<PAGE> 1
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, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7584
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 74-1079400
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
2800 Post Oak Blvd., P. O. Box 1396, Houston, Texas 77251
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(Address of principal executive offices) Zip Code
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
Title of Each Class: Each Class is Registered:
-------------------- -------------------------
New York Stock Exchange
CUMULATIVE PREFERRED STOCK, WITHOUT PAR VALUE
<TABLE>
<CAPTION>
Stated Value
Series Per Share
------ ---------
<S> <C>
$ 6.65 $100
</TABLE>
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 $ 8.75 $100
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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, 1994 was 100.
<PAGE> 2
#
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.
On December 12, 1994, Transco and The Williams Companies, Inc.
(Williams) entered into an Agreement and Plan of Merger (Merger Agreement),
which was amended on February 17, 1995, pursuant to which Williams agreed to
commence a cash tender offer to acquire up to 24.6 million shares, or
approximately 60%, of the outstanding shares of Transco's common stock for
$17.50 per share. According to the terms of the Merger Agreement, the cash
tender offer would be followed by a stock merger (Merger) in which each share
of Transco common stock not purchased in the tender offer would be exchanged
for 0.625 of a share of Williams' common stock.
The tender offer began on December 16, 1994 and expired on January
17, 1995. Approximately 35.2 million shares, or approximately 86.7% of the
outstanding shares of Transco's common stock, were tendered to Williams for
purchase and not withdrawn. Pursuant to the Merger Agreement, on January 18,
1995, Williams accepted for payment 24.6 million shares of Transco's common
stock for $17.50 per share as the first step in acquiring the entire equity
interest of Transco. The remainder of the outstanding shares of Transco's
common stock will be converted to Williams' common stock. Each outstanding
share of Transco's common stock will be converted into 0.625 of a share of
Williams' common stock upon majority approval by Transco's stockholders. The
conversion will occur at the effective date of the Merger, which is expected to
be in April 1995.
Williams has stated that Transco or Williams or both, through their
respective subsidiaries, will promptly expand both regulated and non-regulated
activities in the geographical areas served by Transco's pipeline subsidiaries,
including TGPL, and Williams' existing systems. Williams has stated that
during 1995 it will make capital expenditures of approximately $200 million
with respect to certain Transco regulated businesses and approximately $200
million for expansion by Transco into non-regulated activities.
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In connection with these plans, in January 1995 the boards of
directors of Transco and Williams approved a proposed recapitalization plan for
Transco under which Williams will advance or contribute to Transco up to an
estimated $950 million to execute the proposed plan. In addition, according to
Williams, Williams intends to cause Transco, as promptly as practicable
following the Merger and subject to receipt of any necessary consents, to
declare and pay as dividends to Williams all of Transco's interests in its
principal operating subsidiaries, TGPL, Texas Gas Transmission Corporation
(Texas Gas) and Transco Gas Marketing Company (TGMC) (the dividends
collectively, the Operating Company Dividends). The recapitalization plan is
expected, when taken together with the Operating Company Dividends, to provide
TGPL with somewhat greater ratemaking flexibility afforded by a stand-alone
capital structure.
The following actions were completed in January and February 1995 in
connection with the recapitalization plan, as it impacts TGPL:
- Termination of Transco's Amended Bank Credit Facility dated December
31, 1993, replacing it with a Credit Agreement (the Williams Credit
Agreement) dated as of February 23, 1995 among Williams and certain
of its subsidiaries, TGPL, Texas Gas and Citibank N.A., as agent and
the Banks named therein;
- Termination of the program to sell monthly trade receivables of
TGPL, replacing it with the Williams Credit Agreement with the
expectation that at some future time Williams will enter into a new
receivables program;
- Termination of Transco's Reimbursement Facility dated December 31,
1993; and
- Redemption of all of TGPL's outstanding preferred stock at $100.00
per share plus accrued dividends, to be effective March 23, 1995.
In addition, in February 1995, Standard & Poor's Corporation
and Moody's Investor Service upgraded TGPL's debt securities from BB and Ba2 to
BBB and Baa1, respectively and TGPL's preferred stock from BB- and B1 to BBB-
and Baa2, respectively. These upgrades should provide TGPL with greater access
to capital markets. A security rating is not a recommendation to buy, sell or
hold securities; it may be subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated independently
of any other rating.
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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 3.5 Bcf (1) 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 of TGPL at
December 31, 1994 was 1,713.
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 by the
pipelines to the customers.
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 including equal access to all sources of gas;
providing "no-notice" firm transportation services that are equal in quality to
bundled sales service; establishing a capacity release program and
__________________________________
1 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.
3
<PAGE> 5
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 "Item 8. Financial Statements and Supplementary
Data - Notes to Financial Statements - C. Regulatory Matters - Order 636."
Prior to 1993, TGPL and 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 TGMC.
In January 1993, TGMC, through an agency agreement, began to manage all
jurisdictional merchant 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. TGPL has working storage capacity in five underground storage fields,
located on or near its pipeline system and/or market areas, and operates three
of these storage fields. The certificated storage capacity of TGPL and its
customers is approximately 233 Bcf. This storage permits TGPL's customers to
inject gas into storage during the summer and off-peak periods for delivery
during peak winter periods.
TGPL's total system deliveries for the years 1994, 1993 and 1992 are
shown below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1994 1993 1992
----------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
TGPL SYSTEM DELIVERIES (Bcf):
Market-area deliveries
Long-haul transportation . . . . 777.3 56% 823.9 60% 821.8 59%
Market-area transportation . . . 437.9 31% 374.4 27% 379.8 27%
--------- ----- ---------- ------- --------- ------
Total market-area deliveries . 1,215.2 87% 1,198.3 87% 1,201.6 86%
Production-area transportation . . 178.7 13% 171.2 13% 199.3 14%
--------- ----- ---------- ------- --------- ------
Total system deliveries . . . . . . 1,393.9 100% 1,369.5 100% 1,400.9 100%
========= ===== ========== ======= ========= ======
</TABLE>
TGPL's facilities are divided into seven rate zones. Four are located in
the production area and three are located in the market area. Long-haul
transportation is gas that is received in one of the production-area zones and
delivered in a market-area zone. Market-area transportation is gas that is
both received and delivered within market-area zones. Production-area
transportation is gas that is both received and delivered within
production-area zones.
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As shown in the table above, TGPL's total market-area deliveries for 1994
were 16.9 Bcf higher than 1993. The increased deliveries, primarily firm
transportation volumes, are higher than the same period in 1993 mainly due to
the colder-than-normal weather in the market area during January and February
1994, coupled with higher firm throughput during the summer period due to
implementation of capacity release programs pursuant to Order 636. The
production-area deliveries for 1994 increased 7.5 Bcf, or 4%, when compared to
1993 due to TGPL's decreased rates resulting from the elimination of the
producer settlement surcharge which expired on May 31, 1993. As a result of a
SFV rate design and the interruptible transportation revenue crediting
requirement, these increases in system deliveries had no significant impact on
operating income; however, these increases show the strength of the TGPL
franchise.
The following table sets forth the names of TGPL's five largest customers
during 1994 along with the related sales and transportation volumes shipped to
such customers for the periods shown (in Bcf). Long-haul and market-area
transportation volumes include sales volumes transported by TGPL.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993* 1992*
--------- -------- --------
<S> <C> <C> <C>
TGPL MAJOR CUSTOMERS:
Public Service Electric and Gas Company
Sales . . . . . . . . . . . . . . . . . . . . . 18.7 21.0 18.3
Long-haul and market-area transportation . . . 230.7 221.5 213.6
Consolidated Edison Company of New York, Inc.
Sales . . . . . . . . . . . . . . . . . . . . . 29.8 27.2 17.3
Long-haul and market-area transportation . . . 140.1 148.4 153.4
Piedmont Natural Gas Company, Inc.
Sales . . . . . . . . . . . . . . . . . . . . 16.4 15.2 11.8
Long-haul and market-area transportation . . . 91.8 88.2 82.3
Long Island Lighting Company
Sales . . . . . . . . . . . . . . . . . . . . . 25.2 19.3 10.2
Long-haul and market-area transportation . . . 72.1 66.5 67.8
The Brooklyn Union Gas Company
Sales . . . . . . . . . . . . . . . . . . . . . 17.3 11.9 13.2
Long-haul and market-area transportation . . . 65.0 62.8 77.9
</TABLE>
* Certain reclassifications have been made in the presentation of volumes for
1993 and 1992 to conform to the 1994 presentation.
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 "Item 7. Management's Discussion and Analysis - Capital Resources
and Liquidity - Other Capital Requirements and Contingencies - Long-term gas
purchase contracts" and "Item 8. Financial Statements and Supplementary Data -
Notes to Financial Statements - C. Regulatory Matters - Order 636."
5
<PAGE> 7
PIPELINE PROJECTS
LIBERTY PIPELINE COMPANY. In 1992, Liberty Pipeline Company (Liberty), a
partnership of interstate pipelines and local distribution companies, filed for
FERC approval to construct and operate a natural gas pipeline to provide 500
MMcf/d in firm transportation service to the greater New York City metropolitan
area. The partnership presently is comprised of subsidiaries of Transco and two
other interstate pipelines and subsidiaries of two TGPL customers in New York.
On August 1, 1994, Liberty asked the FERC to postpone indefinitely
its review of the project. The decision followed the withdrawal of two key
shippers from the project. The partners reaffirmed their belief that an
additional delivery point to the New York facilities system, as proposed by
Liberty, would be necessary in the future and advised the FERC that the Liberty
partners would continue to pursue that goal. On August 12, 1994, the FERC
dismissed, without prejudice, the applications of Liberty and other upstream
pipeline companies for authority to build the pipeline and other related
facilities.
At the time Liberty ceased development of its project, TGPL also
suspended development of its associated Liberty Upstream Expansion. That
project contemplated 115 MMcf/d of firm transportation capacity from Leidy,
Pennsylvania interconnects to the Liberty Pipeline, near South Amboy, New
Jersey. The total investment in the Liberty Upstream project is $3.6 million
of which $0.6 million was incurred during 1994. TGPL believes these
expenditures will have value to future projects.
SOUTHEAST EXPANSION PROJECTS. In November 1993, TGPL filed for FERC
approval of its Southeast Expansion Projects to provide additional firm
transportation capacity to growing southeastern markets in Alabama, Georgia,
South and North Carolina and Virginia. The Southeast Expansion Projects will
provide a total of 200 MMcf/d of firm transportation capacity to TGPL's
southeast customers by the 1996-1997 winter heating season. The new firm
transportation capacity will extend from TGPL's Mobile Bay lateral
interconnect, near Butler, Alabama, to delivery points upstream of TGPL's
Compressor Station 165, near Chatham, Virginia. The expansion projects will
include approximately 25 miles of pipeline replacement and looping and the
installation of additional compression totaling approximately 70,000
horsepower. TGPL's FERC applications estimated the cost of the expansion to be
$125 million which will be recovered through incremental rates based on the SFV
rate design methodology.
By orders issued May 27, 1994 and December 21, 1994, the FERC
authorized the 1994 Southeast Expansion Project (SE94) and the 1995/1996
Southeast Expansion Project (SE95/96), respectively. SE94 was completed and
placed into service in November 1994, and provides 35 MMcf/d incremental firm
transportation capacity. SE95/96 will be constructed in two phases: Phase I
will add 115 MMcf/d of incremental firm capacity
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for the 1995-1996 winter heating season, and Phase II will add the remaining 50
MMcf/d for the 1996-1997 winter heating season.
TGPL invested $19.7 million in these projects in 1994 and expects to
invest approximately $69 million in these projects in 1995.
EMINENCE STORAGE FIELD EXPANSION PROJECT. During 1994, TGPL
completed the second phase of its Eminence storage field expansion project,
expanding the working capacity from 9 Bcf to 12 Bcf and increasing the
withdrawal rate from 1.3 Bcf/d to 1.5 Bcf/d. The expansion of the salt-dome
structure, located at TGPL's Compressor Station 77, near Seminary, Mississippi,
will give TGPL additional flexibility to meet the load balancing and emergency
gas supply demands of its customers. High deliverability from storage helps
assure pipelines, such as TGPL, of gas availability for their customers during
adverse weather conditions.
TGPL plans further expansion of the storage field in 1995, increasing
the working capacity of the storage field to 15 Bcf.
MOBILE BAY LATERAL EXPANSION PROJECT. In September 1993, the FERC
issued an order authorizing the joint ownership and expansion of TGPL's Mobile
Bay lateral with Florida Gas Transmission Company (Florida Gas). The lateral
transports gas from the prolific Mobile Bay gas supply basin to the TGPL
mainline, near Butler, Alabama. Construction of the compressor station
authorized as part of the expansion was completed in November 1994 and the
station was placed into service in December 1994. It is anticipated that the
remaining expansion facilities will be placed into service in March 1995.
When the expansion is fully placed into service, the capacity of the
Mobile Bay lateral will be increased from 462 MMcf/d to 829 MMcf/d. The
expansion will increase the TGPL portion of pipeline capacity by approximately
60 MMcf/d to 520 MMcf/d.
The cost of the expansion project has been funded entirely by Florida
Gas, and TGPL estimates it will receive approximately $13 million from Florida
Gas for the sale of a partial interest in the lateral.
In June 1994, TGPL completed the tie-in of Exxon's treatment plant to
the Mobile Bay lateral, adding approximately 350 MMcf/d of production
deliverability.
Both of these expansion projects will not only enhance TGPL's overall
access to gas supply, but will also provide additional gas supply for the
Southeast Expansion Projects.
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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, including the equity component of a pipeline's capital structure.
Rate design and the allocation of costs between the demand and commodity rates
also impact profitability.
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 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.
For a discussion of regulatory matters, see "Item 8. Financial
Statements and Supplementary Data - Notes to Financial Statements - C.
Regulatory Matters."
COMPETITION
Competition for gas transportation has intensified in recent years
due to customer access to other pipelines, rate competitiveness among pipelines
and customers' desire to have more than one supplier. The FERC's stated purpose
of Order 636 is to improve the competitive structure of the natural gas
pipeline industry. TGPL 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 Gas Transmission Corporation
(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
TGPL's production area may result in rates which could make TGPL less
competitive, both in terms of production-area and long-haul transportation
rates. A hearing before a FERC Administrative Law Judge (ALJ) dealing
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<PAGE> 10
with, among other things, TGPL's production-area rate design concluded in June
1994 and the parties submitted briefs to the ALJ in August and September 1994.
The decision of the ALJ, when issued, will be subject to review by the FERC.
TGPL is unable at this time to fully assess the competitive effect and
resulting financial impact on TGPL of having to maintain its current
production-area rate design which is different than that of its competitors.
TGPL does not expect to incur gas supply realignment (GSR) costs
associated with its firm sales service. TGPL's non-GSR transition costs are
anticipated to be insignificant; therefore, TGPL believes the demand charges to
recover these costs will not make its rates noncompetitive in its markets. See
"Item 8. Financial Statements and Supplementary Data - Notes to Financial
Statements - C. Regulatory Matters - Order 636."
Although a significant portion of TGPL's firm customers have
relatively secure residential and commercial end-users, virtually all of TGPL's
LDCs have some price-sensitive end-users that could switch to alternate fuels.
Approximately one-third of TGPL's customer deliveries are at risk to such fuel
switching; however, a recent survey of TGPL's largest customers suggests that
end-users will pay a premium to burn natural gas and that LDCs will
aggressively price their system transportation to stay competitive in
alternate-fuel markets.
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. In January
1993, Transco began to implement a plan to consolidate its gas marketing
businesses under the common management of TGMC to more closely coordinate gas
marketing operations to improve efficiencies, reduce costs and improve
profitability. In January 1993, TGMC, through an agency agreement, began to
manage all jurisdictional merchant sales of TGPL. 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 herein and Notes A, J and L of the Notes to Financial
Statements contained in Item 8 herein.
TGPL makes jurisdictional merchant sales to customers through a Firm
Sales (FS) program and an Optional Firm Sales (OFS) 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. In
addition, TGPL makes jurisdictional merchant sales through an Interruptible
Sales (IS) program and a Negotiated Sales (NS) program.
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TGPL's gas sales volumes for the years 1994, 1993 and 1992 are shown
below.
<TABLE>
<CAPTION>
Gas Sales Volumes (Bcf)(1) 1994 1993 1992
-------------------------- ------- ------- -------
<S> <C> <C> <C>
Long-term sales . . . . . . . . . . . . . . . 213.0 212.3 188.3
Short-term sales . . . . . . . . . . . . . . 109.3 33.2 32.8
------- ------- -------
Total gas sales . . . . . . . . . . . . . 322.3 245.5 221.1
======= ======= =======
</TABLE>
(1) Effective January 1993, TGMC, through an agency agreement with TGPL,
assumed management of TGPL's merchant sales service.
