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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
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 1-7513
TRANSCO ENERGY COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 74-1758039
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 POST OAK BLVD.
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
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Registrant's telephone number,
including area code
(713) 439-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, Par Value $0.50 Per Share New York Stock Exchange
Pacific Stock Exchange
Cumulative Convertible Preferred Stock, New York Stock Exchange
Without Par Value -- Stated Value
$50 Per Share, $4.75 Series
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in a definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the Common Stock, par value $0.50 per share,
held by non-affiliates of Registrant as of March 3, 1995 was approximately
$253,884,893. For the purposes of the determination of the above stated amount
only, all directors and executive officers of the Registrant are presumed to be
affiliates.
The number of shares of Common Stock, par value $0.50 per share,
outstanding as of March 3, 1995 was 40,753,757.
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PART I
ITEM 1. BUSINESS.
GENERAL
Transco Energy Company is engaged primarily in the natural gas pipeline
(Pipelines) and the natural gas marketing (Gas Marketing) businesses. Transco
also has investments in coal mining and marketing operations (Coal), natural gas
liquids processing, natural gas gathering and a nonoperating interest in a
coalbed methane project in Alabama.
As used herein the terms "Transco" or the "Company" refer to Transco Energy
Company together with its wholly-owned subsidiaries unless the context otherwise
requires.
The number of full-time employees of Transco at December 31, 1994 was
4,542.
MERGER WITH THE WILLIAMS COMPANIES, INC.
On December 12, 1994, Transco entered into an Agreement and Plan of Merger
(Merger Agreement), which was amended on February 17, 1995, with The Williams
Companies, Inc., a Delaware corporation (Williams), and WC Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Williams (Sub), pursuant
to which Williams agreed to commence a cash tender offer (Offer) to acquire up
to 24.6 million shares of Common Stock of the Company, par value $0.50 per share
(Common Stock), together with attached common stock purchase rights, or
approximately 60% of the outstanding shares of Common Stock, at a price of
$17.50 per share and common stock purchase right, net to the seller in cash. On
December 16, 1994, Williams commenced the Offer. The Offer expired at midnight
on January 17, 1995, with approximately 86.7% of the outstanding shares of
Common Stock having been tendered pursuant to the Offer and not withdrawn.
On January 18, 1995, all conditions to the Offer having been deemed
satisfied, Williams accepted for payment 24.6 million shares of Common Stock
validly tendered and not withdrawn pursuant to the Offer. As required by the
Merger Agreement, shortly before Williams' acceptance for payment of the Common
Stock pursuant to the Offer, the Company redeemed the common stock purchase
rights for $0.05 per right. Pursuant to the terms of the Merger Agreement and
the Offer, all rights to the proceeds of such redemption with respect to the
Common Stock and associated common stock purchase rights accepted for payment
pursuant to the Offer were assigned to Williams.
The Merger Agreement provides that, upon the terms and subject to the
conditions thereof, at the effective time of the merger (Effective Time), Sub
will be merged with and into the Company in accordance with the General
Corporation Law of the State of Delaware (Merger). As a result of the Merger,
the separate corporate existence of Sub will cease and the Company will continue
as the surviving corporation. The Effective Time is expected to occur in April
1995.
At the Effective Time, each share of Common Stock that is issued and
outstanding immediately prior to the Effective Time (other than shares held in
the treasury of the Company, shares owned by Williams or any direct or indirect
wholly-owned subsidiary of Williams, or dissenting shares) will be converted
into the right to receive 0.625 of a share of Williams common stock and 0.3125
attached Williams preferred stock purchase rights.
In addition, at the Effective Time, each issued and outstanding share of
the Company's $3.50 Series Cumulative Convertible Preferred Stock will be
converted into the right to receive one share of Williams' $3.50 Series
Cumulative Convertible Preferred Stock.
Pursuant to the Merger Agreement, the Company shall call and hold a meeting
of its stockholders (Stockholders' Meeting) for the purpose of considering and
taking action on the Merger Agreement and the transactions contemplated thereby.
The Merger Agreement requires the Company, through its Board of Directors, to
recommend to its stockholders approval of the Merger and related matters;
provided, however, that nothing contained in the Merger Agreement will require
the Board of Directors to take any action or
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refrain from taking any action which it determines in good faith with the advice
of counsel could reasonably be expected to result in a breach of its fiduciary
duties under applicable law. Williams has agreed to cause all shares of Common
Stock acquired by it pursuant to the Offer to be represented at the
Stockholders' Meeting and to be voted in favor of approval and adoption of the
Merger Agreement and the Merger. Since Williams holds a majority of the shares
of Common Stock outstanding on the record date for establishing holders of
shares entitled to vote at the Stockholders' Meeting, Williams has sufficient
voting power to approve the Merger, even if no other stockholder of the Company
votes in favor of it.
On January 25, 1995, as contemplated by the Merger Agreement, Keith E.
Bailey, Chairman, Chief Executive Officer and President of Williams, and John C.
Bumgarner Jr., Senior Vice President for Corporate Development and Planning of
Williams, were elected to the Transco Board of Directors.
RECAPITALIZATION PLAN
Williams has stated that Transco or Williams or both, through their
respective subsidiaries, will promptly expand both regulated and non-regulated
activities in the geographical areas served by Transco's pipeline subsidiaries
and Williams' existing systems. Williams has stated that during 1995 it will
make capital expenditures of approximately $200 million with respect to certain
Transco regulated businesses and approximately $200 million for expansion by
Transco into non-regulated activities.
