Item 1. Business. GENERAL
Effective May 1, 1995, Texas Gas Transmission Corporation (the Company) became a wholly owned subsidiary of The Williams Companies, Inc. (Williams). Prior to May 1, 1995, the Company was a wholly owned subsidiary of Transco Gas Company, which was a wholly owned subsidiary of Transco Energy Company (Transco). As used herein, the term Williams refers to The Williams Companies, Inc. together with its wholly owned subsidiaries, unless the context otherwise requires.
In December 1994, Transco and Williams entered into a merger agreement pursuant to which Williams would acquire the entire equity interest of Transco. Pursuant to the merger agreement, on January 18, 1995, Williams agreed to purchase for cash approximately 60 percent of Transco's outstanding common stock as a first step in the acquisition. The exchange of the remainder of the outstanding shares of Transco common stock for Williams common stock occurred on May 1, 1995. On that date, Transco paid as a dividend to Williams all of Transco's interest in the Company.
The Company is an interstate natural gas transmission company which owns and operates a natural gas pipeline system originating in the Louisiana Gulf Coast area and in East Texas and running generally north and east through Louisiana, Arkansas, Mississippi, Tennessee, Kentucky, Indiana and into Ohio, with smaller diameter lines extending into Illinois. The Company's direct market area encompasses eight states in the South and Midwest, and includes the Memphis, Tennessee; Louisville, Kentucky; Cincinnati and Dayton, Ohio; and Indianapolis, Indiana metropolitan areas. The Company also has indirect market access to the Northeast through interconnections with unaffiliated pipelines.
TRANSPORTATION AND SALES
At December 31, 1996, the Company's system, having a mainline delivery capacity of approximately 2.8 billion cubic feet (Bcf) of gas per day, was composed of approximately 6,000 miles of mainline and branch transmission pipelines and 32 compressor stations having a sea-level-rated capacity totaling approximately 549,000 horsepower.
The Company owns and operates natural gas storage reservoirs in 10 underground storage fields located on or near its pipeline system and/or market areas. The storage capacity of the Company's certificated storage fields is approximately 177 Bcf of gas. The Company owns its own storage gas which it uses, in part to meet operational balancing needs on its system and, in part, to meet the requirements of the Company's "no-notice" transportation service, which allows the Company's customers to temporarily draw from the Company's storage gas to be repaid in-kind during the following summer season. A large portion of the gas delivered by the Company to its market area is used for space heating, resulting in substantially higher daily requirements during winter months.
In 1996, the Company transported gas to customers in Louisiana, Arkansas, Mississippi, Tennessee, Kentucky, Indiana, Illinois and Ohio and to Northeast customers served indirectly by the Company. Gas was transported for 133 distribution companies and municipalities for resale to residential, commercial and industrial users. Transportation services were provided to approximately 102 industrial customers located along the system. At December 31, 1996, the Company had transportation contracts with approximately 559 shippers. Transportation shippers include distribution companies, municipalities, intrastate pipelines, direct industrial users, electrical generators, marketers and producers. During 1996, the Company did not have any customer which accounted for more than ten percent of total operating revenues. The Company's firm transportation agreements are generally long-term agreements with various expiration dates and account for the major portion of the Company's business. Additionally, the Company offers interruptible transportation and storage services under agreements that are generally short term.
OPERATING STATISTICS
The following table summarizes the Company's total system delivery data, which excludes unbundled sales, for the periods shown (expressed in trillion British thermal units [TBtu]):
Year Ended December 31, System deliveries: 1996 1995 1994
Long-haul transportation 736.0 635.7 618.8 Short-haul transportation 58.5 57.6 188.6 Total system deliveries 794.5 693.3 807.4
Average Daily Transportation Volumes (TBtu): 2.2 1.9 2.2 Average Daily Firm Reserved Capacity (TBtu): 2.1 2.0 2.1
The Company's facilities are divided into five rate zones. Generally, gas delivered in the northern four zones is classified as long-haul transportation. Gas delivered under interruptible agreements in the southern most zone is classified as short-haul transportation. The revenues associated with short-haul transportation volumes are not material to the Company.