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. See "Item 8.
Financial Statements and Supplementary Data - Notes to Financial Statements -
E. Environmental Matters."
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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% below the prime rate of Citibank, N.A., not to exceed the
maximum lawful rate of interest.
TGPL has a 20-year lease agreement for 1,005,478 square feet at its
headquarters building in Houston which expires in 2004. The lease is with
Transco Tower Limited, a partnership in which Transco had an indirect 12.5%
interest until December 1994. For information concerning lease commitments,
see "Item 8. Financial Statements and Supplementary Data - Notes to Financial
Statements - J. Commitments and Contingencies."
See also "Sales Service" above.
ITEM 2. PROPERTIES.
See "Item 1. Business."
ITEM 3. LEGAL PROCEEDINGS.
See "Item 8. Financial Statements and Supplementary Data - Notes to
Financial Statements - D. Legal Proceedings."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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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.
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ITEM 6. SELECTED FINANCIAL DATA
(Expressed in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Revenues . . $1,590,962 $ 1,521,533 $ 1,257,197 $1,144,309 $ 1,249,512
========== =========== =========== ========== ===========
Common Stock Equity
in Net Income
(Loss) . . . . . . $ 104,782(1) $ 86,118(2) $ 64,904(3) $ (68,578)(4) $ 23,012(5)
========== =========== =========== ========== ===========
Total Assets . . . . $2,271,115 $ 2,304,225 $ 2,301,558 $2,358,905 $ 2,402,921
========== =========== =========== ========== ===========
Current Maturities
of Long-Term
Debt . . . . . . . . $ - $ - $ 154,856 $ 44,600 $ 74,100
=========== =========== =========== ========== ===========
Capitalization:
Long-term debt,
less current
maturities . . . . . $ 644,238 $ 643,799 $ 518,943 $ 686,064 $ 725,989
------------ ------------- ------------ -------------- ------------
Preferred stock -
redeemable, net . . $ 49,375 $ 75,191 $ 101,006 $ 105,248 $ 110,560
------------ ------------- ------------ ------------ ------------
Common
stockholder's
equity . . . . . . $ 814,827 $ 707,290 $ 618,735 $ 425,601 $ 481,208
------------ ------------- ------------ ------------ ------------
Total
Capitalization . . $1,508,440 $ 1,426,280 $ 1,238,684 $1,216,913 $ 1,317,757
========== =========== =========== ========== ===========
Cash Dividends on
Common Stock . . . $ - $ - $ - $ - $ 100,000
========== =========== =========== ========== ===========
</TABLE>
(1) Includes after-tax charges totaling $3.7 million
applicable to a provision for a regulatory issue. See
Note C of Notes to Financial Statements.
(2) Includes after-tax charges totaling $13.5 million
applicable to a write-off of a note receivable and a
federal income tax rate increase. See Notes I and J of
Notes to Financial Statements.
(3) Includes an after-tax charge of $19.5 million applicable
to a provision for the Challenger Settlement. See Note
D of Notes to Financial Statements.
(4) Includes net after-tax charges totaling $134.8 million
applicable to provisions for asset impairments,
restructuring costs, producer settlements and regulatory
issues, partially offset by benefits of the resolution
of rate issues.
(5) Includes net after-tax charges totaling $44.5 million
applicable to a provision for producer settlements and
regulatory issues.
13
<PAGE> 15
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.
On December 12, 1994, Transco and Williams entered into a Merger
Agreement, which was amended on February 17, 1995, pursuant to which Williams
agreed to commence a cash tender offer to acquire up to 24.6 million shares, or
approximately 60%, of the outstanding shares of Transco's common stock for
$17.50 per share. According to the terms of the Merger Agreement, the cash
tender offer would be followed by a stock merger in which each share of Transco
common stock not purchased in the tender offer would be exchanged for 0.625 of
a share of Williams' common stock.
The tender offer began on December 16, 1994 and expired on January 17,
1995. Approximately 35.2 million shares, or approximately 86.7% of the
outstanding shares of Transco's common stock, were tendered to Williams for
purchase and not withdrawn. Pursuant to the Merger Agreement, on January 18,
1995, Williams accepted for payment 24.6 million shares of Transco's common
stock for $17.50 per share as the first step in acquiring the entire equity
interest of Transco. The remainder of the outstanding shares of Transco's
common stock will be converted to Williams' common stock. Each outstanding
share of Transco's common stock will be converted into 0.625 of a share of
Williams' common stock upon majority approval by Transco's stockholders. The
conversion will occur at the effective date of the Merger, which is expected to
be in April 1995.
Williams has stated that Transco or Williams or both, through their
respective subsidiaries, will promptly expand both regulated and non-regulated
activities in the geographical areas served by Transco's pipeline subsidiaries,
including TGPL, and Williams' existing systems. Williams has stated that
during 1995 it will make capital expenditures of approximately $200 million
with respect to certain Transco regulated businesses and approximately $200
million for expansion by Transco into non-regulated activities.
In connection with these plans, in January 1995 the boards of directors
of Transco and Williams approved a proposed recapitalization plan for Transco
under which Williams will advance or contribute to Transco up to an estimated
$950 million to execute the proposed plan. In addition, according to Williams,
Williams intends to cause Transco, as promptly as practicable following the
Merger and subject to receipt of any necessary consents, to declare and pay as
dividends to Williams the Operating Company Dividends.
14
<PAGE> 16
Since 1992, TGPL has improved its financial strength and has experienced
strong operational results. TGPL expects that Transco's pending merger with
Williams, when completed, will further enhance its financial and operational
strength, as well as allow it to take advantage of new opportunities for
growth.
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 for sources of long-term financing. As general corporate
policy, the interest rate on intercompany demand notes is 1-1/2% below the
prime rate of Citibank, N.A. At December 31, 1994, there were outstanding
advances totaling $116 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 necessary for Transco to service its debt and pay dividends
on its common and preferred stock. TGPL's Board of Directors declared no
common stock dividends in 1994, 1993 and 1992.
Certain of TGPL's debt instruments restrict the amount of dividends
distributable. As of December 31, 1994, approximately $359 million of TGPL's
retained earnings of $529 million was available for distribution.
In connection with the Merger, in January 1995, the boards of directors
of Transco and Williams approved a proposed recapitalization plan for Transco
under which Williams will advance or contribute to Transco up to an estimated
$950 million to execute the proposed plan. The recapitalization plan, as it
impacts TGPL, includes, among other things, the following actions completed in
January and February 1995:
- Termination of Transco's Amended Bank Credit Facility dated December
31, 1993, replacing it with the Williams Credit Agreement;
- Termination of the program to sell monthly trade receivables of
TGPL, replacing it with the Williams Credit Agreement with the
expectation that at some future time Williams will enter into a new
receivables program;
15
<PAGE> 17
- Termination of Transco's Reimbursement Facility dated December 31,
1993; and
- Redemption of all of TGPL's outstanding preferred stock at $100.00
per share plus accrued dividends, to be effective March 23, 1995.
In addition, in February 1995, Standard & Poor's Corporation and Moody's
Investor Service upgraded TGPL's debt securities from BB and Ba2 to BBB and
Baa1, respectively and TGPL's preferred stock from BB- and B1 to BBB- and Baa2,
respectively. These upgrades should provide TGPL with greater access to
capital markets. A security rating is not a recommendation to buy, sell or
hold securities; it may be subject to revision or withdrawal at any time by the
assigning rating organization. Each rating should be evaluated independently
of any other rating.
The recapitalization plan is expected, when taken together with the
Operating Company Dividends, to provide TGPL with somewhat greater ratemaking
flexibility afforded by a stand alone capital structure.
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, 1993 to
December 31, 1994. This results from an increase in common stockholder's
equity, reflecting increased net income, partly offset by a reduction in
preferred stock.
<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ ----------
(In millions)
<S> <C> <C> <C>
Common Stockholder's Equity . . . . . . $ 814.8 $ 707.3 $ 618.7
Preferred Stock . . . . . . . . . . . . 49.4 75.2 101.0
Long-term Debt, less Current Maturities . 644.2 643.8 518.9
----------- ----------- ----------
Total Capitalization . . . . . . . . 1,508.4 1,426.3 1,238.6
Current maturities of Long-Term Debt . . - - 154.9
----------- ----------- ----------
Total Invested Capital . . . . . . . $ 1,508.4 $ 1,426.3 $ 1,393.5
=========== =========== ==========
Long-term Debt, less Current Maturities as
a percentage of Total Capitalization . . 42.7% 45.1% 41.9%
Common Stockholder's Equity as a percentage
of Total Capitalization . . . . . . . . 54.0% 49.6% 50.0%
Total Debt as a percentage of Total Invested
Capital . . . . . . . . . . . . . . . . 42.7% 45.1% 48.4%
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Provided By Operating Activities . . . . $ 161.8 $ 259.3 $ 3.9
======== ======== ========
</TABLE>
16
<PAGE> 18
Cash flows from operating activities for the year ended December 31,
1994 were $98 million lower than for the year ended December 31, 1993. This
decrease in cash flows is primarily the result of rate refunds made by TGPL
under its RP92-137 general rate case ($123 million) and higher collection of
revenues in 1993 subject to refund ($83 million), partly offset by a net
decrease in gas inventory of $25 million and no producer settlement cash
payments being made in 1994 compared to $32 million in 1993.
For the year ended December 31, 1993, cash flows from operating
activities were $255 million higher than for the year ended December 31, 1992.
This improvement in cash flows was primarily the result of cash refunds TGPL
paid to customers in 1992 in connection with the Transition Cost proceeding
($74 million) and its Rate Settlement ($102 million) 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 ($101 million)
and lower payments in 1993 for producer settlements ($35 million).
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(In millions)
<S> <C> <C> <C>
Cash Flows Provided By (Used In)
Financing Activities . . . . . . . . . . . . . . . $ (32.3) $ (66.5) $ 37.4
======= ======= ======
</TABLE>
The cash flows used in financing activities for the year ended December
31, 1994, reflect the retirement of $26 million of preferred stock and dividend
payments of $6 million on preferred stock.
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 proceeds
of $125 million from the sale of TGPL's 8-7/8% notes, partly offset by the
retirement of $200 million of TGPL's long-term debt and dividend payments of $9
million on preferred stock.
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(In millions)
<S> <C> <C> <C>
Cash Flows Used In Investing Activities . . . . . . $ 128.9 $ 193.0 $ 64.0
======== ======== ========
</TABLE>
For the year ended December 31, 1994, cash flows used in investing
activities included cash outflows for capital expenditures for property, plant
and equipment of $143 million, as shown in the following table, partly offset
by a net decrease of $17 million in advances to Transco.
For the year ended December 31, 1993, cash flows used in investing
activities were primarily for capital expenditures for property, plant and
equipment of $110
17
<PAGE> 19
million, as shown in the following table, and a net increase of $119 million in
advances to Transco, partly offset by the recovery of $30 million of producer
settlement costs.
For the year ended December 31, 1992, cash flows used in investing
activities reflect capital expenditures for property, plant and equipment of
$116 million, as shown in the following table, and a net increase of $11
million in advances to Transco, partly offset by the recovery of $53 million of
producer settlement costs.
<TABLE>
<CAPTION>
Budget Actual
---------- --------------------------------------
Capital Expenditures 1995 1994 1993 1992
---------- ---------- ----------- -----------
(In millions)
<S> <C> <C> <C> <C>
Market-Area Projects . . . . . . . $ 68.8 $ 20.4 $ 13.1 $ 54.6
Supply-Area Projects . . . . . . . 9.0* 13.7 27.3 16.1
Maintenance of Existing Facilities
and Other Projects . . . . . . . 132.4 109.3 69.8 45.0
---------- ----------- ----------- ------------
Total Capital Expenditures . $ 210.2 $ 143.4 $ 110.2 $ 115.7
========== =========== =========== ============
</TABLE>
* Excludes $13.1 million that TGPL is budgeted to receive from Florida Gas for
the sale of a partial interest in the Mobile Bay lateral.
Included in TGPL's capital expenditures for 1994 were $20 million for
market-area expansion, primarily for the Southeast Expansion Projects, compared
to $13 million in 1993; $14 million for supply projects, primarily for a
production-area storage facility, compared to $27 million in 1993; and $109
million for maintenance of existing facilities and other projects, compared to
$70 million in 1993.
FUTURE CAPITAL EXPENDITURES
As shown in the table above, TGPL has budgeted approximately $210
million (before application of the Mobile Bay lateral proceeds) for 1995
capital expenditures. This budget reflects TGPL's plans for capital spending
without consideration of the potential effects of the Merger, and therefore, is
subject to revision after the Merger is consummated. The increase in expected
capital expenditures in 1995 over 1994 and 1993 is generally related to
pipeline expansion projects, primarily the Southeast Expansion Projects, and
the maintenance of existing facilities.
SOUTHEAST EXPANSION PROJECTS. In November 1993, TGPL filed for FERC
approval of its Southeast Expansion Projects to provide additional firm
transportation capacity to growing southeastern markets in Alabama, Georgia,
South and North Carolina and Virginia. The Southeast Expansion Projects will
provide a total of 200 MMcf/d of firm transportation capacity to TGPL's
southeast customers by the 1996-1997 winter heating season. The new firm
transportation capacity will extend from TGPL's Mobile Bay lateral
interconnect, near Butler, Alabama, to delivery points upstream of TGPL's
Compressor Station 165, near Chatham, Virginia. The expansion projects will
include approximately 25 miles of pipeline replacement and looping and the
installation
18
<PAGE> 20
of additional compression totaling approximately 70,000 horsepower. TGPL's
FERC applications estimated the cost of the expansion to be $125 million which
will be recovered through incremental rates based on the SFV rate design
methodology.
By orders issued May 27, 1994 and December 21, 1994, the FERC authorized
the 1994 Southeast Expansion Project (SE94) and the 1995/1996 Southeast
Expansion Project (SE95/96), respectively. SE94 was completed and placed into
service in November 1994, and provides 35 MMcf/d of incremental firm
transportation capacity. SE95/96 will be constructed in two phases: Phase I
will add 115 MMcf/d of incremental firm capacity for the 1995-1996 winter
heating season, and Phase II will add the remaining 50 MMcf/d for the 1996-1997
winter heating season.
TGPL invested $19.7 million in these projects in 1994 and expects to
invest approximately $69 million in these projects in 1995.
LIBERTY PIPELINE COMPANY. In 1992, Liberty, a partnership of interstate
pipelines and local distribution companies, filed for FERC approval to
construct and operate a natural gas pipeline to provide 500 MMcf/d in firm
transportation service to the greater New York City metropolitan area. The
partnership is presently comprised of subsidiaries of Transco and two other
interstate pipelines and subsidiaries of two TGPL customers in New York.
On August 1, 1994, Liberty asked the FERC to postpone indefinitely its
review of the project. The decision followed the withdrawal of two key
shippers from the project. The partners reaffirmed their belief that an
additional delivery point to the New York facilities system, as proposed by
Liberty, would be necessary in the future and advised the FERC that the Liberty
partners would continue to pursue that goal. On August 12, 1994, the FERC
dismissed, without prejudice, the applications of Liberty and other upstream
pipeline companies for authority to build the pipeline and other related
facilities.
At the time Liberty ceased development of its project, TGPL also
suspended development of its associated Liberty Upstream Expansion. That
project contemplated 115 MMcf/d of firm transportation capacity from Leidy,
Pennsylvania interconnects to the Liberty Pipeline, near South Amboy, New
Jersey. TGPL's total investment in the Liberty Upstream project is $3.6
million, of which $0.6 million was incurred during 1994. TGPL believes these
expenditures will have value to future projects.
EMINENCE STORAGE FIELD EXPANSION PROJECT. During 1994, TGPL completed
the second phase of its Eminence storage field expansion project, expanding the
working capacity from 9 Bcf to 12 Bcf and increasing the withdrawal rate from
1.3 Bcf/d to 1.5 Bcf/d. The expansion of the salt-dome structure, located at
TGPL's Compressor Station 77, near Seminary, Mississippi, will give TGPL
additional flexibility to meet the load balancing and emergency gas supply
demands of it customers. High deliverability from
19
<PAGE> 21
storage helps assure pipelines, such as TGPL, of gas availability for their
customers during adverse weather conditions.
TGPL plans further expansion of the storage field in 1995, increasing
the working capacity of the storage field to 15 Bcf. TGPL expects to invest
approximately $9 million in this project in 1995.
MOBILE BAY LATERAL EXPANSION PROJECT. In September 1993, the FERC
issued an order authorizing the joint ownership and expansion of TGPL's Mobile
Bay lateral with Florida Gas. The lateral transports gas from the prolific
Mobile Bay gas supply basin to the TGPL mainline, near Butler, Alabama.