In connection with these plans, in January 1995 the Boards of Directors of
Transco and Williams approved a proposed recapitalization plan for Transco under
which Williams will advance or contribute to Transco up to an estimated $950
million to execute the proposed plan. In addition, according to Williams,
Williams intends to cause Transco, as promptly as practicable following the
Merger and subject to receipt of any necessary consents, to declare and pay as
dividends to Williams all of Transco's interests in its principal operating
subsidiaries, Transcontinental Gas Pipe Line Corporation (TGPL), Texas Gas
Transmission Corporation (Texas Gas) and Transco Gas Marketing Company (TGMC)
(the dividends collectively, the Operating Company Dividends). After giving
effect to the Operating Company Dividends, substantially all of Transco's
remaining assets will be in non-regulated activities. Certain of such assets are
non-core assets which Williams has stated it intends to dispose of during 1995.
The recapitalization plan is expected, when taken together with the Operating
Company Dividends, to provide Williams with somewhat greater ratemaking
flexibility afforded by a stand-alone capital structure for the natural gas
pipeline subsidiaries.
The following actions were completed in January and February 1995 in
connection with the recapitalization plan:
-- Termination of Transco's Amended Bank Credit Facility dated December 31,
1993, replacing it with a Credit Agreement (Credit Agreement) dated as
of January 23, 1995 among Williams, Transco and Transco Coal Company
(TCC), and a Credit Agreement (Williams Credit Agreement) dated as of
February 23, 1995 among Williams and certain of its subsidiaries, TGPL,
Texas Gas and Citibank N.A., as agent and the Banks named therein;
-- Termination of the program to sell monthly trade receivables of TGPL and
Texas Gas, replacing it with the Williams Credit Agreement with the
expectation that at some future time Williams will enter into a new
receivables program;
-- Termination of Transco's interest rate swaps that had effectively
converted $450 million of fixed-rate debt into floating-rate debt;
-- Termination of Transco's Reimbursement Facility dated December 31, 1993,
replacing it with letters of credit obtained pursuant to a Standby
Letter of Credit Facility between First Interstate Bank of California
and Williams;
-- Tender offer by Transco to acquire any or all of its $300 million of
outstanding 11 1/4% Notes due 1999 (Notes), pursuant to which Transco
acquired approximately $284 million, or 94.7%, of the Notes. Prior to
the initiation of the tender offer, holders of a majority in principal
amount of the Notes agreed (i) to waive certain provisions of the
Indenture dated as of July 1, 1992 (Indenture) under which the
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Notes were issued that restricted the disposition of certain of
Transco's assets, and (ii) to amend the Indenture to eliminate certain
restrictive covenants in the Indenture with regard to the incurrence of
new debt and Transco's ability to make restricted payments, including
dividends;
-- Call for redemption by Transco of all of its existing $4.75 Series
Cumulative Convertible Preferred Stock at $50.475 per share plus accrued
dividends, to be effective March 20, 1995; and
-- Call for redemption of all of the outstanding preferred stock of TGPL at
$100.00 per share plus accrued dividends, to be effective March 23,
1995.
The recapitalization plan may include the defeasance of the remainder of
the 11 1/4% Notes not tendered to the Company and the potential repurchase or
retirement of certain other debt of Transco and its subsidiaries.
In addition, in February 1995, Standard & Poor's Corporation and Moody's
Investors Service upgraded Transco's debt securities from B+ and Ba3 to BBB- and
Baa2, respectively, Transco's preferred stock from B- and B2 to BB+ and Baa3,
respectively, TGPL's debt securities from BB and Ba2 to BBB and Baa1,
respectively, TGPL's preferred stock from BB- and B1 to BBB- and Baa2,
respectively, and Texas Gas' debt securities from BB and Ba2 to BBB and Baa1,
respectively. These upgrades should provide Transco, TGPL and Texas Gas with
greater access to capital markets. 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.
Set forth below is a description of the principal business segments of
Transco prior to the Effective Time of the Merger. Williams has stated that it
intends to reorganize Transco and certain of its subsidiaries after the
consummation of the Merger. For financial information regarding the major
industry segments, see "Item 8. Financial Statements and Supplementary
Data -- Schedule of Segment Information."
PIPELINES
The Company's pipeline business is conducted through TGPL and Texas Gas.
These companies, which are regulated by the Federal Energy Regulatory Commission
(FERC), principally transport natural gas from the Gulf of Mexico and the Gulf
Coast regions to markets in the eastern half of the United States through their
respective 10,500 and 6,050 mile interstate pipeline systems.
Prior to 1984, interstate pipelines, including TGPL and Texas Gas, served
primarily as merchants of natural gas, purchasing gas under long-term contracts
with numerous producers in production areas and transporting and reselling gas
to local utilities in market areas under long-term sales agreements. Such
service was known as "bundled" service. Regulatory policies under the Natural
Gas Act of 1938 (NGA), relating to both pipeline rates and conditions of
service, stressed security of gas supplies and service, and the recovery by
pipelines of their prudently incurred costs of providing that service.
However, commencing in 1984, the FERC issued a series of orders which have
resulted in a major restructuring of the natural gas transmission industry and
its business practices. With Order 380, issued in 1984, the FERC freed pipeline
customers from their contractual obligations to purchase certain minimum levels
of gas from their pipeline suppliers. With implementation of "open access"
transportation rules contained in FERC Orders 436 and 500, the FERC afforded
pipeline customers the opportunity to purchase gas from others and have it
transported by the pipelines to the customers.