REGULATORY MATTERS
The Company is subject to regulation by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act of 1938 and under the Natural Gas Policy Act of 1978, and as such, its rates and charges for transportation of natural gas in interstate commerce, the extension, enlargement or abandonment of facilities, and its accounting, among other things, are subject to regulation. As necessary, the Company 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 customers, including a reasonable rate of return.
The Company is also 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.
Regulatory Matters
The Company's rates are established primarily through the FERC ratemaking process. Key determinants in the ratemaking process are (1) costs of providing service, (2) allowed rate of return, including the equity component of the Company's capital structure, and (3) volume throughput assumptions. The allowed rate of return is determined by the FERC in each rate case. Rate design and the allocation of costs between the demand and commodity rates also impact profitability.
In September 1994, the Company filed a general rate case (Docket No. RP94-423) which became effective April 1, 1995, subject to refund. A proposed settlement was filed with the FERC in September 1995, and was approved by the FERC on February 20, 1996. Refunds of approximately $23.2 million, including interest, for which the Company had provided a reserve, were made to customers in April 1996.
For discussion of other regulatory matters affecting the Company, see Note C of Notes to Financial Statements contained in Item 8 hereof.
Environmental Matters
The Company is subject to extensive federal, state and local environmental laws and regulations which affect the Company's operations related to the construction and operation of its pipeline facilities. For a complete discussion of this issue, see Note C of Notes to Financial Statements contained in Item 8 hereof.
COMPETITION
Competition for natural 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. In 1992, the FERC issued its Order 636, the stated purpose of which was to improve the competitive structure of the natural gas pipeline industry. Future utilization of the Company's pipeline capacity will depend on competition from other pipelines, the general level of natural gas demand and weather conditions.
When restructured tariffs became effective under FERC Order 636, all suppliers of natural gas were able to compete for any gas markets capable of being served by the pipelines using nondiscriminatory transportation services provided by the pipelines. As the FERC Order 636 regulated environment has matured, many pipelines have faced reduced levels of subscribed capacity as contractual terms expire and customers opt for alternative sources of transmission and related services. This issue is known as "capacity turnback" in the industry.
The Company is working diligently to replace any and all markets lost due to capacity turnback, as well as to pursue new markets. During 1996, the Company increased firm service to one of its largest customers and extended the service agreement through the third quarter of the year 2000. All capacity turned back in 1996 has been fully subscribed, and the Company anticipates that it will continue to be able to remarket future capacity turnback.
OWNERSHIP OF PROPERTY
The Company's pipeline system is owned in fee, with certain portions, such as the offshore areas, being held jointly with third parties. However, a substantial portion of the Company's system is constructed and maintained pursuant to rights-of-way, easements, permits, licenses or consents on and across property owned by others. The majority of the Company's compressor stations, with appurtenant facilities, are located in whole or in part on lands owned in fee by the Company, with a few sites held under long-term leases or permits issued or approved by public authorities. Storage facilities are either owned or contracted for under long-term leases.
EMPLOYEE RELATIONS
The Company had 975 employees as of December 31, 1996. Certain of those employees were covered by a collective bargaining agreement. A favorable relationship existed between management and labor during the period.
As discussed in Note F of Notes to Financial Statements contained in Item 8 hereof, approximately 9 percent of the Company's employees elected to retire in 1995 under an early retirement program offered by the Company.
The International Chemical Workers Council of the United Food and Commercial Workers Union Local 187 represents 186 of the Company's 443 field operating employees. The current collective bargaining agreement between the Company and Local 187 expires on October 31, 1998.
The Company has a non-contributory pension plan and various other plans which provide regular active employees with group life, hospital and medical benefits as well as disability benefits and savings benefits. Officers and directors who are full-time employees may participate in these plans.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although the Company believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. Such statements are made in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995.
As required by such Act, the Company hereby identifies the following important factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted by the Company in forward- looking statements: (i) risks and uncertainties related to changes in general economic conditions in the United States, changes in laws and regulations to which the Company is subject, including tax, environmental and employment laws and regulations, the cost and effects of legal and administrative claims and proceedings against the Company or which may be brought against the Company and conditions of the capital markets utilized by the Company to access capital to finance operations; (ii) risks and uncertainties related to the impact of future federal and state regulation of business activities, including allowed rates of return; and (iii) risks and uncertainties related to the ability to develop expanded markets as well as maintain existing markets. In addition, future utilization of pipeline capacity will depend on energy prices, competition from other pipelines and alternate fuels, the general level of natural gas demand and weather conditions, among other things. Further, gas prices which directly impact transportation and operating profits may fluctuate in unpredictable ways.
