161,998 168,824
Postretirement benefits other than pensions 36,449 38,505
Pension Plan Costs 30,535 27,733
Other 26,065 24,522
Total other liabilities and deferred credits 255,047 259,584
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 627,046 627,046
Retained earnings 20,032 34,593
Total stockholder's equity 647,079 661,640
Total Liabilities and Stockholder's Equity $ 1,253,601 $ 1,297,704
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Operating Revenues:
Gas transportation $ 44,580 $ 51,371 $177,576 $189,674
Gas storage 595 652 1,876 1,921
Other 1,128 379 3,860 1,148
Total operating revenues 46,303 52,402 183,312 192,743
Operating Costs and Expenses:
Cost of gas transportation 1,633 684 3,639 4,488
Operation and maintenance 12,390 10,543 35,973 33,690
General and administrative 11,832 12,812 37,941 39,207
Depreciation and amortization 11,123 10,931 33,644 33,068
Taxes other than income taxes 3,336 4,326 10,981 11,869
Total operating costs and expenses 40,314 39,296 122,178 122,322
Operating Income 5,989 13,106 61,134 70,421
Other (Income) Deductions:
Interest expense 4,816 5,060 14,736 14,893
Interest income (1,230) (887) (4,365) (2,881)
Miscellaneous other (income), net (454) (359) (422) (367)
Total other deductions 3,132 3,814 9,949 11,645
Income Before Income Taxes 2,857 9,292 51,185 58,776
Provision for Income Taxes 927 3,429 19,746 23,132
Net Income $ 1,930 $ 5,863 $ 31,439 $ 35,644
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 31,439 $ 35,644
Adjustments to reconcile to cash provided
from operations:
Depreciation and amortization 33,644 33,068
Provision for deferred income taxes (3,481) 8,087
Changes in receivables sold (10,200) (6,900)
Changes in receivables 3,471 11,097
Changes in inventories (46) 130
Changes in other current assets 7,375 (2,062)
Changes in payables 3,985 (3,736)
Changes in accrued liabilities (24,806) (26,083)
Other, including changes in noncurrent assets
and liabilities 27,049 (11,983)
Net cash provided by operating activities 68,430 37,262
FINANCING ACTIVITIES:
Dividends and returns of capital (46,000) (24,000)
Net cash used in financing activities (46,000) (24,000)
INVESTING ACTIVITIES:
Property, plant and equipment:
Capital expenditures, net of allowance for
funds used during construction (46,566) (43,669)
Costs of removal, net of proceeds from sales
and salvage values (1,594) (1,515)
Advances to affiliates, net 25,524 31,771
Proceeds from sale of long-term investments 172 -
Net cash (used in) investing activities (22,464) (13,413)
Decrease in cash and cash equivalents (34) (151)
Cash and cash equivalents at beginning of period 266 201
Cash and cash equivalents at end of period $ 232 $ 50
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
TEXAS GAS TRANSMISSION CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. Corporate Structure and Control and Basis of Presentation
Corporate Structure and Control
Texas Gas Transmission Corporation and its wholly owned subsidiary,
TGT Enterprises, Inc., (collectively, Texas Gas) are wholly owned by Williams
Gas Pipeline Company (WGP), which is a wholly owned subsidiary of The
Williams Companies, Inc. (Williams).
Basis of Presentation
The consolidated financial statements have been prepared from the books
and records of Texas Gas without audit. 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 Texas Gas' management, are necessary to present fairly its
financial position at September 30, 2000, and results of operations for the
three and nine months ended September 30, 2000 and 1999, and cash flows for
the nine months ended September 30, 2000 and 1999. These consolidated
financial statements should be read in conjunction with the financial
statements, notes thereto and management's narrative analysis contained in
Texas Gas' 1999 Annual Report on Form 10-K and Texas Gas' 2000 First and
Second Quarter Reports on Form 10Q.
Certain reclassifications have been made in the 1999 financial statements
to conform to the 2000 presentation.
Seasonal Variation
Operating income may vary by quarter. Based on current rate structure,
Texas Gas experiences higher operating income in the first and fourth quarters
as compared to the second and third quarters.