Faced with these changing conditions, increased competition and declining
bundled sales, TGPL and Texas Gas altered the manner in which they had
traditionally conducted their businesses and began to transport a larger
percentage of gas for customers that purchased such gas from others. In 1988,
TGPL and Texas Gas accepted certificates to become permanent open-access
pipeline systems under FERC Orders 436 and 500.
On April 8, 1992, the FERC issued Order 636 which made further fundamental
changes in the way natural gas pipelines conduct their businesses. The FERC's
stated purpose of Order 636 was to improve the competitive structure of the
natural gas pipeline industry by, among other things, unbundling a pipeline's
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merchant role from its transportation services; ensuring "equality" of
transportation services including equal access to all sources of gas; providing
"no-notice" firm transportation services that are equal in quality to bundled
sales service; establishing a capacity release program; and changing rate design
methodology from modified fixed-variable (MFV) to straight fixed-variable (SFV),
unless the pipeline and its customers agree to, and the FERC approves, a
different form of rate design methodology. Effective November 1, 1993, both TGPL
and Texas Gas implemented their Order 636 restructuring plans. For a complete
discussion of Order 636, see "Item 8. Financial Statements and Supplementary
Data -- Notes to Consolidated Financial Statements -- B. Regulatory
Matters -- Order 636."
As a result of the Order 636 requirement that a pipeline unbundle its
merchant role from its transportation services, Transco determined to implement
a plan to consolidate its gas marketing businesses under the common management
of TGMC. In January 1993, TGMC, through an agency agreement, began to manage all
jurisdictional merchant sales of TGPL. In November 1993, TGMC, through an agency
agreement, began to manage all jurisdictional sales of Texas Gas, except for the
sales of gas purchased by Texas Gas under certain contracts with pricing
provisions that are not variable market based which is being resold by Texas Gas
at monthly auction pursuant to Order 636. See "Gas Marketing."
MARKETS
TGPL's principal markets encompass eleven Southeast and Atlantic seaboard
states, and include the New York City and Philadelphia metropolitan areas. TGPL
has working storage capacity in five underground storage fields, located on or
near its pipeline system and/or market areas, and operates three of these
storage fields. The certificated storage capacity of TGPL and its customers is
approximately 233 Bcf*. This storage permits TGPL's customers to inject gas into
storage during the summer and off-peak periods for delivery during peak winter
periods.
Texas Gas' direct market area encompasses eight states in the South and
Midwest, and includes the Memphis, Louisville, Cincinnati, Dayton, and
Indianapolis metropolitan areas. Texas Gas also has indirect market access to
Northeast markets through interconnections with Columbia Gas Transmission
Corporation (Columbia), CNG Transmission Corporation and Texas Eastern
Transmission Corporation (Texas Eastern). Texas Gas owns and operates ten
underground storage reservoirs in or near its market area, with certificated
storage capacity of Texas Gas of approximately 176.7 Bcf. This storage permits
Texas Gas' customers to inject gas into storage during the summer and off-peak
periods for delivery during peak winter periods.
TGPL and Texas Gas' total system deliveries for the years 1994, 1993 and
1992 are shown below. Sales as shown below include only bundled sales. See "Gas
Marketing."
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YEARS ENDED DECEMBER 31,
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1994 1993 1992
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TGPL SYSTEM DELIVERIES (Bcf):
Market-area deliveries
Long-haul transportation............. 777.3 56% 823.9 60% 821.8 59%
Market-area transportation........... 437.9 31 374.4 27 379.8 27
------- --- ------- --- ------- ---
Total market-area
deliveries................. 1,215.2 87 1,198.3 87 1,201.6 86
Production-area transportation......... 178.7 13 171.2 13 199.3 14
------- --- ------- --- ------- ---
Total system deliveries................ 1,393.9 100% 1,369.5 100% 1,400.9 100%
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* As used in this report, the term "Mcf" means thousand cubic feet, the term
"MMcf" means million cubic feet, the term "Bcf" means billion cubic feet, the
term "Tcf" means trillion cubic feet, the term "MMcf/d" means million cubic
feet per day, the term "MMBtu" means million British Thermal Units and the
term "MMGals" means million gallons.
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TGPL's facilities are divided into seven rate zones. Four are located in
the production area and three are located in the market area. Long-haul
transportation is gas that is received in one of the production-area zones and
delivered in a market-area zone. Market-area transportation is gas that is both
received and delivered within market-area zones. Production-area transportation
is gas that is both received and delivered within production-area zones.
As shown in the table above, TGPL's total market-area deliveries for 1994
were 16.9 Bcf higher than 1993. The increased deliveries, primarily firm
transportation volumes, are higher than the same period in 1993 mainly due to
the colder-than-normal weather in the market area during January and February
1994, coupled with higher firm throughput during the summer period due to
implementation of capacity release programs pursuant to Order 636. The
production-area deliveries for 1994 increased 7.5 Bcf, or 4%, when compared to
1993 due to TGPL's decreased rates resulting from the elimination of the
producer settlement surcharge which expired on May 31, 1993. As a result of a
SFV rate design and the interruptible transportation revenue crediting
requirement, these increases in system deliveries had no significant impact on
operating income; however, these increases show the strength of the TGPL
franchise.
