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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
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 1-7584
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 74-1079400
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
2800 POST OAK BLVD., P.O. BOX 1396, 77251
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 439-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EXCHANGE ON WHICH EACH CLASS IS REGISTERED:
NEW YORK STOCK EXCHANGE
TITLE OF EACH CLASS:
CUMULATIVE PREFERRED STOCK, WITHOUT PAR VALUE
<TABLE>
<CAPTION>
STATED VALUE
SERIES PER SHARE
------ ------------
<S> <C>
$6.65 $100
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CUMULATIVE PREFERRED STOCK, WITHOUT PAR VALUE
(TITLE OF CLASS)
<TABLE>
<CAPTION>
STATED VALUE STATED VALUE
SERIES PER SHARE SERIES PER SHARE
- ------ ------------ ------ ------------
<S> <C> <C> <C>
$4.80 $100
$5.00 $100 $8.75 $100
</TABLE>
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 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
All of the Registrant's Common Stock, par value $1.00 per share, is held by
its parent, Transco Gas Company, which is a wholly owned subsidiary of Transco
Energy Company.
The number of shares of Common Stock, par value $1.00 per share,
outstanding at December 31, 1993 was 100.
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PART I
ITEM 1. BUSINESS.
GENERAL
Transcontinental Gas Pipe Line Corporation (TGPL) is a wholly owned
subsidiary of Transco Gas Company (TGC) which in turn is wholly owned by
Transco Energy Company (Transco). As used herein, the term Transco refers to
Transco Energy Company together with its wholly owned subsidiary companies
unless its context otherwise requires.
The principal business of TGPL is the transportation of natural gas.
TGPL's main gas transmission system extends from the Gulf Coast gas supply
areas to the New York City area. TGPL has an aggregate peak mainline delivery
capacity of approximately 3.3 Bcf * of gas per day, an additional peak day
delivery capacity of 2.6 Bcf per day through the Leidy line and market area
facilities and maintains an extensive gas gathering system both onshore and
offshore in the Gulf Coast area. The number of full time employees at TGPL at
December 31, 1993 was 1,694.
Prior to 1984, interstate pipelines, including TGPL, 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 Federal Energy Regulatory
Commission (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 to the customers by pipelines.
____________________
* 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 "Bcf/d" means
billion cubic feet per day and the term "MMBtu" means British Thermal
Units.
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Faced with these changing conditions, increased competition and
declining bundled sales, TGPL altered the manner in which it had traditionally
conducted its businesses and began to transport a larger percentage of gas for
customers that purchased such gas from others. In 1988, TGPL accepted a
certificate to become a permanent open access pipeline system 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 merchant role from its transportation services; ensuring "equality"
of transportation services; ensuring that shippers and customers have equal
access to all sources of gas; providing "no-notice" firm transportation
services that are equal in quality to bundled sales service; 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, TGPL implemented its Order 636 restructuring plan. For a complete
discussion of Order 636 see "Regulatory Matters -- Order 636" below.
Prior to 1993, TGPL and Texas Gas Transmission Corporation (Texas
Gas), an affiliate, were responsible for all jurisdictional gas sales to their
pipeline customers and Transco Energy Marketing Company (TEMCO) and TXG Gas
Marketing Company (TXG Marketing), also affiliates, were responsible for all
non-jurisdictional gas sales. 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 Transco Gas Marketing Company (TGMC). These
changes were needed to more closely coordinate gas marketing operations to
improve efficiencies, reduce costs and improve profitability. After FERC
approval in January 1993, TGMC, through an agency agreement, began to manage
all jurisdictional sales of TGPL.
MARKETS AND TRANSPORTATION
TGPL's principal markets encompass eleven Southeast and Atlantic
seaboard states, and include the New York City and Philadelphia metropolitan
areas. A large portion of the gas transported by TGPL to its market areas is
used for space heating, resulting in substantially higher daily delivery
requirements for TGPL's customers during the winter months than during the
summer months. 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
available to TGPL and its customers is approximately 213 Bcf.
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TGPL's total system deliveries and the mix of sales and
transportation volumes for the years 1993, 1992 and 1991 are shown below.
Sales as shown below include only bundled sales.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1992 1991
----------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
TGPL SYSTEM DELIVERIES (Bcf):
Market-area deliveries
Sales . . . . . . . . . . . . . - 0% - 0% 0.4 0%
Long-haul transportation . . . 823.9 60% 821.8 59% 873.5 63%
Market-area transportation . . 374.4 27% 379.8 27% 250.3 18%
--------- ----- ---------- ------- --------- ------
Total market-area deliveries 1,198.3 87% 1,201.6 86% 1,124.2 81%
Production-area transportation . 171.2 13% 199.3 14% 255.3 19%
--------- ----- ---------- ------- --------- ------
Total system deliveries . . . . . 1,369.5 100% 1,400.9 100% 1,379.5 100%
========= ===== ========== ======= ========= ======
</TABLE>
TGPL's facilities are divided into six rate zones. Three 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
1993 were comparable to those in 1992. Production- area deliveries decreased
28.1 Bcf, or 14 percent for 1993 compared to 1992, primarily due to increased
competition for production-area transportation. However, as a result of the
new SFV rate structure that went into effect September 1, 1992, subject to
refund, these decreased deliveries had no significant impact on TGPL's
operating income.
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The following table sets forth the names of TGPL's five largest
customers along with the related sales and transportation volumes shipped by
such customers for the periods shown (in Bcf):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1992 1991
--------- -------- --------
<S> <C> <C> <C>
TGPL MAJOR CUSTOMERS:
Public Service Electric and Gas Company
Sales . . . . . . . . . . . . . . . . . . 21.0 18.3 27.4
Long-haul and market-area transportation 168.3 174.5 116.4
Consolidated Edison Company of New York, Inc.
Sales . . . . . . . . . . . . . . . . . . 27.2 17.3 14.8
Long-haul and market-area transportation 138.8 138.9 116.6
The Brooklyn Union Gas Company
Sales . . . . . . . . . . . . . . . . . . 11.9 13.2 8.4
Long-haul and market-area transportation 70.7 84.4 67.8
Long Island Lighting Company
Sales . . . . . . . . . . . . . . . . . . 19.3 10.2 26.3
Long-haul and market-area transportation 45.1 41.4 20.1
Piedmont Natural Gas Company, Inc.
Sales . . . . . . . . . . . . . . . . . . 15.2 11.8 16.7
Long-haul and market-area transportation 82.5 68.0 45.4
</TABLE>
As a result of the fundamental business changes resulting from FERC
Order 636, especially the shifting of the responsibility for gas supply from
the pipeline companies to local distribution customers (LDCs), maintaining
committed proved gas reserves is no longer material to TGPL's transportation
business. See "Regulatory Matters -- Order 636" below and "Capital Resources
and Liquidity -- Other Capital Requirements and Contingencies -- Long-term gas
purchase contracts" contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7 herein.
PIPELINE PROJECTS
LIBERTY PIPELINE COMPANY. In 1992, Liberty Pipeline Company, 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 area. The
partnership is comprised of subsidiaries of Transco and two other interstate
pipelines and subsidiaries of three TGPL customers in New York.
The pipeline is expected to cost approximately $162 million and is
proposed to be in service by the 1995-1996 winter heating season, subject to
timely FERC approval. The pipeline will offer a new firm transportation route
from TGPL and another interstate
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pipeline to a proposed new delivery point on Long Island near the John F.
Kennedy Airport.
Liberty Operating Company (LOC), an affiliate of TGPL, will construct
and operate the pipeline. LOC has begun design work, permit application, and
survey and right-of-way acquisition. The FERC has issued a notice that it
intends to prepare an Environmental Impact Statement associated with the
Liberty Pipeline.
Transco Liberty Pipeline Company, an affiliate of TGPL, owns a 35
percent interest in the pipeline, which will be project-financed.
TGPL anticipates investing approximately $78 million in existing TGPL
facilities upstream of Liberty Pipeline to provide additional transportation
capacity for subsequent delivery to the Liberty Pipeline. The expenditures
involve looping existing facilities and adding compression in Pennsylvania and
New Jersey. The majority of the expenditures for TGPL's upstream expansion are
expected to be made in 1995 and 1996.
SOUTHEAST EXPANSION PROJECTS. In November 1993, TGPL filed for FERC
approval of its Southeast Expansion Projects. These new expansion projects will
provide additional firm transportation capacity to growing southeastern markets
in Alabama, Georgia, South and North Carolina and Virginia.
The proposed Southeast Expansion Projects are expected to be phased
into service beginning in 1994 and, upon completion, 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 estimates the cost of the
expansion to be $125 million and has proposed rates based on the SFV rate
design methodology.
The 1994 Southeast Expansion Project (SE94) will provide 35 MMcf/d of
incremental firm capacity by the 1994-1995 winter heating season. The 1995-1996
Southeast Expansion Project (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.
Subject to FERC approval, construction on SE94 is scheduled to begin
in June 1994. TGPL expects to invest approximately $45 million in these
projects in 1994.
EMINENCE STORAGE FIELD EXPANSION PROJECT. During 1993, TGPL completed
the first phase of its Eminence storage field expansion project, expanding the
working capacity
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from 6 Bcf to 9 Bcf and increasing the withdrawal rate from 750 MMcf/d to 1.3
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 peak-day and emergency 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 expansions of the storage field in 1994 and 1995,
allowing for withdrawals of up to 1.5 Bcf/d and ultimately increasing the
working capacity of the storage field to 15 Bcf.
MOBILE BAY PIPELINE EXPANSION PROJECT. In September, 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, and the expansion will increase the capacity
from 462 MMcf/d to 829 MMcf/d. The expansion will be accomplished through the
addition of compression facilities and will include a new interconnect on the
lateral with the Florida Gas mainline.
The cost of the expansion project will be funded entirely by Florida
Gas, and TGPL will receive approximately $13 million from Florida Gas for the
sale of a partial interest in the lateral. The expansion will increase the TGPL
portion of pipeline capacity by approximately 60 MMcf/d to 520 MMcf/d. The
Mobile Bay lateral expansion is expected to be placed in service by December
1994.
Also, TGPL and Exxon have agreed to construct a two-mile pipeline in
1994 to allow for connection of Exxon's recently constructed treatment plant to
the Mobile Bay lateral.
Both of these expansion projects will not only enhance TGPL's overall
access to supply, but will also provide additional supply for the Southeast
Expansion Projects.
REGULATORY MATTERS
RATES. TGPL's 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. Rate design and the allocation of costs and return on equity between
the demand and commodity rates also impact profitability.
TGPL, effective September 1, 1992, changed from the MFV method of rate
design to the SFV method of rate design. Under MFV rate design, all fixed
costs, with the exception of return on equity and income taxes, are included in
a demand charge to customers and return on equity and income taxes are
recovered as part of a volumetric
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charge to customers. Accordingly, under MFV rate design overall throughput has
a significant impact on operating income. Under the SFV method of rate design,
all fixed costs, including return on equity and income taxes, are included in a
demand charge to customers and all variable costs are recovered through a
commodity charge to customers. While the use of SFV rate design limits TGPL's
opportunity to earn incremental revenues through increased throughput, it also
minimizes TGPL's risk associated with fluctuations in throughput.
On June 4, 1992, the FERC issued its final order on rehearing in
TGPL's Rate Settlement and Gas Inventory Charge (GIC) Settlement (Docket No.
RP90-8). This order became effective in July 1992. As a result, in August 1992,
TGPL made refunds of approximately $102 million, including interest, for
differences between filed rates and settlement rates. Certain parties appealed
the FERC's June 4, 1992 order to the United States Court of Appeals for the
D.C. Circuit (D.C. Circuit Court). On December 17, 1993, the D.C. Circuit Court
issued its opinion affirming the FERC's order, except for one issue not
material to TGPL which was remanded to the FERC for further consideration.
On March 2, 1992, TGPL filed with the FERC a general rate case (Docket
No. RP92-137). The general rate filing proposed an increase in transportation
rates, based primarily on increases in operating and maintenance costs,
including those associated with additional services provided to TGPL's markets
since its last general rate filing, and increased cost of capital. The filing
also included a change to SFV rate design and an increase in rate base
resulting from additional plant and equipment costs and higher working capital
requirements. On September 1, 1992, the increased rates went into effect
subject to refund.
On September 17, 1992, the FERC issued a decision addressing the
single issue of the appropriate rate of return in Docket No. RP92-137. The
FERC, using a hypothetical capital structure based on the average capital
structure of a group of seven publicly-traded companies with pipeline
subsidiaries, determined TGPL's appropriate after-tax rate of return on equity
to be 14.45%. The FERC did not determine TGPL's cost of debt and preferred
stock, suggesting that this issue should be the subject of further proceedings
in the context of the general rate case. Consequently, TGPL's current rates
reflect an after-tax rate of return on equity of 14.45% but, consistent with
the FERC order, the rates continue to reflect the cost of debt and preferred
stock originally filed in the general rate case. The issue of the appropriate
rate of return for TGPL is currently on appeal before the D.C. Circuit Court.
TGPL appealed seeking to increase the rate of return and certain other parties
have appealed seeking to lower the rate of return.
On May 3, 1993, TGPL filed with the FERC an Offer of Settlement (the
Settlement) with regard to Docket No. RP92-137. On November 4, 1993, the FERC
issued an order accepting the Settlement. The Settlement resolves all issues in
Docket No. RP92-137
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except (i) issues relating to TGPL's rate of return which are on appeal before
the D.C. Circuit Court (see discussion above), and (ii) the issue of
appropriate load factor for the design of TGPL's interruptible rates which the
FERC referred to a hearing in Docket No. RP92-137 for prospective effect only
(see "Regulatory Matters-Order 636" below for discussion of additional issues
referred to this hearing). On December 16, 1993, TGPL filed a request to
accelerate partial refunds under the Settlement on the ground that those
refunds could be made without prejudice to the pending requests for rehearing
or clarification. TGPL's request was granted by order of the FERC dated
February 14, 1994. In early 1994, TGPL will make the initial refunds
(approximately $100 million including interest) under RP92-137. TGPL has
previously provided a reserve for that refund. TGPL has also provided a reserve
which it believes is sufficient for any additional refunds that may be required
under Docket No. RP92-137.
FUEL RETENTION PROCEEDINGS. On February 23, 1989, the FERC issued an
order which found, among other things, that TGPL had overcollected for fuel
from transportation customers during the period April 1, 1984 to April 1, 1987.
The order required TGPL to refund the difference between the amount collected
and the rate allowed for fuel retention. Accordingly, TGPL made refunds to
customers of approximately $35 million, including interest. In response to
subsequent FERC orders, TGPL recalculated the refund and on November 30, 1993,
under this revised calculation, TGPL made additional refunds of approximately
$11.6 million, including interest. TGPL had previously provided a reserve that
was sufficient for these refunds. On February 9, 1994, the FERC issued an order
accepting TGPL's refund report, stating that TGPL made the refunds in
accordance with the FERC's orders.
ORDER 94-A. In 1983, the FERC issued Order 94-A, which permitted
producers to collect certain production-related gas costs from pipelines on a
retroactive basis. The FERC subsequently issued orders allowing several
pipelines, including TGPL, to bill their customers for such production-related
costs through fixed monthly charges based on a customer's historical purchases.
In February 1990, the D.C. Circuit Court overturned the FERC's authorization
for pipelines to bill production-related costs to customers based on gas
purchased in prior periods and remanded the matter to the FERC to determine an
appropriate recovery mechanism.
TGPL's GIC Settlement contains a provision pursuant to which TGPL's
customers, with the exception of Columbia Gas Transmission Corporation
(Columbia), have agreed not to contest the Order 94-A payments previously made
by them. TGPL had billed to and recovered from Columbia approximately $7
million of Order 94-A costs. On October 26, 1993, TGPL and Columbia executed a
letter agreement by which the parties resolved the amount of refunds to be made
to Columbia in this proceeding. Pursuant to the letter agreement, TGPL and
Columbia agreed that TGPL shall refund $1.4 million to Columbia, which amount
is inclusive of principal and interest, in full and final settlement of all
issues in this proceeding. The letter agreement was filed with the FERC on
October 26, 1993 and is subject to approval by the FERC. TGPL has provided a
reserve
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which is sufficient to cover the refunds provided for by the letter agreement.
On January 26, 1994, Columbia filed a letter with the FERC stating that, due to
developments in other pipeline company proceedings involving settlements of the
issue of recovery of Order 94-A costs from Columbia, Columbia could no longer
support, pending rehearing in those proceedings, the letter agreement between
TGPL and Columbia. Columbia requested that the FERC hold any action on the
letter agreement in abeyance pending action on rehearing in the other
proceedings. On February 4, 1994, TGPL filed a response opposing Columbia's
January 26 letter, stating that the October 26 letter agreement constitutes a
valid and binding agreement between TGPL and Columbia and requesting that the
FERC approve that letter agreement without delay. This matter is pending before
the FERC.
Although no assurances can be given, TGPL believes that the final
resolution of the recovery of production-related costs will not have a material
adverse effect on its financial position or results of operations.
ORDER 636. On November 1, 1993, TGPL implemented Order 636. In
connection with its implementation of Order 636, TGPL received orders from the
FERC which, among other things, (i) required TGPL to revise its throughput
projection for rate purposes to reflect a mix of throughput that includes a
higher level of interruptible transportation, (ii) accepted TGPL's proposal for
rolled-in rate treatment of its Mobile Bay facilities and exempted TGPL from
having to reflect Mobile Bay transportation volumes and related revenues in an
interruptible revenue crediting mechanism, (iii) approved a Stipulation and
Agreement filed with the FERC by TGPL and its sales customers resolving certain
sales service issues and mooting potential issues regarding TGPL's recovery of
gas supply realignment (GSR) costs associated with TGPL's firm sales service,
and (iv) referred to the hearing in Docket No. RP92-137 the following issues:
TGPL's limited Section 4 filing with the FERC relating to TGPL's
production-area rate design, the allocation of certain costs to TGPL's sales
service, TGPL's use of a system-wide cost of service, the level of TGPL's
gathering rates and aggregation/pooling services in TGPL's production area. Any
changes in TGPL's rates or services resulting from this hearing would have a
prospective effect only. Order 636 provides that pipelines should be allowed
the opportunity to recover all prudently incurred transition costs, including
GSR costs. TGPL does not expect to incur any GSR costs associated with its firm
sales service. TGPL's non-GSR transition costs are anticipated to be in a
range of $5 million to $10 million.
TGPL and certain other parties have filed appeals of certain of the
FERC's orders to the D. C. Circuit Court. These appeals have been held in
abeyance pending completion of the FERC's rehearing process and the expiration
of the time to seek judicial review.
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
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issues in the 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 has been set for April
1994. TGPL is unable at this time to fully assess the 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 expects that any Order 636 transition costs incurred should be
recovered from TGPL's customers, subject only to the costs and other risks
associated with the difference between the time such costs are incurred and the
time those costs may be recovered from customers. Although no assurances can be
given, TGPL does not believe that the implementation of Order 636 will have a
material adverse effect on its financial position or results of operations.
COMPETITION
Competition for gas transportation has intensified in recent years due
to customer access to other pipelines, rate competitiveness between pipelines
and the 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 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 and its primary market-area competitors, Texas Eastern
Transmission Corporation (Texas Eastern), Columbia, Southern Natural Gas
Company (Southern Natural), 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 the 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 ALJ
dealing with, among other things, TGPL's production-area rate design has been
set for April 1994. TGPL is unable at this time to fully assess the 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 GSR costs associated with its firm sales
service. TGPL's non-GSR transition costs are anticipated to be in a range of $5
million to $10 million; therefore, TGPL believes the demand charges to recover
these costs will not
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make its rates noncompetitive in its markets. See "Regulatory Matters -- Order
636" above.
Although a significant portion of TGPL's firm customers have
relatively secure residential and commercial end-users, virtually all of TGPL's
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 intend to
aggressively price their system transportation to stay competitive in
alternate-fuel markets.
SALES SERVICE
Prior to 1993, TGPL and Texas Gas were responsible for all
jurisdictional gas sales to their pipeline customers and TEMCO and TXG
Marketing were responsible for all non-jurisdictional gas sales. 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.
These changes were needed to more closely coordinate gas marketing operations
to improve efficiencies, reduce costs and improve profitability. After FERC
approval in January 1993, TGMC, through an agency agreement, began to manage
all jurisdictional sales of TGPL. See "Other Capital Requirements and
Contingencies - Long-term gas purchase contracts" contained in Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Item 7 hereof and Notes A, J and K of the Notes to Financial Statements
contained in Item 8 hereof.
TGPL makes sales to customers through a Firm Sales (FS) program, an
Optional Firm Sales (OFS) program and an Interruptible Sales (IS) program
coupled with a firm transportation program as replacement for a contract sales
quantity. These programs give customers the option to purchase daily
quantities of gas from TGPL at market-responsive prices in exchange for a
demand charge payment to TGPL designed to recover the costs of gas in excess of
current month spot prices that TGPL is obligated to pay under its producer
contracts.
TGPL's gas sales volumes for the years 1993, 1992 and 1991 are shown
below.
<TABLE>
<CAPTION>
Gas Sales Volumes (Bcf)(1) 1993 1992 1991
- -------------------------- ------- ------- -------
<S> <C> <C> <C>
Long-term sales . . . . . . . . . . . . . . . 212.3 188.3 186.8
Short-term sales . . . . . . . . . . . . . . 33.2 32.8 54.8
------- ------- -------
Total gas sales . . . . . . . . . . . . . 245.5 221.1 241.6
======= ======= =======
</TABLE>
(1) Effective January 1993, TGMC, through an agency management agreement
with TGPL, assumed operation of TGPL's sales service.
11
<PAGE> 13
REGULATION
INTERSTATE GAS PIPELINE OPERATIONS. TGPL is subject to regulation by
the FERC as a "natural gas company" 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 holds 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 to charge
natural gas sales rates that are market-based. As necessary, TGPL files with
the FERC changes in its transportation and storage rates and charges designed
to allow it to recover fully its costs of providing service to its interstate
system's 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 also is 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 its
interstate gas transmission facilities.
ENVIRONMENTAL. TGPL is subject to extensive federal, state and local
environmental laws and regulations which affect TGPL's operations related to
the construction and operation of its pipeline facilities. Appropriate
governmental authorities may enforce these laws and regulations with a variety
of civil and criminal enforcement measures, including monetary penalties,
assessment and remediation requirements and injunctions as to future
compliance. TGPL's use and disposal of hazardous materials are subject to the
requirements of the federal Toxic Substances Control Act (TSCA), the federal
Resource Conservation and Recovery Act (RCRA) and comparable state statutes.
The Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA), also known as "Superfund," imposes liability, without regard to fault
or the legality of the original act, for release of a "hazardous substance"
into the environment. Because these laws and regulations change from time to
time, practices which have been acceptable to the industry and to the
regulators have to be changed and assessment and monitoring have to be
undertaken to determine whether those practices have damaged the environment
and whether remediation is required. Since 1989, TGPL has had studies underway
to test their facilities for the presence of toxic and hazardous substances to
12
<PAGE> 14
determine to what extent, if any, remediation may be necessary. On the basis of
the findings to date, TGPL estimates that environmental assessment and
remediation costs that will be incurred over the next five years under TSCA,
RCRA, CERCLA and comparable state statutes will total approximately $52 million
to $62 million. 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. TGPL 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. At
December 31, 1993, TGPL had a reserve of approximately $52 million for these
estimated costs.