Construction of the compressor station authorized as part of the expansion was
completed in November 1994 and the station was placed into service in December
1994. It is anticipated that the remaining expansion facilities will be placed
into service in March 1995.
When the expansion is fully placed into service, the capacity of the
Mobile Bay lateral will be increased from 462 MMcf/d to 829 MMcf/d. The
expansion will increase the TGPL portion of pipeline capacity by approximately
60 MMcf/d to 520 MMcf/d.
The cost of the expansion project has been funded entirely by Florida
Gas, and TGPL estimates it will receive approximately $13 million from Florida
Gas for the sale of a partial interest in the lateral.
In June 1994, TGPL completed the tie-in of Exxon's treatment plant to
the Mobile Bay lateral, adding approximately 350 MMcf/d of production
deliverability.
Both of these expansion projects will not only enhance TGPL's overall
access to gas supply, but will also provide additional gas supply for the
Southeast Expansion Projects.
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.
TGPL does not expect to incur GSR costs associated with its firm sales
service. TGPL's non-GSR transition costs are anticipated to be insignificant.
Order 636 provides that pipelines should be allowed the opportunity to recover
all prudently incurred transition costs. 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.
20
<PAGE> 22
RATE AND REGULATORY REFUNDS. As discussed in Note C of the Notes to
Financial Statements included in Item 8 herein, TGPL received a FERC order
accepting an Offer of Settlement (the Settlement) in connection with its
general rate case (Docket No. RP92-137) on November 4, 1993. Through January
31, 1995, TGPL made partial refunds of approximately $150 million, including
interest, under the Settlement. An additional refund of approximately $24
million, including interest, is expected to be made during the first quarter of
1995. TGPL had previously provided a reserve for these refunds.
As discussed in Note C of the Notes to Financial Statements included in
Item 8 herein, on February 13, 1995, the FERC issued an order rejecting the
settlement with Columbia and requiring TGPL to refund to Columbia within 30
days approximately $7 million of Order 94-A costs collected from Columbia. On
March 9, 1995, TGPL filed with the FERC a request for extension of time to make
the refund. On March 13, 1995, the FERC granted an extension of time for
making the refund, to and including 30 days after FERC action on requests for
rehearing. On March 15, 1995, TGPL filed for rehearing of the FERC's February
13 order. Also, on March 15, 1995 Columbia filed for rehearing of the February
13 order asking that the FERC require that TGPL pay interest on the refund of
the Order 94-A amounts. TGPL has provided a reserve of approximately $7
million which it believes is adequate to provide for any amounts which it may
ultimately be required to refund.
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, results of operations or net
cash flows.
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 contracts.
21
<PAGE> 23
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>
1995 . . . . . . . . . . . . . . . . . . . . . . . . $ 77.2
1996 . . . . . . . . . . . . . . . . . . . . . . . . 35.5
1997 . . . . . . . . . . . . . . . . . . . . . . . . 34.8
1998 . . . . . . . . . . . . . . . . . . . . . . . . 6.9
1999 . . . . . . . . . . . . . . . . . . . . . . . . 6.3
Cumulative thereafter . . . . . . . . . . . . . . . . 19.5
</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 gas 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 82% 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. Approximately 17% of
TGPL's portfolio is fixed priced or variable priced with a significant premium
which can result in a price that is not 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 sales customers,
TGPL has in place a gas inventory charge (GIC) which, although no assurances
can be given, TGPL believes will be adequate to enable full recovery of its
above-spot-market gas costs. Through an agency agreement with TGPL, TGMC has
assumed management of TGPL's merchant sales service and, as TGPL's agent, is at
risk for any above-spot-market gas costs that it may incur 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, results of operations or net cash flows.
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.
22
<PAGE> 24
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, when
necessary, by repayments of funds advanced to Transco or advances or capital
contributions from Transco or Williams, will provide TGPL with sufficient
liquidity to meet its capital requirements. If necessary, TGPL also expects to
be able to access public and private capital markets to finance its capital
requirements.
RESULTS OF OPERATIONS
The table below shows the results of operations of TGPL for the years
1994, 1993 and 1992, the effects of certain selected items that have impacted
those results and references to discussions of those selected items in the
Notes to Financial Statements.
<TABLE>
<CAPTION>
1994 1993 1992
---------- ----------- -----------
(In millions)
<S> <C> <C> <C>
Net Income Before Selected Items . . . . . . . $ 108.5 $ 99.6 $ 84.4
Write-off of note receivable (Note J) . . . . . - ( 12.5) -
Federal tax rate increase (Note I) . . . . . . - ( 1.0) -
FERC Order 94 Reserve (Note C) . . . . . . . . ( 3.7) - -
Provision for Challenger Settlement (Note D) . - - ( 19.5)
---------- ----------- -----------
Net Income . . . . . . . . . . . . . . . . . . $ 104.8 $ 86.1 $ 64.9
========== =========== ===========
</TABLE>
In January 1993, upon FERC approval, Transco realigned its gas
marketing businesses under the common management of TGMC. TGMC, through an
agency agreement with TGPL, manages all jurisdictional merchant gas sales made
by TGPL. The financial performance of TGPL's sales service, both merchant and
non-merchant, is discussed separately in the following discussion.
1994 COMPARED TO 1993
NET AND OPERATING INCOME. TGPL's net income for 1994 was $18.7 million
higher than 1993. Selected items affecting the results for 1994 include a
reserve for refunds of certain FERC Order 94 production-related costs and
selected items affecting the results for 1993 include a write-off of a note
receivable from TGPL's prior sale of an interest in a gas field and related gas
processing plant. Excluding the net income impact of the selected items shown
in the table above, TGPL's net income was higher by
23
<PAGE> 25
$8.9 million, due primarily to higher net revenues of $19.9 million (net of the
related cost of sales and transportation) and lower dividends on preferred
stock of $2.2 million, partly offset by higher operation and maintenance
expenses of $14.3 million. Operating income for 1994 was $224.5 million
($230.5 million excluding the selected item), compared to operating income of
$203.1 million ($223.2 million excluding the selected item) for 1993. This
$7.3 million increase, excluding the selected items, was primarily due to
higher net revenues of $19.9 million, partly offset by higher operation and
maintenance expenses of $14.3 million.
The acquisition of Transco by Williams will be accounted for using the
purchase method of accounting. Accordingly, upon completion of the Merger, the
purchase price will be allocated to the net assets acquired, including the net
assets of TGPL. Current FERC policy does not permit TGPL to recover through
its rates amounts in excess of the original cost of its regulated facilities.
As a result, absent any offsetting effects of the acquisition, future
amortization of purchase price amounts allocated to TGPL in excess of the
current book value of TGPL's net assets could cause TGPL's operating income in
1995 to be lower than 1994.
As shown on the table below, pretax net interest expense for 1994 was
$3.9 million lower than 1993, primarily due to the lower interest on long-term
debt and higher interest income in 1994 compared to 1993.
<TABLE>
<CAPTION>
1994 1993 1992
----------- ------------ -----------
(In millions)
<S> <C> <C> <C>
Interest expense relating to:
Long-term debt . . . . . . . . . . . . . . . $ 54.1 $ 55.9 $ 61.4
Transition Cost proceeding . . . . . . . . . - - 0.8
Rate refunds . . . . . . . . . . . . . . . . 4.6 5.1 3.2
Other . . . . . . . . . . . . . . . . . . . . 0.6 1.5 7.3
----------- ------------ -----------
Total interest expense . . . . . . . . . . 59.3 62.5 72.7
Interest income . . . . . . . . . . . . . . . (6.7) (5.1) (3.5)
AFUDC . . . . . . . . . . . . . . . . . . . . (4.2) (5.1) -
----------- ------------ -----------
Net interest expense . . . . . . . . . . . . . $ 48.4 $ 52.3 $ 69.2
=========== ============ ===========
</TABLE>
TRANSPORTATION SERVICES. TGPL's operating revenues, excluding sales and
storage services, decreased $6 million to $688 million for 1994, when compared
to 1993. However, exclusive of the producer settlement surcharge discussed
below, transportation revenues increased $20 million reflecting an increase of
$10 million due to increased throughput on the Mobile Bay lateral as a result
of the change from interruptible transportation to firm transportation combined
with additional demand revenues of $7 million from Phases I and II of the
Eminence storage field expansion project. Other revenues increased $4 million,
primarily due to higher transportation of liquid and liquefiable hydrocarbons.
Transportation revenues also include a decrease of $29 million due to lower
transportation rates resulting from the elimination of the producer settlement
surcharge, which expired on May 31, 1993, although the decrease had no effect
on
24
<PAGE> 26
TGPL's operating or net income variances when compared with the prior year
since it was offset by corresponding variances in the cost of transportation.
Excluding the pretax effects of the selected items in 1994 and 1993 and
the cost of sales and transportation of $871 million for 1994 and $822 million
for 1993, TGPL's operating expenses increased approximately $13 million over
1993. The increase for the year was primarily due to higher costs for platform
rental space ($4 million) and labor ($6 million), partly offset by lower costs
for postretirement benefits other than pensions ($3 million).
As shown in the table below, TGPL's total market-area deliveries for
1994 were 16.9 Bcf higher than 1993. The increased deliveries, primarily firm
transportation volumes, are higher than the same period in 1993 mainly due to
the colder-than-normal weather in the market area during January and February
1994, coupled with higher firm throughput during the summer period due to
implementation of capacity release programs pursuant to Order 636. The
production-area deliveries for 1994 increased 7.5 Bcf, or 4%, when compared to
1993 due to TGPL's decreased rates resulting from the elimination of the
producer settlement surcharge which expired on May 31, 1993. As a result of a
SFV rate design and the interruptible transportation revenue crediting
requirement, these increases in system deliveries had no significant impact on
operating income; however, these increases show the strength of the TGPL
franchise.
<TABLE>
<CAPTION>
TGPL System Deliveries (Bcf) 1994 1993 1992
----------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Market-area deliveries:
Long-haul transportation . . . . . . . . . . . . . . . 777.3 823.9 821.8
Market-area transportation . . . . . . . . . . . . . . 437.9 374.4 379.8
---------- ---------- ----------
Total market-area deliveries . . . . . . . . . . . . 1,215.2 1,198.3 1,201.6
Production-area transportation . . . . . . . . . . . . . 178.7 171.2 199.3
---------- ---------- ----------
Total system deliveries . . . . . . . . . . . . . . . . . 1,393.9 1,369.5 1,400.9
========== ========== ==========
</TABLE>
TGPL's facilities are divided into seven rate zones. Four are located
in the production area and three are located in the market area. Long-haul
transportation is gas that is received in one of the production-area zones and
delivered in a market-area zone. Market-area transportation is gas that is
both received and delivered within market-area zones. Production-area
transportation is gas that is both received and delivered within
production-area zones.
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 ALJ, dealing with, among
other things, TGPL's production-area rate design, concluded in June 1994 and
the parties submitted briefs to the ALJ in August and September 1994. The
decision of the ALJ, when issued, will be subject to review by the
25
<PAGE> 27
FERC. 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.
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 settlement 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 was appealed to the United States Court of Appeals for the
D.C. Circuit (D.C. Circuit Court). TGPL appealed, seeking to increase the rate
of return, and certain other parties appealed, seeking to lower the rate of
return. On December 23, 1994, the D.C. Circuit Court issued an opinion
remanding to the FERC the FERC's September 17, 1992 order. The D.C. Circuit
Court determined that the FERC had failed to explain adequately its decisions
to use a hypothetical capital structure for TGPL, to select a rate of return on
equity at the top range of reasonableness, and to use as a proxy group to
develop TGPL's hypothetical capital structure a group of publicly-traded parent
companies with pipeline subsidiaries rather than a group of regulated
pipelines. Accordingly, the D.C. Circuit Court remanded the order to the FERC
for further consideration. Although no assurances can be given, TGPL believes
the final outcome of this issue will not have a material adverse effect on
TGPL's financial position, results of operations, or net cash flows.
On October 26, 1994, the FERC issued a notice of a request for
initiation of a complaint proceeding in TGPL's Order 636 restructuring docket,
stating that Fina Natural Gas Company (Fina) has filed a complaint requesting
that the FERC initiate a proceeding under section 5 of the NGA to investigate
the functionalization of TGPL's production-area facilities. Fina asserts that
some of TGPL's production-area facilities have been misfunctionalized as
transmission, and that under recent gathering orders, those facilities should
properly be functionalized as gathering facilities. On November 28, 1994, TGPL
filed an answer in response to the notice. In that answer, TGPL requested that
the FERC defer action on Fina's complaint until June 1, 1995. TGPL advised the
FERC that, in light of the FERC's evolving policies on gathering and
production-area rate design, TGPL is evaluating which, if any, of its Gulf
Coast gathering facilities could be spun down into a nonjurisdictional
subsidiary. TGPL stated that it anticipates that it will complete that
evaluation on or before June 1, 1995, at which point TGPL will either submit a
proposal to the FERC or will notify the FERC of its intentions. If the FERC
elects to initiate a proceeding, any change in classification of the function
of plant facilities between transmission and gathering would be prospective
26
<PAGE> 28
only. Although no assurances can be given, TGPL does not believe the final
outcome of this issue will have a material adverse effect on TGPL's financial
position, results of operations or net cash flows.
For a complete discussion of TGPL's regulatory matters, including
rates, see Note C of the Notes to Financial Statements included in Item 8
herein.
SALES SERVICES. TGPL makes jurisdictional merchant gas sales to
customers through a FS program and an OFS 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. In
addition, TGPL makes jurisdictional merchant sales through an IS program and a
NS program.
TGPL's operating revenues related to its sales service increased $73
million to $755 million for 1994, when compared to 1993. Of this increase $78
million was related to higher volumes sold through TGPL's jurisdictional
merchant sales services and $22 million was related to the cash settlement of
historical transportation imbalances, partly offset by a decrease in
non-merchant sales revenues of $27 million related to TGPL's cash-out program
for the settlement of current month transportation imbalances and the sale in
1993 of storage gas purchased for and sold to TGPL's customers. However, the
increase in TGPL's non-merchant sales revenues had no impact on TGPL's
operating or net income since these revenue variances were offset by
corresponding variances in the cost of sales when compared to the prior year.
TGPL's jurisdictional sales service also had no impact on TGPL's operating or
net income in either 1994 or 1993. In January 1993, TGMC, through an agency
agreement, began to manage all jurisdictional merchant gas sales of TGPL.
Under this agency agreement, TGMC bills TGPL for the cost of managing TGPL's
merchant gas sales service and receives all margins associated with such
business. Consequently, TGPL's merchant gas sales service has no impact on its
operating income or results of operations.
<TABLE>
<CAPTION>
Gas Sales Volumes (Bcf)(1) 1994 1993 1992
-------------------------- ------- ------- -------
<S> <C> <C> <C>
Long-term sales . . . . . . . . . . . . . . . 213.0 212.3 188.3
Short-term sales . . . . . . . . . . . . . . 109.3 33.2 32.8
------- ------- -------
Total gas sales . . . . . . . . . . . . . 322.3 245.5 221.1
======= ======= =======
</TABLE>
(1) Effective January 1993, TGMC, through an agency agreement with TGPL,
assumed management of TGPL's merchant sales service.
The issue of the allocation of certain costs to TGPL's merchant sales
service, among others, was referred to the hearing in Docket No. RP92-137 by
the FERC orders approving TGPL's implementation of Order 636. In the ALJ's
initial decision on October 20, 1994, the ALJ determined that there is no
genuine issue of material fact
27
<PAGE> 29
warranting a trial-type hearing on the issue and directed TGPL to remove from
its gathering function approximately $5.6 million of indirect costs and to
reassign this amount to its merchant sales service. On November 21, 1994, TGPL
filed a brief on exceptions with the FERC, seeking to reverse the ALJ's
decision. On December 12, 1994, certain parties, including the FERC's staff,
filed briefs opposing TGPL's exceptions. In late February 1995, the FERC
issued an order affirming the ALJ's October 20, 1994 decision and directing
TGPL to file, within 15 days after the FERC's final order on the initial
decision, to remove from its gathering function a total of $5.6 million of
indirect costs and to reassign that amount to its merchant service. Any
changes in TGPL's rates or services resulting from this issue would have a
prospective effect only. Although no assurances can be given, TGPL believes
that the final resolution of this cost allocation issue will not have a
material adverse effect on its financial position, results of operations or net
cash flows.
For a complete discussion of TGPL's regulatory matters, including
rates, see Note C of the Notes to Financial Statements included in Item 8
herein. 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 for 1994 related to its
storage services were comparable to those in 1993.