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YEARS ENDED DECEMBER 31,
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1994 1993 1992
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TEXAS GAS SYSTEM DELIVERIES (Bcf):
Sales................................. -- -- 51.5 7% 80.4 11%
Long-haul transportation.............. 602.9 77% 519.6 67 402.2 55
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Total mainline deliveries........ 602.9 77 571.1 74 482.6 66
Short-haul transportation............. 183.1 23 204.0 26 244.2 34
----- --- ----- --- ----- ---
Total system deliveries.......... 786.0 100% 775.1 100% 726.8 100%
===== === ===== === ===== ===
</TABLE>
Texas Gas' facilities are divided into five rate zones. Prior to the
adoption of Order 636 on November 1, 1993, receipts and deliveries were made in
the northern four rate zones to service sales and long-haul transportation
markets. Receipts and deliveries in the remaining zone were made to service
sales and short-haul transportation markets in southern Louisiana. Effective
with the adoption of Order 636 on November 1, 1993, receipts and deliveries are
made in the northern four rate zones to service long-haul transportation
markets. Receipts and deliveries in the remaining zone are made to serve
short-haul transportation markets in southern Louisiana. All sales are made
prior to entering Texas Gas' pipeline system and therefore do not constitute
system deliveries.
As shown in the table above, Texas Gas' total mainline deliveries for the
year ended December 31, 1994 increased 31.8 Bcf, or 5.6%, as compared to the
year ended December 31, 1993, primarily as a result of increased throughput in
connection with restructured services resulting from the implementation of Order
636 and increased service to other interstate natural gas pipelines. While
presently not adding significantly to Texas Gas' operating income, this increase
shows the strength of Texas Gas' franchise.
PIPELINE PROJECTS
Liberty Pipeline Company
In 1992, Liberty Pipeline Company (Liberty), a partnership of interstate
pipelines and local distribution companies, filed for FERC approval to construct
and operate a natural gas pipeline to provide 500 MMcf/d in firm transportation
service to the greater New York City metropolitan area. The partnership
presently is comprised of subsidiaries of Transco and two other interstate
pipelines and subsidiaries of two TGPL customers in New York.
On August 1, 1994, Liberty asked the FERC to postpone indefinitely its
review of the project. The decision followed the withdrawal of two key shippers
from the project. The partners reaffirmed their belief that an additional
delivery point to the New York facilities system, as proposed by Liberty, would
be necessary in the future and advised the FERC that the Liberty partners would
continue to pursue that goal. On August 12, 1994, the FERC dismissed, without
prejudice, the applications of Liberty and other upstream pipeline
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companies for authority to build the pipeline and other related facilities. As a
result of the indefinite delay of the project, Transco recorded a $4.2 million
pretax charge to establish a reserve for its investment in the partnership.
At the time Liberty ceased development of its project, TGPL also suspended
development of its associated Liberty Upstream Expansion. That project
contemplated 115 MMcf/d of firm transportation capacity from Leidy, Pennsylvania
interconnects to the Liberty Pipeline, near South Amboy, New Jersey. The total
investment in the Liberty Upstream project is $3.6 million, of which $0.6
million was incurred during 1994. TGPL believes these expenditures will have
value to future projects.
Southeast Expansion Projects
In November 1993, TGPL filed for FERC approval of its Southeast Expansion
Projects to provide additional firm transportation capacity to growing
southeastern markets in Alabama, Georgia, South and North Carolina and Virginia.
The Southeast Expansion Projects will provide a total of 200 MMcf/d of firm
transportation capacity to TGPL's southeast customers by the 1996-1997 winter
heating season. The new firm transportation capacity will extend from TGPL's
Mobile Bay lateral interconnect near Butler, Alabama, to delivery points
upstream of TGPL's Compressor Station 165, near Chatham, Virginia. The expansion
projects will include approximately 25 miles of pipeline replacement and looping
and the installation of additional compression totaling approximately 70,000
horsepower. TGPL's FERC applications estimated the cost of the expansion to be
$125 million which will be recovered through incremental rates based on the SFV
rate design methodology.
By orders issued May 27, 1994 and December 21, 1994, the FERC authorized
the 1994 Southeast Expansion Project (SE94) and the 1995/1996 Southeast
Expansion Project (SE95/96), respectively. SE94 was completed and placed into
service in November 1994, and provides 35 MMcf/d incremental firm transportation
capacity. SE95/96 will be constructed in two phases: Phase I will add 115 MMcf/d
of incremental firm capacity for the 1995-1996 winter heating season, and Phase
II will add the remaining 50 MMcf/d for the 1996-1997 winter heating season.
TGPL invested $19.7 million in these projects in 1994 and expects to invest
approximately $69 million in these projects in 1995.
Eminence Storage Field Expansion Project
During 1994, TGPL completed the second phase of its Eminence storage field
expansion project, expanding the working capacity from 9 Bcf to 12 Bcf and
increasing the withdrawal rate from 1.3 Bcf/d to 1.5 Bcf/d. The expansion of the
salt-dome structure, located at TGPL's Compressor Station 77, near Seminary,
Mississippi, will give TGPL additional flexibility to meet the load balancing
and emergency gas supply demands of its customers. High deliverability from
storage helps assure pipelines, such as TGPL, of gas availability for their
customers during adverse weather conditions.
TGPL plans further expansion of the storage field in 1995, increasing the
working capacity of the storage field to 15 Bcf.
Mobile Bay Lateral Expansion Project
In September 1993, the FERC issued an order authorizing the joint ownership
and expansion of TGPL's Mobile Bay lateral with Florida Gas Transmission Company
(Florida Gas). The lateral transports gas from the prolific Mobile Bay gas
supply basin to the TGPL mainline, near Butler, Alabama. Construction of the
compressor station authorized as part of the expansion was completed in November
1994 and the station was placed into service in December 1994. It is anticipated
that the remaining expansion facilities will be placed into service in March
1995.