TGPL considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the ordinary course of
business. To date, TGPL has been permitted recovery of environmental costs
incurred, and it is TGPL's intent to continue seeking recovery of such costs,
as incurred, through rate filings. Therefore, these estimated costs of
environmental assessment and remediation have been recorded as regulatory
assets.
Since 1989, TGPL has been involved in discussions with the Pennsylvania
Department of Environmental Resources (PADER) concerning environmental
conditions at TGPL's operating sites in Pennsylvania. These discussions have
resulted in the execution of a consent order and agreement in 1992 between
PADER and TGPL. TGPL agreed to conduct an environmental assessment and
remediation program at its Pennsylvania sites, fund certain beneficial
environmental projects, pay oversight costs and pay a $425,000 civil penalty.
Of such penalty, $142,000 remains to be paid in May 1994. The estimated costs
of the environmental assessment and remediation program are included in the $52
million to $62 million range discussed above.
TGPL has used lubricating oils containing polychlorinated biphenyls
(PCBs) and, although the use of such oils was discontinued in the 1970s, has
discovered residual PCB contamination in equipment and soils at certain gas
compressor station sites. TGPL has worked closely with the Environmental
Protection Agency (EPA) and state regulatory authorities regarding PCB issues,
and has a program to assess and remediate such conditions where they exist, the
costs of which are a significant portion of the $52 million to $62 million
range discussed above. Proposed civil penalties have been assessed by the EPA
against another major pipeline company for the alleged improper use and
disposal of PCBs. Although similar penalties have not been asserted against
TGPL to date, no assurances can be given that the EPA may not seek such
penalties in the future.
TGPL has been named as a potentially responsible party (PRP) in one
Superfund waste disposal site, the Combustion Inc. site, and in two state
sites. Based on present volumetric estimates, TGPL's exposure for remediation
of the Combustion Inc. site is estimated to be $500,000. TGPL's estimated
individual exposure at each of the two state
13
<PAGE> 15
sites where it has been named as a PRP is less than $100,000 per site. The
estimated remediation costs for all such sites have been included in TGPL's
environmental reserve discussed above. Liability under CERCLA (and applicable
state law) can be joint and several with other PRPs. Although volumetric
allocation is a factor in assessing liability, it is not necessarily
determinative; thus, the ultimate liability could be substantially greater than
the amounts described above. Although no assurances can be given, TGPL does not
believe that its PRP status will have a material adverse effect on its
financial position or results of operations.
TGPL is also subject to the federal Clean Air Act and to the federal
Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly
to the existing requirements established by the federal Clean Air Act. The 1990
Amendments required that the EPA issue new regulations, mainly related to
mobile sources, air toxics, ozone non-attainment areas and acid rain. TGPL is
installing new emission control devices where required and conducting certain
emission testing programs to comply with the federal Clean Air Act standards
and the 1990 Amendments. In addition, pursuant to the 1990 Amendments the EPA
has issued regulations under which states must implement new air pollution
controls to achieve attainment of national ambient air quality standards in
areas where they are not currently achieved. TGPL has compressor stations in
ozone non-attainment areas that could require substantial additional air
pollution reduction expenditures, depending on the requirements imposed. While
it will not be possible to estimate the ultimate costs of compliance with these
new requirements until the states approve TGPL's proposed plans for
modifications, TGPL expects that significant capital spending may be required
to modify TGPL's facilities, particularly the compressor engines along TGPL's
pipeline system. Additions to facilities for compliance with currently known
federal Clean Air Act standards and the 1990 Amendments are expected to cost in
the range of $20 million to $30 million over the next five years and will be
recorded as assets as the facilities are added.
TRANSACTIONS WITH AFFILIATES
TGPL has made interest bearing advances to and incurred interest
bearing advances from Transco for consolidated cash management purposes. The
advances are represented by demand notes bearing interest at the rate of 1-1/2
percent below the prime rate of Citibank, N.A., not to exceed the maximum
lawful rate of interest.
In 1984, a wholly-owned subsidiary of Transco in partnership with a
Houston development firm and a real estate investment company completed
construction of a new Transco Tower at a total cost of approximately $200
million. TGPL has leased a substantial portion of the building to serve as its
corporate headquarters.
See also "Sales Service" above.
14
<PAGE> 16
ITEM 2. PROPERTIES.
See "Item 1. Business"
ITEM 3. LEGAL PROCEEDINGS.
The information required by this item is contained in Note D of the
Notes to Financial Statements included in Item 8 herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the outstanding shares of TGPL's common stock is owned by TGC,
a wholly owned subsidiary of Transco. TGPL's common stock is not publicly
traded and there exists no market for such common stock.
16
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
(Expressed in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 1,521,533 $ 1,257,197 $ 1,144,309 $ 1,249,512 $ 1,053,172
============ ============ ============ ============ ============
Common Stock Equity
in Net Income
(Loss) . . . . . $ 86,118 $ 64,904 $( 68,578) $ 23,012 $ 30,572
============ ============ ============ ============ ============
Total Assets . . . $ 2,317,660 $ 2,301,558 $ 2,358,905 $ 2,402,921 $ 2,402,170
============ ============ ============ ============ ============
Current Maturities
of Long-Term
Debt . . . . . . $ - $ 154,856 $ 44,600 $ 74,100 $ 26,000
============ ============ ============ ============ ============
Capitalization:
Long-term debt,
less current
maturities . . . $ 643,799 $ 518,943 $ 686,064 $ 725,989 $ 682,357
------------ ------------- ------------ -------------- ------------
Preferred stock -
redeemable, net . $ 75,191 $ 101,006 $ 105,248 $ 110,560 $ 116,615
------------ ------------- ------------ ------------ ------------
Common stockholder's
equity . . . . . $ 707,290 $ 618,735 $ 425,601 $ 481,208 $ 551,425
------------ ------------- ------------ ------------ ------------
Total
Capitalization . $ 1,426,280 $ 1,238,684 $ 1,216,913 $ 1,317,757 $ 1,350,397
============ ============ ============ ============ ============
Cash Dividends on
Common Stock . . $ - $ - $ - $ 100,000 $ 95,771
============ ============ ============ ============ ============
</TABLE>
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. (THIS DISCUSSION SHOULD BE READ IN
CONJUNCTION WITH ITEM 6, SELECTED FINANCIAL DATA, AND ITEM 8,
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.)
INTRODUCTION
TGPL is an indirect wholly-owned subsidiary of Transco and as such may
be affected by the financial position and performance of Transco and its
subsidiaries other than TGPL.
In October 1991, Transco's Board of Directors approved a comprehensive
strategic and financial plan (Plan) designed to stabilize Transco's financial
position, improve its financial flexibility and restore its earnings. Since
the Plan's adoption, Transco has made significant progress in the
implementation of the Plan, including the sale of certain non-core and
non-strategic businesses, reduction in capital expenditures, resolution of
certain material litigation and improvement in its results of operations and
financial flexibility.
Transco remains committed to deleveraging its balance sheet, further
eliminating or mitigating the potentially adverse impact from the resolution of
remaining litigation and contingencies and improving financial results.
In order to further improve Transco's financial results, in conjunction
with efforts to reduce debt and related interest expense, Transco will continue
efforts to ensure the solid financial performance of TGPL and Texas Gas, while
working to eliminate operating losses from Transco's gas marketing and gas
gathering businesses.
CAPITAL RESOURCES AND LIQUIDITY
METHOD OF FINANCING
As a subsidiary of Transco, TGPL engages in transactions with Transco
and other Transco subsidiaries, characteristic of group operations. TGPL meets
its working capital requirements by participation in the Transco consolidated
cash management program pursuant to which TGPL both makes advances to and
receives advances and capital contributions from Transco, and by accessing
capital markets to refinance its long-term debt maturities. As general
corporate policy, the interest rate on intercompany demand notes is 1-1/2
percent below the prime rate of Citibank, N.A. At December 31, 1993, there
were outstanding advances totaling $133.3 million from TGPL to Transco. TGPL
currently expects to receive payment of these advances within the next twelve
months and has classified such advances as current assets.
In addition, TGPL and Transco's other subsidiaries pay dividends, based
on the level of their earnings and net cash flow, to assist Transco in
providing the funds
18
<PAGE> 20
necessary for Transco to service its debt and pay dividends on its common and
preferred stock. TGPL's Board of Directors has declared no common stock
dividends in 1993, 1992 and 1991.
Certain of Transco's credit facilities and indentures prohibit TGPL
from, among other things, incurring or guaranteeing any additional
indebtedness, except for indebtedness incurred to refinance existing
indebtedness, issuing preferred stock or advancing cash to affiliates other
than Transco. Further, certain of Transco's credit facilities and indentures
contain restrictive covenants which could limit Transco's ability to make
additional borrowings and, therefore, under certain circumstances, Transco's
ability to make or repay advances to TGPL or make capital contributions to
TGPL.
To meet the working capital requirements of Transco and its
subsidiaries, Transco has in place a $450 million working capital line with a
group of fifteen banks. TGPL is guarantor of $270 million of this working
capital line. At December 31, 1993, Transco had no outstanding borrowings
under this facility.
Transco also has in place a $50 million reimbursement facility, dated as
of December 31, 1993, between Transco and a group of banks. This facility
provides Transco the opportunity to obtain standby letters of credit under
certain circumstances from the banks. TGPL is guarantor of $30 million of the
obligations that arise under this facility. At December 31, 1993, Transco had
no amounts outstanding under this facility.
These credit facilities prohibit TGPL from, among other things,
incurring or guaranteeing any additional indebtedness (except for indebtedness
incurred to refinance existing indebtedness), issuing preferred stock or
advancing cash to affiliates other than Transco. Further, these credit
facilities and Transco's indentures contain restrictive covenants which could
limit Transco's ability to make additional borrowings and, therefore, under
certain circumstances, its ability to repay advances or make capital
contributions to TGPL. Additionally, certain of TGPL's debt instruments
restrict the amount of dividends distributable. As of December 31, 1993,
approximately $287 million of TGPL's retained earnings of $424 million was
available for distribution.
TGPL repriced the interest rate on its Extendible Notes due May 15, 2000
to a rate of 6.21% beginning May 15, 1993 and ending May 14, 1996.
In September 1993, TGPL entered into a new program to sell monthly trade
receivables to replace a similar program, which expired. The new trade
receivables program, which expires in September 1995, provides for the sale of
up to $100 million of trade receivables without recourse. As of December 31,
1993, $100 million in trade receivables were held by the investor.
19
<PAGE> 21
CAPITALIZATION AND CASH FLOWS
As shown in the following table, there has been an improvement in TGPL's
percentage of total debt to total invested capital from December 31, 1992 to
December 31, 1993. This results from both an increase in common stockholder's
equity, reflecting increased net income, and a reduction in total debt.
<TABLE>
<CAPTION>
1993 1992 1991
----------- ------------ -----------
(In millions)
<S> <C> <C> <C>
Common Stockholder's Equity . . . . . . $ 707.3 $ 618.7 $ 425.6
Preferred Stock . . . . . . . . . . . . 75.2 101.0 105.2
Long-term Debt, less Current Maturities 643.8 518.9 686.1
----------- ------------ -----------
Total Capitalization . . . . . . . . 1,426.3 1,238.6 1,216.9
Current maturities of Long-Term Debt . - 154.9 44.6
----------- ------------ -----------
Total Invested Capital . . . . . . . $ 1,426.3 $ 1,393.5 $ 1,261.5
=========== ============ ============
Long-term Debt, less Current Maturities as
a Percentage of Total Capitalization 45.1% 41.9% 56.4%
Common Stockholder's Equity as a Percentage
of Total Capitalization . . . . . . . 49.6% 50.0% 35.0%
Total Debt as a Percentage of Total Invested
Capital . . . . . . . . . . . . . . . 45.1% 48.4% 57.9%
</TABLE>
As shown in the accompanying Statement of Cash Flows, TGPL's net cash
outflows exceeded net cash inflows by $0.2 million resulting primarily from
producer settlement payments, retirement of long-term debt and preferred stock,
the capital spending requirements for 1993 and a net increase in advances to
Transco. Funding of TGPL's 1993 cash requirements for financing and investing
activities, including capital expenditures, has been provided primarily through
cash provided by operations, and to a lesser extent, through recoveries of
producer settlement costs.
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Provided By Operating Activities . . . . $ 259.3 $ 6.7 $ 169.4
======== ======== ========
</TABLE>
For the year ended December 31, 1993, cash flows from operating
activities were $253 million higher than for the year ended December 31, 1992.
This improvement in cash flows is primarily the result of cash refunds TGPL
paid to customers in 1992 in connection with the Transition Cost proceeding and
its Rate Settlement as discussed in Note C of the Notes to Financial Statements
included in Item 8 herein, combined with TGPL's higher collection of revenues
in 1993 subject to refund and lower payments in 1993 for producer settlements.
For the year ended December 31, 1992, cash flows from operating
activities were $163 million lower than 1991 resulting primarily from refunds
made to customers in
20
<PAGE> 22
connection with the Transition Cost proceeding and its Rate Settlement, and
producer settlement payments.
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Provided By (Used In) Financing Activities $( 66.5) $ 34.7 $( 78.5)
======== ======== ========
</TABLE>
The cash flows used in financing activities for the year ended December
31, 1993, were mainly due to the retirement of $30 million of TGPL's long-term
debt and $26 million of preferred stock and dividend payments of $8 million on
preferred stock.
The cash flows provided by financing activities in 1992 were primarily
attributable to a $126 million capital contribution from Transco, and net
proceeds of $122 million from the sale of TGPL's 8-7/8 percent notes, partly
offset by the retirement of $200 million of TGPL's long-term debt and dividend
payments of $9 million on preferred stock.
The cash flows used in financing activities in 1991 were primarily
attributable to the $70 million retirement of TGPL's long-term debt and
dividend payments of $9 million on preferred stock.
<TABLE>
<CAPTION>
1993 1992 1991
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Used In Investing Activities . . . . . . $ 193.0 $ 64.0 $ 74.4
======== ======== ========
</TABLE>
For the years ended December 31, 1993 and 1992, cash flows used in
investing activities were primarily for capital expenditures for property,
plant and equipment, as shown in the following table, and a net increase in
advances to Transco, partly offset by the recovery of producer settlement
costs.
21
<PAGE> 23
For the year ended December 31, 1991, cash flows used in investing
activities were primarily for capital expenditures for property, plant and
equipment, as shown in the following table, and a loan related to a take-or-pay
settlement, partly offset by the recovery of producer settlement costs, net of
recoverable producer settlement payments and a net decrease in advances to
Transco.
<TABLE>
<CAPTION>
Budget Actual
---------- ----------------------------------------
Capital Expenditures 1994 1993 1992 1991
---------- ---------- ----------- -----------
(In millions)
<S> <C> <C> <C> <C>
Market-Area Projects . . . . . . . $ 50.3 $ 13.1 $ 54.6 $ 128.3
Supply-Area Projects . . . . . . . 10.4 27.3 16.1 43.1
Maintenance of Existing Facilities
and Other Projects . . . . . . . 109.0 69.8 45.0 70.7
---------- ---------- ----------- -----------
Total Capital Expenditures $ 169.7 $ 110.2 $ 115.7 $ 242.1
========= ========== =========== ===========
</TABLE>
Included in TGPL's capital expenditures for 1993 were $13 million for
market-area expansion, primarily for the Southeast Expansion Projects and the
Niagara Cogeneration project, compared to $55 million in 1992; $27 million for
supply projects, primarily for a production-area storage facility in 1993
compared to $16 million in 1992, and $70 million for maintenance of existing
facilities and other projects, compared to $45 million in 1992.
FUTURE CAPITAL EXPENDITURES
As shown in the table above, TGPL has budgeted approximately $170
million for 1994 capital expenditures. The increase in expected capital
expenditures in 1994 over 1993 and 1992 is generally related to pipeline
expansion projects, primarily the Southeast Expansion Projects, and the
maintenance of existing facilities.
In November 1993, TGPL filed for FERC approval of its Southeast
Expansion Projects. These new expansion projects will provide additional firm
transportation capacity to growing southeastern markets in Alabama, Georgia,
South and North Carolina and Virginia.
The proposed Southeast Expansion Projects are expected to be phased into
service beginning in 1994 and, upon completion, 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 estimates the
22
<PAGE> 24
cost of the expansion to be $125 million and has proposed rates based on the
SFV rate design methodology.
The 1994 Southeast Expansion Project (SE94) will provide 35 MMcf/d of
incremental firm capacity by the 1994-1995 winter heating season. The
1995-1996 Southeast Expansion Project (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.
Subject to FERC approval, construction on SE94 is scheduled to begin in
June 1994. TGPL expects to invest approximately $45 million in these projects
in 1994.
In 1992, Liberty Pipeline Company, 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 area. The partnership is comprised of
subsidiaries of Transco and two other interstate pipelines, and subsidiaries of
three TGPL customers in New York.
The pipeline is expected to cost approximately $162 million and is
proposed to be in service by the 1995-1996 winter heating season, subject to
timely FERC approval. The pipeline will offer a new firm transportation route
from TGPL and another interstate pipeline to a proposed new delivery point on
Long Island near the John F. Kennedy Airport.
Liberty Operating Company (LOC), an affiliate of TGPL, will construct
and operate the pipeline. LOC has begun design work, permit application, and
survey and right-of-way acquisition. The FERC has issued a notice that it
intends to prepare an Environmental Impact Statement associated with the
Liberty Pipeline.
Transco Liberty Pipeline Company, an affiliate of TGPL, owns a 35
percent interest in the pipeline, which will be project financed.
TGPL anticipates investing approximately $78 million in existing TGPL
facilities upstream of Liberty Pipeline to provide additional transportation
capacity for subsequent delivery to the Liberty Pipeline. The expenditures
involve looping existing facilities and adding compression in Pennsylvania and
New Jersey. The majority of the expenditures for TGPL's upstream expansion are
expected to be made in 1995 and 1996.
OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES
ORDER 636 TRANSITION COSTS. As discussed in Note C of the Notes to
Financial Statements included in Item 8 herein, TGPL implemented Order 636
services effective November 1,1993.
23
<PAGE> 25
Order 636 provides that pipelines should be allowed the opportunity to
recover all prudently incurred transition costs. TGPL does not expect to incur
GSR costs associated with its firm sales service. TGPL's non-GSR transition
costs are anticipated to be in a range of $5 million to $10 million. TGPL
expects that any transition costs incurred should be recovered from its
customers, subject only to the costs and other risks associated with the
difference between the time such costs are incurred and the time when those
costs may be recovered from customers.
TGPL does not believe that Order 636 transition costs to be incurred by
TGPL will have a material adverse effect on its financial position or results
of operations.
RATE REFUNDS. As discussed in Note C of the Notes to Financial
Statements included in Item 8 herein, TGPL received a FERC order accepting the
Settlement in connection with its general rate case (Docket No. RP92-137) on
November 4, 1993. In early 1994, TGPL will make the initial refunds
(approximately $100 million, including interest) under the Settlement. TGPL
has previously provided a reserve for that refund. TGPL has also provided a
reserve which it believes is sufficient for any additional refunds that may be
required under Docket No. RP92-137. TGPL anticipates it will fund its rate
refunds through Transco's repayment to TGPL of amounts previously advanced by
TGPL.
REGULATORY AND LEGAL PROCEEDINGS. As discussed in Notes C and D of the
Notes to Financial Statements included in Item 8 herein, TGPL is involved in
several pending regulatory and legal proceedings. Because of the complexities
of the issues involved in these proceedings, TGPL cannot predict the actual
timing of resolution or the ultimate amounts which might have to be refunded or
paid in connection with the resolution of these pending regulatory and legal
proceedings.
Although no assurances can be given, TGPL does not believe that the
ultimate resolution of these pending regulatory and legal proceedings will have
a material adverse effect on its financial position or results of operations.
LONG-TERM GAS PURCHASE CONTRACTS. As discussed in Note J of the Notes
to Financial Statements included in Item 8 herein, TGPL has long-term gas
purchase contracts containing take-or-pay provisions and prices which are not
variable market based. Future changes in market conditions affecting the
volumes of gas sold and prices of natural gas may expose TGPL to financial
risks pursuant to these provisions.
24
<PAGE> 26
Following is a summary of TGPL's estimated purchase commitments for the
next five years and cumulative thereafter under gas purchase contracts that
contain either fixed prices or variable prices that are at a significant
premium to the estimated market price.
<TABLE>
<CAPTION>
Total Dollar
Estimated Purchase Commitments (1) Commitment
------------------------------- -----------
(In millions)
<S> <C>
1994 . . . . . . . . . . . . . . . . . . . . . . . . $ 119.6
1995 . . . . . . . . . . . . . . . . . . . . . . . . 70.5
1996 . . . . . . . . . . . . . . . . . . . . . . . . 33.6
1997 . . . . . . . . . . . . . . . . . . . . . . . . 32.0
1998 . . . . . . . . . . . . . . . . . . . . . . . . 5.8
Cumulative thereafter . . . . . . . . . . . . . . . . 68.5
</TABLE>
(1) The declines in estimated purchase commitments over future
periods reflect contract expirations and, to a lesser extent,
estimated deliverability declines. There are inherent risks in
estimating gas reserves and gas deliverability. To the extent
actual reserves and actual deliverability are different than those
estimated in determining future purchase obligations or to the
extent additional reserves are added under contracts or as a result
of future drilling, TGPL's future purchase obligations could be
increased or decreased from the amounts shown above. The total
dollar commitment in the table reflects gross dollar amounts to be
paid under the gas purchase contracts. The market price is based
on an estimate of future market prices issued by Petroleum Industry
Research Associates, Inc.
TGPL's supply purchase contracts are structured in a variety of ways.
While many contracts still contain minimum purchase take-or-pay volume
provisions, others stipulate the availability of gas for purchase but contain
no minimum purchase requirements. Currently, approximately 80% of TGPL's
portfolio is variable priced relative to the spot market which results in a
price that is competitive in the natural gas market. Less than 1% of the
portfolio is tied to the fuel oil market.
Pursuant to a settlement that TGPL has with all its customers, TGPL has
in place a GIC designed to allow TGPL to recover its above-spot-market gas
costs through March 31, 2001. Pursuant to this settlement, in 1993 and early
1994, TGPL's agreements with its customers were renegotiated by TGMC, as agent
for TGPL. TGMC and TGPL believe that the GIC agreed to with TGPL's customers
will be adequate to enable recovery of its above-spot-market gas costs.
However, TGPL is at risk for any above-spot-market gas costs that may be
incurred in excess of the amounts recovered under the GIC.
TGPL does not believe that the financial risk associated with long-term
gas purchase contracts will have a material adverse effect on its financial
position or results of operations.