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 resulted in maintaining operating expenses at levels
provided in the new general rate case effective September 1, 1992, revenues of
$14.2 million, net of related transportation expense, from new pipeline
projects placed in service in 1993, lower interest expense of $10.3 million and
higher allowance for funds used during construction of $5.1 million. Excluding
the pretax 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
and new pipeline projects discussed above.
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 of $40 million from Phase II of
the TGPL/Texas Gas/CNG project placed in service in 1993 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
28
<PAGE> 30
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 Docket No.
RP92-137 are also based on a different mix and level of volumes than the Docket
No. RP90-8 rates.
Excluding the pretax effects of the selected items in the table above
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
($16 million) and higher depreciation ($5 million). 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.
SALES SERVICES. TGPL made jurisdictional merchant sales to customers
through a FS program and an OFS program coupled with a firm transportation
program as replacement for contract sales quantity. These programs gave
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. In addition, TGPL
made jurisdictional merchant sales through an IS program.
TGPL's operating revenues related to its sales service increased $160
million to $682 million in 1993 when compared to 1992, primarily due 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 January 1993, TGMC, through an agency agreement,
began to manage all jurisdictional merchant gas sales of TGPL. Under this
agency agreement, TGMC bills TGPL for the cost of managing TGPL's merchant gas
sales service and receives all margins associated with such business.
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
COMPETITION
Competition for gas transportation has intensified in recent years due
to customer access to other pipelines, rate competitiveness among pipelines and
customers' desire to have more than one supplier. The FERC's stated purpose of
Order 636 is to improve the competitive structure of the natural gas pipeline
industry. TGPL 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 TGPL's 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 ALJ
dealing with, among other things, TGPL's production-area rate design, concluded
in June 1994 and the parties submitted briefs to the ALJ in August and
September 1994. The decision of the ALJ, when issued, will be subject to
review by the FERC. TGPL is unable at this time to fully assess the long-term
competitive effect and resulting financial impact on TGPL of having to maintain
its current production-area rate design which is different than that of its
competitors.
TGPL does not expect to incur GSR costs associated with its firm sales
service. TGPL's non-GSR transition costs are anticipated to be insignificant;
therefore, TGPL believes the demand charges to recover these costs will not
make its rates noncompetitive in its markets.
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 will
aggressively price their system transportation to stay competitive in
alternate-fuel markets.
30
<PAGE> 32
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, 1994 and 1993, and the
related statements of income, 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, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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, 1994 and 1993, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 20, 1995
31
<PAGE> 33
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 LLP, 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 three 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.
32
<PAGE> 34
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
BALANCE SHEET
(NOTES B AND J)
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1993
------------ ------------
($ thousands)
ASSETS
<S> <C> <C>
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,628 $ 1,094
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 7,218 7,348
Receivables:
Trade (Notes B and F) . . . . . . . . . . . . . . . . . . 40,257 53,924
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 15,149 34,632
Advances to Transco (Note A) . . . . . . . . . . . . . . 115,974 133,304
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 5,707 4,625
Transportation and exchange gas receivables:
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 18,882 -
Others . . . . . . . . . . . . . . . . . . . . . . . . . . 92,870 22,000
Inventories:
Gas in storage, at LIFO . . . . . . . . . . . . . . . . . 19,010 32,555
Materials and supplies, at average cost . . . . . . . . . 42,747 44,755
Gas available for customer nomination . . . . . . . . . . 1,341 2,237
Prepaid gas purchases . . . . . . . . . . . . . . . . . . . 4,417 1,676
Deferred income tax benefits (Note I) . . . . . . . . . . . 34,578 -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,426 22,063
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . 424,204 360,213
------------- -------------
Property, Plant and Equipment, at cost:
Natural gas transmission plant . . . . . . . . . . . . . . . 4,340,912 4,223,501
Less - Accumulated depreciation and amortization . . . . . . 2,578,069 2,480,332
------------- -------------
Total property, plant and equipment, net . . . . . . . . . 1,762,843 1,743,169
------------- -------------
Other Assets:
Transportation and exchange gas receivable:
Affiliates . . . . . . . . . . . . . . . . . . . . . . . - 32,155
Others . . . . . . . . . . . . . . . . . . . . . . . . . - 92,960
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 84,068 75,728
------------- -------------
Total other assets . . . . . . . . . . . . . . . . . . 84,068 200,843
------------- -------------
$ 2,271,115 $ 2,304,225
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 35
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
BALANCE SHEET
(NOTES B AND J)
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1993
------------ ------------
($ thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Payables:
Trade . . . . . . . . . . . . . . . . . . . . . . . . . . $ 109,176 $ 135,231
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 28,286 26,743
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 32,745 36,554
Dividends . . . . . . . . . . . . . . . . . . . . . . . . 731 1,107
Transportation and exchange gas payable:
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 2,687 -
Others . . . . . . . . . . . . . . . . . . . . . . . . . . 47,218 12,000
Accrued liabilities:
Federal income taxes . . . . . . . . . . . . . . . . . . . 6,494 4,847
Other taxes . . . . . . . . . . . . . . . . . . . . . . . 11,299 9,736
Interest . . . . . . . . . . . . . . . . . . . . . . . . . 15,396 15,357
Employee benefits (Note H) . . . . . . . . . . . . . . . . 24,122 20,341
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 25,758 22,864
Reserve for producer settlements, legal and regulatory
issues (Notes C and D) . . . . . . . . . . . . . . . . . . 1,466 5,240
Reserve for rate refunds (Note C) . . . . . . . . . . . . . 68,862 141,270
Deferred income taxes (Note I) . . . . . . . . . . . . . . . - 1,452
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,040 16,162
------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . 388,280 448,904
------------- -------------
Long-Term Debt, less current maturities (Note F) . . . . . . . 644,238 643,799
------------- -------------
Other Liabilities and Deferred Credits:
Income taxes (Note I) . . . . . . . . . . . . . . . . . . . 302,846 279,303
Income taxes refundable to customers (Note B) . . . . . . . 8,781 19,148
Transportation and exchange gas payable:
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . - 726
Others . . . . . . . . . . . . . . . . . . . . . . . . . . - 64,976
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,768 64,888
------------- -------------
Total other liabilities and deferred credits . . . . . . . 374,395 429,041
------------- -------------
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
497,444 and 757,427 shares in 1994 and 1993,
respectively . . . . . . . . . . . . . . . . . . . . . . . 49,744 75,743
Less - Issue expense . . . . . . . . . . . . . . . . . . . . 369 552
------------- -------------
Total preferred stock . . . . . . . . . . . . . . . . . . . 49,375 75,191
------------- -------------
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 . . . . . 285,792 283,037
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 529,035 424,253
------------- -------------
Total common stockholder's equity . . . . . . . . . . . . 814,827 707,290
------------- -------------
$ 2,271,115 $ 2,304,225
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 36
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
STATEMENT OF INCOME
(NOTE B)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1994 1993 1992
------------ ------------ ------------
($ thousands)
<S> <C> <C> <C>
Operating Revenues:
Natural gas sales . . . . . . . . . . . . $ 754,984 $ 681,839 $ 522,037
Natural gas transportation . . . . . . . . 678,561 687,808 592,422
Natural gas storage . . . . . . . . . . . 148,290 146,416 137,292
Other . . . . . . . . . . . . . . . . . . 9,127 5,470 5,446
------------ ------------ ------------
Total operating revenues . . . . . . . . 1,590,962 1,521,533 1,257,197
------------ ------------ ------------
Operating Costs and Expenses:
Cost of natural gas sales . . . . . . . . 752,495 681,482 508,068
Cost of natural gas transportation . . . . 118,865 140,358 93,772
Operation and maintenance . . . . . . . . 190,501 176,171 183,134
Administrative and general . . . . . . . . 146,740 148,186 119,669
Depreciation and amortization . . . . . . 120,797 119,495 114,145
Taxes - other than income taxes . . . . . 31,061 32,593 29,669
Provision for producer settlements, legal
and regulatory issues (Notes C and D) . 6,000 - 31,000
Write-off of note receivable (Note J) . . - 20,125 -
------------ ------------ ------------
Total operating costs and expenses . . . 1,366,459 1,318,410 1,079,457
------------ ------------ ------------
Operating Income . . . . . . . . . . . . . . 224,503 203,123 177,740
------------ ------------ ------------
Other (Income) and Other Deductions:
Interest expense - affiliates . . . . . . - 221 2,216
- other . . . . . . . . . 59,327 62,247 70,511
Interest income - affiliates . . . . . . ( 6,122) ( 3,177) ( 191)
- other . . . . . . . . . ( 567) ( 1,928) ( 3,328)
Allowance for equity and borrowed funds
used during construction . . . . . . . . ( 4,184) ( 5,126) 16
Miscellaneous other (income) and . . . . .
deductions, net . . . . . . . . . . . . . 7,590 7,320 994
------------ ------------ ------------
Total other (income) and other deductions . 56,044 59,557 70,218
------------ ------------ ------------
Income Before Income Taxes . . . . . . . . . 168,459 143,566 107,522
Provision for Income Taxes (Note I) . . . . . 57,733 49,341 33,979
------------ ------------ ------------
Net Income . . . . . . . . . . . . . . . . . 110,726 94,225 73,543
Dividends on Preferred Stock . . . . . . . . 5,944 8,107 8,639
------------ ------------ ------------
Common Stock Equity in Net Income . . . . . . $ 104,782 $ 86,118 $ 64,904
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 37
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,
-----------------------------------------------
1994 1993 1992
------------ ------------ -------------
($ thousands)
<S> <C> <C> <C>
Retained Earnings:
Balance at beginning of period . . . . . . $ 424,253 $ 338,135 $ 273,231
Add (deduct):
Net income . . . . . . . . . . . . . . 110,726 94,225 73,543
Dividends on preferred stock . . . . . ( 5,944) ( 8,107) ( 8,639)
------------- ------------ ------------
Balance at end of period . . . . . . . . . $ 529,035 $ 424,253 $ 338,135
============ ============ ============
Premium on Capital Stock and Other
Paid-in Capital:
Balance at beginning of period . . . . . . $ 283,037 $ 280,600 $ 152,370
Add (deduct):
Tran$tock contribution . . . . . . . . . 2,901 2,227 2,253
Capital contribution . . . . . . . . . . 37 393 126,048
Loss on reacquired preferred
stock, net . . . . . . . . . . . . . . ( 183) ( 183) ( 71)
------------- ------------ ------------
Balance at end of period . . . . . . . . . $ 285,792 $ 283,037 $ 280,600
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 38
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
STATEMENT OF CASH FLOWS
(NOTE B)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1994 1993 1992
-------------- ------------- --------------
($ thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 110,726 $ 94,225 $ 73,543
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 134,363 133,202 128,275
Deferred income taxes (Note I) . . . . . . . . . . . . . . . ( 24,466) 4,788 ( 22,545)
Allowance for equity funds used during construction
(AFUDC) . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,410) ( 2,801) ( 1,999)
Provision for producer settlements, legal and regulatory
issues (Notes C and D) . . . . . . . . . . . . . . . . . . . 6,000 - 31,000
Write-off of note receivable (Note J) . . . . . . . . . . . . - 20,125 -
Tran$tock compensation expense (Note H) . . . . . . . . . . . 2,901 2,227 2,253
Transition Cost refund (Note C) . . . . . . . . . . . . . . . - - ( 74,104)
Nonrecoverable producer settlements . . . . . . . . . . . . . - ( 31,600) ( 66,160)
Changes in operating assets and liabilities:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . 131 ( 997) ( 4,720)
Receivables . . . . . . . . . . . . . . . . . . . . . . . . 32,067 ( 28,884) 7,150
Transportation and exchange gas receivable . . . . . . . . 35,363 45,308 ( 35,706)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 16,448 ( 8,105) ( 2,920)
Prepaid gas purchases . . . . . . . . . . . . . . . . . . . ( 2,741) ( 998) 7,729
Deferred gas costs . . . . . . . . . . . . . . . . . . . . - - 3,618
Payables . . . . . . . . . . . . . . . . . . . . . . . . . ( 30,836) 15,497 41,815
Transportation and exchange gas payable . . . . . . . . . . ( 27,798) ( 56,428) 11,557
Accrued liabilities . . . . . . . . . . . . . . . . . . . . 7,527 ( 1,896) ( 35,555)
Reserve for rate refunds . . . . . . . . . . . . . . . . . ( 78,408) 93,357 ( 52,579)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . ( 16,072) ( 17,671) ( 6,716)
-------------- ------------- --------------
Net cash provided by operating activities . . . . . . . . 161,795 259,349 3,936
-------------- ------------- --------------
Cash flows from financing activities: (Notes F and G)
Additions to long-term debt . . . . . . . . . . . . . . . . . . - - 125,000
Retirement of long-term debt and capital lease obligations . . - ( 29,856) ( 200,300)
Retirement of preferred stock . . . . . . . . . . . . . . . . . ( 25,999) ( 25,998) ( 4,312)
Advances from Transco (Note A) . . . . . . . . . . . . . . . . - 245,926 1,384,263
Retirement of advances from Transco (Note A) . . . . . . . . . - ( 245,926) ( 1,384,263)
Capital contribution by parent . . . . . . . . . . . . . . . . - - 126,048
Dividends on preferred stock . . . . . . . . . . . . . . . . . ( 6,320) ( 8,483) ( 8,703)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . - ( 2,161) ( 300)
-------------- ------------- --------------
Net cash provided by (used in) financing activities . . . ( 32,319) ( 66,498) 37,433
-------------- ------------- --------------
Cash flows from investing activities:
Property, plant and equipment, net of equity AFUDC . . . . . . ( 143,440) ( 110,227) ( 115,685)
Recovery of producer settlements . . . . . . . . . . . . . . . - 30,412 53,175
Net proceeds from sale of assets . . . . . . . . . . . . . . . - - 4,293
Advances to Transco (Note A) . . . . . . . . . . . . . . . . . ( 1,655,666) ( 1,308,557) ( 215,911)
Retirement of advances to Transco (Note A) . . . . . . . . . . 1,672,997 1,189,753 204,607
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . ( 2,833) 5,603 5,483
-------------- ------------- --------------
Net cash used in investing activities . . . . . . . . . . ( 128,942) ( 193,016) ( 64,038)
-------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents . . . . . . 534 ( 165) ( 22,669)
Cash and cash equivalents at beginning of period . . . . . . . . 1,094 1,259 23,928
-------------- ------------- --------------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 1,628 $ 1,094 $ 1,259
============== ============= ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) . . . . . . . . . . . . $ 59,485 $ 61,275 $ 116,076
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . 31,105 94,147 66,704
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
A. Corporate Structure and Control . . . . . . . . . . . . . . . . . . . . 38
B. Summary of Significant Accounting Policies . . . . . . . . . . . . . . 40
C. Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 42
D. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
E. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . 50
F. Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
G. Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
H. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . 55
I. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
J. Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . 61
K. Fair Value of Financial Instruments . . . . . . . . . . . . . . . . . . 64
L. Transactions with Major Customers and Affiliates . . . . . . . . . . . 64
M. Quarterly Information (Unaudited) . . . . . . . . . . . . . . . . . . . 67
</TABLE>
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.
On December 12, 1994, Transco and The Williams Companies, Inc. (Williams)
announced that they had entered into a merger agreement (Merger Agreement)
pursuant to which Williams agreed to commence a cash tender offer to acquire up
to 24.6 million shares, or approximately 60% of the outstanding shares of
Transco's common stock for $17.50 per share. The cash tender offer would be
followed by a stock merger (Merger) in which each share of Transco common stock
not purchased in the tender offer would be exchanged for 0.625 of a share of
Williams' common stock. The Merger Agreement was approved by both Transco and
Williams' boards of directors on December 11, 1994.
The tender offer began on December 16, 1994 and expired on January 17,
1995. Approximately 35.2 million shares, or approximately 86.7% of the
outstanding shares of Transco's common stock were tendered to Williams for
purchase and not withdrawn. Pursuant to the Merger Agreement, on January 18,
1995, Williams accepted for payment 24.6 million shares of Transco's common
stock for $17.50 per share as the first step in acquiring the entire equity
interest of Transco. The remainder of the outstanding shares of Transco's
common stock will be converted to Williams' common stock upon majority approval
by Transco's stockholders. The conversion will occur at the effective date of
the Merger, which is expected to be in April 1995.
Williams has stated that it intends to cause Transco, as promptly as
practicable following the Merger and subject to receipt of any necessary
consents, to declare and pay
38
<PAGE> 40
as dividends to Williams all of Transco's interests in its principal operating
subsidiaries, TGPL, Texas Gas Transmission Corporation (Texas Gas) and Transco
Gas Marketing Company (TGMC) (the dividends collectively, the Operating Company
Dividends).
The accompanying financial statements have been prepared on the historical
cost basis and do not reflect an allocation of the purchase price that will be
recorded by Williams as a result of the Merger.