Item 2.
Item 2. Properties.
See "Item 1. Business."
Item 3.
Item 3. Legal Proceedings.
For a discussion of the Company's current legal proceedings, see Note C of Notes to Financial Statements contained in Item 8 hereof.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) and (b) As of December 31, 1996, all of the outstanding shares of the Company's common stock are owned by The Williams Companies, Inc. The Company's common stock is not publicly traded and there exists no market for such common stock.
Item 7.
Item 7. Management's Narrative Analysis of the Results of Operations
Introduction
As discussed in Note A of Notes to Financial Statements contained in Item 8
Item 8. Financial Statements and Supplementary Data
REPORTS OF INDEPENDENT AUDITORS
Texas Gas Transmission Corporation The Board of Directors
We have audited the accompanying balance sheet of Texas Gas Transmission Corporation as of December 31, 1996 and 1995, and the related statements of income, retained earnings and paid- in capital and cash flows for the year ended December 31, 1996, and the periods from January 1, 1995 to January 17, 1995, and from January 18, 1995 to December 31, 1995. 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. The statements of income, retained earnings and paid-in capital, and cash flows for the period ended December 31, 1994, were audited by other auditors whose report dated February 20, 1995, expressed an unqualified opinion on those statements.
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 misstatements. 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 Texas Gas Transmission Corporation at December 31, 1996 and 1995, and the results of its operations and its cash flows for the year ended December 31, 1996, and the periods from January 1, 1995 to January 17, 1995, and from January 18, 1995 to December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP ERNST & YOUNG LLP
Tulsa, Oklahoma February 7, 1997
To Texas Gas Transmission Corporation:
We have audited the accompanying statements of income, retained earnings and paid-in capital and cash flows of Texas Gas Transmission Corporation (a Delaware corporation) for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Texas Gas Transmission Corporation for the year ended December 31, 1994, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP
Houston, Texas February 20, 1995
TEXAS GAS TRANSMISSION CORPORATION BALANCE SHEETS (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
BALANCE SHEETS (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was accounted for using the purchase method of accounting. Accordingly, the purchase price was "pushed down" and recorded in the accompanying financial statements which affects the comparability of the post-acquisition and pre-acquisition results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF INCOME (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was accounted for using the purchase method of accounting. Accordingly, the purchase price was "pushed down" and recorded in the accompanying financial statements which affects the comparability of the post-acquisition and pre-acquisition results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION
STATEMENTS OF RETAINED EARNINGS AND PAID-IN CAPITAL (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
The acquisition of the Company by The Williams Companies, Inc. was accounted for using the purchase method of accounting. Accordingly, the purchase price was "pushed down" and recorded in the accompanying financial statements which affects the comparability of the post-acquisition and pre-acquisition results of operations and cash flows.
TEXAS GAS TRANSMISSION CORPORATION STATEMENTS OF CASH FLOWS (Thousands of Dollars)
The accompanying notes are an integral part of these financial statements.
TEXAS GAS TRANSMISSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
A. Corporate Structure and Control, Nature of Operations and Basis of Presentation
Corporate Structure and Control
Effective May 1, 1995, Texas Gas Transmission Corporation (the Company) became a wholly owned subsidiary of The Williams Companies, Inc. (Williams). Prior to May 1, 1995, the Company was a wholly owned subsidiary of Transco Gas Company, which was a wholly owned subsidiary of Transco Energy Company (Transco). As used herein, the term Williams refers to The Williams Companies, Inc. together with its wholly owned subsidiaries, unless the context otherwise requires.
In December 1994, Transco and Williams entered into a merger agreement pursuant to which Williams would acquire the entire equity interest of Transco. Pursuant to the merger agreement, on January 18, 1995, Williams agreed to purchase for cash approximately 60 percent of Transco's outstanding common stock as a first step in the acquisition. The exchange of the remainder of the outstanding shares of Transco common stock for Williams common stock occurred on May 1, 1995. On that date, Transco paid as a dividend to Williams all of Transco's interest in the Company.