When the expansion is fully placed into service, the capacity of the Mobile
Bay lateral will be increased from 462 MMcf/d to 829 MMcf/d. The expansion will
increase the TGPL portion of pipeline capacity by approximately 60 MMcf/d to 520
MMcf/d.
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The cost of the expansion project has been funded entirely by Florida Gas,
and TGPL estimates it will receive approximately $13 million from Florida Gas
for the sale of a partial interest in the lateral.
In June 1994, TGPL completed the tie-in of Exxon's treatment plant to the
Mobile Bay lateral, adding approximately 350 MMcf/d of production
deliverability.
Both of these expansion projects will not only enhance TGPL's overall
access to gas supply, but will also provide additional gas supply for the
Southeast Expansion Projects.
West Tennessee Pipeline Expansion
In January 1994, Texas Gas received approval from the FERC to expand its
Jackson-Ripley pipeline system located in northwest Tennessee to provide 4.6
MMcf/d of additional firm deliveries to three West Tennessee customers and to
construct additional pipeline looping providing system security on that part of
Texas Gas' system. Construction was completed and facilities were placed into
service in April 1994. Total cost for this system expansion was $4.0 million.
REGULATORY MATTERS
TGPL and Texas Gas' transportation rates are established through the FERC
ratemaking process. Key determinants in the ratemaking process are (i) volume
throughput assumptions, (ii) costs of providing service and (iii) allowed rate
of return, including the equity component of a pipeline's capital structure.
Rate design and the allocation of costs between the demand and commodity rates
also impact profitability.
For a discussion of regulatory matters, see "Item 8. Financial Statements
and Supplementary Data -- Notes to Consolidated Financial Statements -- B.
Regulatory Matters."
COMPETITION
General
Competition for gas transportation has intensified in recent years due to
customer access to other pipelines, rate competitiveness among pipelines and
customers' desire to have more than one supplier. The FERC's stated purpose of
Order 636 is to improve the competitive structure of the natural gas pipeline
industry. TGPL and Texas Gas implemented Order 636 on November 1, 1993. Future
utilization of pipeline capacity will depend on competition from other pipelines
and alternative fuels, the general level of natural gas demand and weather
conditions.
TGPL
TGPL and its primary market-area competitors (Texas Eastern Transmission
Corporation (Texas Eastern), Columbia Gas Transmission Corporation (Columbia),
Southern Natural Gas Company, Tennessee Gas Pipeline Company (Tennessee) and
Iroquois Gas Transmission System (Iroquois)) implemented Order 636 on their
respective systems during the period June 1993 to November 1993. TGPL and its
major competitors all employ SFV rate design for firm transportation as mandated
by Order 636. However, TGPL has expressed to the FERC concerns that inconsistent
treatment under Order 636 of TGPL and its competitor pipelines with regard to
rate design and cost allocation issues in TGPL's production area may result in
rates which could make TGPL less competitive, both in terms of production-area
and long-haul transportation rates. A hearing before a FERC administrative law
judge (ALJ) dealing with, among other things, TGPL's production-area rate
design, concluded in June 1994 and the parties submitted briefs to the ALJ in
August and September 1994. The decision of the ALJ, when issued, will be subject
to review by the FERC. TGPL is unable at this time to fully assess the long-term
competitive effect and resulting financial impact on TGPL of having to maintain
its current production-area rate design which is different than that of its
competitors.
TGPL does not expect to incur Gas Supply Realignment (GSR) costs associated
with its firm sales service. TGPL's non-GSR transition costs are anticipated to
be insignificant; therefore, TGPL believes the demand charges to recover these
costs will not make its rates noncompetitive in its markets. See "Item 8.
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Financial Statements and Supplementary Data -- Notes to Consolidated Financial
Statements -- B. Regulatory Matters -- Order 636."
Although a significant portion of TGPL's firm customers have relatively
secure residential and commercial end-users, virtually all of TGPL's local
distribution customers (LDCs) have some price-sensitive end-users that could
switch to alternate fuels. Approximately one-third of TGPL's customer deliveries
are at risk to such fuel switching; however, a recent survey of TGPL's largest
customers suggests that end-users will pay a premium to burn natural gas and
that LDCs will aggressively price their system transportation to stay
competitive in alternate-fuel markets.
Texas Gas
Texas Gas and its primary market-area competitors (ANR Pipeline Company,
Panhandle Eastern Pipe Line Company, Trunkline Gas Company, Texas Eastern,
Columbia, Tennessee and Midwestern Gas Transmission Company) implemented Order
636 on their respective systems during the period May 1993 to November 1993.
Texas Gas and its major competitors all employ SFV rate design for firm
transportation as mandated by Order 636.
Texas Gas' analysis of Order 636 indicates that Texas Gas' transition
costs, which are not expected to exceed approximately $90 million, are primarily
related to GSR contract termination costs, GSR pricing differential costs
incurred pursuant to the auction process as discussed above and unrecovered gas
purchase costs. Texas Gas believes that under Order 636, with SFV rates, its
rate structure will 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. See "Item 8. Financial Statements and Supplementary
Data -- Notes to Consolidated Financial Statements -- B. Regulatory
Matters -- Order 636."
The end-use markets of several of Texas Gas' customers have the ability to
switch to alternate fuels. To date, however, such losses from fuel switching
have not been significant.