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% below the prime rate of Citibank, N.A.
TGPL's Board of Directors declared no common stock dividends in 1994, 1993
or 1992.
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 realigned its gas marketing businesses under
the common management of TGMC to more closely coordinate gas marketing
operations to improve efficiencies, reduce costs and improve profitability. In
January 1993, TGMC, through an agency agreement, began to manage all
jurisdictional merchant gas sales of TGPL. Under this agency agreement, TGMC
bills TGPL for the cost of managing TGPL's merchant gas sales service and
receives all margins associated with such business. For the years ended
December 31, 1994 and 1993, included in TGPL's cost of sales is $24.4 million
and $25.1 million, respectively, representing agency fees billed by TGMC under
this agreement. Consequently, TGPL's merchant gas sales service has had no
impact on its operating income or results of operations.
Pursuant to a settlement that TGPL has with all its sales 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. TGPL believes
that the GIC agreed to with its customers will be adequate to enable full
recovery of its above-spot-market gas costs. Through an agency agreement with
TGPL, TGMC has assumed management of TGPL's jurisdictional merchant gas sales
service and, as TGPL's agent, is at risk for any above-spot-market gas costs it
may incur in excess of the amounts recovered under the GIC.
39
<PAGE> 41
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DEPRECIATION AND AMORTIZATION. Depreciation rates used for major regulated gas
plant facilities at year-end 1994, 1993 and 1992 were:
<TABLE>
<CAPTION>
Category of Property 1994 1993 1992
------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Gathering facilities . . . . . . . . . . . 6.22% 6.22% 6.22%
Storage facilities . . . . . . . . . . . . 2.50% 2.50% 2.50%
Onshore transmission facilities . . . . . 2.65% 2.50%-2.65% 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 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.
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.
ALLOWANCES FOR DOUBTFUL RECEIVABLES. Due to its customer base, TGPL has
not historically experienced recurring credit losses in connection with its
receivables. As a result, receivables determined to be uncollectible are
reserved or written off in the period of such determination. At December 31,
1994 and 1993, TGPL had no allowance for doubtful accounts.
CASH FLOWS FROM OPERATING ACTIVITIES. TGPL uses the indirect method to
report cash flows from operating activities, which requires adjustments to net
income to
40
<PAGE> 42
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 both December 31, 1994 and 1993, TGPL had
approximately $7 million 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 $0.8 million, $2.3 million and $(2.0) million for 1994, 1993
and 1992, 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 $3.4
million, $2.8 million and $2.0 million for 1994, 1993 and 1992, 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, 1994 and 1993 was $40 million and $58
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 on behalf of those shippers. Additionally, TGPL
transports gas on various pipeline systems which may deliver different
quantities of gas on behalf of TGPL than the quantities of gas received from
TGPL. 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 at December 31, 1994.
DERIVATIVE FINANCIAL INSTRUMENTS. TGPL, through TGMC as its agent, is a
party to various futures contracts and option and commodity price swap
agreements used to
41
<PAGE> 43
manage price volatility in its natural gas marketing activities which are
related to TGMC's management of TGPL's jurisdictional merchant sales service.
See Note J for a discussion of TGPL's accounting policy for the recognition of
gains and losses in connection with these financial instruments.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1993
and 1992 financial statements to conform to the 1994 presentation.
C. REGULATORY MATTERS
RATE MATTERS. 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 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,
(see discussion below), 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 discussion
for additional issues referred to this hearing). In addition, in the
Settlement TGPL agreed to file a new general section 4 rate case to be
effective no later than September 1, 1995. The Settlement became effective on
April 1, 1994. One party has appealed the FERC's orders related to the
Settlement to the United States Court of Appeals for the D.C. Circuit (D.C.
Circuit Court). Through January 31, 1995, TGPL made partial refunds of
approximately $150 million, including interest, under Docket No. RP92-137. An
additional refund of approximately $24 million, including interest, is expected
to be made during the first quarter of 1995. TGPL had previously provided a
reserve for these refunds. TGPL has also provided a reserve which, excluding
the remanded proceedings with respect to TGPL's rate of return, it believes is
adequate for any additional refunds that may be required under Docket No.
RP92-137.
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
42
<PAGE> 44
settlement 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 was appealed to the D.C. Circuit Court.
TGPL appealed, seeking to increase the rate of return, and certain other
parties appealed, seeking to lower the rate of return. On December 23, 1994,
the D.C. Circuit Court issued an opinion remanding to the FERC the FERC's
September 17, 1992 order. The D.C. Circuit Court determined that the FERC had
failed to explain adequately its decisions to use a hypothetical capital
structure for TGPL, to select a rate of return on equity at the top range of
reasonableness, and to use as a proxy group to develop TGPL's hypothetical
capital structure a group of publicly-traded parent companies with pipeline
subsidiaries rather than a group of regulated pipelines. Accordingly, the D.C.
Circuit Court remanded the order to the FERC for further consideration.
Although no assurances can be given, TGPL believes that the final resolution of
this rate of return issue will not have a material adverse effect on its
financial position, results of operations or net cash flows.
As discussed below, the issue of the allocation of certain costs to TGPL's
merchant sales service, among others, was referred to the hearing in Docket No.
RP92-137 by the FERC orders approving TGPL's implementation of Order 636. In
the Administrative Law Judge's (ALJ) initial decision on October 20, 1994, the
ALJ determined that there is no genuine issue of material fact warranting a
trial-type hearing on the issue, and directed TGPL to remove from its gathering
function approximately $5.6 million of indirect costs and to reassign this
amount to its merchant sales service. On November 21, 1994, TGPL filed a brief
on exceptions with the FERC, seeking to reverse the ALJ's decision. On
December 12, 1994, certain parties, including the FERC's staff, filed briefs
opposing TGPL's exceptions. In late February 1995, the FERC issued an order
affirming the ALJ's October 20, 1994 decision and directing TGPL to file,
within 15 days after the FERC's final order on the initial decision, to remove
from its gathering function a total of $5.6 million of indirect costs and to
reassign that amount to its merchant service. Any changes in TGPL's rates or
services resulting from this issue would have a prospective effect only.
Although no assurances can be given, TGPL believes that the final resolution of
this cost allocation issue will not have a material adverse effect on its
financial position, results of operations or net cash flows.
On October 26, 1994, the FERC issued a notice of a request for initiation
of a complaint proceeding in TGPL's Order 636 restructuring docket, stating
that Fina Natural Gas Company (Fina) has filed a complaint requesting that the
FERC initiate a proceeding under section 5 of the Natural Gas Act of 1938 (NGA)
to investigate the functionalization of TGPL's production-area facilities.
Fina asserts that some of TGPL's production-area facilities have been
misfunctionalized as transmission, and that under recent gathering orders,
those facilities should properly be functionalized as gathering facilities. On
November 28, 1994, TGPL filed an answer in response to the notice. In that
answer, TGPL requested that the FERC defer action on Fina's complaint until
June 1, 1995. TGPL advised the FERC that, in light of the FERC's evolving
policies on
43
<PAGE> 45
gathering and production-area rate design, TGPL is evaluating which, if any, of
its Gulf Coast gathering facilities could be spun down into a nonjurisdictional
subsidiary. TGPL stated that it anticipates that it will complete that
evaluation on or before June 1, 1995, at which point TGPL would either submit a
proposal to the FERC or will notify the FERC of its intentions. If the FERC
elects to initiate a proceeding, any change in classification of the function
of plant facilities between transmission and gathering would be prospective
only. Although no assurances can be given, TGPL does not believe the final
outcome of this issue will have a material adverse effect on its financial
position, results of operations or net cash flows.
ORDER 636. On November 1, 1993, TGPL implemented Order 636. Prior to
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 a separate
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 merchant
sales service, TGPL's use of a system-wide cost of service and 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. TGPL does not expect to incur
GSR costs associated with its firm sales service. TGPL's non-GSR transition
costs are anticipated to be insignificant.
TGPL and certain other parties have filed appeals of certain of the
FERC's orders to the D.C. Circuit Court. On February 13, 1995, the D.C.
Circuit Court issued an order holding all appeals of restructuring orders
arising out of Order 636 in abeyance until the court renders an opinion in the
appeals of Order 636. Among the issues raised by the parties are whether the
separately stated gathering rates charged by TGPL should be subject to refund
and issues related to TGPL's storage tracker authority.
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 ALJ, dealing with, among
other things, TGPL's production-area rate
44
<PAGE> 46
design, concluded in June 1994 and the parties submitted briefs to the ALJ in
August and September 1994. The decision of the ALJ, when issued, will be
subject to review by the FERC. TGPL is unable at this time to fully assess the
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 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.
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 direct bill their customers for such
production-related costs through fixed monthly charges based on a customer's
historical purchases. In 1990, the D.C. Circuit Court overturned the FERC's
authorization for pipelines to direct 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 Rate Settlement and GIC Docket No. RP90-8 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. In
October 1993, TGPL and Columbia filed with the FERC for approval a letter
agreement in which TGPL agreed to 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. 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 the settlement between TGPL and
Columbia. On February 13, 1995, the FERC issued an order rejecting the October
26 settlement and requiring TGPL to refund to Columbia within 30 days the
principal amount of the Order 94-A costs collected from Columbia. The order
does not require TGPL to pay any interest on the principal amount refunded to
Columbia. TGPL has filed with the FERC a request for an extension of time to
make the refund. The FERC has granted an extension of time for making the
refund, to and including 30 days after FERC action on requests for rehearing.
TGPL has filed for rehearing of the FERC's February 13 order. Columbia has
also filed for rehearing of the February 13 order asking that the FERC require
that TGPL pay interest on the refund of the Order 94-A amounts. TGPL has
provided a reserve of approximately $7 million which it believes is adequate to
provide for any amounts which it may ultimately be required to refund.
45
<PAGE> 47
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, results of operations or net cash
flows.
D. LEGAL PROCEEDINGS
PRODUCER CONTRACT LITIGATION. In TGPL's only remaining proceeding
involving take-or-pay and other producer contract claims, a producer filed in
United States District Court for the Southern District of Texas (Federal
District Court) claiming that it should have received more favorable terms for
settlement of its contract claims and asserting federal antitrust claims. In
October 1992, the Federal District Court issued an order granting TGPL's motion
for summary judgement on the antitrust claims and in June 1993, the Federal
District Court issued an order granting TGPL's motion for summary judgement on
all remaining claims. The producer appealed to the United States Court of
Appeals for the Fifth Circuit (Fifth Circuit Court). In July 1994, the Fifth
Circuit Court affirmed the judgement of the Federal District Court dismissing
the producer's claims in all respects and denied the producer's petition for
rehearing. The producer filed no further appeal.
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 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, who recorded such shares as treasury stock.
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
pipeline companies 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.
46
<PAGE> 48
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 charged: (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 attorney's 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
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.
On March 30, 1994, the parties executed definitive agreements which
would settle the litigation subject to final non- appealable regulatory
approvals. The 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.
On June 23, 1994, TGPL filed a petition with the FERC seeking approval of the
settlement provisions and the contract amendment including pass-through of all
costs to TGPL's customers. On October 18, 1994, the FERC issued an order
consolidating TGPL's petition with the petitions filed by the other three
pipeline companies and setting the matter for hearing before an ALJ. The
hearing will be limited to the issues of (i) whether the revised agreements are
prudent, and (ii) the level of Dakota costs to be recovered in the proceeding.
The FERC directed the ALJ to issue an initial decision by December 31, 1995 in
order that final FERC approval may take place by December 31, 1996. On
November 7, 1994, the ALJ convened a prehearing conference and adopted a
procedural schedule to govern the hearing. Under that procedural schedule, the
hearing is scheduled to commence on June 20, 1995. In the event that the
necessary regulatory approvals are not obtained, TGPL, Transco and Transco Coal
Gas Company intend to vigorously defend the suit.
47
<PAGE> 49
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, results of operations or net cash flows.
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 additional royalties which
the producers may be required to pay as a result of such settlements. In
October 1992, 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. Thereafter, the State Mineral Board of
Louisiana 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 respective settlements. Indemnification for royalties will depend on,
among other things, the specific lease provisions between the producer and the
lessor and the terms of the settlement between the producer and TGPL.
In October 1991, a lawsuit was filed in the 32nd Judicial District
Court for the Parish of Terrebonne, State of Louisiana (Betty Duplantis Brown,
et al vs. Mobil Oil Exploration and Producing U.S. Inc., et al (Duplantis)), in
which royalty owners alleged that they were third party beneficiaries of 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 Duplantis lawsuit, allegations were made that Transco
Exploration Company (TXC) and TXP Operating Company (TXPO) and other
defendant-producers were entitled to make claims for breach of gas purchase
contracts but failed to either make claims or receive compensation for such
breaches. On October 6, 1994, all parties in the Duplantis lawsuit, including
TXC and TXPO, reached a settlement in principle, which closed on January 20,
1995. TXC and TXPO paid, in total, approximately $2.5 million, which
represents TXC and TXPO's portion of an $8.4 million settlement to be paid by
all of the defendant-producers. The settlement also released TGPL from any
liability to the plaintiffs and the defendant-producers.
In December 1992, a lawsuit was filed in the United States District
Court for the Southern District of Texas (Vaquillas Ranch Company, Ltd., et al
vs. Texaco Exploration and Production, Inc. (Vaquillas Ranch)) in which royalty
owners have made allegations against the producer for breach of express
obligations under the leases; breach
48
<PAGE> 50
of the 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 August 1993, a lawsuit was filed in the United States
District Court for the Southern District of Texas (Floyd C. Billings, et al vs.
Texaco Exploration and Production Inc., et al (Billings)), in which the royalty
owners' claims are virtually identical to the ones made in the Vaquillas Ranch
lawsuit. However, the royalty owners did not claim that the producer breached
any covenant to develop or protect against drainage. In addition, in the
Billings lawsuit 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 defendants in each of the Billings and Vaquillas
Ranch lawsuits have cross-claimed against TGPL. While the two complaints do
not specify monetary damages, the royalty owners have verbally alleged that
their claims against the producers could approximate $100 million. Both the
Vaquillas Ranch and the Billings lawsuits have been remanded to state court.
No trial dates have been set.
On July 5, 1994, the plaintiffs in the Vaquillas Ranch lawsuit filed a
separate lawsuit in the 111th Judicial District Court of Webb County, Texas
(Vaquillas Ranch Company, Ltd., et al vs. Transcontinental Gas Pipe Line
Corporation and Transco Gas Supply Company) in which the plaintiffs contend
that TGPL tortiously interfered with the plaintiffs' lease by inducing the
producer to enter into certain agreements that reduced TGPL's take-or-pay
obligations and the price TGPL was obligated to pay for the gas it purchased.
The plaintiffs are requesting an unspecified amount of actual and punitive
damages for the alleged tortious interference. It is likely that this lawsuit
will be consolidated with the Vaquillas Ranch lawsuit that has been remanded to
state court.
On January 14, 1994, a lawsuit was filed in the 4th Judicial District
Court of Rusk County, Texas (Marathon Oil Company vs. Transcontinental Gas
Pipe Line Corporation and Transco Energy Company (Marathon)) and, on March 15,
1994, a lawsuit was filed in the 189th Judicial District Court of Harris
County, Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line Corporation
(Texaco)). In the Marathon and Texaco lawsuits, the respective plaintiffs each
have made claims against TGPL for reimbursements of settlement amounts paid to
royalty owners. In the Marathon and Texaco lawsuits, the respective plaintiffs
seek to recover approximately $3.6 million and approximately $14.7 million,
respectively. In the Marathon lawsuit, trial has been set for July 31, 1995.
Each of these lawsuits is in the discovery process. TGPL has denied
liability in the litigation and 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 provisions of its settlements with the
producers is substantially less than the amounts claimed by the royalty owners.
TGPL has not provided a reserve for these lawsuits.
In addition, TGPL has been advised by Freeport-McMoRan, Inc. (FMP)
that the Minerals Management Service (MMS) has made claims for royalties due
under certain
49
<PAGE> 51
gas contracts. FMP has asserted that TGPL's royalty reimbursement obligation
to FMP is approximately $5.7 million, including interest. TGPL has denied any
liability to FMP; however, the parties are continuing to discuss this matter.
Although no assurances can be given, TGPL believes that the ultimate
resolution of the royalty claims and litigation will not have a material
adverse effect on its financial position, results of operations or net cash
flows.
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 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 that 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 $50 million to $60 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, 1994, TGPL had a
reserve of approximately $50 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.
50
<PAGE> 52
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 $50 million to $60 million
range discussed above. Civil penalties have been assessed by the EPA against
other major pipeline companies for the alleged improper use and disposal of
PCBs. TGPL recently has received an information request from the EPA.