ENVIRONMENTAL MATTERS. As discussed in Note E of the Notes to Financial
Statements included in Item 8 herein, TGPL is subject to extensive federal,
state and local environmental laws and regulations which affect TGPL's
operations related to the construction and operation of its pipeline
facilities.
25
<PAGE> 27
TGPL considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the ordinary course of
business. To date, TGPL has been permitted recovery of environmental costs
incurred and it is TGPL's intent to continue seeking recovery of such costs, as
incurred, through rate filings.
CONCLUSION
Although no assurances can be given, TGPL currently believes that the
aggregate of cash flows from operating activities, supplemented, if necessary,
by repayments of funds advanced to Transco or advances by Transco will provide
TGPL with sufficient liquidity to meet its capital requirements.
RESULTS OF OPERATIONS
The table below shows the results of operations of TGPL for the years 1993,
1992 and 1991 and the effects of certain selected items that have impacted
those results.
<TABLE>
<CAPTION>
1993 1992 1991
---------- ----------- -----------
(In millions)
<S> <C> <C> <C>
Net Income Before Selected Items . . . . . . . $ 99.6 $ 84.4 $ 66.2
Write-off of note receivable . . . . . . . . . ( 12.5) - -
Federal tax rate increase . . . . . . . . . . . ( 1.0) - -
Provision for producer settlements, legal and
regulatory issues . . . . . . . . . . . . . . - - ( 38.3)
Provision for Challenger Settlement . . . . . . - ( 19.5) ( 15.8)
Provision for Transition Cost proceeding . . . - - ( 47.6)
Provision for restructuring . . . . . . . . . . - - ( 14.8)
Provision for asset impairments . . . . . . . . - - ( 20.4)
Benefits of resolution of certain rate issues . - - 2.1
---------- ----------- -----------
Net Income (Loss) . . . . . . . . . . . . . . . $ 86.1 $ 64.9 $( 68.6)
========== =========== ===========
</TABLE>
In December 1992, TGPL filed a plan with the FERC for Transco to realign
its gas marketing businesses under the management of TGMC. In January 1993,
the FERC, subject to conditions, accepted tariff sheets filed by TGPL,
effectively allowing Transco to proceed with the realignment. TGMC, through an
agency management agreement with TGPL, manages all gas sales made by TGPL. The
financial performance of TGPL's sales service is discussed separately in the
following discussion.
1993 COMPARED TO 1992
NET AND OPERATING INCOME. TGPL's net income for 1993 was $21.2 million
higher than 1992. However, excluding the net income impact of the selected
items shown in the table above, TGPL's positive net income variance for 1993
compared to 1992 was $15.2 million. This increase was primarily due to cost
control programs that
26
<PAGE> 28
resulted in maintaining operating expenses at levels provided in the new
general rate case effective September 1, 1992, new pipeline projects being
placed in service, lower interest expense and higher allowance for funds used
during construction (AFUDC). Excluding the pre-tax effects of the selected
items shown above, TGPL's positive operating income variance of $14.5 million
was primarily due to the cost control programs discussed above. Although TGPL
implemented Order 636 effective November 1, 1993, TGPL experienced no
significant operational changes as a result of the implementation, because
TGPL's prior settlement with its customers complied with many of the
requirements of Order 636. Therefore, TGPL believes its operating income is
representative of its expected operating income during 1994 under Order 636.
As shown on the table below, pre-tax net interest expense for 1993 was
$16.9 million lower than 1992, primarily due to the lower interest on long-term
debt resulting from the May 1993 repricing of $125 million of Extendible Notes
at a lower interest rate and higher interest income and AFUDC in 1993 compared
to 1992. The higher AFUDC reflects the reversal in 1992 of $3.9 million of
AFUDC, which had been recorded in prior years, as a result of a FERC audit
adjustment.
<TABLE>
<CAPTION>
1993 1992 1991
----------- ------------ -----------
(In millions)
<S> <C> <C> <C>
Interest expense relating to:
Long-term debt . . . . . . . . . . . . . . . $ 55.9 $ 61.4 $ 65.3
Short-term debt . . . . . . . . . . . . . . . - - -
Transition Cost proceeding . . . . . . . . . - 0.8 22.6
Rate refunds . . . . . . . . . . . . . . . . 5.1 3.2 12.0
Other . . . . . . . . . . . . . . . . . . 1.5 7.3 13.2
----------- ------------ -----------
Total interest expense . . . . . . . . . . 62.5 72.7 113.1
Interest income . . . . . . . . . . . . . . . ( 5.1) ( 3.5) ( 12.7)
AFUDC . . . . . . . . . . . . . . . . . . ( 5.1) - ( 14.9)
----------- ------------ -----------
Net interest expense . . . . . . . . . . . . $ 52.3 $ 69.2 $ 85.5
=========== ============ ===========
</TABLE>
TRANSPORTATION SERVICES. TGPL's operating revenues, excluding sales and
storage services, increased $95 million to $693 million in 1993 when compared
to 1992, due primarily to the higher revenues from Phase II of the TGPL/Texas
Gas/CNG project being placed in service and increased revenues related to
certain increased costs as provided by TGPL's rate filings. Effective
September 1, 1992, TGPL placed new rates into effect, subject to refund, under
its general rate case, Docket No. RP92-137. The rates for firm transportation
service are based on a SFV rate design, under which all fixed costs allocated
to firm transportation service, including return on equity and taxes, are
included in a demand charge to customers. All variable costs are recovered
through commodity rates. The pre-September 1, 1992 revenues were collected on
rates under Docket No. RP90-8, which were based on the MFV rate design. Under
the MFV rate design, all fixed costs, with the exception of equity return and
income taxes, were included in the demand charge to customers and the equity
return and income tax component were included as part of the volumetric charge
to customers. The new rates in RP92-137 are also based on a different mix and
level of volumes than the RP90-8 rates. In early 1994, TGPL will make the
initial refunds (approximately $100 million,
27
<PAGE> 29
including interest) under RP92-137. TGPL has previously provided a reserve for
that refund. TGPL has also provided a reserve which it believes is sufficient
for any additional refunds that may be required under RP92-137.
Excluding the pre-tax effects of the selected items and the cost of
sales and transportation of $822 million in 1993 and $604 million in 1992,
TGPL's operating expenses for 1993 were approximately $32 million higher when
compared to 1992. This increase in operating expenses for the year was
primarily a result of the adoption, effective January 1, 1993, of the accrual
basis of accounting for postretirement benefits other than pensions under
Statement of Financial Accounting Standards (SFAS) No. 106, and higher
depreciation. However, these increases in operating expenses were fully
recovered through increases in revenues in the new rates previously discussed.
TGPL's other operating expenses were controlled to levels contained in its new
general rate case effective September 1, 1992.
As shown in the table below, TGPL's total market-area deliveries for
1993 were comparable to those in 1992. Production-area deliveries decreased
28.1 Bcf, or 14 percent for 1993 compared to 1992, primarily due to increased
competition for production-area transportation. However, as a result of the
new rate structure that went into effect September 1, 1992, subject to refund,
these decreased deliveries had no significant impact on operating income.
<TABLE>
<CAPTION>
TGPL System Deliveries (Bcf) 1993 1992 1991
- ----------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Market-area deliveries:
Sales . . . . . . . . . . . . . . . . . . . . . . . . - - 0.4
Long-haul transportation . . . . . . . . . . . . . . . 823.9 821.8 873.5
Market-area transportation . . . . . . . . . . . . . . 374.4 379.8 250.3
---------- ---------- ----------
Total market-area deliveries . . . . . . . . . . . . 1,198.3 1,201.6 1,124.2
Production-area transportation . . . . . . . . . . . . . 171.2 199.3 255.3
---------- ---------- ----------
Total system deliveries . . . . . . . . . . . . . . . . . 1,369.5 1,400.9 1,379.5
========== ========== ==========
</TABLE>
TGPL's facilities are divided into six rate zones. Three 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 previously discussed, prior to September 1, 1992, TGPL's rates were
designed on the MFV method of rate design. Accordingly, overall throughput had
a significant impact on operating income. However, effective September 1,
1992, TGPL began collecting new rates, subject to refund, under the SFV rate
design. Accordingly, with SFV rate design, throughput has less of an impact on
operating income than in prior periods.
28
<PAGE> 30
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 the production area may result in rates which
could make TGPL less competitive, both in terms of production-area and
long-haul transportation. A hearing before a FERC Administrative Law Judge
(ALJ) dealing with, among other things, TGPL's production-area rate design has
been set for April 1994. TGPL is unable at this time to fully assess the
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. For a discussion of TGPL's Order 636 compliance filing, see Note
C of the Notes to Financial Statements included in Item 8 herein.
SALES SERVICES. TGPL makes sales to customers through a FS program, an
OFS program and an IS program coupled with a firm transportation program as
replacement for contract sales quantity. These programs give customers the
option to purchase daily quantities of gas from TGPL at market-responsive
prices in exchange for a demand charge payment to TGPL designed to recover the
costs of gas in excess of current month spot prices that TGPL is obligated to
pay under its producer contracts.
TGPL's operating revenues related to its sales service increased $160
million to $682 million due primarily to higher sales volumes and higher
average prices. However, TGPL's sales service did not have a significant
impact on TGPL's operating income or results of operations in either 1993 or
1992. In 1993, Transco consolidated its gas marketing businesses under the
common management of TGMC. In January 1993, TGMC, through an agency agreement,
began to manage all jurisdictional sales of TGPL. Under this agency agreement,
TGMC bills TGPL for the cost of managing TGPL's gas sales service and receives
all margins associated with such business. TGPL believes its gas sales service
will have no impact on its operating income or results of operations.
<TABLE>
<CAPTION>
Gas Sales Volumes (Bcf)(1) 1993 1992 1991
- -------------------------- ------- ------- -------
<S> <C> <C> <C>
Long-term sales . . . . . . . . . . . . . . . 212.3 188.3 186.8
Short-term sales . . . . . . . . . . . . . . 33.2 32.8 54.8
------- ------- -------
Total gas sales . . . . . . . . . . . . . 245.5 221.1 241.6
======= ======= =======
</TABLE>
(1) Effective January 1993, TGMC, through an agency management agreement
with TGPL, assumed operation of TGPL's sales service.
For a discussion of TGPL's long-term gas purchase commitments see
"Other Capital Requirements and Contingencies - Long-term gas purchase
contracts" above.
STORAGE SERVICES. TGPL's operating revenues related to its storage
services increased $9 million to $146 million in 1993 when compared to 1992,
primarily due to additional revenues realized under the new rates effective
September 1, 1992.
29
<PAGE> 31
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash flows provided by
operating activities during 1993 totaled $259 million, compared to $7 million
in 1992. The net increase was primarily due to:
- Higher cash payments of $102 million in 1992 due to rate refunds made
by TGPL under its RP90-8 general rate case;
- Higher cash receipts of $101 million in 1993 from the collection of
revenues subject to refund to TGPL's customers upon final settlement
of its RP92-137 general rate case.
- Cash payments of $74 million in 1992 made in connection with TGPL's
Transition Cost proceeding;
- Lower cash payments of $35 million in 1993 for non-recoverable
producer settlements;
Offset by:
- Higher cash payments of $62 million in 1993 due to the amount and
timing of collections of receivables and disbursements for payables.
1992 COMPARED TO 1991
OPERATING AND NET INCOME. TGPL's net income for 1992 was $133.5
million higher than 1991. However, excluding the net income impact of the
selected items, TGPL's net income for 1992 was $18.2 million higher than 1991.
The increase in net income for 1992 is primarily the result of higher
market-area transportation volumes and revenues from incremental projects,
including the TGPL/Texas Gas/CNG project, the South Virginia Lateral expansion,
the first phase of the TGPL System Expansion project and the IEC Cogen project,
all of which went into service in November 1991. Excluding the pre-tax effects
of the selected items, TGPL's operating income variances are reflective of the
net income variances, showing an increase of $29.2 million in 1992 compared to
1991.
TGPL's operating revenues, exclusive of the effects of settlements of
certain rate issues in 1991, increased $116 million in 1992 when compared to
1991. This increase in revenues is the result of revenues from incremental
projects placed in service in late 1991. Effective September 1, 1992, TGPL
placed increased rates into effect, subject to refund, in Docket No. RP92-137.
TGPL has provided a reserve it considers adequate to provide for any refunds
that may be required upon final settlement of this rate case.
Excluding the pre-tax effects of the selected items and the cost of
sales and transportation of $604 million in 1992 and $510 million in 1991,
TGPL's operating
30
<PAGE> 32
expenses in 1992 were approximately $7 million lower for 1992 compared to the
same period in 1991. This variance resulted primarily from lower operation and
maintenance expenses due to lower underground storage costs and lower
administrative and general expenses.
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash flows provided by
operating activities during 1992 totaled $7 million, compared to $169 million
in 1991. The net decrease primarily was due to:
- Cash payments of $74 million in 1992 made in connection with the
Transition Cost proceeding;
- Higher cash payments of $102 million in 1992 due to rate refunds made
by TGPL;
- Higher cash payments of $37 million in 1992 for gas costs incurred in
current and prior periods;
- Higher cash payments of $20 million for non-recoverable producer
settlements;
Offset by:
- Lower cash payments of $90 million due to the amount and timing of
disbursements for payables and collections of receivables due primarily
to payments for gas purchased in prior periods.
COMPETITION
Competition for gas transportation has intensified in recent years due to
customer access to other pipelines, rate competitiveness between pipelines and
the 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 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 and its primary market-area competitors (Texas Eastern, Columbia,
Southern Natural, Tennessee and 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 the 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
31
<PAGE> 33
ALJ dealing with, among other things, TGPL's production-area rate design has
been set for April 1994. TGPL is unable at this time to fully assess the
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 GSR costs associated with its firm sales
service. TGPL's non-GSR transition costs are anticipated to be in a range of
$5 million to $10 million; therefore, TGPL believes the demand charges to
recover these costs will not make its rates noncompetitive in its markets. See
Note C - Regulatory Matters - Order 636, of the Notes to Financial Statements
included in Item 8 herein.
Although a significant portion of TGPL's firm customers have relatively
secure residential and commercial end-users, virtually all of TGPL's 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 intend to
aggressively price their system transportation to stay competitive in
alternate-fuel markets.
32
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Transcontinental Gas Pipe Line Corporation:
We have audited the accompanying balance sheet of Transcontinental Gas
Pipe Line Corporation (a Delaware corporation and an indirect wholly owned
subsidiary of Transco Energy Company) as of December 31, 1993 and 1992, and the
related statements of operations, retained earnings and premium on capital
stock and other paid-in capital and cash flows for each of the three years in
the period ended December 31, 1993. These financial statements and the
financial statement schedules referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcontinental Gas Pipe
Line Corporation as of December 31, 1993 and 1992, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedules
listed in the index to Part IV, Item 14(a)2, are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These financial statement schedules have
been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly state in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Houston, Texas
February 18, 1994
33
<PAGE> 35
MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The financial statements have been prepared by management in conformity
with generally accepted accounting principles. Management is responsible for
the fairness and reliability of the financial statements and other financial
data included in this report. In the preparation of the financial statements,
it is necessary to make informed estimates and judgments of the effects of
certain events and transactions based on currently available information.
TGPL maintains accounting and other controls that management believes
provide reasonable assurance that financial records are reliable, assets are
safeguarded, and that transactions are properly recorded in accordance with
management's authorizations. However, limitations exist in any system of
internal control based upon the recognition that the cost of the system should
not exceed benefits derived.
TGPL's independent auditors, Arthur Andersen & Co., are engaged to audit
the financial statements and to express an opinion thereon. Their audit is
conducted in accordance with generally accepted auditing standards to enable
them to report that the financial statements present fairly, in all material
respects, the financial position, results of operations and cash flows of TGPL
in conformity with generally accepted accounting principles.
The Audit Committee of the Board of Directors of Transco Energy Company
(Transco), composed of two directors who are not employees of Transco, meets
regularly with the independent auditors and management. The independent
auditors have full and free access to the Audit Committee and meet with them,
with and without management being present, to discuss the results of their
audits and the quality of financial reporting.
34
<PAGE> 36
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
BALANCE SHEET
(NOTES B AND J)
<TABLE>
<CAPTION>
December 31,
------------------------------
1993 1992
------------ -------------
($ thousands)
<S> <C> <C>
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,094 $ 1,259
Deposits (Note B) . . . . . . . . . . . . . . . . . . . . . 7,348 6,351
Receivables:
Trade (Note F) . . . . . . . . . . . . . . . . . . . . . . 53,924 54,922
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 34,632 7,827
Advances to Transco (Note A) . . . . . . . . . . . . . . 133,304 14,500
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,625 2,269
Transportation and exchange gas receivable - Others (Note B) 22,000 -
Producer settlement costs recoverable from customers (Note F) - 34,726
Inventories:
Gas in storage, at LIFO . . . . . . . . . . . . . . . . . 32,555 24,758
Materials and supplies, at average cost . . . . . . . . . 44,755 47,310
Gas available for customer nomination . . . . . . . . . . 2,237 4,373
Prepaid gas purchases . . . . . . . . . . . . . . . . . . . 1,676 678
Deferred income tax benefits (Note I) . . . . . . . . . . . - 28,326
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,063 16,324
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . 360,213 243,623
------------- -------------
Property, Plant and Equipment, at cost:
Natural gas transmission plant . . . . . . . . . . . . . . . 4,223,501 4,141,625
Less - Accumulated depreciation and amortization . . . . . . 2,480,332 2,377,572
------------- -------------
Total property, plant and equipment, net . . . . . . . . . 1,743,169 1,764,053
------------- -------------
Other Assets:
Notes receivable (Note J) . . . . . . . . . . . . . . . . . - 15,723
Transportation and exchange gas receivable: (Note B)
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 28,986 22,512
Others . . . . . . . . . . . . . . . . . . . . . . . . . . 109,564 169,911
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,728 85,736
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . . . 214,278 293,882
------------- -------------
$ 2,317,660 $ 2,301,558
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 37
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
BALANCE SHEET
(NOTES B AND J)
<TABLE>
<CAPTION>
December 31,
----------------------------
1993 1992
------------ ------------
($ thousands)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (Note F) . . . . . . . $ - $ 154,856
Payables:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 135,231 109,185
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 26,743 29,030
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 36,554 44,405
Dividends . . . . . . . . . . . . . . . . . . . . . . . . 1,107 1,484
Transportation and exchange gas payable - Others (Note B) . 12,000 -
Accrued liabilities:
Federal income taxes . . . . . . . . . . . . . . . . . . . 4,847 4,347
Other taxes . . . . . . . . . . . . . . . . . . . . . . . 9,736 6,764
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 15,357 15,884
Employee benefits (Note H) . . . . . . . . . . . . . . . . 20,341 24,569
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 22,864 27,277
Reserve for producer settlements, legal and regulatory
issues (Notes C and D) . . . . . . . . . . . . . . . . . . 5,240 46,660
Reserve for rate refunds (Note C) . . . . . . . . . . . . . 141,270 52,913
Deferred income taxes (Note I) . . . . . . . . . . . . . . . 1,452 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,162 18,677
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 448,904 536,051
------------- -------------
Long-Term Debt, less current maturities (Note F) . . . . . . . 643,799 518,943
------------- -------------
Other Liabilities and Deferred Credits:
Income taxes (Note I) . . . . . . . . . . . . . . . . . . . 279,303 279,647
Income taxes refundable to customers (Note B) . . . . . . . 19,148 43,888
Transportation and exchange gas payable: (Note B)
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 3,607 941
Others . . . . . . . . . . . . . . . . . . . . . . . . . . 75,530 133,189
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,888 69,158
------------- -------------
Total other liabilities and deferred credits . . . . . . . 442,476 526,823
------------- -------------
Commitments and contingencies (Notes C, D, E and F)
Cumulative Redeemable Preferred Stock, without par value: (Note G)
Authorized 10,000,000 shares:
Stated value $100 per share, issued and outstanding
757,427 and 1,017,410 shares in 1993 and 1992,
respectively . . . . . . . . . . . . . . . . . . . . . . . 75,743 101,741
Less - Issue expense . . . . . . . . . . . . . . . . . . . . 552 735
------------- -------------
Total preferred stock . . . . . . . . . . . . . . . . . . 75,191 101,006
------------- -------------
Cumulative Redeemable Second Preferred Stock,
without par value: (Note G)
Authorized 2,000,000 shares: none issued or outstanding . - -
------------- -------------
Common Stockholder's Equity:
Common Stock $1.00 par value:
100 shares authorized, issued and outstanding . . . . . . - -
Premium on capital stock and other paid-in capital . . . . 283,037 280,600
Retained earnings . . . . . . . . . . . . . . . . . . . . . 424,253 338,135
------------- -------------
Total common stockholder's equity . . . . . . . . . . . . 707,290 618,735
------------- -------------
$ 2,317,660 $ 2,301,558
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 38
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
STATEMENT OF OPERATIONS
(NOTE B)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1993 1992 1991
------------ ------------ ------------
($ thousands)
<S> <C> <C> <C>
Operating Revenues:
Natural gas sales . . . . . . . . . . . . $ 681,839 $ 522,037 $ 482,654
Natural gas transportation . . . . . . . . 687,808 592,422 512,398
Natural gas storage . . . . . . . . . . . 146,416 137,292 142,060
Other . . . . . . . . . . . . . . . . . . 5,470 5,446 7,197
------------- ------------ ------------
Total operating revenues . . . . . . . . 1,521,533 1,257,197 1,144,309
------------- ------------ ------------
Operating Costs and Expenses:
Cost of natural gas sales . . . . . . . . 678,782 508,068 460,372
Cost of natural gas transportation . . . . 143,338 95,861 50,017
Operation and maintenance . . . . . . . . 175,891 181,045 184,793
Administrative and general . . . . . . . . 148,186 119,669 127,213
Depreciation and amortization . . . . . . 119,495 114,145 108,703
Taxes - other than income taxes . . . . . 32,593 29,669 30,426
Provision for producer settlements, legal
and regulatory issues (Notes C and D) . - 31,000 82,152
Provision for Transition Cost proceeding
(Note C) . . . . . . . . . . . . . . . . - - 52,996
Provision for asset impairments . . . . . - - 32,343
Provision for restructuring (Note H) . . . - - 23,537
Write-off of note receivable (Note J) . . 20,125 - -
------------- ------------ ------------
Total operating costs and expenses . . . 1,318,410 1,079,457 1,152,552
------------- ------------ ------------
Operating Income (Loss) . . . . . . . . . . . 203,123 177,740 ( 8,243)
------------- ------------ ------------