Nature of Operations
The Company is an interstate natural gas transmission company which owns and operates a natural gas pipeline system originating in the Louisiana Gulf Coast area and in East Texas and running generally north and east through Louisiana, Arkansas, Mississippi, Tennessee, Kentucky, Indiana and into Ohio, with smaller diameter lines extending into Illinois. The Company's direct market area encompasses eight states in the South and Midwest, and includes the Memphis, Tennessee; Louisville, Kentucky; Cincinnati and Dayton, Ohio; and Indianapolis, Indiana metropolitan areas. The Company also has indirect market access to the Northeast through interconnections with unaffiliated pipelines.
Basis of Presentation
The acquisition by Williams has been accounted for using the purchase method of accounting. Accordingly, an allocation of the purchase price was assigned to the assets and liabilities of the Company, based on their estimated fair values. The accompanying financial statements reflect the pushdown of the purchase price allocation (amounts in excess of book value) to the Company. Retained earnings and accumulated depreciation and amortization were eliminated on the date of acquisition, January 18, 1995, and the Company's assets and liabilities were adjusted to their estimated fair values. The purchase price allocation to the Company primarily consisted of an allocation of approximately $257 million to property, plant and equipment and adjustments to deferred taxes based upon the book basis of the net assets recorded as a result of the acquisition. The accounting for
the effects of the acquisition included recognizing the difference between the plan assets and the benefit obligations related to pension benefits and postretirement benefits other than pensions. The recognition of these amounts was offset by the recognition of regulatory assets or liabilities of equal amounts, due to the expected future rate recovery of these costs.
Included in property, plant and equipment at December 31, 1996, is an aggregate of approximately $430 million related to amounts in excess of the original cost of the regulated facilities as a result of the Williams' and prior acquisitions. This amount is being amortized over 40 years, the estimated useful lives of these assets at the date of acquisition, at approximately $11 million per year. Current Federal Energy Regulatory Commission (FERC) policy does not permit the Company to recover through its rates amounts in excess of original cost.
The accompanying financial statements were prepared in accordance with Securities and Exchange Commission guidelines. Therefore, as a result of the change in control of the Company to Williams on January 18, 1995, the Statement of Income and Statement of Cash Flows for the year ended December 31, 1995, have been segregated into a pre-acquisition period ending January 17, 1995 and a post-acquisition period beginning January 18, 1995.
Related Parties
As a subsidiary of Williams, the Company engages in transactions with Williams and other Williams subsidiaries characteristic of group operations. Prior to May 1, 1995, the Company participated in Transco's consolidated cash management program and made interest-bearing advances to Transco. Effective May 1, 1995, the Company began participation in Williams' cash management program. On that date, the balance of the advances due from Transco were transferred by Transco to Williams. These advances are represented by demand notes payable to the Company. Those amounts that the Company anticipates Williams will repay in the next twelve months are classified as current assets, while the remainder are classified as noncurrent. The interest rate on intercompany demand notes is the London Interbank Offered Rate on the first day of the month plus 0.35%. Net interest income on advances to or from affiliated companies was $12.0 million, $11.9 million and $10.4 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Both Williams and Transco have policies of charging subsidiary companies for management services provided by the parent company and other affiliated companies. Amounts charged to expense relative to management services were $5.6 million, $11.3 million and $7.1 million for the years ended December 31, 1996, 1995 and 1994, respectively. Management considers the cost of these services reasonable.
Effective November 1, 1993, the Company contracted with a gas marketing affiliate to become the Company's agent for the purpose of administering all existing and future gas sales and market-responsive purchase obligations, except for its auction gas transactions as discussed in Note B. Sales and purchases under this agreement do not impact the Company's results of operations. For the years ended December 31, 1996, 1995 and 1994, the Company paid to its gas marketing affiliates agency fees of $0.7 million, $0.7 million and $1.9 million, respectively, for these services.
Included in the Company's gas sales revenues for the years ended December 31, 1996, 1995 and 1994, is $22.4 million, $17.4 million and $42.2 million, respectively, applicable to gas sales to the Company's gas marketing affiliates.