Although penalties have not presently been asserted, no assurances can be given
that the EPA will not seek such penalties in the future.
TGPL has been named as a potentially responsible party (PRP) in two
Superfund waste disposal sites. TGPL has also been named as a PRP in two
Louisiana state sites. Based on present volumetric estimates, TGPL's estimated
aggregate exposure for remediation of the two Superfund sites is approximately
$600,000. TGPL's estimated individual exposure at each of the two Louisiana
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 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, results of operations or net cash flows.
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 states approve TGPL's proposed plans for modifications,
TGPL expects that significant capital spending will 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 $50 million to $60 million over the next five years and will be
51
<PAGE> 53
recorded as additions to property, plant and equipment as the facilities are
added. Such costs, however, may increase depending on the requirements
imposed. TGPL considers costs associated with compliance with the federal
Clean Air Act and the 1990 Amendments to be prudent costs incurred in the
ordinary course of business and, therefore, recoverable through their rates.
In November 1994, TGPL received notice pursuant to section 304 of the
federal Clean Air Act of the intent of three Virginia citizens to file suit
against it for alleged violations of several provisions of both federal and
state air regulations. Since 1991, TGPL has worked with the appropriate
Virginia agencies pursuant to an agreement to resolve the emissions issues
raised by the citizens. TGPL believes the state agencies are in agreement with
the actions proposed by TGPL which will resolve emission issues at its Virginia
facilities. TGPL believes the citizens' claims are without merit and is
prepared to vigorously defend any suit brought by the citizens. Although no
assurances can be given, TGPL does not believe that this issue will have a
material adverse effect on its financial condition, results of operations or
net cash flows.
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<PAGE> 54
F. FINANCING
LONG-TERM DEBT. At December 31, 1994 and 1993, long-term debt issues were
outstanding as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<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
-------- --------
Total long-term debt issues . . . . . . . . . . . . . . . . . . 649,000 649,000
Less: Unamortized debt premium and discount . . . . . . . 4,762 5,201
-------- --------
Total long-term debt . . . . . . . . . . . . . . . . . . . . . $644,238 $643,799
======== ========
</TABLE>
Sinking fund or prepayment requirements applicable to long-term debt
outstanding at December 31, 1994 are as follows (in thousands):
<TABLE>
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
========
1996:
9% Notes . . . . . . . . . . . . . . . . . . . . . . . $150,000
6.21% Notes . . . . . . . . . . . . . . . . . . . . . . 125,000
--------
Total . . . . . . . . . . . . . . . . . . . . . . $275,000
========
1997:
8-1/8% . . . . . . . . . . . . . . . . . . . . . . . . $ 99,000
========
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
========
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -
========
</TABLE>
No property is pledged as collateral under any of the long-term debt
issues.
RECAPITALIZATION. In connection with the merger with Williams, in
January 1995, the boards of directors of Transco and Williams approved a
proposed recapitalization plan for Transco under which Williams will advance or
contribute to Transco up to an estimated $950 million to execute the proposed
plan. The following actions were completed in January and February 1995 in
connection with the recapitalization plan, as it impacts TGPL:
- Termination of Transco's Amended Bank Credit Facility dated December
31, 1993, and the repayment of the outstanding balance of $36
million, replacing it with the credit agreement described below;
- Termination of the program to sell monthly trade receivables of TGPL,
replacing it with the Williams Credit Agreement discussed below with
the
53
<PAGE> 55
expectation that at some future time Williams will enter into a new
receivables program; and
- Termination of Transco's Reimbursement Facility dated December 31,
1993.
Transco's Amended Bank Credit Facility was replaced with a Credit
Agreement among Williams and certain of its subsidiaries, TGPL and Texas Gas
(Williams Credit Agreement).
The Williams Credit Agreement, with a group of 22 banks, provides for an
$800 million working capital line of credit, under which TGPL can borrow up to
$400 million and Texas Gas can borrow up to $200 million. Interest on advances
is paid at a rate based on the base rate of Citibank N.A., which at December
31, 1994 was 8.5%; the latest three-week moving average of secondary market
morning offering rates in the United States for three-month certificates of
deposit of major United States money market bank, which at December 31, 1994
was 6.31%, plus 1/2%; or the Federal Funds Rate in effect, which at December
31, 1994 was 5.45%, plus 1/2%.
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. Certain of TGPL's debt instruments restrict the
amount of dividends distributable. As of December 31, 1994, approximately $359
million of TGPL's retained earnings of $529 million was available for
distribution.
SALE OF RECEIVABLES. TGPL has sold trade and producer settlement
receivables. The sale of trade receivables was made without recourse. At
December 31, 1994 and 1993, approximately $85 million and $100 million,
respectively, of trade receivables were held by an investor. As discussed
above, the sale of receivables program was terminated in January 1995.
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<PAGE> 56
G. PREFERRED STOCK
TGPL has authorized 10,000,000 shares of cumulative first preferred stock
without par value, of which 497,444 shares and 757,427 shares were outstanding
at December 31, 1994 and 1993, 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, 1994. The first preferred
stock issued and outstanding at December 31, 1994 and 1993, included the
following series:
<TABLE>
<CAPTION>
Stated Value Amount
Per Share Shares (in thousands)
------------ ------------------ -------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$5.00 Series . . . . . $100 - 12,500 $ - $ 1,250
$4.80 Series . . . . . $100 10,000 20,000 1,000 2,000
$6.65 Series . . . . . $100 37,444 49,927 3,744 4,993
$8.75 Series . . . . . $100 450,000 675,000 45,000 67,500
------- ------- ------- -------
Total preferred stock
outstanding . . . . 497,444 757,427 $49,744 $75,743
======= ======= ======= =======
</TABLE>
TGPL gave notice to the holders of each series of outstanding preferred
stock that TGPL will redeem all outstanding preferred stock effective March 23,
1995 at a redemption price for each series of $100.00 per share plus accrued
dividends.
The changes in the total TGPL preferred stock in each of the years 1994,
1993 and 1992 are (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
---------------- -------------------- ------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year . . . . . . . . . . 757 $75,743 1,017 $ 101,741 1,061 $106,059
Retirements . . . . . . . . 260 25,999 260 25,998 44 4,318
--- ------- ----- --------- ----- --------
Balance at end of year . . 497 $49,744 757 $ 75,743 1,017 $101,741
=== ======= ===== ========= ===== ========
</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
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<PAGE> 57
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.
The following table sets forth the funded status of the Retirement Plan
at October 1, 1994 and 1993, and the amount of accrued pension costs as of
December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$105,418 at October 1, 1994 and $107,428 at
October 1, 1993 . . . . . . . . . . . . . . . . . . . . $(122,244) $(117,718)
========= =========
Actuarial present value of projected benefit obligation $(161,625) $(156,856)
Plan assets at fair value . . . . . . . . . . . . . . . . 130,419 118,193
--------- ---------
Projected benefit obligation in excess of plan assets . . . (31,206) (38,663)
Unrecognized net loss . . . . . . . . . . . . . . . . . . 9,965 5,676
Unrecognized net asset at October 1, 1984 being
recognized over 15 years . . . . . . . . . . . . . . . . (5,249) (6,299)
Unrecognized prior service cost . . . . . . . . . . . . . (3,109) (2,843)
Activity subsequent to measurement date . . . . . . . . . 2,723 1,171
--------- ---------
Accrued pension cost . . . . . . . . . . . . . . . . . . . $ (26,876) $ (40,958)
========= =========
</TABLE>
The following table sets forth the components of the Retirement Plan's
pension cost, including TGPL's, for the years ended December 31, 1994, 1993 and
1992 (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Service cost-benefits earned during the period . . $ 7,361 $ 6,664 $ 6,425
Interest cost on projected benefit obligation . . . 11,046 9,950 9,380
Actual return on plan assets . . . . . . . . . . . (3,228) (15,155) (10,141)
Net amortization and deferral . . . . . . . . . . . (10,250) 3,563 (365)
-------- -------- --------
Transco pension cost . . . . . . . . . . . . . . . $ 4,929 $ 5,022 $ 5,299
======== ======== ========
</TABLE>
56
<PAGE> 58
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 1994, 1993 and 1992(1):
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . . . 7.5% 7.25% 7.5%
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.
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
$45-3/8 per share. Tran$tock was funded by a $180 million loan which was
extinguished at year-end 1994. Tran$tock used $120 million of the funds
received from the restructuring of Transco's retirement plan, tax deductible
dividends paid on the common stock held in the plan and contributions by
Transco to service the loan. The final allocation of shares was made to
eligible participants in January 1995.
Compensation expense of $2.9 million, $2.2 million and $2.3 million
related to Tran$tock has been recognized by TGPL in 1994, 1993 and 1992,
respectively. This expense represents the shares of Transco common stock
allocated to employees of TGPL for 1994, 1993 and 1992, 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
57
<PAGE> 59
by most employers. In the first quarter of 1993, TGPL adopted Statement of
Financial Accounting Standards (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. At the January 1, 1993 date of adoption of SFAS No. 106, TGPL's
postretirement benefits obligation (transition obligation) was $104 million.
Effective January 1, 1994, 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.
In December 1992, the FERC issued a Statement of Policy which allows
jurisdictional pipelines to recognize allowances for prudently incurred costs
of postretirement benefits other than pensions on an accrual basis consistent
with the accounting principles set forth in SFAS No. 106. TGPL believes that
all costs of providing postretirement benefits to its employees are necessary
and prudent operating expenses and that such costs associated with its
jurisdictional natural gas pipeline operations are recoverable in rates. TGPL
has recognized and expects to continue to recognize the additional
jurisdictional costs concurrent with the receipt of revenues. Since all of
TGPL's existing employees are associated with its jurisdictional pipeline
operations, the adoption of SFAS No. 106 in 1993 did not have a material effect
on TGPL's financial position, results of operations or net cash flows. In May
1993, TGPL filed settlement agreements with the FERC with regard to its general
rate case which provided for recovery through jurisdictional rates of all
prudently incurred costs of postretirement benefits accrued under SFAS No. 106.
This settlement was approved by the FERC in November 1993.
The following table sets forth the funded status of the Plan at December
31, 1994 and 1993, reconciled with the accrued postretirement benefits cost at
December 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . $ (63,715) $ (66,927)
Fully eligible active plan participants . . . . . (38,125) (38,824)
Other active plan participants . . . . . . . . . . (11,640) (10,144)
--------- ---------
(113,480) (115,895)
Plan assets at fair value . . . . . . . . . . . . . 32,372 13,698
--------- ---------
Accumulated postretirement benefit obligation in
excess of plan assets . . . . . . . . . . . . . . (81,108) (102,197)
Unrecognized net gain . . . . . . . . . . . . . . (12,104) (3,350)
Unrecognized transition obligation . . . . . . . . . 95,645 100,959
--------- ---------
Prepaid (accrued) postretirement benefit cost . . . $ 2,433 $ (4,588)
========= =========
</TABLE>
58
<PAGE> 60
The following table sets forth the components of the Plan's net periodic
postretirement benefit cost, including TGPL's, for the years ended December 31,
1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Service cost-benefits earned during the period . . $ 2,915 $ 2,812
Interest cost on accumulated postretirement benefit
obligation . . . . . . . . . . . . . . . . . . . 8,218 9,483
Actual return on plan assets . . . . . . . . . . . (895) (428)
Amortization of transition obligation . . . . . . 5,314 6,034
Net amortization and deferral . . . . . . . . . . (516) (28)
------- -------
Net periodic postretirement benefit cost . . . . . $15,036 $17,873
======= =======
</TABLE>
TGPL's share of the Plan's net periodic postretirement benefit cost for
1994 and 1993 was $13.7 million and $16.2 million, respectively. TGPL's cost
of providing these benefits for retirees and survivors during 1992 on a
pay-as-you-go-basis was $4.6 million.
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, 1994, the annual rate of
increase in the per capita cost of covered health care benefits was assumed to
be 11.4%. The rate was assumed to decrease gradually to 6% for the year 2004
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, 1995 by 12% and the aggregate of the
service and interest cost components of the net periodic postretirement health
care benefit cost for 1995 by 14%.
To determine the accumulated postretirement benefit obligation, the Plan
used a discount rate of 7.75% 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,
international equity funds 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.
59
<PAGE> 61
TGPL believes that all costs of providing postretirement benefits to its
employees are necessary and prudent operating expenses that will be recoverable
in rates.
I. INCOME TAXES
Following is a summary of the provision for income taxes for 1994, 1993
and 1992 (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- ------- --------
<S> <C> <C> <C>
Federal:
Current . . . . . . . . . . . . . . . . $ 72,364 $38,593 $ 53,180
Deferred . . . . . . . . . . . . . . . (23,669) 1,767 (25,353)
-------- ------- --------
48,695 40,360 27,827
State and municipal:
Current . . . . . . . . . . . . . . . . . 9,835 5,961 3,343
Deferred . . . . . . . . . . . . . . . . (797) 3,020 2,809
-------- ------- --------
Provision for income taxes . . . . . . . . $ 57,733 $49,341 $ 33,979
======== ======= ========
</TABLE>
Following is a reconciliation of the statutory federal income tax rate to
the effective tax rate (amounts in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------------------- ------------------ ------------------
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 $55,797 35.0 % $47,105 35.0 % $34,466 34.0 %
Amortization of over
funded tax liabilities (7,675) (4.8)% (7,675) (5.7)% (7,675) (7.6)%
Tran$tock compensation 1,015 0.6 % 779 0.6 % 766 0.8 %
Other, net (442) (0.3)% 151 0.1 % 270 0.3 %
------- ---- ------- ---- ------- ----
Provision for federal
income taxes $48,695 30.5 % $40,360 30.0 % $27,827 27.5 %
======= ==== ======= ==== ======= ====
</TABLE>
In August 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
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, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
(Assets) Liabilities 1994 1993
-------------------- -------- --------
<S> <C> <C>
Revenues collected subject to refund recognized for tax purposes but
deferred for financial purposes until refunded to customers, net . . $(24,619) $ 15,636
Federal income tax benefit for state income taxes . . . . . . . . . . . . (12,308) (12,334)
Producer settlements, legal and regulatory issues expensed for
financial purposes but deferred for tax purposes, net . . . . . . . . (4,820) (19,395)
Restructuring costs expensed for financial purposes but deferred for
tax purposes until paid . . . . . . . . . . . . . . . . . . . . . . . (3,500) (3,696)
Depreciation differences . . . . . . . . . . . . . . . . . . . . . . . . 278,909 281,534
Allowance for funds used during construction . . . . . . . . . . . . . . 13,552 11,881
Gain/loss on reacquired debt . . . . . . . . . . . . . . . . . . . . . . 13,221 13,488
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,833 (6,359)
-------- --------
Net deferred income tax liability . . . . . . . . . . . . . . . . . . . . $268,268 $280,755
======== ========
</TABLE>
J. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS. TGPL has a 20-year lease agreement with Transco Tower
Limited for its headquarters building which expires in 2004. 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.
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>
1995 . . . . . . . . . . . . . . . . . $ 26,972 $4,059 $ 31,031
1996 . . . . . . . . . . . . . . . . . 26,972 954 27,926
1997 . . . . . . . . . . . . . . . . . 26,972 - 26,972
1998 . . . . . . . . . . . . . . . . . 26,972 - 26,972
1999 . . . . . . . . . . . . . . . . . 26,972 - 26,972
Thereafter . . . . . . . . . . . . . . 114,631 - 114,631
-------- ------ --------
Total minimum obligations . . . . . . $249,491 $5,013 $254,504
======== ====== ========
</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
61
<PAGE> 63
share of the building lease expense. TGPL's lease expense is as follows
(amounts expressed in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Transco Tower lease expense . . . . . . $22,561 $22,624 $20,856
Other lease expense . . . . . . . . . . 13,444 9,716 11,356
------- ------- -------
Total . . . . . . . . . . . . . . . $36,005 $32,340 $32,212
======= ======= =======
</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 contracts.
Pursuant to a settlement that TGPL has with all its sales customers,
TGPL has in place a GIC which, although no assurances can be given, TGPL
believes will be adequate to enable full recovery of its above-spot-market gas
costs. Through an agency agreement with TGPL, TGMC has assumed management of
TGPL's merchant sales service and, as TGPL's agent, is at risk for any
above-spot-market gas costs it may incur 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 some cases weekly, in order to ensure that performance is proceeding
according to plan. Since TGPL has been and expects to continue to be able to
perform in accordance with its contract terms and expects to recover all
material contract costs from customers, no provision has been recorded for
future loss. Although no assurances can be given, TGPL does not believe that
financial risks associated with its long-term gas purchase contracts will have
a material adverse effect on TGPL's financial position, results of operations
or net cash flows.
ROYALTY COMMITMENTS. As discussed in Note D, 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.