Other (Income) and Other Deductions:
Interest expense - Transition Cost
proceeding . . . . . . - 778 22,559
- affiliates . . . . . . 221 2,216 727
- other . . . . . . . . . 62,247 69,733 89,851
Interest income - affiliates . . . . . . ( 3,177) ( 191) ( 3,239)
- other . . . . . . . . . ( 1,928) ( 3,328) ( 9,441)
Allowance for equity and borrowed funds
used during construction . . . . . . . . ( 5,126) 16 ( 14,877)
Miscellaneous other (income) and
deductions, net . . . . . . . . . . . . 7,320 994 5,930
------------ ------------ ------------
Total other (income) and other deductions 59,557 70,218 91,510
------------ ------------ ------------
Income (Loss) Before Income Taxes . . . . . . . 143,566 107,522 ( 99,753)
Provision for (Benefit of) Income Taxes
(Note I) . . . . . . . . . . . . . . . . . . 49,341 33,979 ( 40,090)
------------ ------------ ------------
Net Income (Loss) . . . . . . . . . . . . . . 94,225 73,543 ( 59,663)
Dividends on Preferred Stock . . . . . . . . 8,107 8,639 8,915
------------ ------------ ------------
Common Stock Equity in Net Income (Loss) . . $ 86,118 $ 64,904 $( 68,578)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 39
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
STATEMENT OF RETAINED EARNINGS AND PREMIUM ON
CAPITAL STOCK AND OTHER PAID-IN CAPITAL
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1993 1992 1991
------------ ------------ ------------
($ thousands)
<S> <C> <C> <C>
Retained Earnings:
Balance at beginning of period . . . . . . $ 338,135 $ 273,231 $ 341,809
Add (deduct):
Net income (loss) . . . . . . . . . . . 94,225 73,543 ( 59,663)
Dividends on preferred stock . . . . . ( 8,107) ( 8,639) ( 8,915)
------------ ------------ ------------
Balance at end of period . . . . . . . . . $ 424,253 $ 338,135 $ 273,231
============ ============ ============
Premium on Capital Stock and Other
Paid-in Capital:
Balance at beginning of period . . . . . . $ 280,600 $ 152,370 $ 139,399
Add (deduct):
Tran$tock contribution . . . . . . . . . 2,227 2,253 4,028
Capital contribution . . . . . . . . . . 393 126,048 9,034
Loss on reacquired preferred
stock, net . . . . . . . . . . . . . . ( 183) ( 71) ( 91)
------------ ------------ ------------
Balance at end of period . . . . . . . . . $ 283,037 $ 280,600 $ 152,370
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE> 40
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
STATEMENT OF CASH FLOWS
(NOTE B)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1993 1992 1991
-------------- ------------- --------------
($ thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 94,225 $ 73,543 $( 59,663)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 133,202 128,275 120,113
Deferred income taxes (Note I) . . . . . . . . . . . . . . . . 4,788 ( 22,545) ( 102,654)
Allowance for equity funds used during construction (AFUDC) . . ( 2,801) ( 1,999) ( 9,100)
Provision for producer settlements, legal and regulatory issues
(Notes C and D) . . . . . . . . . . . . . . . . . . . . . . . . - 31,000 82,152
Provision for asset impairments . . . . . . . . . . . . . . . . - - 32,343
Provision for Transition Cost proceeding (Note C) . . . . . . . - - 75,555
Provision for restructuring (Note H) . . . . . . . . . . . . . - - 23,537
Write-off of note receivable (Note J) . . . . . . . . . . . . . 20,125 - -
Tran$tock compensation expense (Note H) . . . . . . . . . . . . 2,227 2,253 4,028
-------------- ------------- --------------
251,766 210,527 166,311
Transition Cost refund (Note C) . . . . . . . . . . . . . . . . . - ( 74,104) -
Nonrecoverable producer settlements . . . . . . . . . . . . . . . ( 31,600) ( 66,160) ( 45,681)
Changes in operating assets and liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 997) ( 4,720) ( 84)
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . ( 28,884) 7,150 4,101
Transportation and exchange gas receivable (Note B) . . . . . . 31,873 ( 35,706) ( 562)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . ( 8,105) ( 2,920) ( 2,259)
Prepaid gas purchases . . . . . . . . . . . . . . . . . . . . . ( 998) 7,729 2,866
Deferred gas costs . . . . . . . . . . . . . . . . . . . . . . - 3,618 13,231
Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,497 41,815 ( 44,932)
Transportation and exchange gas payable (Note B) . . . . . . . ( 42,993) 11,557 12,577
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . ( 1,896) ( 35,555) 21,157
Reserve for rate matters . . . . . . . . . . . . . . . . . . . 93,357 ( 52,579) 39,376
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . ( 17,671) ( 3,985) 3,310
-------------- ------------- --------------
Net cash provided by operating activities . . . . . . . . . . 259,349 6,667 169,411
-------------- ------------- --------------
Cash flows from financing activities: (Notes F and G)
Net additions to long-term debt . . . . . . . . . . . . . . . . . - 122,269 -
Retirement of long-term debt and capital lease obligations,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 29,856) ( 200,300) ( 69,700)
Retirement of preferred stock . . . . . . . . . . . . . . . . . . ( 25,998) ( 4,312) ( 5,404)
Advances from Transco (Note A) . . . . . . . . . . . . . . . . . 245,926 1,384,263 432,111
Retirement of advances from Transco (Note A) . . . . . . . . . . ( 245,926) ( 1,384,263) ( 432,111)
Receivables from affiliates for construction . . . . . . . . . . - - 6,147
Capital contribution by parent . . . . . . . . . . . . . . . . . - 126,048 -
Dividends on preferred stock . . . . . . . . . . . . . . . . . . ( 8,483) ( 8,703) ( 9,008)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,161) ( 300) ( 508)
-------------- ------------- --------------
Net cash provided by (used in) financing activities . . . . . ( 66,498) 34,702 ( 78,473)
-------------- ------------- --------------
Cash flows from investing activities:
Property, plant and equipment, net of equity AFUDC . . . . . . . ( 110,227) ( 115,685) ( 242,057)
Recoverable producer settlements . . . . . . . . . . . . . . . . - - ( 30,089)
Recovery of producer settlements . . . . . . . . . . . . . . . . 30,412 53,175 49,601
Net proceeds from sale of assets . . . . . . . . . . . . . . . . - 4,293 -
Advances to Transco (Note A) . . . . . . . . . . . . . . . . . . ( 1,308,557) ( 215,911) ( 662,207)
Retirement of advances to Transco (Note A) . . . . . . . . . . . 1,189,753 204,607 828,525
Notes receivable (Note J) . . . . . . . . . . . . . . . . . . . . - - ( 16,000)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,603 5,483 ( 2,186)
-------------- ------------- --------------
Net cash used in investing activities . . . . . . . . . . . . ( 193,016) ( 64,038) ( 74,413)
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents . . . . . . . ( 165) ( 22,669) 16,525
Cash and cash equivalents at beginning of period . . . . . . . . . 1,259 23,928 7,403
-------------- ------------- --------------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 1,094 $ 1,259 $ 23,928
============== ============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . . $ 61,275 $ 116,076 $ 64,424
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . 94,147 66,704 51,145
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS
A. Corporate Structure and Control . . . . . . . . . . . . . . 40
B. Summary of Significant Accounting Policies . . . . . . . . 41
C. Regulatory Matters . . . . . . . . . . . . . . . . . . . . 43
D. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 47
E. Environmental Matters . . . . . . . . . . . . . . . . . . . 50
F. Financing . . . . . . . . . . . . . . . . . . . . . . . . . 53
G. Preferred Stock . . . . . . . . . . . . . . . . . . . . . . 55
H. Employee Benefit Plans . . . . . . . . . . . . . . . . . . 56
I. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . 60
J. Commitments and Contingencies . . . . . . . . . . . . . . . 61
K. Transactions with Major Customers and Affiliates . . . . . 64
L. Fair Value of Financial Instruments . . . . . . . . . . . . 66
M. Quarterly Information (Unaudited) . . . . . . . . . . . . . 66
A. CORPORATE STRUCTURE AND CONTROL
Transcontinental Gas Pipe Line Corporation (TGPL) is a wholly-owned
subsidiary of Transco Gas Company (TGC). TGC is a wholly- owned subsidiary of
Transco Energy Company and, as used herein, the term "Transco" refers to
Transco Energy Company and its wholly- owned subsidiaries unless the context
otherwise requires.
As a subsidiary of Transco, TGPL engages in transactions with Transco
and other Transco subsidiaries, characteristic of group operations. For
consolidated cash management purposes, TGPL has made interest bearing advances
to Transco and received interest bearing advances and capital contributions
from Transco. These advances are represented by demand notes. TGPL currently
expects to receive payment of these advances within the next twelve months and
has recorded such advances as current in the accompanying Balance Sheet. As
general corporate policy, the interest rate on intercompany demand notes is
1-1/2 percent below the prime rate of Citibank, N.A.
Certain of Transco's credit facilities and indentures prohibit TGPL from,
among other things, incurring or guaranteeing any additional indebtedness,
except for indebtedness incurred to refinance existing indebtedness, issuing
preferred stock or advancing cash to affiliates other than Transco. Further,
certain of Transco's credit facilities and indentures contain restrictive
covenants which could limit Transco's ability to make additional borrowings
and, therefore, under certain circumstances, its ability to make or repay
advances to TGPL or make capital contributions to TGPL.
TGPL's Board of Directors has declared no common stock dividends in 1993,
1992 or 1991.
40
<PAGE> 42
Prior to 1993, TGPL was responsible for all jurisdictional gas sales to
its pipeline customers. After Federal Energy Regulatory Commission (FERC)
approval in January 1993, Transco implemented a plan to consolidate its gas
marketing businesses under the common management of Transco Gas Marketing
Company (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 sales of TGPL.
Under this agency agreement, TGMC bills TGPL for the cost of managing TGPL's
gas sales service and, during 1993, received all margins associated with such
business. For the year ended December 31, 1993, included in TGPL's cost of
sales is $25.1 million representing agency fees billed by TGMC under this
agreement. Consequently, in 1993, TGPL's gas sales service had no impact on its
results of operations.
Pursuant to a settlement that TGPL has with its customers, TGPL has in
place a gas inventory charge (GIC) designed to allow TGPL to recover its
above-spot-market gas cost through March 31, 2001. Pursuant to this
settlement, in 1993 and early 1994, TGPL's agreements with its customers were
renegotiated by TGMC, as agent for TGPL. TGMC and TGPL believe that the GIC
agreed to with TGPL's customers will be adequate to enable recovery of its
above-spot-market gas costs.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION AND AMORTIZATION. Depreciation rates used for major regulated gas
plant facilities at year-end 1993, 1992 and 1991 were:
<TABLE>
<CAPTION>
Category of Property 1993 1992 1991
-------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Gathering facilities . . . . . . . . . . . 6.22% 6.22% 6.22%
Storage facilities . . . . . . . . . . . . 2.50% 2.50% 2.50%
Onshore transmission facilities . . . . . 2.50%-2.65% 2.50% 2.50%
Offshore transmission facilities . . . . . 3.75%-7.78% 3.75%-7.78% 3.75%-7.78%
</TABLE>
Depreciation of general plant is provided at straight-line rates.
TAX POLICY. Transco and its wholly-owned subsidiaries, which include TGPL
through its ownership by TGC, file a consolidated federal income tax return.
It is Transco's policy to charge or credit each subsidiary with an amount
equivalent to its federal income tax expense or benefit computed as if each
subsidiary had a separate return, but including benefits from each subsidiary's
losses and tax credits that may be utilized only on a consolidated basis.
ACCOUNTING FOR INCOME TAXES. TGPL uses the liability method of accounting
for deferred taxes which requires, among other things, adjustments to the
existing deferred tax balances for changes in tax rates, whereby such balances
will more closely approximate the actual taxes to be paid. Net tax rate
reductions related to regulated
41
<PAGE> 43
operations and subject to refund to customers over the average remaining life
of natural gas transmission plant have been shown in the accompanying Balance
Sheet as income taxes refundable to customers, the current portion of which is
included in other current liabilities.
In the first quarter of 1993, TGPL adopted Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which
supersedes SFAS No. 96, Accounting for Income Taxes. Due to TGPL's prior
adoption of SFAS No. 96 in 1987, the adoption of SFAS No. 109 in 1993 did not
have a material effect on TGPL's financial position or results of operations.
REVENUE RECOGNITION. TGPL recognizes revenues for the sale of its
commodities in the period of delivery and recognizes revenue for the
transportation of gas in the period the service is provided. TGPL is subject
to FERC regulations and, accordingly, certain revenues are collected subject to
possible refunds pending final FERC orders. TGPL establishes reserves, where
required, for such revenues collected subject to refund.
CASH FLOWS FROM OPERATING ACTIVITIES. TGPL uses the indirect method to
report cash flows from operating activities, which requires adjustments to net
income to reconcile to net cash flows provided by operating activities. TGPL
includes short-term, highly-liquid investments that have a maturity of three
months or less as cash equivalents.
RESTRICTED DEPOSITS. At December 31, 1993 and 1992, TGPL had
approximately $7 million and $6 million, respectively, of restricted deposits
that are classified on the accompanying Balance Sheet in current assets as
deposits. These restricted deposits serve as collateral for various standby
letters of credit, regulatory trusts and legal proceedings.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION. The allowance for funds
used during construction (AFUDC) represents the cost of funds applicable to
regulated natural gas transmission plant under construction as permitted by
FERC regulatory practices. The allowance for borrowed funds used during
construction was $2.3 million, $(2.0) million and $5.8 million for 1993, 1992
and 1991, respectively. The negative 1992 amount reflects a reversal of $3.9
million of AFUDC, which was recorded in prior years, as a result of a FERC
audit adjustment. A reserve for this adjustment was recorded in miscellaneous
other income and deductions in 1991. The allowance for equity funds was $2.8
million, $2.0 million and $9.1 million for 1993, 1992 and 1991, respectively.
GAS IN STORAGE. TGPL utilizes the last-in, first-out (LIFO) method of
accounting for inventory gas in storage. The current replacement cost of the
inventory gas in storage at December 31, 1993 and 1992 was $58 million and $43
million, respectively.
GAS IMBALANCES. In the course of providing transportation services to
customers, TGPL may receive different quantities of gas from shippers than the
quantities delivered
42
<PAGE> 44
on behalf of those shippers. These transactions result in gas transportation
and exchange imbalance receivables and payables which are recovered or repaid
in cash or through the receipt or delivery of gas in the future and are
recorded in the accompanying Balance Sheet. Imbalances have become of greater
significance to the pipeline industry generally, since the implementation of
open access transportation by the FERC in 1985, as a result of the substantial
increase in the number of shippers on pipeline systems. Settlement of
imbalances requires agreement between the pipelines and shippers as to
allocations of volumes to specific transportation contracts and timing of
delivery of gas based on operational conditions. TGPL's rate structure
includes a method whereby most imbalances generated after August 1, 1991 are
settled on a monthly basis. Imbalances predating August 1, 1991 are being
recovered or repaid in cash or through the receipt or delivery of gas in the
future upon agreements of allocation and as permitted by operating conditions.
These imbalances have been classified as current assets or current liabilities
to the extent TGPL believes this will occur during 1994.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. TGPL participates in a plan
with Transco and certain affiliated companies that provides certain health care
and life insurance benefits for retired employees. Prior to 1993, TGPL
accounted for postretirement benefits other than pensions (primarily health
care) on a cash basis, which had been the accounting method followed by most
employers. In the first quarter of 1993, TGPL adopted SFAS No. 106, Employer's
Accounting for Postretirement Benefits Other Than Pensions, which requires TGPL
to accrue, during the years that employees render the necessary service, the
estimated cost of providing postretirement benefits other than pensions to
those employees. The adoption of SFAS No. 106 did not have a material effect
on its financial position or results of operations.
POSTEMPLOYMENT BENEFITS. In November 1992, the Financial Accounting
Standards Board (FASB) issued SFAS No. 112, Employers' Accounting for
Postemployment Benefits, which requires TGPL, effective January 1994, to accrue
the estimated cost of providing postemployment benefits to former or inactive
employees after employment but before retirement if the obligation is
attributable to employees' services previously rendered, employees' rights to
those benefits accumulate or vest, payment of the benefits is probable and the
amount of the benefits can be reasonably estimated. TGPL does not expect
adoption of SFAS No. 112 to have a material effect on its financial position or
results of operations.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1992
and 1991 financial statements to conform to the 1993 presentation.
C. REGULATORY MATTERS
RATE MATTERS. On June 4, 1992, the FERC issued its final order on
rehearing in TGPL's Rate Settlement and GIC Settlement (Docket No. RP90-8).
This order became effective in July 1992. As a result, in August 1992, TGPL
made refunds of
43
<PAGE> 45
approximately $102 million, including interest, for differences between filed
rates and settlement rates. Certain parties appealed the FERC's June 4, 1992
order to the United States Court of Appeals for the D.C. Circuit (D.C. Circuit
Court). On December 17,1993, the D.C. Circuit Court issued its opinion
affirming the FERC's order, except for one issue not material to TGPL which was
remanded to the FERC for further consideration.
On March 2, 1992, TGPL filed with the FERC a general rate case (Docket No.
RP92-137). The general rate filing proposed an increase in transportation
rates, based primarily on increases in operating and maintenance costs,
including those associated with additional services provided to TGPL's markets
since its last general rate filing, and increased cost of capital. The filing
also included a change to straight fixed-variable (SFV) rate design and an
increase in rate base resulting from additional plant and equipment costs and
higher working capital requirements. On September 1, 1992, the increased rates
went into effect subject to refund.
On September 17, 1992, the FERC issued a decision addressing the single
issue of the appropriate rate of return in Docket No. RP92-137. The FERC,
using a hypothetical capital structure based on the average capital structure
of a group of seven publicly- traded companies with pipeline subsidiaries,
determined TGPL's appropriate after-tax rate of return on equity to be 14.45%.
The FERC did not determine TGPL's cost of debt and preferred stock, suggesting
that this issue should be the subject of further proceedings in the context of
the general rate case. Consequently, TGPL's current rates reflect an after-tax
rate of return on equity of 14.45% but, consistent with the FERC order, the
rates continue to reflect the cost of debt and preferred stock originally filed
in the general rate case. The issue of the appropriate rate of return for TGPL
is currently on appeal before the D.C. Circuit Court. TGPL appealed, seeking
to increase the rate of return, and certain other parties have appealed,
seeking to lower the rate of return.
On May 3, 1993, TGPL filed with the FERC an Offer of Settlement (the
Settlement) with regard to Docket No. RP92-137. On November 4, 1993, the FERC
issued an order accepting the Settlement. The Settlement resolves all issues
in Docket No. RP92-137 except (i) issues relating to TGPL's rate of return,
which are on appeal before the D.C. Circuit Court (see discussion above), and
(ii) the issue of the appropriate load factor for the design of TGPL's
interruptible rates, which the FERC referred to a hearing in Docket No.
RP92-137, for prospective effect only (see Order 636 below for discussion of
additional issues referred to this hearing). On December 16, 1993, TGPL filed
a request to accelerate partial refunds under the Settlement on the ground that
those refunds could be made without prejudice to the pending requests for
rehearing or clarification. TGPL's request was granted by order of the FERC
dated February 14, 1994. In early 1994, TGPL will make the initial refunds
(approximately $100 million, including interest) under RP92-137. TGPL has
previously provided a reserve for that refund.
44
<PAGE> 46
TGPL has also provided a reserve which it believes is sufficient for any
additional refunds that may be required under RP92-137.
TRANSITION COST PROCEEDING. In 1986, TGPL filed to recover from its
customers $82 million of specific gas supply costs incurred during prior
periods (the Transition Cost proceeding). The FERC ordered a hearing regarding
the recovery of such costs but permitted TGPL to begin collecting such costs
subject to refund. Through April 1989 when TGPL ceased collecting these costs,
approximately $51 million had been collected. On January 15, 1992, the FERC
issued a final order on the Transition Cost proceeding which required TGPL to
pay cash refunds within thirty days of issuance of the order totaling
approximately $51 million, plus interest of approximately $23 million, to its
customers and forego recovery of an additional $26 million in gas costs
incurred by TGPL during 1985 and 1986. TGPL made the cash refunds in 1992.
TGPL appealed the FERC's decision to the United States Court of Appeals
for the Fifth Circuit (the Fifth Circuit). Several customers also filed
petitions for review. On August 27, 1993, the Fifth Circuit issued its opinion
affirming the FERC's order in all respects.
FUEL RETENTION PROCEEDINGS. On February 23, 1989, the FERC issued an
order which found, among other things, that TGPL had overcollected for fuel
from transportation customers during the period April 1, 1984 to April 1, 1987.
The order required TGPL to refund the difference between the amount collected
and the rate allowed for fuel retention. Accordingly, TGPL made refunds to
customers of approximately $35 million, including interest. In response to
subsequent FERC orders, TGPL recalculated the refund and on November 30, 1993
under this revised calculation, TGPL made additional refunds of approximately
$11.6 million, including interest. TGPL had previously provided a reserve that
was sufficient for these refunds. On February 9, 1994, the FERC issued an
order accepting TGPL's refund report stating that TGPL made the refunds in
accordance with the FERC's orders.
ORDER 94-A. In 1983, the FERC issued Order 94-A, which permitted
producers to collect certain production-related gas costs from pipelines on a
retroactive basis. The FERC subsequently issued orders allowing several
pipelines, including TGPL, to bill their customers for such production-related
costs through fixed monthly charges based on a customer's historical purchases.
In February 1990, the D.C. Circuit Court overturned the FERC's authorization
for pipelines to bill production-related costs to customers based on gas
purchased in prior periods and remanded the matter to the FERC to determine an
appropriate recovery mechanism.
TGPL's GIC Settlement contains a provision pursuant to which TGPL's
customers, with the exception of Columbia Gas Transmission Corporation
(Columbia), have agreed not to contest the Order 94-A payments previously made
to TGPL by them. TGPL had billed to and recovered from Columbia approximately
$7 million of Order 94-A costs.
45
<PAGE> 47
On October 26, 1993, TGPL and Columbia executed a letter agreement by which the
parties resolved the amount of refunds to be made to Columbia in this
proceeding. Pursuant to the letter agreement, TGPL and Columbia agreed that
TGPL shall refund $1.4 million to Columbia, which amount is inclusive of
principal and interest, in full and final settlement of all issues in this
proceeding. This letter agreement was filed with the FERC on October 26, 1993
and is subject to approval by the FERC. TGPL has provided a reserve which is
sufficient to cover the refund provided for by the letter agreement. On
January 26, 1994, Columbia filed a letter with the FERC stating that, due to
developments in other pipeline company proceedings involving settlements of the
issue of recovery of Order 94-A cost from Columbia, Columbia could no longer
support, pending rehearing in those proceedings, the letter agreement between
TGPL and Columbia. Columbia requested that the FERC hold any action on the
letter agreement in abeyance pending action on rehearing in the other
proceedings. On February 4, 1994, TGPL filed a response opposing Columbia's
January 26 letter, stating that the October 26 letter agreement constitutes a
valid and binding agreement between TGPL and Columbia and requesting that the
FERC approve that letter agreement without delay. This matter is pending
before the FERC.
Although no assurances can be given, TGPL believes that the final
resolution of the recovery of production-related costs will not have a material
adverse effect on its financial position or results of operations.