Included in the Company's gas transportation revenues for the years ended December 31, 1996, 1995 and 1994, are amounts applicable to transportation for affiliates as follows (expressed in thousands):
Year Ended December 31, 1996 1995 1994
Williams Energy Services Company/Transco Gas Marketing Company $ 2,245 $ 2,626 $ 2,866 Transcontinental Gas Pipe Line Corporation 17,460 36,439 35,705 $19,705 $39,065 $38,571
Included in the Company's cost of gas sold for the years ended December 31, 1996, 1995 and 1994, is $31.5 million, $25.6 million and $58.5 million, respectively, applicable to gas purchases from the Company's gas marketing affiliates.
B. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenues for the sale of natural gas when products have been delivered and for the transportation of natural gas based upon contractual terms and the related transportation volumes through month-end. Pursuant to FERC regulations, a portion of the revenues being collected may be subject to refunds upon final orders in pending rate cases. The Company has established reserves, where required, for such cases (see Note C for a summary of pending rate cases before the FERC).
Costs Recoverable from/Refundable to Customers
The Company has various mechanisms whereby rates or surcharges are established and revenues are collected and recognized based on estimated costs. Costs incurred over or under approved levels are deferred in anticipation of recovery or refunds through future rate or surcharge adjustments (see Note C for a discussion of the Company's rate matters).
Property, Plant and Equipment
Depreciation is provided primarily on the straight-line method over estimated useful lives. Gains or losses from the ordinary sale or retirement of property, plant and equipment generally are credited or charged to accumulated depreciation; other gains or losses are recorded in net income.
Income Taxes
Deferred income taxes are computed using the liability method and are provided on all temporary differences between the book basis and the tax basis of the Company's assets and liabilities.
Liabilities to customers, resulting from net tax rate reductions related to regulated operations and to be refunded to customers have been shown in the accompanying balance sheets as income taxes refundable to customers. The current portion of this liability is included in costs refundable to customers and the noncurrent portion is included in other liabilities.
For federal income tax reporting, the Company is included in the consolidated federal income tax return of Williams for the periods after May 1, 1995. For prior reporting periods, the Company is included in the consolidated federal income tax return of Transco.
It is Williams' policy to charge or credit each subsidiary or subgroup with an amount equivalent to its federal income tax expense or benefit as if each subsidiary or subgroup filed a separate return. The Transco policy was similar but varied in that benefits from each subsidiary's losses and tax credits generally would be credited only when utilized on a consolidated basis.
Gas Sales and Purchases
Since November 1, 1993, the only gas sales administered by the Company have been volumes purchased under a limited number of non-market-responsive gas purchase contracts which were auctioned each month to the highest bidder. The Company filed to recover the price differential between the cost to buy the gas under these gas purchase contracts and the price realized from the resale of the gas at the auction as a gas supply realignment (GSR) cost pursuant to FERC Order 636. Effective November 1, 1996, the auction sales and the related pricing differential mechanism terminated in accordance with the Company's GSR settlement (see Note C).
A gas marketing affiliate of the Company has been appointed as the Company's exclusive agent for the purpose of administering all existing and future purchases of gas under market-responsive gas purchase contracts and the resale of these purchases.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Capitalized Interest
The allowance for funds used during construction 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 and capitalized interest for the years ended December 31, 1996, 1995 and 1994, was $0.4 million, $0.2 million and $0.3 million, respectively. The allowance for equity funds for the years ended December 31, 1996, 1995 and 1994, was $0.7 million, $0.4 million and $0.5 million, respectively.
Gas in Storage
The Company's storage gas is used for system management, in part to meet operational balancing needs on its system and, in part, to meet the requirements of the Company's "no-notice" transportation service, which allows customers to temporarily draw from the Company's gas to be repaid in-kind during the following summer season. In 1996, the Company adopted FERC Order 581, which, among other things, addressed the accounting requirements for gas stored underground. As a result of this order, that portion of the Company's gas stored underground, which exceeded its system management requirements, as approved by the FERC, has been classified as a current asset in the accompanying balance sheets.
Gas Imbalances
In the course of providing transportation services to customers, the Company may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. These transactions result in imbalances which are repaid or recovered in cash or through the receipt or delivery of gas in the future. Customer imbalances to be repaid or recovered in-kind are recorded as transportation and exchange gas receivable or payable in the accompanying balance sheets. 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.