62
<PAGE> 64
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
TRADE RECEIVABLES. As of December 31, 1994, TGPL had trade receivables
of $40 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. TGPL has not
historically experienced significant credit losses in connection with its trade
receivables.
NOTES RECEIVABLE. In 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 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 1993
resulting in an after-tax non-cash charge of $12.5 million.
DERIVATIVE FINANCIAL INSTRUMENTS. TGPL, through TGMC as its agent, has
been a party to various futures contracts and option agreements traded on the
New York Mercantile Exchange and various option and commodity price swap
agreements made in the over-the- counter market (derivatives) in the management
of price volatility in its natural gas marketing activities, which are related
to TGMC's management of TGPL's jurisdictional merchant sales service. TGPL
does not use derivatives for trading purposes. Derivatives 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. In
connection with open contracts on natural gas marketing activity designated as
hedges, TGPL recorded a net deferred gain of approximately $1.9 million and
$0.4 million at December 31, 1994 and 1993, respectively, based on the market
value of the open contracts calculated using the applicable year-end closing
prices. The December 1994 open contracts are expected to be closed from
January 1995 through March 1996. As of December 31, 1994, open contracts on
natural gas activity had an absolute notional quantity of 61.7 Bcf. The total
net cash inflow related to these contracts at December 31, 1994 was $1.9
million.
TGPL is exposed to market risk on these contracts to the extent of
changes in the market prices for natural gas between December 31, 1994, 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 to express the amounts
of derivatives, the amounts potentially subject to credit risks, in the event
of nonperformance by third parties, are substantially smaller. TGPL minimizes
such risk exposure by limiting the third parties to companies whose long-term
credit ratings are at the minimum investment grade, and in the majority of
cases, they
63
<PAGE> 65
possess at least a single A Standard & Poor's Corporation designation.
Therefore, TGPL does not expect to record any losses as a result of third party
default.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair values of TGPL's financial
instruments as of December 31, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Amount Fair Value
-------------------- --------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term financial assets . . $153,918 $188,293 $153,918 $188,293
Receivables (derivatives) . . . . . . . . 3,185 498 3,185 498
Financial liabilities:
Short-term financial liabilities . . . . 128,136 217,794 128,136 217,794
Long-term debt, less current maturities . 649,000 649,000 601,884 654,618
Payables (derivatives) . . . . . . . . . 1,299 93 1,299 93
</TABLE>
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.
DERIVATIVE FINANCIAL INSTRUMENTS. The amounts shown as receivables and
payables (derivatives) relate to TGPL's natural gas futures, options and
commodity price swaps.
The carrying amount of these derivatives approximates fair value for all
periods. The estimated fair value of these derivative financial instruments is
based on the estimated consideration that would be received to terminate those
agreements and contracts in a gain position and the estimated cost that would
be incurred to terminate those agreements and contracts in a loss position.
LONG-TERM DEBT. Effectively, all of TGPL's debt is publicly traded,
therefore estimated fair value is based on quoted market prices at year end,
less accrued interest.
L. 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>
1994 1993 1992
-------- -------- --------
(Expressed in thousands)
<S> <C> <C> <C>
Public Service Electric and Gas Company . . . . . $180,482 $189,791 $156,691
Consolidated Edison Company of New York, Inc. . . 131,260 133,681 101,392
The Brooklyn Union Gas Company . . . . . . . . . 103,786 93,923 85,587
</TABLE>
64
<PAGE> 66
The gas sold for resale in 1994 was sold to customers under executed Firm
Sales Agreements with primary terms of not less than two years (1995) but not
greater than seven years (2001).
AFFILIATES. Transactions with affiliates during 1994, 1993 and 1992
were as follows:
Included in TGPL's sales and transportation revenues for 1994, 1993 and
1992 are revenues applicable to sales and transportation for affiliates,
Transco Energy Marketing Company (TEMCO), TXG Gas Marketing Company (TXG
Marketing), 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>
1994 1993 1992
------ ----- -----
<S> <C> <C> <C>
TEMCO . . . . . . . . . . . . . . . . $195.9 $49.8 $43.9
TXG Marketing . . . . . . . . . . . . 12.0 9.3 1.2
Texas Gas . . . . . . . . . . . . . . - 0.2 -
TEVCO . . . . . . . . . . . . . . . . - 0.9 2.0
TOGCO . . . . . . . . . . . . . . . . 1.5 1.6 1.0
------ ----- ----
$209.4 $61.8 $48.1
====== ===== =====
</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. The significant increase in 1994 sales and
transportation revenue from TEMCO reflects the consolidation of Transco's gas
marketing businesses, including all jurisdictional merchant sales of TGPL,
under the common management of TGMC, as discussed below.
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 realigned 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. In January 1993, TGMC, through an agency agreement,
began to manage all jurisdictional merchant sales of TGPL. For the years ended
December 31, 1994 and 1993, included in TGPL's cost of sales is $24.4 million
and $25.1 million, respectively, representing agency fees billed by TGMC to
TGPL under this agreement.
65
<PAGE> 67
Included in TGPL's cost of sales and transportation for 1994, 1993 and
1992 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>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
TEMCO . . . . . . . . . . . . . . . . $83.6 $54.5 $ 1.9
TXG Marketing . . . . . . . . . . . . 10.0 1.7 0.9
TEPCO . . . . . . . . . . . . . . . . - - 1.7
----- ----- -----
$93.6 $56.2 $ 4.5
===== ===== =====
</TABLE>
All gas purchases are made at market or contract prices. The
significant increase in 1994 and 1993 for purchased gas cost from TEMCO
reflects the consolidation of Transco's gas marketing businesses, including all
jurisdictional merchant sales of TGPL, under the common management of TGMC, as
discussed above.
Also included in TGPL's cost of transportation is transportation expense
for 1994, 1993 and 1992 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>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Texas Gas . . . . . . . . . . . . . . $36.3 $32.9 $21.7
TOGCO . . . . . . . . . . . . . . . . - - 1.2
HIOS . . . . . . . . . . . . . . . . - - 4.8
UTOS . . . . . . . . . . . . . . . . - - 0.6
----- ----- -----
$36.3 $32.9 $28.3
===== ===== =====
</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 1994, 1993 and 1992,
was $15.2 million, $14.6 million and $11.8 million, respectively, for
management services charged by Transco. Management considers the cost of these
services reasonable.
66
<PAGE> 68
M. QUARTERLY INFORMATION (UNAUDITED)
The following summarizes selected quarterly financial data for 1994 and
1993 (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1994
Operating revenues . . . . . . . . . . . . $431,915 $398,661 $368,485 $391,901
Operating expenses . . . . . . . . . . . . 371,475 344,877 316,988 333,119 (1)
-------- -------- -------- --------
Operating income . . . . . . . . . . . . . 60,440 53,784 51,497 58,782
-------- -------- -------- --------
Other (income) deductions:
Interest expense . . . . . . . . . . . . 15,805 14,524 14,832 14,166
Other (income) and deductions, net . . . (636) (463) (947) (1,237)
-------- ------- -------- --------
Total other deductions . . . . . . . . 15,169 14,061 13,885 12,929
-------- ------- -------- --------
Income before income taxes . . . . . . . . 45,271 39,723 37,612 45,853
Provision for income taxes . . . . . . . . 16,023 13,874 13,068 14,768
-------- ------- -------- --------
Net income . . . . . . . . . . . . . . . . 29,248 25,849 24,544 31,085
Dividends on preferred stock . . . . . . . 1,599 1,572 1,551 1,222
-------- ------- -------- --------
Common stock equity in net income . . . . . $ 27,649 $ 24,277 $ 22,993 $ 29,863
======== ======== ======== ========
</TABLE>
(1) Includes a provision of $6,000 related to a regulatory issue.
<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.
67
<PAGE> 69
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 3, 1995:
<TABLE>
<CAPTION>
Executive Officer
Name Age Position Since (1)
---------------------- ---- --------------------------------------------- -----------------
<S> <C> <C> <C>
John P. Des Barres 55 Chairman of the Board & Chief Executive January 1992
Officer
Robert W. Best 48 Director, President & Chief Operating Officer February 1992
Larry J. Dagley 46 Senior Vice President & Chief Financial August 1985
Officer
James R. Gattis 50 Senior Vice President, Technical Services December 1987
Jay P. Lukens 40 Senior Vice President, Rates & Planning September 1986
Nicholas J. Neuhausel 49 Senior Vice President, Human Resources & June 1993
Administration
Thomas E. Skains 38 Senior Vice President, Transportation & September 1986
Customer Services
David E. Varner 57 Secretary May 1982
Nick A. Bacile 51 Vice President and Controller April 1992
Randall R. Conklin 38 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. Des Barres 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. Des Barres 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. Des Barres 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 Pipe Line Company, a subsidiary of Sun Company Inc.,
a diversified energy company.
68
<PAGE> 70
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, 1994, 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,
1994, 1993, and 1992. No information is presented for Mr. Neuhausel for the
fiscal year ended December 31, 1992 because he was not an officer of TGPL until
June 1993.
69
<PAGE> 71
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SUMMARY COMPENSATION TABLE
<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> <C> <C>
John P. Des Barres, 1994 $ 534,250(3) $ 272,500 $ 59,686(4)
Chairman of the Board 1993 $ 513,000(3) $ 275,000 $ 100,662(4)
and Chief Executive 1992 $ 486,667(3) $ 200,000 $ 383,520(4)(5)
Officer
Robert W. Best, 1994 $ 330,171 $ 137,200 $ 0
President and Chief 1993 $ 315,000 $ 136,900 $ 11,050(4)
Operating Officer 1992 $ 307,438 $ 90,000 $ 182,602(8)
Larry J. Dagley, 1994 $ 241,667 $ 100,000 $ 27,269(4)
Senior Vice President and 1993 $ 213,523 $ 101,800 $ 26,211(4)
Chief Financial Officer 1992 $ 193,750 $ 64,000 $ 17,461(4)
David E. Varner, Secretary 1994 $ 245,833 $ 100,000 $ 24,629(4)
1993 $ 240,000 $ 83,400 $ 28,349(4)
1992 $ 237,500 $ 50,000 $ 23,161(4)
Nicholas J. Neuhausel, 1994 $ 204,667 $ 72,800 $ 7,337(4)
Senior Vice President, 1993 $ 109,091 $ 43,000 $ 0
Human Resources and
Administration
</TABLE>
70
<PAGE> 72
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SUMMARY COMPENSATION TABLE
(CONTINUED)
<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. Des Barres, 1994 $ 0 $ 232,300 $ 65,835 $ 0
Chairman of the Board 1993 $ 0 $ 0 $ 0 $ 0
and Chief Executive 1992 $ 0 $ 0 $ 0 $ 0
Officer
Robert W. Best, 1994 $ 0 $ 115,800 $ 30,457(6) $ 61,261(7)
President and Chief 1993 $ 0 $ 0 $ 20,439(6) $ 70,182(7)
Operating Officer 1992 $ 144,375 $ 12,500 $ 0 $ 47,530(7)
Larry J. Dagley, 1994 $ 0 $ 79,000 $ 15,362(6) $ 0
Senior Vice President and 1993 $ 0 $ 20,000 $ 10,311(6) $ 0
Chief Financial Officer 1992 $ 82,688 $ 0 $ 8,114(9) $ 0
David E. Varner, Secretary 1994 $ 0 $ 75,700 $ 24,140(6) $ 0
1993 $ 0 $ 0 $ 16,159(6) $ 0
1992 $ 0 $ 0 $ 13,737(9) $ 0
Nicholas J. Neuhausel, 1994 $ 0 $ 58,100 $ 0 $ 0
Senior Vice President, 1993 $ 0 $ 15,000 $ 0 $ 0
Human Resources and
Administration
</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, 1994, Mr. Des Barres held
20,000 shares of Transco Restricted Stock with a value of $332,500. On
January 1, 1995, 10,000 of such shares vested and the remaining 10,000
shares will vest on January 1, 1996, assuming Mr. Des Barres is an
employee of Transco on the vesting dates. As of the close of business on
December 31, 1994, Messrs. Best and Dagley held 5,500 and 3,150 shares of
Transco Restricted Stock, with a value of $91,438 and $52,369
respectively. Such Transco Restricted Stock shares vest at a rate of
2,750 and 1,575, respectively, annually on each March 24 in 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, 1994, Messrs. Best, Dagley, Des Barres, Neuhausel and Varner
held 18,050, 10,050, 35,750, 4,200 and 12,050 shares of performance-
based Restricted Stock and 9,025, 5,025, 17,875, 2,100 and 6,025
corresponding
71
<PAGE> 73
Restricted Stock Units, respectively. The value of this Restricted Stock
for Messrs. Best, Dagley, Des Barres, Neuhausel and Varner as of December
31, 1994 (excluding the 1992 grants, the payment of which is reported in
column (h) and discussed in footnote 6 below) was $300,081, $167,081,
$594,344, $69,825 and $200,331, 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 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, 1994.
As a result of the tender offer by Williams, the performance measurement
periods scheduled to end December 31, 1995 and 1996 ended one day prior
to the expiration of the tender offer. The number of shares of Transco
common stock earned and issuable for these performance measurement
periods in exchange for Restricted stock and Restricted Stock Units were
paid in cash at a price of $17.50 per share during the first quarter of
1995. Non-performance-based Restricted Stock will become vested at the
consummation of the Merger and will be converted into the right to
receive unrestricted shares of Williams common stock.
(3) Includes Transco director's fees of $8,000 in 1994, $13,000 in 1993 and
$20,000 in 1992.
(4) Includes, except for Mr. Best, the value (as of the date of allocation)
of shares of Transco's Common Stock allocated pursuant to Transco's
Tran$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.
(5) Also includes moving and relocation expenses including tax gross-up
($257,033) and other perquisites and personal benefits ($25,075).
(6) Represents cash value of Transco Restricted Stock which vested pursuant
to grants under Transco's 1983 Incentive Stock Plan. This Transco
Restricted Stock was issued in 1992 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, 1992 and ending on December 31, 1994, of certain performance goals.
(7) Includes (i) a matching contribution under the Texas Gas Thrift Plan
($10,262 for 1992, $10,013 for 1993 and $6,750 for 1994), (ii) a related
accrual ($3,562 for 1993 and $8,855 for 1994) 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,
$55,047 for 1993 and $43,932 for 1994) and to provide a death benefit
($1,380 for 1992, $1,560 for 1993 and $1,724 for 1994) under the Texas
Gas Salary Continuation Plan.
(8) Includes moving and relocation expenses including tax gross-up
($156,236), other perquisites and personal benefits ($19,555) and
dividends on performance-based Transco Restricted Stock (i.e., Restricted
Stock that vests only if Transco achieves certain performance goals).
(9) Represents cash payment for Performance Units earned pursuant to grants
under Transco's 1983 Incentive Plan. When these Performance Units were
granted in 1989, the performance criteria under which all or a portion
would be earned required that Transco and certain subsidiaries, including
TGPL, achieve certain performance goals. In 1990, the performance
criteria was revised to condition the vesting of all or a portion of the
awards upon the attainment of certain performance goals solely by
Transco.
72
<PAGE> 74
OPTION GRANTED IN LAST FISCAL YEAR
Shown below is further information on the stock options, reflected in
column (g) of the Summary Compensation Table, granted pursuant to Transco's
1991 Incentive Stock Plan during the fiscal year ended December 31, 1994 to the
Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE GRANT
GRANTED EMPLOYEES IN PRICE EXPIRATION DATE
NAME (#)(1) FISCAL YEAR ($/SHARE) DATE VALUE(2)
----------------------- ---------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
John P.Des Barres . . . 232,300 23.10% $ 15.50 5/16/04 $ 1,015,151
Robert W. Best . . . . 115,800 11.52% $ 15.50 5/16/04 $ 506,046
Larry J. Dagley . . . . 79,000 7.86% $ 15.50 5/16/04 $ 345,230
David E. Varner . . . . 75,700 7.53% $ 15.50 5/16/04 $ 330,809
Nicholas J. Neuhausel . 58,100 5.78% $ 15.50 5/16/04 $ 253,897
</TABLE>
(1) These options vest at a rate of 25% annually, expire 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.
As a result of the tender offer by Williams, these options vested upon the
completion of the tender offer. If the stock options are not exercised
prior to or at the effective time of the Merger, the options will be
cancelled and holders of the options will have the choice to receive an
amount in cash, to the extent the option price of the options is below
$17.50, or to receive replacement options from Williams.