ORDER 636. On November 1, 1993, TGPL implemented Order 636. In
connection with its implementation of Order 636, TGPL received orders from the
FERC which, among other things, (i) required TGPL to revise its throughput
projection for rate purposes to reflect a mix of throughput that includes a
higher level of interruptible transportation, (ii) accepted TGPL's proposal for
rolled-in rate treatment of its Mobile Bay facilities and exempted TGPL from
having to reflect Mobile Bay transportation volumes and related revenues in an
interruptible revenue crediting mechanism, (iii) approved a Stipulation and
Agreement filed with the FERC by TGPL and its sales customers resolving certain
sales service issues and mooting potential issues regarding TGPL's recovery of
gas supply realignment (GSR) costs associated with TGPL's firm sales service,
and (iv) referred to the hearing in Docket No. RP92-137 the following issues:
TGPL's limited Section 4 filing with the FERC relating to TGPL's
production-area rate design, the allocation of certain costs to TGPL's sales
service, TGPL's use of a system-wide cost of service, the level of TGPL's
gathering rates and aggregation/pooling services in TGPL's production area.
Any changes in TGPL's rates or services resulting from this hearing would have
a prospective effect only. Order 636 provides that pipelines should be allowed
the opportunity to recover all prudently incurred transition costs, including
GSR costs. TGPL does not expect to incur GSR costs associated with its firm
sales service. TGPL's non-GSR transition costs are anticipated to be in a
range of $5 million to $10 million.
46
<PAGE> 48
TGPL and certain other parties have filed appeals of certain of the FERC's
orders to the D.C. Circuit Court. These appeals have been held in abeyance
pending completion of the FERC's rehearing process and the expiration of the
time to seek judicial review.
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 the production area may result in rates which could
make TGPL less competitive, both in terms of production-area and long-haul
transportation rates. TGPL is unable at this time to fully assess the
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 expects that any Order 636 transition costs incurred should be
recovered from TGPL's customers, subject only to the costs and other risks
associated with the difference between the time such costs are incurred and the
time when those costs may be recovered from customers. Although no assurances
can be given, TGPL does not believe that the implementation of Order 636 will
have a material adverse effect on its financial position or results of
operations.
D. LEGAL PROCEEDINGS
PRODUCER CONTRACT LITIGATION. TGPL has one remaining proceeding involving
take-or-pay and other producer contract claims. In this lawsuit, a producer
filed in federal district court in Texas claiming that it should have received
more favorable terms for settlement of its contract claims and asserting
federal antitrust claims. Such producer is seeking damages of approximately
$30 million, of which approximately $10 million represents claims for punitive
damages. In October 1992, the court issued an order granting TGPL's motion for
summary judgment on the antitrust claims and in June 1993, the court issued an
order granting TGPL's motion for summary judgment on all remaining claims. The
producer has filed an appeal. Although no assurances can be given, TGPL does
not believe that the ultimate resolution of this litigation will have a
material adverse effect on its financial position or results of operations.
In 1993, TGPL resolved another case involving producer contract claims in
which a pipeline company filed suit against TGPL in a federal district court in
Texas claiming that TGPL failed to pay amounts due under a FERC-certificated
contract. The FERC issued a final order authorizing TGPL retroactively to
abandon its purchase of gas from the plaintiff, and TGPL filed a motion for
summary judgment asking the court to absolve it from liability under the
contract. The court issued orders granting TGPL's motion for summary judgment
on all counts.
On May 7, 1992, TGPL and Challenger Minerals, Inc. (Challenger) entered
into a Settlement Agreement to settle all matters in controversy between them,
including, but
47
<PAGE> 49
not limited to, all claims and causes of action which were asserted or which
might have been asserted in the lawsuit. In settling this litigation, TGPL
agreed to provide shares of Transco common stock with a market value of $15
million to Challenger in 1994 and in connection with such agreement placed
1,500,000 shares of Transco common stock in escrow. The number of shares
ultimately released to Challenger was to be determined by dividing $15 million
by Transco's average common stock price during January 1994, subject to certain
adjustments, with Challenger receiving a minimum of 750,000 shares. In
February 1994, 1,017,771 shares of Transco common stock were released to
Challenger from escrow and the remainder of the shares were returned to
Transco.
DAKOTA GASIFICATION LITIGATION. In October 1990, Dakota Gasification
Company (Dakota), the owner of the Great Plains Coal Gasification Plant
(Plant), filed suit in the United States District Court in North Dakota against
TGPL and three other pipeline companies alleging that TGPL and the other
pipelines had not complied with their respective obligations under certain gas
purchase and gas transportation contracts. Specifically at issue is the proper
price to be paid by TGPL and the other pipelines for synthetic gas since August
1989, the proper rate to be charged by Dakota for transportation through the
Great Plains pipeline since October 1987, and the proper quantity of synthetic
gas required to be taken-or-paid for by TGPL and the other pipelines.
On September 8, 1992, Dakota and the United States Department of Justice
on behalf of the Department of Energy (DOJ) filed a Third Amended Complaint in
the U.S. District Court in North Dakota naming as defendants in the suit, in
addition to TGPL and the other pipelines, Transco and Transco Coal Gas Company,
the subsidiary of Transco that was the partner in Great Plains Gasification
Associates (Partnership), the partnership that originally constructed the
Plant. In addition, Dakota and DOJ named as defendants all of the other
partners in the Partnership and each of the parent companies of these entities.
In the Third Amended Complaint, Dakota and DOJ charge: (i) the pipeline
defendants with breach of contract for failure to pay for volumes of gas
tendered but not taken, for underpayment for gas purchased and for failure to
pay for transportation services; (ii) all defendants with breach of
representations and warranties, misrepresentation and breach of an implied
covenant of good faith and fair dealing; and (iii) all parent company
defendants and the affiliated partner defendants of each of the pipeline
defendants with intentional interference with contractual relations. Dakota
and DOJ are seeking declaratory and injunctive relief; the recovery of damages,
alleging that the four pipeline defendants have underpaid for gas,
collectively, as of June 30, 1992, by more than $232 million plus interest and
for additional damages for transportation services; and costs and expenses,
including attorneys' fees. On October 30, 1992, Dakota invoiced TGPL $70.5
million for "all synthetic gas costs" Dakota claims are due from TGPL. Because
the proper gas price under TGPL's gas purchase contract with Dakota is derived
from a formula involving the weighted average prices paid for certain natural
gas purchased by TGPL, and is further the average of each of such prices
48
<PAGE> 50
calculated for each of the four pipeline purchasers, it is not feasible at this
time for TGPL to determine if it in fact has underpaid for gas.
Recent settlement negotiations between all of the parties to this
litigation have resulted in the execution of a nonbinding settlement term
sheet. The parties are currently working toward the execution of definitive
agreements which would settle the litigation subject to final nonappealable
regulatory approvals. The proposed settlement is also subject to a FERC ruling
that TGPL's existing authority to recover in rates certain costs related to the
purchase and transportation of gas produced by Dakota will pertain to gas
purchase and transportation costs TGPL will pay Dakota under the terms of the
settlement. In the event that the settlement agreement is not consummated or
if the necessary regulatory approvals are not obtained, TGPL, Transco and
Transco Coal Gas Company intend to vigorously defend the suit.
Although no assurances can be given, TGPL and Transco believe that TGPL
has substantially complied with its obligation under the contracts with Dakota
and that Transco and Transco Coal Gas Company have not breached
representations, warranties or implied covenants and have not intentionally
interfered with the parties' contractual relations. Although no assurances can
be given, TGPL does not believe that the ultimate resolution of this
litigation, whether settled or not, will have a material adverse effect on its
financial position or results of operations.
ROYALTY CLAIMS. In connection with TGPL's renegotiations with producers
to resolve take-or-pay and other contract claims and to amend gas purchase
contracts, TGPL has entered into certain settlements which may require the
indemnification by TGPL of certain claims for "excess royalties" which the
producer may be required to pay as a result of such settlements. On October
15, 1992, the United States Court of Appeals for the Fifth Circuit and the
Louisiana Supreme Court, with respect to the same litigation in applying
Louisiana law, determined that royalties are due on take-or-pay payments under
the royalty clauses of the specific mineral leases reviewed by the Courts.
Furthermore, the State Mineral Board of Louisiana has passed a resolution
directing the State's lessees to pay to the State royalties on gas contract
settlement payments. As a result of these and related developments, TGPL has
been made aware of demands on producers for additional royalties and such
producers may receive other demands which could result in claims against TGPL
pursuant to the indemnification provisions in their settlements.
Indemnification for excess 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 TGPL.
TGPL has been notified by two producers that they believe TGPL is
obligated to reimburse each of them for approximately $16.0 million and $3.6
million, respectively, in settlement payments made by such producers to certain
royalty owners in East Texas. TGPL has denied liability to the two producers
and believes that it has meritorious
49
<PAGE> 51
defenses to these claims which it intends to pursue vigorously. One of the
producers filed a lawsuit against TGPL in a state court on January 14, 1994.
TGPL has been named as a defendant in three other lawsuits involving
claims by producers and/or royalty owners, two in South Texas and one in
Louisiana. In one of the Texas lawsuits, the royalty owners have made
allegations against the producer for breach of express obligations under the
lease; breach of covenant to reasonably market gas; breach of the covenant to
reasonably develop; breach of the covenant to protect against drainage; and
failure to deal in good faith. In the other Texas suit, the royalty owners did
not claim that the producer breached any covenant to develop or protect against
drainage. However, except for this omission, the royalty owners' claims in the
second suit are virtually identical to the ones made in the first. In
addition, the royalty owners have sued the parent and an affiliate of the
producer and TGPL for allegedly conspiring to tortiously interfere with their
lease. The producer defendant in the Texas cases has cross-claimed against
TGPL pursuant to the excess royalty provision in the Omnibus Contract Amendment
and Settlement Agreement between TGPL and the producer. While the complaints
have not specified monetary damages, the royalty owners have verbally alleged
that their claims against the producers could approximate $100 million. One of
the Texas lawsuits is set for trial on December 2, 1994. In the Louisiana
case, the royalty owners have alleged that they were third party beneficiaries
to the original gas purchase contract between TGPL and the producers and that
the settlement agreement entered into between TGPL and such producers is not
valid without the royalty owners' consent. Additionally, in a separate lawsuit
consolidated with the TGPL lawsuit, allegations have been made that Transco
Exploration Company (TXC) and TXP Operating Company (TXPO) and other
defendant-producers were entitled to make claims for breach of the gas purchase
contracts but failed to either make claim or receive compensation for such
breaches. The royalty owners make a number of allegations with respect to
breach of the leases and breach of implied covenants similar to those alleged
in the South Texas cases. The royalty owners have not specified an amount of
monetary damages in their complaints. Trial is set for September 1994.
Each of the royalty cases is in the discovery process. TGPL, TXC and TXPO
have each denied liability in the litigation and each believes that it has
meritorious defenses to the claims which it intends to pursue vigorously. TGPL
believes at this time that its exposure, if any, under the excess royalty
provisions of its settlements with the producers is substantially less than the
amounts claimed by the royalty owners. Although no assurances can be given,
TGPL believes that the ultimate resolution of these royalty claims and
litigation will not have a material adverse effect on its financial position or
results of operations.
E. ENVIRONMENTAL MATTERS
TGPL is subject to extensive federal, state and local environmental laws
and regulations which affect TGPL's operations related to the construction and
operation of
50
<PAGE> 52
its pipeline facilities. Appropriate governmental authorities may enforce
these laws and regulations with a variety of civil and criminal enforcement
measures, including monetary penalties, assessment and remediation requirements
and injunctions as to future compliance. TGPL's use and disposal of hazardous
materials are subject to the requirements of the federal Toxic Substances
Control Act (TSCA), the federal Resource Conservation and Recovery Act (RCRA)
and comparable state statutes. The Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA), also known as "Superfund," imposes
liability, without regard to fault or the legality of the original act, for
release of a "hazardous substance" into the environment. Because these laws
and regulations change from time to time, practices which have been acceptable
to the industry and to the regulators have to be changed and assessment and
monitoring have to be undertaken to determine whether those practices have
damaged the environment and whether remediation is required. Since 1989, TGPL
has had studies underway to test its facilities for the presence of toxic and
hazardous substances to determine to what extent, if any, remediation may be
necessary. On the basis of the findings to date, TGPL estimates that
environmental assessment and remediation costs that will be incurred over the
next five years under TSCA, RCRA, CERCLA and comparable state statutes will
total approximately $52 million to $62 million. 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. TGPL
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. At December 31, 1993, TGPL had a reserve of
approximately $52 million for these estimated costs.
TGPL considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the ordinary course of
business. To date, TGPL has been permitted recovery of environmental costs
incurred, and it is TGPL's intent to continue seeking recovery of such costs,
as incurred, through rate filings. Therefore, these estimated costs of
environmental assessment and remediation have been recorded as regulatory
assets in the accompanying Balance Sheet.
Since 1989, TGPL has been involved in discussions with the Pennsylvania
Department of Environmental Resources (PADER) concerning environmental
conditions at TGPL's operating sites in Pennsylvania. These discussions have
resulted in the execution of a consent order and agreement in 1992 between
PADER and TGPL. TGPL agreed to conduct an environmental assessment and
remediation program at its Pennsylvania sites, fund certain beneficial
environmental projects, pay oversight costs and pay a $425,000 civil penalty.
Of such penalty, $142,000 remains to be paid in May 1994. The estimated costs
of the environmental assessment and remediation program are included in the $52
million to $62 million range discussed above.
51
<PAGE> 53
TGPL has used lubricating oils containing polychlorinated biphenyls (PCBs)
and, although the use of such oils was discontinued in the 1970s, has
discovered residual PCB contamination in equipment and soils at certain gas
compressor station sites. TGPL has worked closely with the Environmental
Protection Agency (EPA) and state regulatory authorities regarding PCB issues,
and has a program to assess and remediate such conditions where they exist, the
costs of which are a significant portion of the $52 million to $62 million
range discussed above. Proposed civil penalties have been assessed by the EPA
against another major pipeline company for the alleged improper use and
disposal of PCBs. Although similar penalties have not been asserted against
TGPL to date, no assurance can be given that the EPA may not seek such
penalties in the future.
TGPL has been named as a potentially responsible party (PRP) in one
Superfund waste disposal site, the Combustion Inc. site, and in two state
sites. Based on present volumetric estimates, TGPL's exposure for remediation
of the Combustion Inc. site is estimated to be $500,000. TGPL's estimated
individual exposure at each of the two state sites where it has been named as a
PRP is less than $100,000 per site. The estimated remediation costs for all
such sites have been included in TGPL's environmental reserve discussed above.
Liability under CERCLA (and applicable state law) can be joint and several with
other PRPs. Although volumetric allocation is a factor in assessing liability,
it is not necessarily determinative; thus, the ultimate liability could be
substantially greater than the amount described above. Although no assurances
can be given, TGPL does not believe that its PRP status will have a material
adverse effect on its financial position or results of operations.
TGPL is also subject to the federal Clean Air Act and the federal Clean
Air Act Amendments of 1990 (1990 Amendments), which added significantly to the
existing requirements established by the federal Clean Air Act. The 1990
Amendments required that the EPA issue new regulations, mainly related to
mobile sources, air toxics, ozone non-attainment areas and acid rain. TGPL is
installing new emission control devices where required and conducting certain
emission testing programs to comply with the federal Clean Air Act standards
and the 1990 Amendments. In addition, pursuant to the 1990 Amendments the EPA
has issued regulations under which states must implement new air pollution
controls to achieve attainment of national ambient air quality standards in
areas where they are not currently achieved. TGPL has compressor stations in
ozone non-attainment areas that could require substantial additional air
pollution reduction expenditures, depending on the requirements imposed. While
it will not be possible to estimate the ultimate costs of compliance with these
new requirements until the states approve TGPL's proposed plans for
modifications, TGPL expects that significant capital spending may be required
to modify TGPL's facilities, particularly the compressor engines along TGPL's
pipeline system. Additions to facilities for compliance with currently known
federal Clean Air Act standards and the 1990 Amendments are expected to cost in
the range of $20 million to $30 million over the next five years and will be
recorded as assets as the facilities are added.
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<PAGE> 54
F. FINANCING
LONG-TERM DEBT. At December 31, 1993 and 1992, long-term debt issues were
outstanding as follows (in thousands):
<TABLE>
<CAPTION>
1993 1992
------------ -------------
<S> <C> <C>
Debentures:
9-1/8% due 2017 . . . . . . . . . . . . . . . . . . . . . . $ 150,000 $ 150,000
------------ -------------
Notes:
9% due 1996 . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000
8-1/8% due 1997 . . . . . . . . . . . . . . . . . . . . . . 99,000 99,000
6.21% due 2000 (subject to remarketing in 1996) . . . . . . 125,000 125,000
8-7/8% due 2002 . . . . . . . . . . . . . . . . . . . . . . 125,000 125,000
------------ -------------
Total notes . . . . . . . . . . . . . . . . . . . . . . 499,000 499,000
------------ -------------
Other:
Unguaranteed portion of producer settlement costs sold . . - 29,856
------------ -------------
Total long-term debt issues . . . . . . . . . . . . . . . . . . 649,000 678,856
Less: Unamortized debt premium and discount . . . . . . 5,201 5,057
Current maturities . . . . . . . . . . . . . . . . - 154,856
------------ -------------
Total long-term debt, less current maturities . . . . . . . . . $ 643,799 $ 518,943
============ =============
</TABLE>
Sinking fund or prepayment requirements applicable to long-term debt
outstanding at December 31, 1993 are as follows (in thousands):
<TABLE>
<S> <C>
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
=========
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
=========
1996:
9% Notes . . . . . . . . . . . . . . . . . . . . . . . $150,000
6.21% Notes . . . . . . . . . . . . . . . . . . . . . . 125,000
---------
Total . . . . . . . . . . . . . . . . . . . . . . $275,000
=========
1997:
8-1/8% . . . . . . . . . . . . . . . . . . . . . . . . $ 99,000
=========
</TABLE>
No property is pledged as collateral under any of the long-term debt
issues.
REFINANCING. In May 1993, TGPL repriced the interest rate on its
Extendible Notes due May 15, 2000. The interest rate for the interest period
beginning May 15, 1993 and ending May 14, 1996 is 6.21%. The Extendible Notes
are equal in rank with all existing indebtedness of TGPL and senior in right of
payment to any future subordinated indebtedness. The Extendible Notes are
redeemable at the option of TGPL, in whole or in part, at their principal
amount plus accrued interest thereon on May 15, 1996. This was a refinancing
and TGPL did not receive any proceeds from the resale of the Extendible Notes.
RESTRICTIVE COVENANTS. Transco has in place a $450 million working
capital line with a group of fifteen banks that will continue through December
31, 1996. TGPL is guarantor of $270 million of this working capital line.
Effective December 31, 1993, Transco and a group of banks entered into a $50
million reimbursement facility. This
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<PAGE> 55
facility provides Transco the opportunity to obtain standby letters of credit
under certain circumstances from the banks. TGPL is guarantor of $30 million
of the obligations that arise under this facility. Certain of Transco's credit
facilities and indentures prohibit TGPL from, among other things, placing a
lien on any of the property or assets owned by TGPL, incurring or guaranteeing
any additional indebtedness, except for indebtedness incurred to refinance
existing indebtedness, issuing preferred stock or advancing cash to affiliates
other than Transco. Further, certain of Transco's credit facilities and
indentures contain restrictive covenants which could limit Transco's ability to
make additional borrowings and, therefore, under certain circumstances, its
ability to make or repay advances to TGPL or make capital contributions to
TGPL.
Additionally, certain of TGPL's debt instruments restrict the amount of
dividends distributable. As of December 31, 1993, approximately $287 million
of TGPL's retained earnings of $424 million was available for distribution.
SALE OF RECEIVABLES. TGPL has sold trade and producer settlement
receivables and continues to sell trade receivables. The sale of trade
receivables is made without recourse.
In September 1993, TGPL entered into a new program to sell monthly trade
receivables to replace a similar program which expired. The new trade
receivable program, which expires in September 1995, provides for the sale of
up to $100 million of trade receivables on substantially the same terms as the
prior program.
To maintain the level of trade receivables sold at approximately $100
million, new trade receivables are sold as collections reduce previously sold
trade receivables. At December 31, 1993 and 1992, approximately $100 million
and $108 million, respectively, of trade receivables were held by an investor.
54
<PAGE> 56
G. PREFERRED STOCK
TGPL has authorized 10,000,000 shares of cumulative first preferred stock
without par value, of which 757,427 shares and 1,017,410 shares were
outstanding at December 31, 1993 and 1992, respectively. TGPL has authorized
2,000,000 shares of cumulative second preferred stock without par value. None
of the second preferred had been issued at December 31, 1993. The first
preferred stock issued and outstanding at December 31, 1993 and 1992, included
the following series:
<TABLE>
<CAPTION>
Amount
Shares (in thousands)
Stated Value ----------------------- -----------------------
Per Share 1993 1992 1993 1992
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$5.00 Series . . . $100 12,500 25,000 $ 1,250 $ 2,500
$4.80 Series . . . $100 20,000 30,000 2,000 3,000
$6.65 Series . . . $100 49,927 62,410 4,993 6,241
$8.75 Series . . . $100 675,000 900,000 67,500 90,000
---------- ---------- ---------- ----------
Total preferred stock
outstanding . 757,427 1,017,410 $ 75,743 $ 101,741
========== ========== ========== ==========
</TABLE>
The preference in involuntary liquidation is the stated value of each
issue. The sinking fund redemption price for each series is the stated value
per share plus accrued and unpaid dividends.
The shares of each series are redeemable by various annual sinking fund
requirements in each of the years 1994 through 1997. TGPL may redeem in whole
or in part the preferred shares of each series at the stated value of each
series. Sinking fund requirements applicable to preferred stock outstanding at
December 31, 1993, are (in thousands):
<TABLE>
<S> <C>
1994 . . . . . . . $ 25,998
1995 . . . . . . . 24,748
1996 . . . . . . . 23,748
1997 . . . . . . . 1,249
</TABLE>
TGPL may not declare any common stock dividends if the sinking fund
provisions of the preferred stock of TGPL are not met. The preferred stock of
TGPL, excluding the $8.75 series, has no voting rights except in cases of (i)
amending the Certificate of Incorporation so as to affect adversely the rights,
powers or preferences of the preferred stock, (ii) the merger or consolidation
by TGPL with any other corporation, (iii) the sale of all or substantially all
of its assets, or (iv) whenever dividends payable on the preferred stock are in
arrears in an aggregate amount equivalent to six full quarterly dividends, in
which case the outstanding preferred stock shall have the exclusive right,
voting separately and as a class, to elect two directors of TGPL until all past
dividends have been paid. The $8.75 series has no voting rights except in
cases of (i) and (ii) above.