B. Contingent Liabilities and Commitments
Regulatory and Rate Matters and Related Litigation
FERC Order 637
On February 9, 2000, the FERC issued a final rule, Order 637, in which FERC
adopted certain policies that it finds are necessary to adjust its current
regulatory model to the needs of the evolving markets, but determined that
any fundamental changes to its regulatory policy will be considered after
further study and evaluation of the evolving marketplace. Most significantly,
<PAGE>
in Order 637, the FERC (i) revised its pricing policy to waive, for two-year
period, the maximum price ceilings for short-term releases of capacity ofless
than one year, and (ii) permits pipelines to file proposals to implement
seasonal rates for short-term services and term-differentiated rates, subject
to certain requirements including the requirement that a pipeline be limited
to recovering its annual revenue requirement under those rates. Texas Gas
submitted an Order 637 compliance filing on August 15, 2000, which contained
pro forma tariff sheets designed to comply with certain directives in the
order regarding the conduct of daily business transactions.
FERC Order 636
Effective November 1, 1993, Texas Gas 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 Texas Gas, are primarily related to gas supply realignment (GSR)
costs and unrecovered purchased gas costs. Certain aspects of Texas Gas'
FERC Order 636 restructuring are under appeal.
In September 1995, Texas Gas received FERC approval of a settlement
agreement which resolves all issues regarding Texas Gas' recovery of GSR
costs. To date, Texas Gas has paid $76.2 million and collected $66.4
million, plus interest, related to GSR costs. Texas Gas expects to pay no
more than $80 million for GSR costs, primarily as a result of contract
terminations, and has provided reserves for the remaining GSR costs it
may be required to pay, as well as a regulatory asset for the estimated
future amounts recoverable.
General Rate Issues
On April 28, 2000, Texas Gas filed a general rate case (Docket No. RP00-
260) which became effective November 1, 2000, subject to refund. This new
rate case reflects a requested annual revenue increase of approximately $81
million, based on filed rates, primarily attributable to increases in the
utility rate base, depreciation expense, rate of return and related taxes,
and revised system rate design quantities. Texas Gas also proposes in this
new rate case to implement value-based, term-differentiated seasonal rates
for short-term services effective November 1, 2000, as permitted by FERC
Order 637. On May 31, 2000, the Commission issued its "Order Accepting and
Suspending Tariff Sheets Subject to Refund, Rejecting Other Tariff Sheets,
and Establishing Hearing and Settlement Procedures" which permitted the
filing to take effect November 1, 2000, subject to refund, and established
administrative procedures for the case. Although the case was set for
hearing, the hearing was held in abeyance pending the filing of additional
information related to the value-based rate proposal for short-term firm
transportation service. Texas Gas made that supplemental filing on June 30,
2000. On October 27, 2000 the Commission issued an order on that supplemental
filing referring all issues in the case for hearing. Texas Gas has begun
informal settlement negotiations under a procedural schedule to attempt to
resolve all issues without a formal hearing.
<PAGE>
Royalty Claims and Producer Litigation
In connection with Texas Gas' renegotiations of supply contracts with
producers to resolve take-or-pay and other contract claims, Texas Gas has
entered into certain settlements which may require the indemnification by
Texas Gas of certain claims for royalties which a producer may be required
to pay as a result of such settlements. Texas Gas has been made aware of
demands on producers for additional royalties and may receive other demands
which could result in claims against Texas Gas 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 Texas Gas.
In June 1999, Texas Gas filed to recover approximately $1.3 million (75%)
of such costs pursuant to the provisions of FERC Order 528. These costs were
collected over a twelve-month period, which ended June 30, 2000. Texas Gas
has provided reserves for the estimated settlement costs of other royalty
claims and litigation.
Environmental Matters
As of September 30, 2000, Texas Gas had a reserve of approximately $1.4
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. Texas Gas 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.
Texas Gas 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.