(2) The estimated present value of stock options is based on the Black-scholes
Model, a mathematical formula that calculates a theoretical option value
based on certain assumptions. The assumptions used in calculating the
values that appear in this column are as follows: a volatility factor of
0.2493 for the 12 months preceding date of grant, a risk-free rate of
return of 7.31%, yield on U.S. Treasury zero-coupon bond expiring in May
2004, a dividend yield of 3.87% and a time of exercise of ten years, based
on the annual dividend rate as of the date of grant. The actual value, if
any, that a Named Executive Officer may realize will depend on the spread
between the option price and the market price on the date the option is
exercised. Therefore, there can be no assurance that the value estimated
by the Black-Scholes model will be predictive of the actual value realized
by the Named Executive Officer on the date the option is exercised.
73
<PAGE> 75
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
None of the Named Executive Officers exercised any stock options during
the fiscal year 1994. Shown below is information with respect to the
unexercised options to purchase Transco's common stock granted under Transco's
1991 Incentive Stock Plan or 1983 Incentive Plan to the Named Executive
Officers and held by them at December 31, 1994.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION UPDATES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY(1)
OPTIONS AT OPTIONS AT
FISCAL YEAR-END (#) FISCAL YEAR-END ($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE UNEXERCISABLE
----------------------------------- ----------------------------- -------------------------
<S> <C> <C>
John P. Des Barres . . . . . . . . 70,350/255,750 $0/$261,338
Robert W. Best . . . . . . . . . . 50,675/129,125 $0/$130,275
Larry J. Dagley . . . . . . . . . . 42,071/ 98,313 $1,875/$ 94,500
David E. Varner . . . . . . . . . . 51,525/ 81,575 $0/$ 85,163
Nicholas J. Neuhausel . . . . . . . 3,750/ 69,350 $7,031/$ 86,456
</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, 1994 was $16.625 per share.
74
<PAGE> 76
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, 1994
under Transco's 1991 Incentive Stock Plan.
LONG-TERM INCENTIVE PLAN
AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER
SHARES, UNITS OTHER PERIOD NON-STOCK PRICE-BASED PLANS
-----------------------------------
OR OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT (#) (#) (#)
---------------------------- ------------- ------------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
John P. Des Barres . . . . 17,400(1) 1/3/94 to 12/31/96 2,958 17,400 26,100
8,700(2)
Robert W. Best . . . . . . 8,800(1) 1/3/94 to 12/31/96 1,496 8,800 13,200
4,400(2)
Larry J. Dagley . . . . . . 5,600(1) 1/3/94 to 12/31/96 952 5,600 8,400
2,800(2)
David E. Varner . . . . . . 5,850(1) 1/3/94 to 12/31/96 995 5,850 8,775
2,925(2)
Nicholas J. Neuhausel . . . 4,200(1) 1/3/94 to 12/31/96 714 4,200 6,300
2,100(2)
</TABLE>
(1) Represents performance-based Transco Restricted Stock granted pursuant to
Transco's 1991 Incentive Stock 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
criterion 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.
TRANSCO ENERGY COMPANY RETIREMENT PLAN AND SUPPLEMENTAL RETIREMENT 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 Retirement Agreements, 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 payment.
Benefits listed in the table are not subject to a deduction for offsets for
75
<PAGE> 77
social security or other offset amounts. The Transco Supplemental Retirement
Agreements 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 . . . . . . . . . 50,677 67,569 84,461 101,353 118,245
$400,000 . . . . . . . . . 103,177 137,569 171,961 206,353 240,745
$600,000 . . . . . . . . . 155,677 207,569 259,461 311,353 363,245
$800,000 . . . . . . . . . 208,177 277,569 346,961 416,353 485,745
$1,000,000 . . . . . . . . 260,677 347,569 434,461 521,353 608,245
</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 Retirement Agreements, the covered
compensation includes all covered compensation under the Transco
Retirement Plan, without regard to the Internal Revenue Code limitation
described above, plus annual incentive compensation. This annual
incentive compensation is set forth in Column (d) of the Summary
Compensation Table.
The current years of service with Transco for the Named Executive Officers
as of December 31, 1994 are: Mr. Des Barres 3.33 years, Mr. Dagley 9.42 years,
Mr. Varner 12.67 years, and Mr. Neuhausel 1.58 years, respectively. Mr. Best
does not participate in this plan. Mr. Des Barres has 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. Des
Barres will vest in this benefit on September 30, 1994. Any amount received
under this agreement is required to be reduced by any amount
Mr. Des Barres receives under any other employer's retirement plan. This
agreement was entered into by Transco and Mr. Des Barres 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.
76
<PAGE> 78
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 participants in such plans in
various earnings classifications, with representative years of service,
assuming in each case that the employee elected a five-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 . . . . . . . . . 145,680 194,240 242,800 291,360 453,670
$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, 1994 were 20.25 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.
A Termination Agreement between Transco and Mr. Des Barres is currently in
effect. This Agreement provides that if a "change in control" (2) occurs, and
Mr. Des Barres' 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 based upon a certain target
------------------------
(2) A "Change of Control" is defined to include the acquisition by any person
of beneficial ownership of 25% or more of the outstanding shares of Transco
common stock, approval by the stockholders of Transco of a reorganization,
merger or consolidation, subject to certain circumstances, and approval
by the stockholders of Transco of a complete liquidation or dissolution
of Transco or the sale or other disposition of all or substantially all
of the assets of Transco, subject to certain circumstances.
77
<PAGE> 79
award percentage which must equal at least 50% of his base salary and the value
of certain benefits under Transco's 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. Mr. Dagley and Mr. Varner have
also entered into Termination Agreements with provisions similar to those
described above for Mr. Des Barres 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
certain benefits under Transco's employee benefit plans and programs which
would have accrued during a period of up to three years after the change in
control. In addition, a Termination Agreement is also in effect for Mr.
Neuhausel. Mr. Neuhausel's Termination Agreement has the same provisions as
the Agreements of Messrs. Dagley and Varner, except that his total payments
under the Termination Agreement will be limited to an amount such that no
payments to him will be "excess parachute payments" for tax purposes.
Mr. Des Barres 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. Mr. Best
has entered into a Severance Agreement with provisions similar to those
described for Mr. Des Barres, 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. Messrs. Dagley, Neuhausel 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 Transco 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 and certain benefits for tax, financial and outplacement
counseling.
Transco, Williams and each of Messrs. Des Barres, Dagley, Neuhausel and
Varner entered into agreements dated as of December 11, 1994 providing that
such executives agree to eliminate their rights under their Severance
Agreements upon any termination of their employment following a change of
control in which they receive benefits under their Termination Agreements
except that (i) in the case of Messrs. Des Barres, Dagley and Varner, to the
extent they would receive less than one year's salary as severance under their
respective Termination Agreement, they will continue to receive the balance of
one year as severance under their Severance Agreement, and (ii) in the case of
Messrs. Dagley, Neuhausel and Varner, they will continue to receive certain
tax, financial counseling and outplacement benefits provided under their
Severance Agreements.
78
<PAGE> 80
On December 11, 1994, Transco's board of directors established the Senior
Executive Special Bonus and Retention Plan (the Senior Executive Plan), under
which the participants received bonuses as a result of the consummation of the
tender offer by Williams and will receive bonuses following the consummation of
the Merger or another Extraordinary Transaction (as defined in the Senior
Executive Plan) involving Transco, if such event occurs on or before December
31, 1995. The bonuses payable under the Senior Executive Plan consist of (i) a
cash bonus (Transaction Bonus) which was paid upon the consummation of the
tender offer, and (ii) a retention bonus (Retention Bonus) in an amount equal
to the Transaction Bonus, also payable in cash, on the later of December 31,
1995 or the sixth month anniversary of the effective date of the Merger or
another Extraordinary Transaction. An individual participant will be eligible
to receive the Retention Bonus only if (i) he is employed by Transco on the
date the Retention Bonus becomes payable, (ii) his employment is terminated by
Transco before the Extraordinary Transaction in anticipation of, or at the
request of a party intending to consummate, the Extraordinary Transaction, or
(iii) his employment is terminated by the participant for "good reason" or by
Transco without "cause" (as defined in the participant's Termination Agreement
with Transco) before the Retention Bonus becomes payable. The participants in
the program, and the aggregate amount of the combined Transaction Bonus and
Retention Bonus that each of them is eligible to receive under the Senior
Executive Plan are: Messrs. Des Barres ($2,062,500), Best ($1,375,000), Dagley
($1,375,000) and Varner ($687,500). Pursuant to such participants' Termination
Agreements (or in the case of Mr. Best, his Severance Agreement), Transco
indemnifies the participants against certain excise taxes payable by them,
which would include any such excise taxes payable on bonuses under the Senior
Executive Plan.
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 Transco's board of directors or its
Compensation Committee. The Transco board of directors and its Compensation
Committee receive input from Transco management as well as independent
executive compensation consultants.
ITEM 12. SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT.
All references to beneficial ownership in this Item 12 are as of March 3,
1995.
79
<PAGE> 81
COMMON STOCK OF TRANSCO ENERGY COMPANY:
<TABLE>
<CAPTION>
AMOUNT BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER AS OF MARCH 3, 1995 PERCENT OF CLASS
------------------------------ ------------------------- ----------------
<S> <C> <C>
John P. Des Barres . . . . . 351,046.273 .85
Robert W. Best . . . . . . . 187,228.000 .46
Larry J. Dagley . . . . . . . 146,580.623 .36
David E. Varner . . . . . . . 143,950.251 .35
Nicholas J. Neuhausel . . . . 73,279.789 .18
All Directors and Executive 1,082,312.129 2.60
Officers as a Group (10 persons)
</TABLE>
PREFERRED STOCK OF TGPL
None of the directors and executive officers of TGPL own any preferred
stock of TGPL.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
80
<PAGE> 82
========================================================================
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGE
REFERENCE TO
1994 10-K
------------
<S> <C> <C> <C>
A. INDEX
-----
1. FINANCIAL STATEMENTS:
Report of Independent Public Accountants 31
Management Responsibility
for Financial Statements 32
Balance Sheet as of
December 31, 1994 and 1993 33-34
Statement of Income for the Years
Ended December 31, 1994, 1993 and 1992 35
Statements of Retained Earnings
and Premium on Capital Stock
and Other Paid-In Capital for the Years
Ended December 31, 1994, 1993 and 1992 36
Statement of Cash Flows for the Years
Ended December 31, 1994, 1993 and 1992 37
Notes to Financial Statements 38-67
</TABLE>
81
<PAGE> 83
2. FINANCIAL STATEMENT SCHEDULES:
The following schedules are omitted because of
the absence of the conditions under which they
are required:
I, II, III, IV, and V.
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, as amended. (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.
(Exhibit 3.1 to TGPL Form 8-K dated January 23, 1987
Commission File Number 1-7584)
82
<PAGE> 84
- 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)
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.
83
<PAGE> 85
(Exhibit (4)-5h to TGPL Form 10-K for 1989
Commission File Number 1-7584)
- 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)-5c to Transco Form
10-K for 1993 Commission File Number 1-7513)
(i) Second Amendment dated as of December 12,
1994 among Transco, the Banks named therein
and Citibank, N.A., as Agent. (Exhibit 30 to
Amendment No. 3 to Transco Schedule 14D-9
Commission File Number 005-19963)
(ii) Third Amendment Agreement dated as of
December 12, 1994 among Transco, the Banks
named therein and Citibank, N.A., as Agent
(Exhibit 31 to Amendment No. 3 to Transco
Schedule 14D-9 Commission File Number
005-19963)
- 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)
(a) Second Amendment dated as of December 12,
1994 among Transco, the Banks named therein
and Bank of Montreal as Agent and Issuing
Bank. (Exhibit 32 to Amendment No. 3 to
Transco Schedule 14D-9 Commission File Number
005-19963)
(b) Third Amendment dated as of December 12, 1994
among Transco, the Banks named therein and
Bank of Montreal as Agent and Issuing Bank.
(Exhibit 33 to Amendment No. 3 to Transco
Schedule 14D-9 Commission File Number
005-19963)
- 6 Credit Agreement dated as of February 23, 1995 by and
among TGPL, Texas Gas, The Williams Companies, Inc.,
Northwest Pipeline Corporation, Williams Pipe Line
Company and Citibank, N.A. as agent and the Banks
named therein (Exhibit (4)-7 to Transco Form 10-K for
1994 Commission File Number 1-7513)
84
<PAGE> 86
(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 Amended and Restated 1991 Incentive Stock Plan
(Exhibit (10)-3 to Transco Form 10-K for 1994
Commission File Number 1-7513)
- 8 Form of Supplemental Retirement Agreement which
Transco has entered into with Messrs. Dagley and
Varner (Exhibit (10)-7 to Transco Form 10-K for 1992
Commission File Number 1-7513)
- 9 Form of Termination Agreement which Transco has
entered into with Messrs. Best, Dagley and Varner
(Exhibit (10)-8 to Transco Form 10-K for 1992
Commission File Number 1-7513)
- 10 Severance Agreement between Transco and John P.
Des Barres, effective as of September 14, 1991 (Exhibit
(10)-10 to Transco Form 10-K for 1992 Commission File
Number 1-7513)
- 11 Termination Agreement between Transco and John P.
Des Barres, effective as of September 14, 1991 (Exhibit
(10)-11 to Transco Form 10-K for 1992 Commission File
Number 1-7513)
- 12 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)
- 13 Severance Agreement, dated as of March 17, 1993, by
and between Transco and David E. Varner and schedule
identifying substantially
85
<PAGE> 87
similar Severance Agreements between Transco and
other executive officers (Exhibit (10)-13 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)
- 15 Termination Agreement dated as of December 11, 1994
between Transco and Nicholas J. Neuhausel (Exhibit 7
to Schedule 14D-9 Commission File Number 005-19963)
- 16 Amendment dated as of December 11, 1994 to the
Termination Agreement between Transco and Larry J.
Dagley dated as of March 25, 1992 (Exhibit 8 to
Schedule 14D-9 Commission File Number 005-19963)
- 17 Amendment dated as of December 11, 1994 to the
Termination Agreement between Transco and David E.
Varner dated as of March 25, 1992 (Exhibit 10 to
Schedule 14D-9 Commission File Number 005-19963)
- 18 Amendment dated as of December 11, 1994 to the
Termination Agreement between Transco and John P.
Des Barres dated as of October 31, 1991 (Exhibit 11 to
Schedule 14D-9 Commission File Number 005-19963)
- 19 Amendment dated as of December 11, 1994 to the
Severance Agreement between Transco and Robert W.
Best dated March 25, 1992 (Exhibit 12 to Schedule
14D-9 Commission File Number 005-19963)
- 20 Senior Executive Special Bonus and Retention Plan
(Exhibit 13 to Schedule 14D-9 Commission File Number
005-19963)
- 21 Agreement dated as of December 11, 1994 between
Transco, The Williams Companies, Inc. and Larry J.
Dagley (Exhibit 14 to Schedule 14D-9 Commission File
Number 005-19963)
- 22 Agreement dated as of December 11, 1994 between
Transco, The Williams Companies, Inc. and David E.
Varner (Exhibit 15 to Schedule 14D-9 Commission File
Number 005-19963)
86
<PAGE> 88
- 23 Agreement dated as of December 11, 1994 between
Transco, The Williams Companies, Inc. and Nicholas
Neuhausel (Exhibit 16 to Schedule 14D-9 Commission
File Number 005-19963)
- 24 Agreement dated as of December 11, 1994 between
Transco, The Williams Companies, Inc. and John P.
Des Barres (Exhibit 19 to Schedule 14D-9 Commission File
Number 005-19963)
4. REPORTS ON FORM 8-K:
None.
87
<PAGE> 89
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. DES BARRES Chairman of the Board and Chief Executive
(John P. Des Barres) 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>
88
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF INCOME INCLUDED IN THE FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1994, OF TRANSCONTINENTAL GAS PIPE LINE CORPORATION AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,628
<SECURITIES> 0
<RECEIVABLES> 40,257
<ALLOWANCES> 0
<INVENTORY> 63,098
<CURRENT-ASSETS> 424,204
<PP&E> 4,340,912
<DEPRECIATION> 2,578,069
<TOTAL-ASSETS> 2,271,115
<CURRENT-LIABILITIES> 388,280
<BONDS> 644,238<F1>
<COMMON> 0
49,375<F2>
0
<OTHER-SE> 814,827
<TOTAL-LIABILITY-AND-EQUITY> 2,271,115
<SALES> 754,984
<TOTAL-REVENUES> 1,590,962
<CGS> 752,495
<TOTAL-COSTS> 1,213,719
<OTHER-EXPENSES> 6,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,327
<INCOME-PRETAX> 168,459
<INCOME-TAX> 57,733
<INCOME-CONTINUING> 110,726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,726<F3>
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>NET OF UNAMORTIZED DEBT PREMIUM AND DISCOUNT
<F2>NET OF ISSUE EXPENSE
<F3>BEFORE PREFERRED DIVIDENDS OF 5,944
</FN>
</TABLE>