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<PAGE> 57
The changes in the total TGPL preferred stock in each of the years 1993,
1992 and 1991 are (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year . . . . . . . 1,017 $ 101,741 1,061 $ 106,059 1,115 $ 111,473
Retirements . . . . . 260 25,998 44 4,318 54 5,414
------ ---------- ------ ---------- ------ ----------
Balance at end of year 757 $ 75,743 1,017 $ 101,741 1,061 $ 106,059
====== ========== ====== ========== ====== ==========
</TABLE>
H. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS. TGPL has a retirement plan (Retirement Plan) with
Transco and certain affiliated companies that covers substantially all of
TGPL's officers and regular employees.
The benefits under the Retirement Plan are determined by a formula based
on the employee's highest 36 consecutive months of earnings out of the last 60
months of service prior to actual retirement date and years of participation in
the Retirement Plan. The Retirement Plan provides for the vesting of employees
after five years of credited service. Transco's funding policy is to
contribute an amount at least equal to the minimum funding requirements
actuarially determined by an independent actuary in accordance with the
Employee Retirement Income Security Act of 1974. The Retirement Plan's assets,
which are managed by external investment organizations, include cash and cash
equivalents, corporate and government debt instruments, preferred and common
stocks, commingled funds, international equity funds and venture capital
limited partnership interests.
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<PAGE> 58
The following table sets forth the funded status of the Retirement Plan
at October 1, 1993 and 1992, and the amount of accrued pension costs as of
December 31, 1993 and 1992 (in thousands):
<TABLE>
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$107,428 at October 1, 1993 and $93,350 at
October 1, 1992 . . . . . . . . . . . . . . . . . . . . $(117,718) $(104,328)
Actuarial present value of projected benefit obligation . . $(156,856) $(138,669)
Plan assets at fair value . . . . . . . . . . . . . . . . 118,193 106,801
---------- ----------
Projected benefit obligation in excess of plan assets . . . ( 38,663) ( 31,868)
Unrecognized net (gain) loss . . . . . . . . . . . . . . . 5,676 ( 739)
Unrecognized net asset at October 1, 1984 being
recognized over 15 years . . . . . . . . . . . . . . . . ( 6,299) ( 7,350)
Unrecognized prior service cost . . . . . . . . . . . . . ( 2,843) ( 3,071)
Activity subsequent to measurement date . . . . . . . . . 1,171 732
---------- ----------
Accrued pension cost . . . . . . . . . . . . . . . . . . . $( 40,958) $( 42,296)
========== ==========
</TABLE>
The following table sets forth the components of the Retirement Plan's
pension cost, including TGPL's, for the years ended December 31, 1993, 1992 and
1991 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ -------------
<S> <C> <C> <C>
Service cost-benefits earned during the period. . $ 6,664 $ 6,425 $ 7,061
Interest cost on projected benefit obligation . . 9,950 9,380 9,629
Actual return on plan assets . . . . . . . . . . ( 15,155) ( 10,141) ( 21,145)
Net amortization and deferral . . . . . . . . . . 3,563 ( 365) 12,757
Early retirement termination benefits . . . . . . - - 757
------------ ------------ -------------
Transco pension cost . . . . . . . . . . . . . . $ 5,022 $ 5,299 $ 9,059
=========== ============ =============
</TABLE>
The projected unit credit method is used to determine the actuarial
present value of the accumulated benefit obligation and the projected benefit
obligation. The following table summarizes the various assumptions used to
determine the projected benefit obligation for the Retirement Plan for the
years 1993, 1992 and 1991(1):
<TABLE>
<CAPTION>
1993 1992 1991
------ ------ ------
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . 7.25% 7.5% 7.75%
Rate of increase in future compensation levels . . 5.0% 5.0% 5.0%
Expected long-term rate of return on assets. . . . 10% 10% 10%
</TABLE>
(1) Pension costs are determined using the assumptions as of the
beginning of the year. The funded status is determined using the
assumptions as of the end of the year.
Effective November 15, 1991, an amendment to the Retirement Plan was
adopted to allow the lump sum payment of benefits to all current active and
terminated vested participants. A lump sum distribution is the discounted
present value of a participant's vested benefit. The effect of this amendment
was to reduce unrecognized prior service cost by $6.1 million.
57
<PAGE> 59
During 1991, TGPL offered a special voluntary retirement program (SVRP)
to a certain group of employees. The SVRP included an incentive in the form of
increased pension benefits to be paid out of the Retirement Plan.
Approximately 124 employees elected to retire under the SVRP. The net cost of
the SVRP to the Retirement Plan was approximately $0.8 million ($0.5 million,
after-tax). In connection with Transco's plans to reduce TGPL's work force by
a total of approximately 275 employee positions, an additional charge of $9.5
million ($6.3 million, after-tax) was recorded by TGPL for estimated severance
costs.
TRAN$TOCK. In January 1987, Transco's Board of Directors approved the
establishment of a new employee stock ownership plan called Tran$tock, which
subsequently purchased 3,966,942 shares of newly issued Transco common stock at
$45-3/8 per share. The Tran$tock plan was funded by a $180 million loan at an
interest rate of 7.39% due in 1994. Tran$tock subsequently used $120 million
of the funds received from the restructuring of Transco's retirement plan to
reduce the outstanding loan balance. Interest and principal on the remaining
loan balance of $9 million at December 31, 1993, is being serviced by
tax-deductible dividends paid on the common stock held by Tran$tock and
contributions by Transco.
Compensation expense of $2.2 million, $2.3 million and $4.0 million
related to Tran$tock has been recognized by TGPL in 1993, 1992 and 1991,
respectively. This expense represents the shares of Transco common stock
allocated to employees of TGPL for 1993, 1992 and 1991, respectively. In each
of these respective years, TGPL has recorded a capital contribution from
Transco in the amount of the expense.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. TGPL has a plan (Plan)
with Transco and certain affiliated companies that provides certain health care
and life insurance benefits for retired employees of TGPL and certain other
Transco subsidiaries.
The Plan provides medical and life insurance benefits to employees who
retire under the Retirement Plan with at least ten years of participation in
Transco's group insurance plans and the Retirement Plan immediately preceding
retirement. Effective January 1, 1994, the Plan was amended to require monthly
contributions by retirees and to increase annual deductibles, out-of-pocket
limits and lifetime maximum benefits per individual.
The medical benefits for all retired TGPL employees are currently funded
at a specified amount per month through a trust established under the
provisions of section 501(c)(9) of the Internal Revenue Code.
Prior to 1993, TGPL accounted for postretirement benefits other than
pensions (primarily health care) on a cash basis, which had been the accounting
method followed by most employers. In the first quarter of 1993, TGPL adopted
SFAS No. 106, Employer's Accounting for Postretirement Benefits Other Than
Pensions, which requires
58
<PAGE> 60
TGPL to accrue, during the years that employees render the necessary service,
the estimated cost of providing postretirement benefits other than pensions to
those employees. At the January 1, 1993 date of adoption of SFAS No. 106,
TGPL's postretirement benefits obligation (transition obligation) was $104
million. TGPL's transition obligation was reduced by approximately $9 million
by the Plan amendments discussed above. The transition obligation is being
amortized over twenty years.
The following table sets forth the funded status of the Plan at December
31, 1993 reconciled with the accrued postretirement benefits cost at December
31, 1993 (in thousands):
<TABLE>
<CAPTION>
1993
----------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . $( 66,927)
Fully eligible active plan participants . . . . . ( 38,824)
Other active plan participants . . . . . . . . . . ( 10,144)
----------
( 115,895)
Plan assets at fair value . . . . . . . . . . . . . 13,698
----------
Accumulated postretirement benefit obligation in
excess of plan assets . . . . . . . . . . . . . . ( 102,197)
Unrecognized net gain . . . . . . . . . . . . . . ( 3,350)
Unrecognized transition obligation . . . . . . . . . 100,959
----------
Accrued postretirement benefit cost . . . . . . . . $( 4,588)
==========
</TABLE>
The following table sets forth the components of the Plan's net periodic
postretirement benefit cost, including TGPL's, for the year ended December 31,
1993 (in thousands):
<TABLE>
<CAPTION>
1993
----------
<S> <C>
Service cost-benefits earned during the period . . $ 2,812
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . 9,483
Actual return on plan assets . . . . . . . . . . . ( 428)
Amortization of transition obligation . . . . . . 6,034
Net amortization and deferral . . . . . . . . . . ( 28)
----------
Net periodic postretirement benefit cost . . . . . $ 17,873
==========
</TABLE>
TGPL's share of the Plan's net periodic postretirement benefit cost for
1993 was $16.2 million. TGPL's cost of providing these benefits for retirees
and survivors during 1992 and 1991 on a pay-as-you-go-basis were $4.6 million
and $4.1 million, respectively.
The annual expense is subject to change in future periods as a result
of, among other things, the passage of time, changes in participants, changes
in plan benefits and changes in assumptions upon which the estimates are made.
For measurement purposes as of December 31, 1993, the initial annual
rate of increase in the per capita cost of covered health care benefits was
assumed to be 12%.
59
<PAGE> 61
The rate was assumed to decrease gradually to 6% for the year 2005 and remain
at that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rate by one percentage point in each year would
increase the accumulated postretirement benefit obligation for health care
benefits as of January 1, 1994 by 11% and the aggregate of the service and
interest cost components of the net periodic postretirement health care benefit
cost for 1994 by 14%.
To determine the accumulated postretirement benefit obligation, the Plan
used a discount rate of 7.25% and a salary growth assumption of 5.0% per annum.
Plan assets are managed by external investment organizations and include cash
and cash equivalents, commingled funds, preferred and common stocks and
government and corporate debt instruments. The expected long-term rate of
return on plan assets was 7% after taxes. Realized returns on plan assets are
subject to federal income taxes at a sliding scale that reaches a 39.6% tax
rate.
In January 1993, TGPL began recovering in rates its postretirement
benefits costs accrued under SFAS No. 106.
TGPL believes that all costs of providing postretirement benefits to its
employees are necessary and prudent operating expenses that will be recoverable
in rates. The adoption of SFAS No. 106 did not have a material adverse effect
on TGPL's financial position or results of operations.
I. INCOME TAXES
Following is a summary of the provision for (benefit of) income taxes
for 1993, 1992 and 1991 (in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------ -------------
<S> <C> <C> <C>
Federal:
Current . . . . . . . . . . . . . . . . $ 38,593 $ 53,180 $ 63,604
Deferred . . . . . . . . . . . . . . . 1,767 ( 25,353) ( 101,331)
------------ ------------ -------------
40,360 27,827 ( 37,727)
State and municipal . . . . . . . . . . . . 8,981 6,152 ( 2,363)
------------ ------------ -------------
Provision for (benefit of) income taxes . . $ 49,341 $ 33,979 $( 40,090)
============ ============ =============
</TABLE>
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law. Among its provisions was an overall increase in corporate
federal income tax rates from 34% to 35% effective January 1, 1993. As a
result, TGPL recognized additional income tax expense of $1.0 million in 1993
related to the increase in corporate federal income tax rates.
60
<PAGE> 62
Following is a reconciliation of the statutory federal income tax rate to
the effective tax rate (amounts in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
----------------------- --------------------- ---------------------
Percent Percent Percent
of of of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Taxes computed by
applying statutory rate $ 47,105 35.0 % $ 34,466 34.0 % $( 33,113) ( 34.0)%
Amortization of over
funded tax liabilities ( 7,675) ( 5.7)% ( 7,675) ( 7.6)% ( 7,675) ( 7.9)%
Tran$tock compensation 779 0.6 % 766 0.8 % 1,370 1.4 %
Other, net 151 0.1 % 270 0.3 % 1,691 1.8 %
---------- ---------- ---------- --------- ----------- ---------
Provision for (benefit of)
federal income taxes $ 40,360 30.0 % $ 27,827 27.5 % $( 37,727) ( 38.7)%
========== ========== ========== ========= =========== =========
</TABLE>
Deferred income taxes result from temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in taxable or deductible amounts in future years,
or temporary differences resulting from events that have been recognized in the
financial statements that will result in taxable or deductible amounts in
future years. The tax effect of each type of temporary difference and
carryforward reflected in deferred income tax benefits and liabilities as of
December 31, 1993 and 1992 are as follows (in thousands):
<TABLE>
<CAPTION>
(Assets) Liabilities 1993 1992
- -------------------- ------------ ------------
<S> <C> <C>
Producer settlements, legal and regulatory issues expensed for
financial purposes but deferred for tax purposes, net . . . . . . $ ( 19,395) $ ( 19,210)
Federal income tax benefit for state income taxes . . . . . . . . . . ( 12,334) ( 9,325)
Restructuring costs expensed for financial purposes but deferred for
tax purposes until paid . . . . . . . . . . . . . . . . . . . . . ( 3,696) ( 5,368)
Depreciation differences . . . . . . . . . . . . . . . . . . . . . . 281,534 264,976
Revenues collected subject to refund recognized for tax purposes but
deferred for financial purposes until refunded to customers, net 15,636 718
Allowance for funds used during construction . . . . . . . . . . . . 11,881 10,634
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,129 8,896
----------- ------------
Net deferred income tax liability . . . . . . . . . . . . . . . . . . $ 280,755 $ 251,321
=========== ============
</TABLE>
J. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS. TGPL has a 20-year lease agreement for its
headquarters building which expires in 2004. The lease is with Transco Tower
Limited, a partnership in which Transco has an indirect 12.5% interest. TGPL
has an option to renew and extend the existing lease term under the same
provisions for three successive renewal terms of five years each.
61
<PAGE> 63
The future minimum lease payments under TGPL's various operating leases
are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
-----------------------------------------
Transco Other
Tower Leases Total
------------ ------------ -------------
<S> <C> <C> <C>
1994 . . . . . . . . . . . . . . . . . $ 27,250 $ 4,271 $ 31,521
1995 . . . . . . . . . . . . . . . . . 27,250 4,016 31,266
1996 . . . . . . . . . . . . . . . . . 27,250 944 28,194
1997 . . . . . . . . . . . . . . . . . 27,250 - 27,250
1998 . . . . . . . . . . . . . . . . . 27,250 - 27,250
Thereafter . . . . . . . . . . . . . . 143,061 - 143,061
------------ ------------- -------------
Total minimum obligations . . . . . . $ 279,311 $ 9,231 $ 288,542
============ ============= =============
</TABLE>
TGPL's Transco Tower lease agreement covers all space occupied by
Transco and its subsidiaries, including TGPL. TGPL is reimbursed by the other
subsidiaries for their share of the building lease expense. TGPL's lease
expense is as follows (amounts expressed in thousands):
<TABLE>
<CAPTION>
1993 1992 1991
------------ ------------- -------------
<S> <C> <C> <C>
Transco Tower lease expense . . . . . . $ 22,624 $ 20,856 $ 16,081
Other lease expense . . . . . . . . . . 9,716 11,356 11,466
------------ ------------- -------------
Total . . . . . . . . . . . . . . . $ 32,340 $ 32,212 $ 27,547
============ ============= =============
</TABLE>
LONG-TERM GAS PURCHASE CONTRACTS. TGPL has long-term gas purchase
contracts containing take-or-pay provisions and prices which are not variable
market based. Future changes in market conditions affecting the volumes of gas
sold and prices of natural gas may expose TGPL to financial risks pursuant to
these provisions.
Pursuant to a settlement that TGPL has with its customers, TGPL has in
place a GIC designed to allow TGPL to recover its above-spot-market gas costs
through March 31, 2001. TGMC and TGPL believe that the GIC agreed to with its
customers will be adequate to enable recovery of TGPL's above-spot-market gas
costs. As discussed in Note A, in January 1993, TGPL entered into an agency
agreement with TGMC to manage all of TGPL's jurisdictional sales. However,
TGPL is at risk for any above-spot-market gas costs that may be incurred in
excess of the amounts recovered under the GIC.
TGPL's basic business policy is to perform under the terms and
conditions of its contractual obligations. To achieve this objective, an
operating plan is utilized to monitor the current status of contractual
obligations under each gas purchase agreement, whereby the obligation-to-date
is matched against the performance-to-date. Any overperformance or
underperformance is corrected by appropriate adjustments to the operating plan
over the remainder of the period of the agreement. Deliverability tests,
actual takes and prices paid are some of the factors reviewed at least monthly,
and in most cases weekly, in order to ensure that performance is proceeding
according to plan.
62
<PAGE> 64
Since TGPL has been and expects to continue to be able to perform in accordance
with its contract terms, no provision has been recorded for future loss. TGPL
does not believe that financial risks associated with its long-term gas
purchase contracts are material to TGPL's financial position or results of
operations.
ROYALTY COMMITMENTS. In connection with TGPL's renegotiations of supply
contracts with producers to resolve take-or-pay and other contract claims and
to amend gas purchase contracts, TGPL has entered into certain settlements
which may require the indemnification by TGPL of certain claims for royalties
which the producer may be required to pay as a result of such settlements (see
Note D. Legal Proceedings - Royalty Claims).
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
TRADE RECEIVABLES. As of December 31, 1993, TGPL had trade receivables
of $54 million. These trade receivables primarily are due from local
distribution companies and other pipeline companies predominantly located in
the eastern United States. TGPL's credit risk exposure in the event of
nonperformance by the other parties is limited to the face value of the
receivables. No collateral is required on these receivables.
NOTE RECEIVABLE. In April 1991, TGPL accepted a note receivable in
consideration for the conveyance of certain interests in a gas field and
related processing plant to a producer. The note was to be repaid out of
proceeds from the field production and plant revenues. However, in October
1993, the producers sold the gas field and related processing plant. TGPL's
portion of the sales proceeds was used to reduce the outstanding note
receivable. The remaining balance plus certain associated costs were written
off in September 1993 resulting in an after-tax non-cash charge of $12.5
million.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
FUTURES CONTRACTS. TGPL has been a party to various futures contracts
in the management of its natural gas marketing activities. Futures contracts
designated as hedges are carried at market value with gains and losses deferred
until the hedged marketing activity is included in current net income or loss.
As of December 31, 1993, in connection with open contracts on gas marketing
activity designated as hedges, TGPL recorded a deferred gain of approximately
$0.4 million. These contracts are expected to be closed from February 1994
through August 1994. The market value of the open contracts designated as
hedged transactions is calculated using the applicable New York Mercantile
Exchange (NYMEX) closing prices at December 31, 1993. TGPL is exposed to
market risk on these contracts to the extent of changes in the market prices
for natural gas and liquids between December 31, 1993, and the date the
contracts are closed. However, market risk exposure on hedged transactions is
offset by the gain or loss recognized upon the sale of the products that are
hedged. While market values are used
63
<PAGE> 65
to express the amounts of futures contracts, the amounts potentially subject to
credit risks, in the event of nonperformance by third parties, are
substantially smaller.
K. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
MAJOR CUSTOMERS. Major customers of TGPL and the related sales,
transportation and storage revenues received from such customers were as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ----------- -----------
(Expressed in thousands)
<S> <C> <C> <C>
Public Service Electric and Gas Company . . $ 189,791 $ 156,691 $ 143,094
Consolidated Edison Company of New York, Inc. 133,681 101,392 85,164
The Brooklyn Union Gas Company . . . . . . 93,923 85,587 76,011
</TABLE>
The gas sold for resale in 1993 was sold to customers under executed Firm
Sales Agreements with primary terms of not less than three years (1995) but not
greater than eight years (2001).
AFFILIATES. Transactions with affiliates during 1993, 1992 and 1991
were as follows:
Included in TGPL's sales and transportation revenues for 1993, 1992 and
1991 are revenues applicable to sales and transportation for affiliates,
Transco Energy Marketing Company (TEMCO), TXG Gas Marketing Company (TXG
Marketing), Texas Gas Transmission Corporation (Texas Gas), Transco Offshore
Gathering Company (TOGCO), and Transco Energy Ventures Company (TEVCO), an
affiliate until it was sold on September 13, 1993, as follows (expressed in
millions):
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
TEMCO . . . . . . . . . . . . . . . . $ 49.8 $ 43.9 $ 38.7
TXG Marketing . . . . . . . . . . . . 9.3 1.2 4.5
Texas Gas . . . . . . . . . . . . . . 0.2 - 0.1
TEVCO . . . . . . . . . . . . . . . . 0.9 2.0 2.0
TOGCO . . . . . . . . . . . . . . . . 1.6 1.0 0.9
---------- ----------- -----------
$ 61.8 $ 48.1 $ 46.2
========== =========== ===========
</TABLE>
The rates charged to provide sales and transportation services to
affiliates are the same as those that are charged to similarly-situated
nonaffiliated customers.
Prior to 1993, TGPL and Texas Gas were responsible for all
jurisdictional gas sales to their pipeline customers and TEMCO and TXG
Marketing were responsible for all non-jurisdictional gas sales. After FERC
approval in January 1993, Transco began to implement a plan to consolidate its
gas marketing businesses under the common management of TGMC. These changes
were needed to more closely coordinate gas
64
<PAGE> 66
marketing operations to improve efficiencies, reduce costs and improve
profitability. In January 1993, TGMC, through an agency agreement, began to
manage all jurisdictional sales of TGPL. For the year ended December 31, 1993,
included in TGPL's cost of sales is $25.1 million representing agency fees
billed by TGMC to TGPL under this agreement.
Included in TGPL's cost of sales and transportation for 1993, 1992 and
1991 is purchased gas cost from affiliates, TEMCO, TXG Marketing and Transco
Exploration and Production Company (TEPCO), an affiliate until July 31, 1992,
as follows (expressed in millions):
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
TEMCO . . . . . . . . . . . . . . . . $ 54.5 $ 1.9 $ -
TXG Marketing . . . . . . . . . . . . 1.7 0.9 2.0
TEPCO . . . . . . . . . . . . . . . . - 1.7 3.2
--------- ---------- -----------
$ 56.2 $ 4.5 $ 5.2
========= ========== ===========
</TABLE>
All gas purchases are made at market or contract prices. The
significant increase in 1993 for purchased gas cost from TEMCO reflects the
consolidation of Transco's gas marketing businesses, including all
jurisdictional sales of TGPL, under the common management of TGMC, as discussed
above.
Also included in TGPL's cost of transportation is transportation expense
for 1993, 1992 and 1991 applicable to the transportation of gas by affiliates,
Texas Gas and TOGCO, and High Island Offshore System (HIOS) and the U-T
Offshore System (UTOS), both affiliates until July 20, 1992, as follows
(expressed in millions):
<TABLE>
<CAPTION>
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Texas Gas . . . . . . . . . . . . . . $ 32.9 $ 21.7 $ 1.7
TOGCO . . . . . . . . . . . . . . . . - 1.2 1.8
HIOS . . . . . . . . . . . . . . . . - 4.8 8.2
UTOS . . . . . . . . . . . . . . . . - 0.6 0.3
----------- ------------ ------------
$ 32.9 $ 28.3 $ 12.0
=========== ============ ============
</TABLE>
On July 20, 1992, Transco sold its interest in both HIOS and UTOS. TGPL
was the operator of UTOS until November 1, 1993. HIOS, UTOS and Texas Gas are
regulated by the FERC and their transportation rates charged to TGPL are
approved by the FERC. TOGCO is a nonjurisdictional company whose
transportation rates are charged to TGPL at contract prices.
Transco has a policy of charging subsidiary companies for management
services provided by the parent company and other affiliated companies.