GAS MARKETING
Prior to 1993, TGPL and Texas Gas were responsible for all jurisdictional
gas sales to their pipeline customers and Transco Energy Marketing Company
(TEMCO) and TXG Gas Marketing Company (TXG Marketing) were responsible for all
non-jurisdictional gas sales. In January 1993, Transco began to implement a plan
to consolidate its gas marketing businesses under the common management of TGMC
to more closely coordinate gas marketing operations to improve efficiencies,
reduce costs and improve profitability. In January 1993, TGMC, through an agency
agreement, began to manage all jurisdictional merchant sales of TGPL. In
November 1993, TGMC, through an agency agreement, began to manage all
jurisdictional merchant sales of Texas Gas, except for the sales of gas
purchased by Texas Gas under certain contracts with pricing provisions that are
not variable market based which is being resold by Texas Gas at a monthly
auction pursuant to Order 636. See "Item 8. Financial Statements and
Supplementary Data -- Notes to Consolidated Financial Statements -- B.
Regulatory Matters -- Order 636." TGMC also manages all non-jurisdictional sales
that are offered by TEMCO and TXG Marketing. TEMCO buys, arranges transportation
for, and sells natural gas, primarily in the eastern and midwestern United
States and Gulf Coast region. TXG Marketing markets natural gas, primarily to
customers in the midwestern United States.
TGMC is also engaged, through its subsidiaries, Transco Liquids Company
(TLC) and TXG Energy Services Company (TXG Energy), in the purchase and
processing of natural gas, the sale of natural gas liquids and the separation,
terminalling and storage of condensate. TLC owns interests in two natural gas
processing facilities. TLC owns a 50% joint ownership interest in the Cameron
Meadows Complex, a gas processing facility located in southwestern Louisiana,
with a capacity to extract natural gas liquids from an inlet gas stream of
approximately 400 MMcf/d. TLC also has a 50% partnership interest in the Bee
County Plant, a 60 MMcf/d cryogenic extraction facility located in south Texas.
TLC also processes natural gas at third-party owned facilities. In addition to
its processing business, TLC owns and operates the Crystal Beach
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<PAGE> 10
Separation Facility and the HI-BOL Pipeline. In the fourth quarter of 1994, TLC
recorded pretax charges totaling $14.2 million to establish reserves for
investments in the Crystal Beach Separation Facility and HI-BOL Pipeline.
The following table sets forth the Gas Marketing sales volumes during 1994,
1993 and 1992.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
SALES VOLUMES 1994 1993 1992
------------------------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Gas sales (Bcf)
Long-term................................................. 389.2 352.7 148.6
Short-term................................................ 264.6 208.7 192.2
----- ----- -----
Total gas sales................................... 653.8 561.4 340.8
===== ===== =====
Liquids sales (million gallons)............................. 94.4 130.6 234.9
===== ===== =====
</TABLE>
Gas sales volumes in 1994 were higher than 1993, primarily due to greater
spot sales, higher demand as a result of colder weather during the first quarter
of 1994 and the inclusion of Texas Gas' merchant sales service volumes of 28.3
Bcf in 1994 compared to 6.9 Bcf in 1993. Gas sales volumes in 1993 were higher
than 1992 primarily due to inclusion of TGPL's merchant sales service volumes of
234.5 Bcf. TGPL's merchant sales service volumes included in Pipelines' 1992
results were 221.1 Bcf. Liquids sales volumes decreased due to continued
processing curtailments beginning in May 1993 and the discontinuation of naphtha
processing in August 1992 due to product-price economics, which are largely
dictated by crude oil prices.
Gas Marketing's profitability is determined by volumes and margins, both of
which are heavily influenced by gas demand, alternate fuels, competition and
commodity price volatility. Moreover, the costs associated with maintaining Gas
Marketing's long-term supply portfolio must be recovered in premiums paid by
customers pursuant to long-term contracts in order to avoid a loss on such sales
to the spot market. In addition, Gas Marketing is a party to firm transportation
contracts with third parties in which monthly demand charges are paid for
pipeline capacity in order to transport Canadian gas to markets in the United
States. During 1994, Gas Marketing did not recover approximately $8 million of
the cost of firm transportation capacity under those contracts. Gas Marketing's
current annual commitment for such firm transportation capacity is approximately
$56 million under contracts that substantially expire in 2002. To the extent Gas
Marketing is unable to find business alternatives for potentially underutilized
transportation capacity or receive sales prices at or near its cost, Gas
Marketing's results of operations could be negatively impacted. However, Gas
Marketing believes that the aggregate cost of the firm transportation capacity
will be recovered and, therefore, will not have a material adverse effect on
Transco's financial position, results of operations or net cash flows. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity -- Other Capital Requirements and
Contingencies -- Long-term gas purchase contracts."
Gas Marketing is a party to various derivative financial instruments that
are used to manage price volatility in its natural gas and natural gas liquids
marketing activities. See "Item 8. Financial Statements and Supplementary
Data -- Notes to Consolidated Financial Statements -- M. Commitments and
Contingencies."
COMPETITION
Changes in the natural gas industry over the past several years have
substantially increased competition for gas sales. TGMC's competitors include
other natural gas marketers and producers.
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<PAGE> 11
COAL
TCC is engaged in the surface and deep mining, preparation and marketing of
various grades of bituminous steam coal. In addition, TCC purchases minimal
amounts of coal from independent producers for resale to customers. Williams has
identified the coal mining and marketing business as a non-core asset it intends
to dispose of during 1995.
As used herein, the term TCC refers to Transco Coal Company, together with
its wholly-owned subsidiaries, unless the context otherwise requires.