Texas Gas is also subject to the federal Clean Air Act (CAA) and the CAA
Amendments of 1990 (Amendments) which added significant provisions to the
existing federal CAA. The Amendments require the Environmental Protection
Agency (EPA) to promulgate new regulations pertaining to mobile sources,
air toxics, areas of ozone non-attainment, and acid rain. Texas Gas operates
facilities in some areas designated as non-attainment for the current ozone
standard and is aware that the EPA may designate additional non-attainment
areas during 2000 which may potentially impact Texas Gas operations. Emission
control modifications of compression equipment located at facilities required
to comply with current federal CAA provisions, the Amendments, and State
Implementation Plans for NOx reductions are estimated to cost in the range of
$6 million to $14 million by May 2003 and will be recorded as additions to
property, plant and equipment as the facilities are added. If EPA
designates additional new non-attainment areas in 2000 which impact Texas
Gas' operations, the cost of additions to property, plant and equipment is
expected to increase; however, Texas Gas is unable at this time to estimate
with any certainty the cost of additions that may be required. Moreover,
new regulations pertaining to Hazardous Air Pollutants (HAPs) are anticipated
to be promulgated by year-end 2000 which will require emission controls in
<PAGE>
addition to the controls mentioned above. Texas Gas cannot predict
the costs with any certainty at this time resulting from the installation of
these controls. The effective compliance date for the HAPs regulations and
installation of associated controls is anticipated to be November 2003.
Texas Gas considers environmental assessment, 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 EPA or other governmental authorities, and other factors.
Other Legal Issues
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against
Williams and certain of its wholly owned subsidiaries including Texas Gas.
Mr. Grynberg has also filed claims against approximately 300 other energy
companies and alleges that the defendants violated the False Claims Act
in connection with the measurement and purchase of hydrocarbons. The relief
sought is an unspecified amount of royalties allegedly not paid to the
federal government, treble damages, a civil penalty, attorneys' fees, and
costs. On April 9, 1999, the United States Department of Justice announced
that it was declining to intervene in any of the Grynberg qui tam cases,
including the actions filed against the Williams entities in the United
States District Court for the District of Colorado. On October 21, 1999,
the Panel on Multi-District Litigation transferred all of the Grynberg qui tam
cases, including the ones filed against Williams, to the United States
District Court for the District of Wyoming for pre-trial purposes.
Motions to dismiss the complaints, filed by various defendants including
Williams, are pending.
Summary of Contingent Liabilities and Commitments
While no assurances may be given, Texas Gas does not believe that the
ultimate resolution of the foregoing matters taken as a whole, based on
advice from counsel and after consideration of amounts accrued, insurance
coverage, potential recovery from customers or other indemnification
arrangements, will have a materially adverse effect on Texas Gas'
future financial position, results of operations or cash flow requirements.
C. Adoption of Accounting Standard
The FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." This interpretation modifies
the current practice of accounting for certain stock award agreements and
was generally effective beginning July 1, 2000. The initial impact of this
interpretation on Texas Gas' results of operations and financial position
was not material.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB
issued SFAS 137, which deferred the effective date of SFAS 133. This was
followed in June 2000 by the issuance of SFAS 138, "Accounting for
<PAGE>
Certain Derivative Instruments and Certain Hedging Activities," which
amends SFAS 133. SFAS 133 and 138 establish accounting and reporting
standards for derivative financial instruments. The standards require that
all derivative financial instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives will be recorded
each period in earnings if the derivative is not a hedge. If a derivative
is a hedge, changes in the fair value of the derivative will either be
recognized in earnings along with the change in the fair value of the hedged
asset, liability or firm commitment also recognized in earnings or recognized
in other comprehensive income until the hedged item is recognized in
earnings. For a derivative recognized in other comprehensive income, the
ineffective portion of the derivative's change in fair value will be
recognized immediately in earnings. Texas Gas will adopt these standards
effective January 1, 2001.
Based on Texas Gas' implementation efforts to date and the fair value of
its identified derivative positions existing at September 30, 2000, Texas Gas
does not expect that the impact of adopting the standards will be material to
its financial position or results of operations. However, changing market
prices and the possibility of entering into new derivative positions in the
fourth quarter of 2000 and the fact that Texas Gas continues to pursue its
implementation efforts, causes the impact to Texas Gas' financial position or
results of operations to remain uncertain.