Included in TGPL's administrative and general expenses for 1993, 1992 and 1991,
was $14.6 million, $11.8 million and $12.3 million, respectively, for
management services charged by Transco. Management considers the cost of these
services reasonable.
65
<PAGE> 67
L. FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND SHORT-TERM FINANCIAL ASSETS AND LIABILITIES. For short-term
instruments, the carrying amount is a reasonable estimate of fair value due to
the short maturity of those instruments.
LONG-TERM NOTE RECEIVABLE. The carrying amount for the long-term note
receivable is a reasonable estimate of fair value since the note earned an
appropriate rate of interest for the risk involved.
LONG-TERM DEBT. Effectively, all of TGPL's debt is publicly traded,
therefore fair value is estimated based on quoted market prices at year end,
less accrued interest.
The carrying amount and estimated fair values of TGPL's financial
instruments at December 31, 1993 and 1992 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Amount Fair Value
----------------------- ----------------------
1993 1992 1993 1992
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term financial assets . . $ 188,293 $ 35,287 $ 188,293 $ 35,287
Long-term note receivable . . . . . . . . - 15,723 - 15,723
Financial liabilities:
Short-term financial liabilities . . . . 217,794 262,880 217,794 262,880
Long-term debt, less current maturities . 649,000 524,000 654,618 493,783
</TABLE>
M. QUARTERLY INFORMATION (UNAUDITED)
The following summarizes selected quarterly financial data for 1993 and
1992 (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1993
Operating revenues . . . . . . . . . . . . $384,923 $ 358,323 $348,559 $429,728
Operating expenses . . . . . . . . . . . . 323,816 306,853 320,957(1) 366,784
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . 61,107 51,470 27,602 62,944
---------- ---------- ---------- ----------
Other (income) deductions:
Interest expense . . . . . . . . . . . . 16,124 15,526 15,235 15,583
Other (income) and deductions, net . . . ( 144) 206 ( 1,813) ( 1,160)
---------- ---------- ---------- ----------
Total other deductions . . . . . . . . 15,980 15,732 13,422 14,423
---------- ---------- ---------- ----------
Income before income taxes . . . . . . . . 45,127 35,738 14,180 48,521
Provision for income taxes . . . . . . . . 15,658 12,139 5,380 16,164
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . 29,469 23,599 8,800 32,357
Dividends on preferred stock . . . . . . . 2,140 2,112 2,091 1,764
---------- ---------- ---------- ----------
Common stock equity in net income . . . . . $ 27,329 $ 21,487 $ 6,709 $ 30,593
========== ========== ========== ==========
</TABLE>
(1) Includes $20,125 charge for write-off of note receivable.
66
<PAGE> 68
<TABLE>
<CAPTION>
First Second Third Fourth
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1992
Operating revenues . . . . . . . . . . . . $289,649 $284,003 $320,464 $363,081
Operating expenses . . . . . . . . . . . . 264,170(1) 235,044 275,750 304,493
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . 25,479 48,959 44,714 58,588
---------- ---------- ---------- ----------
Other (income) deductions:
Interest expense . . . . . . . . . . . . 20,968 18,021 17,989 15,749
Other (income) and deductions, net . . . ( 2,054) ( 1,238) 688 95
---------- ---------- ---------- ----------
Total other deductions . . . . . . . . 18,914 16,783 18,677 15,844
---------- ---------- ---------- ----------
Income before income taxes . . . . . . . . 6,565 32,176 26,037 42,744
Provision for income taxes . . . . . . . . 1,543 10,921 8,346 13,169
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . 5,022 21,255 17,691 29,575
Dividends on preferred stock . . . . . . . 2,199 2,161 2,140 2,139
---------- ---------- ---------- ----------
Common stock equity in net income . . . . . $ 2,823 $ 19,094 $ 15,551 $ 27,436
========== ========== ========== ==========
</TABLE>
(1) Includes $31,000 provision for producer settlements.
67
<PAGE> 69
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SCHEDULE IV - INDEBTEDNESS OF AND TO
RELATED PARTIES - NOT CURRENT
For Years Ended December 31, 1993, 1992 and 1991
(Thousands of Dollars)
<TABLE>
<CAPTION>
Indebtedness of
--------------------------------------------------------
Balance at Balance at
Beginning End of
of Period Additions Deductions Period
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
1993 . . . . . . . . . . . . . $ - $ - $ - $ -
---------- ------------ ------------ ------------
$ - $ - $ - $ -
=========== ============ ============ ============
1992 . . . . . . . . . . . . . $ - $ - $ - $ -
---------- ------------ ------------ ------------
$ - $ - $ - $ -
=========== ============ ============ ============
1991
- ----
Affiliated Company:
Transco Energy Company . . $ 169,514 $ 587,382 $ 756,896 $ -
---------- ------------ ------------ ------------
$ 169,514 $ 587,382 $ 756,896 $ -
=========== ============ ============ ============
</TABLE>
Reference is made to Note A of the Notes to Financial Statements which are
included in Item 8 herein.
At December 31, 1993, 1992 and 1991, there was no indebtedness to related
parties - not current.
68
<PAGE> 70
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT(1)
For Years Ended December 31, 1993, 1992 and 1991
(Thousands of Dollars)
<TABLE>
<CAPTION>
(3)
Other
Balance at Changes Balance at
Beginning Additions Retirements Add End of
of Period at Cost or Sales (Deduct) Period
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1993
- ----
Gathering . . . . . . . . $ 18,668 $ 256 $ 18 $ - $ 18,906
Storage . . . . . . . . . 205,359 29,752 583 - 234,528
Onshore transmission . . . 2,798,850 64,385 8,061 - 2,855,174
Offshore transmission . . 824,993 4,541 19,087 - 810,447
General and other . . . . 293,755 16,940 6,249 - 304,446
------------ ----------- ----------- ----------- -----------
$ 4,141,625 $ 115,874 $ 33,998 $ - $4,223,501
============ =========== =========== =========== ===========
1992
- ----
Gathering . . . . . . . . $ 18,197 $ 522 $ 51 $ - $ 18,668
Storage . . . . . . . . . 192,610 13,410 661 - 205,359
Onshore transmission . . . 2,672,230 134,460 7,840 - 2,798,850
Offshore transmission . . 835,160 - 10,167 - 824,993
General and other . . . . 343,672 ( 39,700)(2) 10,217 - 293,755
------------ ----------- ----------- ----------- -----------
$ 4,061,869 $ 108,692 $ 28,936 $ - $4,141,625
============ =========== =========== =========== ===========
1991
- ----
Gathering . . . . . . . . $ 89,231 $ 693 $ 37 $( 71,690) $ 18,197
Storage . . . . . . . . . 177,992 17,321 2,703 - 192,610
Onshore transmission . . . 2,469,834 185,744 9,636 26,288 2,672,230
Offshore transmission . . 779,036 17,978 7,256 45,402 835,160
General and other . . . . 308,009 38,414 (2) 2,751 - 343,672
------------ ----------- ----------- ----------- -----------
$ 3,824,102 $ 260,150 $ 22,383 $ - $4,061,869
============ =========== =========== =========== ===========
</TABLE>
(1) For a discussion of the methods and rates used to compute depreciation
and amortization, reference is made to Note B of the Notes to Financial
Statements which are included in Item 8 herein.
(2) Includes reclassification of construction work-in-progress closed to
various plant categories during each respective year.
(3) Reclassification of gathering facilities to transmission plant under
the Rate Settlement.
69
<PAGE> 71
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For Years Ended December 31, 1993, 1992 and 1991
(Thousands of Dollars)
<TABLE>
<CAPTION>
Additions
-------------------------
(1)
Balance at Charged Charged to Other Balance at
Beginning to Clearing Retirements Changes End of
of Period Income and Other or Sales Add(Deduct) Period
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
1993
- ----
Gathering . . . . . . . . $ 13,561 $ 1,164 $ - $ 559 $ - $ 14,166
Storage . . . . . . . . . 98,168 5,178 - 679 - 102,667
Onshore transmission . . . 1,533,532 72,911 - 1,105 - 1,605,338
Offshore transmission . . 642,166 38,406 - 19,609 - 660,963
General and other . . . . 90,145 1,836 11,659 6,442 - 97,198
---------- ---------- ---------- ---------- ----------- ----------
$2,377,572 $ 119,495 $ 11,659 $ 28,394 $ - $2,480,332
========== ========== ========== ========== ========== ==========
1992
- ----
Gathering . . . . . . . . $ 12,550 $ 1,137 $ - $ 126 $ - $ 13,561
Storage . . . . . . . . . 94,612 4,826 - 1,270 - 98,168
Onshore transmission . . . 1,474,210 67,124 - 7,802 - 1,533,532
Offshore transmission . . 612,325 39,120 - 9,279 - 642,166
General and other . . . . 82,832 1,938 11,296 5,921 - 90,145
---------- ---------- ---------- ----------- ---------- -----------
$2,276,529 $ 114,145 $ 11,296 $ 24,398 $ - $2,377,572
========== ========== ========== =========== ========== ==========
1991
- ----
Gathering . . . . . . . . $ 39,087 $ 1,104 $ - $ 111 $ (27,530) $ 12,550
Storage . . . . . . . . . 92,675 4,692 - 2,755 - 94,612
Onshore transmission . . . 1,411,799 61,942 - 12,450 12,919 1,474,210
Offshore transmission . . 562,669 39,304 - 4,259 14,611 612,325
General and other . . . . 76,355 1,661 10,087 5,271 - 82,832
---------- ----------- ---------- ----------- ---------- ----------
$2,182,585 $ 108,703 $ 10,087 $ 24,846 $ - $2,276,529
========== =========== ========== =========== ========== ==========
</TABLE>
(1) Reclassification of gathering facilities to transmission plant under the
Rate Settlement.
70
<PAGE> 72
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT
(Thousands of Dollars)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
For Years ended December 31,
-----------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Item
- ----
Maintenance expense . . . . . . . . . . . . . . $ 48,139 $ 46,939 $ 38,798
============ ============ ============
Taxes, other than payroll and income
taxes . . . . . . . . . . . . . . . . . . . . $ 26,948 $ 23,691 $ 23,928
============ ============ ============
</TABLE>
71
<PAGE> 73
ITEM 9. DISAGREEMENTS ON ACCOUNTING FOR FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except as otherwise noted below, the following table sets forth certain
information regarding all directors and executive officers of TGPL and all
persons nominated to become directors of TGPL as of March 1, 1994:
<TABLE>
<CAPTION> Executive
Officer
Name Age Position Since (1)
---------------------- ---- --------------------------------------------- -------------
<S> <C> <C> <C>
John P. DesBarres 54 Chairman of the Board & Chief Executive January 1992
Officer
Robert W. Best 47 Director, President & Chief Operating Officer February 1992
Larry J. Dagley 45 Senior Vice President & Chief Financial August 1985
Officer
James R. Gattis 49 Senior Vice President - Technical Services December 1987
Jay P. Lukens 39 Senior Vice President - Rates & Planning September 1986
Nicholas J. Neuhausel 48 Senior Vice President - Human Resources & June 1993
Administration
Thomas E. Skains 37 Senior Vice President - Transportation & September 1986
Customer Services
David E. Varner 56 Secretary May 1982
Nick A. Bacile 50 Vice President and Controller April 1992
Randall R. Conklin 37 Vice President, General Counsel & Assistant March 1992
Secretary
</TABLE>
(1) The date shown in the above column is the date the person first became
an executive officer of TGPL. Mr. DesBarres was elected as a director
of TGPL in January 1992. Mr. Best was elected as a director of TGPL in
February 1992. Mr. Varner was elected as a director in June 1982.
With the exception of the following, all officers of TGPL have been
employed by Transco or its subsidiaries for more than the last five years.
John P. DesBarres joined Transco in October 1991 as President and Chief
Executive Officer of Transco and became President and Chief Executive Officer
of TGPL in January 1992. Prior to joining Transco, Mr. DesBarres served from
April 1988 through September 1991 as Chairman, President and Chief Executive
Officer of Santa Fe Pacific Pipelines, Inc. Prior to joining Santa Fe, he
served as President of Sun Pipeline Company, a subsidiary of Sun Company Inc.,
a diversified energy company.
72
<PAGE> 74
Nicholas J. Neuhausel joined Transco in June 1993 as Senior Vice
President - Human Resources and Administration of both Transco and TGPL. Prior
to joining Transco, Mr. Neuhausel held various positions with Sun Company,
Inc., a diversified energy company, and its subsidiaries, including Vice
President of Human Resources and Administration.
The officers of TGPL serve at the pleasure of the Board of Directors.
No family relationship exists between any of them.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below discloses the annual and long-term compensation from
Transco and TGPL awarded or paid to or earned by (i) the Chief Executive
Officer, (ii) the four other most highly compensated executive officers of TGPL
who were serving as executive officers at December 31, 1993, and (ii) above
collectively referred to herein as the "Named Executive Officers" and
individually referred to as a "Named Executive Officer" for services rendered
to Transco and TGPL in all capacities for the fiscal years ended December 31,
1993, 1992, and 1991. No information is presented for Messrs. DesBarres and
Best for the fiscal year ended December 31, 1991 because they were not officers
of TGPL until January 1992 and February 1992, respectively.
<TABLE>
<CAPTION>
Annual Compensation
--------------------------------------------------------------------
(a) (b) (c) (d) (e)
Name and Other
Principal Annual
Position Year Salary ($) Bonus ($) Compensation(1)($)
------------------------------- ----- --------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
John P. DesBarres, 1993 $ 513,000(3) $ 275,000 $ 100,662(4)
Chairman of the Board 1992 486,667(3) 200,000 383,520(4)(5)
and Chief Executive
Officer
Robert W. Best, 1993 $ 315,000 $ 136,900 $ 11,050(4)
President and Chief 1992 307,438 90,000 182,602(6)
Operating Officer
Larry J. Dagley, Senior 1993 $ 213,523 $ 101,800 $ 26,211(4)
Vice President and Chief 1992 193,750 64,000 17,461(4)
Financial Officer 1991 175,000 0 (10)
Thomas W. Spencer, Senior 1993 $ 184,000 $ 70,000 $ 21,285(4)
Vice President 1992 179,500 46,000 16,707(4)
1991 175,000 0 (10)
David E. Varner, Secretary 1993 $ 240,000 $ 83,400 $ 28,349(4)
1992 237,500 50,000 23,161(4)
1991 235,000 0 (10)
</TABLE>
73
<PAGE> 75
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------------------------------
Awards Payouts
-------------------------------- -----------------
(a) (f) (g) (h) (i)
Restricted Securities
Name and Stock Underlying LTIP All Other
Principal Award(s) Options/SARS Payouts Compensation
Position Year $(2) (#) ($) ($)
------------------------------- ---- ------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
John P. DesBarres, 1993 $ 0 $ 0 $ 0 $ 0
Chairman of the Board 1992 0 0 0 0
and Chief Executive
Officer
Robert W. Best, 1993 $ 0 $ 0 $ 20,439(7) $ 70,182(8)
President and Chief 1992 144,375 12,500 0 47,530(8)
Operating Officer
Larry J. Dagley, Senior 1993 $ 0 $ 20,000 $ 10,311(7) $ 0
Vice President and Chief 1992 82,688 0 8,114(9) 0
Financial Officer 1991 0 17,250 20,049(9) (10)
Thomas W. Spencer, Senior 1993 $ 0 $ 0 $ 10,311(7) $ 11,328(11)
Vice President 1992 0 0 8,314(9) 0
1991 0 17,250 19,465(9) (10)
David E. Varner, Secretary 1993 $ 0 $ 0 $ 16,159(7) $ 0
1992 0 0 13,737(9) 0
1991 0 23,500 33,007(9) (10)
</TABLE>
(1) Excludes perquisites and other personal benefits, securities and property
paid to or earned by a Named Executive Officer, the aggregate amount of
which is the lesser of $50,000 or 10% of the annual salary and bonus
reported for such person in columns (c) and (d).
(2) As of the close of business on December 31, 1993, Mr. DesBarres held
20,000 shares of Transco Restricted Stock with a value of $282,500. On
January 1, 1995, 10,000 of such shares will vest and the remaining 10,000
shares will vest on January 1, 1996, assuming Mr. DesBarres is an
employee of Transco on the vesting dates. To effect certain cost savings
to the benefit of Transco, on December 14, 1993, Transco's Compensation
Committee approved the accelerated vesting of 26,592 shares of Transco
Restricted Stock from January 1, 1994 to December 31, 1993. As of the
close of business on December 31, 1993, Messrs. Best and Dagley held
8,250 and 4,725 shares of Transco Restricted Stock, with a value of
$116,531 and $66,741, respectively. Such Transco Restricted Stock shares
vest at a rate of 2,750 and 1,575, respectively, annually on each March
24 in 1994, 1995 and 1996, assuming the holder is an employee of Transco
on the vesting dates. TGPL has elected to report performance-based
Transco Restricted Stock in column (h) upon the vesting thereof. As of
the close of business on December 31, 1993, Messrs. Best, Dagley,
DesBarres, Spencer and Varner held 14,800, 7,250, 30,350, 6,900 and
10,600 shares of performance-based Restricted Stock and 7,400, 3,625,
15,175, 3,450 and 5,300 corresponding Restricted Stock Units,
respectively. The value of this Restricted Stock for Messrs. Best,
Dagley, DesBarres, Spencer and Varner as of December 31, 1993 (excluding
the 1991 grants, the payment of which is reported in column (h) and
discussed in footnote 8 below) was $209,050, $102,406, $428,694, $94,463
and $149,725, respectively. This Restricted Stock is subject to
performance-based vesting conditions. During the restriction period, all
of the aforementioned shares of Transco Restricted Stock are entitled to
receive
74
<PAGE> 76
dividends payable to Transco stockholders. All Transco Restricted Stock
values in this footnote are calculated based upon the closing price of
Transco's Common Stock on December 31, 1993.
(3) Includes Transco director's fees of $13,000 in 1993 and $20,000 in 1992.
(4) Includes (i) except for Mr. Best, the value (as of the date of
allocation) of shares of Transco's Common Stock allocated pursuant to
Transco's Tran$tock Plan and accruals under Transco's Benefit Restoration
Plan (an Internal Revenue Code Section 415 Excess Plan) related to
Tran$tock allocations which would have been made under the Tran$tock Plan
but for certain limitations imposed under the Internal Revenue Code, and
(ii) dividends on performance-based Transco Restricted Stock (i.e.,
Restricted Stock that vests only if Transco achieves certain performance
goals.)
(5) Also includes moving and relocation expenses including tax gross-up
($257,033) and other perquisites and personal benefits ($25,075).
(6) Includes moving and relocation expenses including tax gross-up
($156,236), other perquisites and personal benefits ($19,555) and
dividends on performance-based Transco Restricted Stock (i.e., Restricted
Stock that vests only if Transco achieves certain performance goals).
(7) Represents cash value of Transco Restricted Stock which vested pursuant
to grants under Transco's 1983 Incentive Plan. This Transco Restricted
Stock was issued in 1991 and vesting was subject to certain performance
criteria under which all or a portion would be earned upon attainment by
Transco, during a performance period beginning on January 1, 1991 and
ending on December 31, 1993, of certain performance goals.
(8) Includes (i) a matching contribution under the Texas Gas Thrift Plan
($10,262 for 1992 and $10,013 for 1993), (ii) a related accrual ($3,562
for 1993) under the Texas Gas Excess Benefit Plan (an Internal Revenue
Code Section 415 Excess Plan), and (iii) amounts accrued to provide a
retirement benefit ($35,888 for 1992 and $55,047 for 1993) and to provide
a death benefit ($1,380 for 1992 and $1,560 for 1993) under the Texas Gas
Salary Continuation Plan.
(9) Represents cash payment for Performance Units earned pursuant to grants
under Transco's 1983 Incentive Plan. When these Performance Units were
granted in 1989 and 1988, the performance criteria under which all or a
portion would be earned required that Transco and certain subsidiaries,
including TGPL, achieve certain performance goals. In 1990, the
performance criteria was revised to condition the vesting of all or a
portion of the awards upon the attainment of certain performance goals
solely by Transco.
(10) In order to facilitate the transition to the Securities and Exchange
Commission's revised proxy disclosure requirements, registrants have been
permitted a transition period for disclosure of the amounts reported in
columns (e) and (i). Accordingly, these columns do not include
information for fiscal years ended before December 15, 1992.
(11) Represents a lump sum payment pursuant to an agreement with Transco in
connection with Mr. Spencer's retirement from Transco on January 1, 1994.
75
<PAGE> 77
OPTION GRANTS IN LAST FISCAL YEAR
Shown below is further information on the stock options, reflected in column
(g) of the Summary Compensation Table, granted pursuant to Transco's 1991
Incentive Plan during the fiscal year ended December 31, 1993 to the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE GRANT
GRANTED EMPLOYEES IN PRICE EXPIRATION DATE
NAME (#) FISCAL YEAR ($/SHARE) DATE VALUE(2)
---------------------- ---------- -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
John P.DesBarres . . 0 n/a n/a n/a n/a
Robert W. Best . . . 0 n/a $ n/a n/a $ n/a
Larry J. Dagley . . . 20,000(1) 6.67% $ 16.25 7/19/2003 $ 10,700
Thomas W. Spencer . . 0 n/a n/a n/a n/a
David E. Varner . . . 0 n/a n/a n/a n/a
</TABLE>
(1) These options vest at a rate of 25 percent annually, are exercisable for a
period of ten years after the date of grant and, if held for more than 6
months, may be accelerated automatically upon a change of control in
Transco or, if approved by Transco's Compensation Committee of Transco's
Board of Directors, upon the occurrence of certain other events such as
retirement. The exercise price is equal to the market value of Transco's
Common Stock on the date of grant. The stock options contain a tax-
withholding feature which permits the optionee, with the consent of
Transco's Compensation Committee, to surrender shares for the payment of
any taxes due in connection with the exercise of the option.
(2) The estimated present value of stock options is based on the Black-scholes
Model, a mathematical formula that calculates a theoretical option value
based on certain assumptions. The assumptions used in calculating the
values that appear in this column are as follows: a volatility factor of
.3277 for the 12 months preceding date of grant, a risk-free rate of
return of 6.14%, yield on U.S. Treasury zero-coupon bond expiring in May
2004, and a dividend yield of 3.69%, based on the annual dividend rate as
of the date of grant. The actual value, if any, that a Named Executive
Officer may realize will depend on the spread between the market price and
the option price on the date the option is exercised. Therefore, there
can be no assurance that the value estimated by the Black-Scholes model
will be predictive of the actual value realized by the Named Executive
Officer on the date the option is exercised.