SALES AND MARKETING
TCC, through its subsidiaries, owns and currently operates 5 deep mines and
5 surface mines in eastern Kentucky and Tennessee. TCC sells coal, both under
long-term supply agreements and in the spot market, to electric utilities and
industrial customers located primarily in the southeastern United States. Sales
in 1994 totaled 8.2 million tons, compared to 1993 sales of 8.9 million tons.
Generally under TCC's major sales agreements, contract duration may be
extended at the option of the utility, quantities may be decreased or increased
within specified ranges at the option of the utility, quantities may be
decreased by a force majeure event causing a utility to decrease power
production, prices may be renegotiated in certain cases and other adjustments
may occur under certain conditions. TCC's long-term contracts contain provisions
for adjustments to the base price of coal in response to variations in quality
and changes in economic indices. All of TCC's contracts contain quality
specifications relating to moisture, ash, sulfur content and heating value
(Btu). Premiums are generally paid per Btu value above the guaranteed contract
minimum.
COMPETITION
The sale of coal is highly competitive. TCC must compete with other coal
producers in negotiating coal sales contracts and spot sales. The primary
factors in competition for contract and spot sales are price, quantity and the
quality of coal reserves, production costs and the availability of economical
transportation. In addition, the level of economic activity, energy conservation
and the cost of complying with various environmental regulations directly affect
the demand for coal. Steam grade coal competes with other fuels such as nuclear,
oil and natural gas.
TCC's competition includes the Kentucky operations of Cyprus Amax Minerals
Company, Arch Mineral Corporation, Sun Coal Company and Ashland Coal, Inc.,
although any coal operation with the ability to provide at competitive prices
the quantity and quality of coal needed by TCC's current customers could impact
TCC's future sales.
COAL DEPOSITS
All of TCC's coal deposits are held under coal leases in Kentucky and
Tennessee. The coal deposits controlled by TCC are primarily leased from
independent landowners. Terms of these leases vary considerably; however, the
majority of these leases contain provisions allowing TCC to mine such properties
until the mineable and merchantable coal thereunder is exhausted, provided that
certain minimum production levels are maintained and royalty payments are made.
The following table sets forth TCC's estimate of its in-place coal deposits
in Kentucky and Tennessee as of December 31, 1994. It should be noted that the
amount reported is an estimate only, based on geological observations and
assumptions, and no assurances can be given that the amount presented will
ultimately be recovered.
<TABLE>
<CAPTION>
(THOUSAND TONS)(1)(2)
---------------------
<S> <C>
In-Place Coal Deposits............................................. 317,900
=================
</TABLE>
(Footnotes on following page)
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<PAGE> 12
---------------
(1) The recoverability of the coal deposits is dependent on the mining method.
The reports upon which the estimated tonnage is based assumed a 90% mine
recovery for surface mine methods and a 67% mine recovery for underground
mine methods. Since clean coal thickness was used in the calculations, no
further reductions were made for preparation plant losses.
(2) A coal deposit is a coal bearing underground body which has been
appropriately sampled and assayed in trenches, outcrops, drilling and/or
underground workings to support sufficient tonnage and grade to warrant
further exploration. There is no assurance that this deposit may qualify as
a commercially viable coal reserve, until a final economic, and legal
feasibility study, based upon the test results, is concluded.
OTHER INVESTMENTS
GAS GATHERING
Transco Gas Gathering Company (TGGC) owns non-jurisdictional and intrastate
gas gathering lines located offshore and onshore Texas, as well as the Magnolia
Pipeline in Alabama. In total, TGGC owns or has an interest in more than 500
miles of pipeline, and most of the gathering lines connect to TGPL. These
systems have a combined capacity of approximately 800 MMcf/d.
In the fourth quarter of 1994, TGGC recorded pretax charges totaling $3.5
million to establish reserves for investments in certain gas gathering lines. At
year-end 1994, TGGC's net investment in wholly-owned and joint venture gas
gathering lines, excluding the Magnolia Pipeline, totaled $97 million.
At December 31, 1994, TGGC's investment in the Magnolia Pipeline totaled
$67 million. The ultimate recovery of TGGC's investment in the Magnolia Pipeline
is dependent on transportation of gas produced in the Black Warrior Basin,
including production from the properties transferred to TECO Coalbed Methane,
Inc. (TECO), a subsidiary of TECO Energy, Inc. (see "Coalbed Methane" below), as
well as transportation of gas from other sources.
Williams has identified certain gas gathering lines, including Magnolia
Pipeline, as non-core assets it intends to dispose of during 1995.
COALBED METHANE
In 1989 Transco began investing in certain coalbed methane properties in
the Black Warrior Basin in Alabama. The coalbed methane project has not
performed up to the original expectations and encountered costs that were higher
than originally anticipated. In December 1994, Transco recorded a non-cash,
pretax charge of $45.0 million to reduce the book value of its nonoperating
interest in the coalbed methane properties. At December 31, 1994, Transco's
remaining investment in its nonoperating interest in the coalbed methane
properties totaled $86 million. Williams has identified Transco's interest in
this project as a non-core asset it intends to dispose of during 1995.
For a discussion of the Company's nonoperating interest in coalbed methane
properties, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Other Capital Requirements and
Contingencies -- Investment in Nonoperating Interest in Coalbed Methane
Properties"
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<PAGE> 13
and "Item 8. Financial Statements and Supplementary Data -- Notes to
Consolidated Financial Statements -- L. Investment in Nonoperating Interest in
Coalbed Methane Properties."