<PAGE>
Item 2. Management's Narrative Analysis of the Results of Operations
(Filed Pursuant to General Instruction H)
Financial Analysis of Operations
Nine Months Ended September 30, 2000 Compared to
Nine Months Ended September 30, 1999
Operating income was $9.3 million lower for the nine months ended
September 30, 2000, than for the nine months ended September 30, 1999.
The decrease in operating income was due primarily to $7.4 million from
the 1999 settlement of regulatory and rate issues, the 1999 recognition
of $3.0 million of deferred revenues associated with a January 1999 GSR
reconciliation filing with the FERC, and $1.9 million of one-time costs
associated with the 2000 office consolidation of Williams Gas Pipeline
Central and Texas Gas. Decreases in operating income were partially
offset by a $2.7 million increase in other revenues primarily due to
higher processing revenues resulting from higher energy prices. Interest
income increased due primarily to higher advances to affiliates, throughout
most of 2000, and higher interest rates.
Operating revenues decreased $9.4 million primarily attributable to the
1999 regulatory settlement and GSR adjustment discussed above. Other revenues
increased by $2.7 million as discussed above. Total deliveries were 531.8
Tbtu and 558.0 Tbtu for the nine months of 2000 and 1999, respectively.
Operating costs and expenses decreased $0.1 million primarily attributable
to a $0.8 million reduction in the cost of gas transportation and lower
administrative costs resulting from the synergies of combining Texas Gas'
office operations with Williams Gas Pipeline Central. Decreases in operating
costs and expenses were partially offset by $1.9 million of one-time
office operation consolidation costs.
Financial Condition and Liquidity
Texas Gas is a participant with other Williams' subsidiaries in a $700
million credit agreement under which Texas Gas may borrow up to $200 million,
subject to borrowings by other affiliated companies. Interest rates vary with
current market conditions. To date, Texas Gas has no amounts outstanding
under this facility.
As of September 30, 2000, Texas Gas has $100 million of shelf availability
remaining under a Registration Statement filed with the Securities and
Exchange Commission in 1997.
Texas Gas is a participant in WGP's cash management program. The advances
due Texas Gas by WGP are represented by demand notes. 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 Texas Gas.
Texas Gas expects to access public and private capital markets, as needed,
to finance its own capital requirements.
<PAGE>
Texas Gas' capital expenditures for the first nine months of 2000 and 1999
were $48.2 million and $45.2 million, respectively. Capital expenditures
for 2000 are expected to approximate $89.0 million.
Texas Gas' debt as a percentage of total capitalization at September 30,
2000 and December 31, 1999 was 27.9% and 27.5%, respectively.
On April 28, 2000, Texas Gas filed a general rate case (Docket No. RP00-
260) which became effective November 1, 2000 subject to refund. This new rate
case reflects a requested annual revenue increase of approximately $81
million, based on filed rates, primarily attributable to increases in the
utility rate base, depreciation expense, rate of return and related taxes,
and revised system rate design quantities. Texas Gas also proposes in
this new rate case to implement value-based, term- differentiated seasonal
rates for short-term services effective November 1, 2000, as permitted
by FERC Order 637. On May 31, 2000, the Commission issued its "Order
Accepting and Suspending Tariff Sheets Subject to Refund, Rejecting Other
Tariff Sheets, and Establishing a Hearing and Settlement Procedures" which
permitted the filing to take effect November 1, 2000, subject to refund,
and established administrative procedures for the case. Although the case was
set for hearing, the hearing was held in abeyance pending the filing of
additional information related to the value-based rate proposal for short-
term firm transportation service. Texas Gas made that supplemental filing on
June 30, 2000. On October 27, 2000 the Commission issued an order on that
supplemental filing referring all issues in the case for hearing. Texas Gas
has begun informal settlement negotiations under a procedural schedule to
attempt to resolve all issues without a formal hearing.
<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 nine months ending September 30, 2000.
(b) Reports on Form 8-K
None
_____________________________
* Filed herewith
<PAGE>
S I G N A T U R E
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 TRANSMISSIONCORPORATION
DATE: November 13, 2000 BY: /s/ S. W. Harris
S. W. Harris
Controller and Chief Accounting Officer