76
<PAGE> 78
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
None of the Named Executive Officers exercised any stock options during the
fiscal year 1993. Shown below is information with respect to the unexercised
options to purchase Transco's Common Stock granted under Transco's 1991
Incentive Plan or 1983 Incentive Plan to the Named Executive Officers and held
by them at December 31, 1993.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION UPDATES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY(1)
OPTIONS AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
----------------------------------- ----------------------------- -------------------------
<S> <C> <C>
John P. DesBarres . . . . . . . . . 46,900/46,900 $0/$ 0
Robert W. Best . . . . . . . . . . 36,175/27,825 $0/$ 0
Larry J. Dagley . . . . . . . . . . 30,170/31,214 $0/$ 0
Thomas W. Spencer . . . . . . . . . 30,573/11,214 $0/$ 0
David E. Varner . . . . . . . . . . 44,800/15,600 $0/$ 0
</TABLE>
(1) A stock option is considered to be "in the money" if the market price of
the related stock is higher than the exercise price of the option. The
Transco Common stock price at December 31, 1993 was $14.125 per share.
77
<PAGE> 79
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Shown below is information with respect to long-term incentive awards made
to the Named Executive Officers in the fiscal year ended December 31, 1993
under Transco's 1991 Incentive Plan.
LONG-TERM INCENTIVE PLANS
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF PERFORMANCE OR NON-STOCK PRICE-BASED PLANS
SHARES, UNITS OTHER PERIOD -----------------------------------
OR OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT (#) (#) (#)
- ---------------------------- ------------- ----------------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
John P. DesBarres . . . . . 18,350(1) 1/4/93 to 12/31/95 3,120 18,350 27,525
9,175(2)
Robert W. Best . . . . . . 9,250(1) 1/4/93 to 12/31/95 1,573 9,250 13,875
4,625(2)
Larry J. Dagley . . . . . . 4,450(1) 1/4/93 to 12/31/95 757 4,450 6,675
2,225(2)
Thomas W. Spencer . . . . . 4,100(1)(3) 1/4/93 to 12/31/95 697 4,100 6,150
2,050(2)(3)
David E. Varner . . . . . . 6,200(1) 1/4/93 to 12/31/95 1,054 6,200 9,300
3,100(2)
</TABLE>
(1) Represents performance-based Transco Restricted Stock granted pursuant to
Transco's 1991 Incentive Plan. A grantee of such Transco Restricted Stock
is the record owner thereof during the restriction period and has all
rights of a stockholder including the right to vote and to receive
dividends; provided, however, that such grantee does not have the right to
transfer such Transco Restricted Stock until the restrictions relating
thereto are removed by Transco's Compensation Committee upon the
achievement by Transco of certain performance goals. The performance
criteria for these awards is based upon Transco's total shareholder return
relative to a peer group of other companies.
(2) Represents the grant of Transco Restricted Stock units which are issued in
conjunction with the Transco Restricted Stock presented immediately above.
A Transco Restricted Stock Unit represents one share of Transco Common
Stock to be issued to the grantee in the future upon the determination by
Transco's Compensation Committee that Transco has achieved specified
performance goals in excess of the goals set for a corresponding grant of
Transco Restricted Stock. All awards of Transco Restricted Stock and
Transco Restricted Stock Units presented above are accompanied by tax
withholding rights.
(3) This award was forfeited by Mr. Spencer in connection with his retirement
on January 1, 1994.
TRANSCO ENERGY COMPANY RETIREMENT PLAN AND SUPPLEMENTAL BENEFIT PLAN PENSION
TABLE
The following table shows the estimated annual benefits that would be
payable upon normal retirement under the Transco Retirement Plan and, if
applicable, the Transco Supplemental Benefit Plan, to employees of Transco and
certain subsidiaries, including TGPL, in various earnings classifications with
representative years of service, assuming in each case that the employee
elected a single life annuity as the form of benefit
78
<PAGE> 80
payment. Benefits listed in the table are not subject to a deduction for
offsets for social security or other offset amounts. The Transco Supplemental
Benefit Plan provides benefits to participating executives that cannot be paid
under the Transco Retirement Plan because of limitations imposed by the
Internal Revenue Code on benefits payable under a qualified plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------------------------
Remuneration(1) 15 20 25 30 35
------------ ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
200,000 . . . . . . . . . . $ 50,796 $ 67,728 $ 84,660 $ 101,592 $ 118,524
400,000 . . . . . . . . . . $ 103,302 $ 137,728 $ 172,161 $ 206,593 $ 241,025
600,000 . . . . . . . . . . $ 155,796 $ 207,729 $ 259,662 $ 311,594 $ 363,526
800,000 . . . . . . . . . . $ 208,291 $ 277,728 $ 347,160 $ 416,592 $ 486,024
1,000,000 . . . . . . . . . $ 260,796 $ 347,728 $ 434,652 $ 521,593 $ 608,525
</TABLE>
(1) The covered compensation upon which final average earnings are computed
under the Transco Retirement Plan is the base compensation of the
participant, excluding bonuses, commissions, per diem, premium pay or any
other extra compensation, reimbursement for business expenses, group life
insurance premiums, overtime pay, or any benefits under the Transco
Retirement Plan or any other benefit plan with the exception of Internal
Revenue Code Section 401(k) contributions made under the Transco Thrift
Plan and salary reduction contributions made under Transco's Internal
Revenue Code Section 125 cafeteria plan and is subject to the Internal
Revenue Code limitation described above. This base compensation is set
forth in column (c) of the Summary Compensation Table. Final average
earnings are computed by averaging covered compensation over the highest
three consecutive years out of the final five years prior to retirement.
Under the Transco Supplemental Benefit Plan, the covered compensation
includes all covered compensation under the Transco Retirement Plan,
without regard to the Internal Revenue Service limitation described above,
plus annual incentive compensation. This annual incentive compensation is
set forth in Column (d) of the Summary Compensation Table.
The current and years of service with Transco for the Named Executive
Officers as of December 31, 1993 are: Mr. DesBarres 2.33 years, Mr. Dagley
8.42 years, Mr. Spencer 41.92 years and Mr. Varner 11.67 years, respectively.
Mr. Best does not participate in this plan. Mr. DesBarres has also entered
into a Supplemental Retirement Agreement with Transco which credits him with an
additional 28 years of service for the purposes of calculating his retirement
benefit. Mr. DesBarres will vest in this benefit upon his death or disability,
if he is an employee of Transco on September 30, 1994 or if his employment is
terminated prior to such date by Transco other than for "Cause", as defined, or
if Mr. DesBarres terminates his employment for "Good Reason", as defined. Any
amount received under this agreement is required to be reduced by any amount
Mr. DesBarres receives under any other employer's retirement plan. This
agreement was entered into by Transco and Mr. DesBarres in connection with his
acceptance of employment with Transco and is intended to replace a similar
benefit which he had been provided by his previous employer.
79
<PAGE> 81
TEXAS GAS RETIREMENT PLAN AND SUPPLEMENTAL BENEFIT PLAN PENSION TABLE
The following table shows estimated annual benefits that would be payable on
normal retirement under the Texas Gas Retirement Plan and, if applicable, the
Texas Gas Supplemental Benefit Plan to employees of Texas Gas in various
earnings classifications, with representative years of service, assuming in
each case that the employee elected a 5-year certain and life thereafter
annuity as the form of benefit payment. Benefits listed in the table are not
subject to a deduction for offsets for social security or other offset amounts.
The Texas Gas Supplemental Benefit Plan provides benefits to participating
executives that cannot be paid under the Texas Gas Retirement Plan because of
certain limitations imposed by the Internal Revenue Code on benefits payable
under a qualified plan.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------------------------
Remuneration(1) 15 20 25 30 35
------------ ---------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
200,000 . . . . . . . . . . $ 48,180 $ 64,240 $ 80,300 $ 96,360 $ 112,420
400,000 . . . . . . . . . . $ 96,930 $ 129,240 $ 161,550 $ 193,860 $ 226,170
600,000 . . . . . . . . . . $ 145,680 $ 194,240 $ 242,800 $ 291,360 $ 339,920
800,000 . . . . . . . . . . $ 194,430 $ 259,240 $ 324,050 $ 388,860 $ 453,670
1,000,000 . . . . . . . . . $ 243,180 $ 324,240 $ 405,300 $ 486,360 $ 567,420
</TABLE>
(1) The covered compensation upon which final average earnings are computed
under the Texas Gas Retirement Plan and the Texas Gas Supplemental Benefit
Plan is the base compensation of the employee, excluding overtime,
bonuses, commissions, payments under an employee benefit plan, or other
special compensation without regard to the Internal Revenue Code
limitation described above. This base compensation is set forth in column
(c) of the Summary Compensation Table.
Mr. Best, whose years of service at December 31, 1993 were 19.25 years, is
the only Named Executive Officer who participates in the Texas Gas Retirement
Plan or the Texas Gas Supplemental Benefit Plan.
TERMINATION AND SEVERANCE AGREEMENTS.
Transco has entered into a Termination Agreement with Mr. DesBarres. This
Agreement provides that if a "change in control" of Transco, as defined, occurs
and Mr. DesBarres' employment with Transco terminates within five years after
the change in control and prior to his 65th birthday, Transco will pay him, as
a termination payment, a lump sum equal to his annual salary, estimated bonus
amounts and the value of certain benefits under Transco's employee benefit
plans and programs which would have accrued during a period of up to five years
after the change in control, subject to certain adjustments and offsets,
including an offset relating to salary earned with a subsequent employer. Mr.
DesBarres has also entered into a Severance Agreement which provides benefits
similar to the Termination Agreement for the period from the date of
termination and ending September 1996, but is not conditioned upon the
occurrence of a change in control of Transco. The Severance Agreement
terminates in September 1996, unless extended by mutual agreement.
80
<PAGE> 82
Mr. Best has entered into a Severance Agreement with provisions similar to
those described for Mr. DesBarres above, except that the Severance Agreement
provides, upon termination of employment by Transco, for the payment by Transco
of a lump sum equal to Mr. Best's annual base salary, estimated bonus amounts
and the value of certain benefits under Transco's employee benefit plans and
programs which would have accrued during a period of up to three years after
termination, subject to certain adjustments and offsets, including an offset
relating to salary earned with a subsequent employer.
Messrs. Dagley, Spencer and Varner have entered into Severance Agreements
with provisions similar to those described above for Mr. Best, except that the
Agreements provide for the payment by the Company of benefits which would have
accrued during a one-year period after termination and the payment of the
annual base salary amount is to be paid in semi-monthly installments for twelve
months.
Messrs. Dagley, Spencer and Varner have also entered into Termination
Agreements with provisions similar to those described above for Mr. DesBarres,
except that each shall be entitled to receive, upon termination within three
years after a change in control, a lump sum amount equal to the sum of annual
base salary, estimated bonus amounts and the value of certain benefits under
Transco's employee benefits plans and programs which would have accrued during
a period of up to three years after the change in control, subject to certain
adjustments and offsets, including an offset relating to salary earned with a
subsequent employer.
COMPENSATION OF DIRECTORS
All of the Directors of TGPL are officers of TGPL and receive no additional
compensation for their services as a TGPL Director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
TGPL does not have a compensation committee. Compensation determinations
for TGPL executive officers are made by the Transco Board of Directors or its
Compensation Committee. The Transco Board and its Compensation Committee
receive input from Transco management as well as independent executive
compensation consultants.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
All references to beneficial ownership in this Item 12 are as of March 23,
1994.
81
<PAGE> 83
COMMON STOCK OF TRANSCO ENERGY COMPANY:
<TABLE>
<CAPTION>
Name of Beneficial Owner Amount Beneficially Owned Percent of Class
------------------------------ ------------------------------- ------------------------------
<S> <C> <C>
John P. DesBarres . . . . . . 200,756(1) *
Robert W. Best . . . . . . . 99,092(2) *
Larry J. Dagley . . . . . . . 86,733(3) *
Thomas W. Spencer . . . . . . 50,038(4) *
David E. Varner . . . . . . . 86,156(5) *
All Directors and Executive 747,354(6) 1.83%
Officers as a Group (11)
</TABLE>
(1) Includes 67,750 shares of Transco Restricted Stock granted under Transco's
1991 Incentive Plan over which Mr. DesBarres has voting power, but does
not have investment power; 2,060 shares held in Transco's Tran$tock Plan
over which Mr. DesBarres has voting power but does not have investment
power; and 46,900 shares covered by outstanding options granted under
Transco's 1991 Incentive plan which are currently exercisable or are
exercisable within 60 days of March 23, 1994.
(2) Includes 31,850 shares of Transco Restricted Stock over which Mr. Best has
voting power but does not have investment power and 43,600 shares covered
by outstanding options which are currently exercisable or are exercisable
within 60 days of March 23, 1994.
(3) Includes 17,575 shares of Transco Restricted Stock over which Mr. Dagley
has voting power but does not have investment power; 5,983 shares held in
Transco's Tran$tock Plan over which Mr. Dagley has voting power but does
not have investment power; and 32,758 shares covered by outstanding
options which are currently exercisable or are exercisable within 60 days
of March 23, 1994.
(4) Includes 4,916 shares held in Transco's Tran$tock Plan over which Mr.
Spencer has voting power but does not have investment power; and 41,787
shares covered by outstanding options which are currently exercisable.
Mr. Spencer retired from Transco on January 1, 1994.
(5) Includes 16,450 shares of Transco Restricted Stock over which Mr. Varner
has voting power but does not have investment power; 6,961 shares held in
Transco's Tran$tock Plan over which Mr. Varner has voting power but does
not have investment power; and 48,650 shares covered by outstanding
options which are currently exercisable or are exercisable within 60 days
of March 23, 1994.
(6) Includes 166,775 shares of Transco Restricted Stock over which the
executive officers have voting power but not investment power; 41,266
shares held in Transco's Tran$tock Plan over which the executive officers
have voting power but not investing power; and 308,070 shares owned by
directors and executive officers covered by outstanding options which are
currently exercisable or are exercisable within 60 days of March 23, 1994.
Stock held by Mr. Spencer, who is no longer with Transco, is included in
this total.
* Represents less than 1% of the Class of Common Stock.
PREFERRED STOCK OF TGPL
None of the directors and executive officers of TGPL own any preferred stock
of TGPL.
82
<PAGE> 84
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
83
<PAGE> 85
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
REFERENCE TO
1993 10-K
------------
<S> <C> <C>
A. INDEX
-----
1. FINANCIAL STATEMENTS:
Report of Independent Public Accountants 33
Management Responsibility
for Financial Statements 34
Balance Sheet as of
December 31, 1993 and 1992 35-36
Statement of Operations for the Years
Ended December 31, 1993, 1992 and 1991 37
Statements of Retained Earnings
and Premium on Capital Stock
and Other Paid-In Capital for the Years
Ended December 31, 1993, 1992 and 1991 38
Statement of Cash Flows for the Years
Ended December 31, 1993, 1992 and 1991 39
Notes to Financial Statements 40-67
</TABLE>
84
<PAGE> 86
<TABLE>
<CAPTION>
PAGE
REFERENCE TO
1993 10-K
-----------
<S> <C> <C>
2. FINANCIAL STATEMENT SCHEDULES:
Schedule IV - Indebtedness of and to
related parties - not current
for the years ended December 31, 1993,
1992 and 1991 68
Schedule V - Property, plant and equipment - for the years
ended December 31, 1993, 1992
and 1991 69
Schedule VI - Accumulated depreciation and
amortization of property,
plant and equipment - for the
years ended December 31,
1993, 1992 and 1991 70
Schedule X - Supplemental Income Statement
Information - for years ended
December 31, 1993, 1992 and 1991 71
The following schedules are omitted because of
the absence of the conditions under which they
are required or because the required information
is included in the financial statements or notes
thereto:
I, II, III, VII, VIII, IX, X, XI, XII and XIII.
</TABLE>
85
<PAGE> 87
3. EXHIBITS:
The following instruments are included as exhibits to this
report. Those exhibits below incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, copies of the instrument have been
included herewith.
(3) - 1 Second Restated Certificate of Incorporation, as
amended, of TGPL. (Exhibit 3.1 to TGPL Form 8-K
dated January 23, 1987 Commission File Number 1-7584.
a) Certificate of Amendment, dated July 30,
1992, of the Second Restated Certificate of
Incorporation (Exhibit (10)17(a) to Transco
Form 10-K for 1993 Commission File Number
1-7513)
b) Certificate of Amendment, dated December 22,
1987, of the Second Restated Certificate of
Incorporation (Exhibit (10)17(b) to Transco
Form 10-K for 1993 Commission File Number
1-7513)
c) Certificate of Amendment, dated August 5,
1987, of the Second Restated Certificate of
Incorporation (Exhibit (10)17(c) to Transco
Form 10-K for 1993 Commission File Number
1-7513)
- 2 By-Laws of TGPL. (Exhibit (10)13 to Transco Form
10-K for 1992 Commission File Number 1-7584)
(4) - 1 Certificate of Designation, Preferences and Rights
relating to Registrant's Cumulative Preferred Stock,
$8.75 Series. (TGPL Form 8-K dated January 23, 1987)
- 2 Indenture, dated as of June 1, 1983, between TGPL and
RepublicBank Houston, National Association, as
Trustee. (Exhibit (4)-5 to TGPL Form 10-K for 1989
Commission File Number 1-7584)
86
<PAGE> 88
a) First Supplemental Indenture, dated September
20, 1984, from TGPL to RepublicBank Houston,
National Association related to Indenture
dated as of June 1, 1983. (Exhibit (4)-5a to
TGPL Form 10-K for 1989 Commission File
Number 1-7584)
b) Second Supplemental Indenture, dated as of
May 31, 1985, from TGPL to RepublicBank
Houston, National Association related to
Indenture dated as of June 1, 1983. (Exhibit
(4)-5b to TGPL Form 10-K for 1989 Commission
File Number 1-7584)
c) Third Supplemental Indenture, dated as of
December 3, 1985, from TGPL to RepublicBank
Houston, National Association related to the
Indenture dated as of June 1, 1983. (Exhibit
(4)-5c to TGPL Form 10-K for 1989 Commission
File Number 1-7584)
d) Certified Resolutions of a Special Committee
of the Board of Directors dated October 31,
1986. (Exhibit (4)-5d to TGPL Form 10-K for
1989 Commission File Number 1-7584)
e) Fourth Supplemental Indenture, dated as of
November 7, 1986, from TGPL to RepublicBank
Houston, National Association related to
Indenture dated as of June 1, 1983. (Exhibit
(4)-5e TGPL Form 10- K for 1989 Commission
File Number 1-7584)
f) Fifth Supplemental Indenture, dated as of
January 15, 1987, from TGPL to RepublicBank
Houston, National Association related to
Indenture dated as of June 1, 1983. (Exhibit
(4)-5f to TGPL Form 10-K for 1989 Commission
File Number 1-7584)
g) Certified Resolutions of a Special Committee
of the Board of Directors dated January 29,
1987. (Exhibit (4)-5g to TGPL Form 10-K for
1989 Commission File Number 1-7584)
h) Sixth Supplemental Indenture, dated as of
September 15, 1987, from TGPL to First
RepublicBank Houston, National Association
related to Indenture dated as of June 1,
1983. (Exhibit (4)-5h to TGPL Form 10-K for
1989 Commission File Number 1-7584)
87
<PAGE> 89
- 3 Indenture dated September 15, 1992 between TGPL and
the Bank of New York, as Trustee (Exhibit 4.2 to TGPL
Form 8-K dated September 17, 1992 Commission File
Number 1-7584)
- 4 Amended and Restated Credit Agreement dated as of
December 31, 1993 among Transco, the Banks named
therein, Citibank, N.A. as Agent and Bank of
Montreal, as Co-Agent (Exhibit (4)5(c) to Transco
Form 10-K for 1993 Commission File Number 1-7513)
- 5 Reimbursement Agreement dated as of December 31, 1993
among Transco, the Banks named herein and Bank of
Montreal as Agent and Issuing Bank (Exhibit (4)7 to
Transco Form 10-K for 1993 Commission File Number 1-
7513)
(10) - 1 1983 Incentive Plan of Transco. (Transco Registration
Statement No. 2-85895)
- 2 Transco Tran$tock Employee Stock Ownership Plan.
(Transco Registration Statement No. 33-11721)
- 3 Incentive Compensation Plan of Transco. (Exhibit
(10)-4 to Transco Form 10-K for 1989 Commission File
Number 1-7513)
- 4 Benefit Restoration Plan of Transco. (Exhibit (10)-4
to Transco Form 10-K for 1992 Commission File Number
1-7513)
- 5 Lease Agreement, dated October 5, 1981, between TGPL
and Post Oak/Alabama, a Texas partnership. (Exhibit
(10)-7 to Transco Form 10-K for 1989 Commission File
Number 1-7513)
- 6 1991 Incentive Plan of Transco. (Transco
Registration Statement No. 33-40495)
- 7 Form of Supplemental Retirement Agreement which
Transco has entered into with Messrs. Dagley, Spencer
and Varner. (Exhibit (10)-7 to Transco Form 10-K for
1992 Commission File Number 1-7513)
- 8 Form of Termination Agreement which Transco has
entered into with Messrs. Best, Dagley, Spencer and
Varner. (Exhibit (10)-8 to Transco Form 10-K for
1992 Commission File Number 1-7513)
- 9 Severance Agreement between Transco and John P.
DesBarres, effective as of September 14, 1991.
(Exhibit (10)-10 to Transco Form 10-K for 1992
Commission File Number 1-7513)
88
<PAGE> 90
- 10 Termination Agreement between Transco and John P.
DesBarres, effective as of September 14, 1991.
(Exhibit (10)-11 to Transco Form 10-K for 1992
Commission File Number 1-7513)
- 11 Severance Agreement, dated as of March 25, 1992, by
and between Transco and Robert W. Best (Exhibit
(10)-12 to Transco Form 10-K for 1993 Commission File
Number 1-7513)
- 12 Severance Agreement, dated as of March 17, 1993, by
and between Transco and David E. Varner and schedule
identifying substantially similar Severance
Agreements between Transco and other executive
officers (Exhibit (10)-13 to Transco Form 10-K for
1993 Commission File Number 1-7513)
- 13 Severance Agreement, dated as of March 17, 1993, by
and between Transco and Thomas W. Spencer (Exhibit
(10)-14 to Transco Form 10-K for 1993 Commission File
Number 1-7513)
- 14 Indemnification Agreement between Transco and David
E. Varner and schedule identifying substantially
similar Indemnification Agreements between Transco
and other executive officers (Exhibit (10)-16 to
Transco Form 10-K for 1993 Commission File Number
1-7513)
4. REPORTS ON FORM 8-K:
None.
89
<PAGE> 91
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 30th day
of March, 1994.
TRANSCONTINENTAL GAS PIPE
LINE CORPORATION
Registrant
By: /s/ Nick A. Bacile
------------------------------
Nick A. Bacile
Vice President and Controller
(principal accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on this 30th day of March, 1994, below by the
following persons on behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
JOHN P. DESBARRES Chairman of the Board and Chief Executive
(John P. DesBarres) Officer (principal executive officer)
LARRY J. DAGLEY Director, Senior Vice President and Chief Financial
(Larry J. Dagley) Officer (principal financial officer)
ROBERT W. BEST Director, President and Chief Operating Officer
(Robert W. Best)
NICK A. BACILE Vice President and Controller
(Nick A. Bacile) (principal accounting officer)
</TABLE>
90