OFFICE BUILDING
TGPL has a 20-year lease agreement for 1,005,478 square feet at its
headquarters building in Houston which expires in 2004. The lease is with
Transco Tower Limited, a partnership in which Transco had an indirect 12.5%
interest until December 1994. Effective December 29, 1994, Transco sold its
interest and received a final cash distribution of $0.4 million in connection
with the sale. For information concerning lease commitments, see "Item 8.
Financial Statements and Supplementary Data -- Notes to Consolidated Financial
Statements -- M. Commitments and Contingencies."
REGULATION
INTERSTATE GAS PIPELINE OPERATIONS
TGPL and Texas Gas are subject to regulation by the FERC as "natural gas
companies" under the NGA. The NGA grants to the FERC authority over the
construction and operation of pipeline and related facilities utilized in the
transportation and sale of natural gas in interstate commerce, including the
extension, enlargement and abandonment of such facilities. The FERC requires the
filing of appropriate applications by natural gas companies showing that the
extension, enlargement or abandonment of any facilities, as the case may be, is
or will be required by a certificate of public convenience and necessity. TGPL
and Texas Gas hold certificates of public convenience and necessity issued by
the FERC authorizing them to construct and operate all pipelines, facilities and
properties now in operation for which certificates are required.
The NGA also grants to the FERC authority to regulate rates, charges and
terms of service for natural gas transported in interstate commerce or sold by a
natural gas company in interstate commerce for resale, and to regulate
curtailments of sales to customers. The FERC has authorized TGPL and Texas Gas
to charge natural gas sales rates that are market-based. As necessary, TGPL and
Texas Gas file with the FERC changes in their respective transportation and
storage rates and charges designed to allow them to recover fully their costs of
providing service to their interstate systems' customers, including reasonable
rates of return. Regulation of gas curtailment priorities and the importation of
gas are, under the Department of Energy Reorganization Act of 1977, vested in
the Secretary of Energy.
TGPL and Texas Gas also are subject to regulation by the Department of
Transportation under the Natural Gas Pipeline Safety Act of 1968 with respect to
safety requirements in the design, construction, operation and maintenance of
their interstate gas transmission facilities.
COAL OPERATIONS
The coal mining industry is subject to a number of federal, state and local
statutes and regulations relating to health and safety standards and protection
of the environment. These laws require procedures for obtaining mining permits
and posting bonds, subject mining operations to compliance inspections, impose
land reclamation responsibilities and control the discharge of water from mines
and related facilities. Failure to comply with these laws may result in closure
of mines, bond forfeitures and permit revocation, and other civil and criminal
fines and penalties.
The Surface Mining Control and Reclamation Act of 1977, as amended, and the
regulations promulgated thereunder by the Federal Office of Surface Mining
Reclamation and the enforcement thereof by the Department of the Interior,
established mining and reclamation standards for all aspects of surface mining
as well as certain aspects of underground mining. TCC's operations are also
subject to the federal Clean Air Act, as amended, and the federal Water
Pollution Control Act, as amended, and similar state laws which regulate the
discharge of materials into the environment. While it is not possible to
quantify the costs of compliance with these statutes, the costs have been and
are expected to be significant. TCC believes that its operations are in
substantial compliance with the foregoing legislation.
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<PAGE> 14
TCC is liable under federal legislation for the payment of benefits to coal
miners with pneumoconiosis (black lung). The Black Lung Benefits Revenue Act of
1977 and the Black Lung Benefits Reform Act of 1977 (1977 Act) expanded the
benefits for black lung disease and levied a tax on production of $0.50 per ton
on underground mined coal and $0.25 per ton on surface mined coal, but not to
exceed 2% of the sales price. Since the enactment date, this tax has increased
twice. Effective April 1, 1986, the rates are $1.10 per ton for underground
mined coal and $0.55 per ton for surface mined coal, but, not to exceed 4.4% of
the sales price. In addition, the Black Lung Benefits and Revenue Amendments Act
of 1981 (1981 Act) provides that certain claims which had previously been
assigned to coal operators will be transferred to the Black Lung Disability
Trust Fund. Further, the 1981 Act tightened standards set by the 1977 Act for
establishing and maintaining eligibility for benefits. In addition to
contributing to the federal black lung program, TCC has established a reserve of
approximately $6.2 million to cover future black lung payments.
With regard to quality of coal, important criteria include Btu, and sulfur
and ash content. Many customers are required by environmental and other
considerations to restrict their consumption of high sulfur content coal,
although certain amounts of sulfur may be required by certain other users. TCC
is able to meet current sulfur content requirements under existing sales
agreements.
ENVIRONMENTAL
Transco and certain of its subsidiaries are subject to extensive federal,
state and local environmental laws and regulations which affect Transco's
operations related to the construction and operation of pipeline facilities, oil
and gas exploration, development and production and coal mining. See "Item 8.
Financial Statements and Supplementary Data -- Notes to Consolidated Financial
Statements -- D. Environmental Matters."
ITEM 2. PROPERTIES.
See "Item 1. Business."
ITEM 3. LEGAL PROCEEDINGS.
See "Item 8. Financial Statements and Supplementary Data -- Notes to
Consolidated Financial Statements -- C. Legal Proceedings."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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<PAGE> 15
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, ON THIS 29TH DAY OF
MARCH, 1995.
TRANSCO ENERGY COMPANY
REGISTRANT
BY: NICK A. BACILE
(NICK A. BACILE)
Vice President and Controller
(Principal Accounting Officer)
14