Inventory Valuation
The cost of materials and supplies inventories is determined using the average-cost method.
Cash Flows from Operating Activities
The Company uses the indirect method to report cash flows from operating activities, which requires adjustments to net income to reconcile to net cash flows from operating activities. The Company includes in cash equivalents any short-term highly-liquid investments that have a maturity of three months or less when acquired.
Common Stock Dividends and Returns of Capital
The Company charges against paid-in capital that portion of any common dividend declaration which exceeds the retained earnings balance. Such charges are deemed to be returns of capital.
Impairments of Long-Lived Assets
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption of the standard had no effect on the Company's financial position or results of operations.
Reclassifications
Certain reclassifications have been made in the 1995 and 1994 financial statements to conform to the 1996 presentation.
C. Contingent Liabilities and Commitments
Regulatory and Rate Matters and Related Litigation
FERC Order 636
Effective November 1, 1993, the Company restructured its business to implement the provisions of FERC Order 636, which, among other things, required pipelines to unbundle their merchant role from their transportation services. FERC Order 636 also provides that pipelines should be allowed the opportunity to recover all prudently incurred transition costs which, for the Company, are primarily related to GSR costs and unrecovered purchased gas costs. Certain aspects of the Company's FERC Order 636 restructuring are under appeal.
On July 16, 1996, the United States Court of Appeals for the District of Columbia (D.C. Circuit Court) issued an order which in part affirmed and in part remanded FERC Order 636. However, the court stated that FERC Order 636 would remain in effect until the FERC issued a final order on remand after considering the remanded issues. With the issuance of this decision, the stay on the appeals of individual pipeline's restructuring cases will be lifted. Although no assurances can be given as regards the appeals of the Company's restructuring case, the effect of those appeals should be limited since FERC Order 636 was largely upheld.
On February 27, 1997, FERC issued Order 636-C in response to the court's remand affirming that pipelines may recover all of their GSR costs, but requiring pipelines to individually propose the percentage of such costs to be allocated to interruptible transportation services, instead of a uniform 10 percent allocation. However, the Company's GSR settlement, discussed below, which is not subject to appeal, should be unaffected by this Order. The Order also prospectively relaxed the eligibility requirements for receiving no-notice service and reduced the right of first refusal matching period from 20 years to five years. FERC Order 636-C is still subject to potential rehearing at the FERC.
In September 1995, the Company received FERC approval of a settlement agreement which resolves all issues regarding the Company's recovery of GSR costs. The settlement provides that the Company will recover 100 percent of its GSR costs up to $50 million, will share in costs incurred between $50 million and $80 million and will absorb any GSR costs above $80 million. Under the settlement, all challenges to these costs, on the grounds of imprudence or otherwise, will be withdrawn and no future challenges will be filed. Ninety percent of the cost recovery is being collected via demand surcharges on the Company's firm transportation rates; the remaining 10 percent should be recovered from its interruptible transportation service.
Through December 31, 1996, the Company has paid $76.2 million and expects to pay no more than $80.0 million for GSR costs, primarily as a result of contract terminations. The Company has recovered approximately $58.6 million, plus interest, in GSR costs and has recorded a regulatory asset of approximately $8.6 million for the estimated future recovery of its GSR costs, most of which will be collected from customers prior to December 31, 1997.
Additionally, the Company's transition costs included unrecovered purchased gas costs for periods prior to November 1, 1993, pursuant to FERC Order 636. In October 1995, the Company received FERC approval of a settlement with its customers, under which requirements the Company absorbed approximately $0.7 million of these costs, which was recognized as expense in 1995. Refunds of overrecovered amounts totaling $4 million were issued in December 1995 and January 1996.
General Rate Issues
In September 1994, the Company filed a general rate case (Docket No. RP94-423) which became effective April 1, 1995, subject to refund. A proposed settlement was filed with the FERC in September 1995, and approved by the FERC on February 20, 1996. Refunds of approximately $23.2 million including interest, for which the Company had provided a reserve, were made to customers in April 1996.
Royalty Claims and Producer Litigation
In connection with the Company's renegotiations of supply contracts with producers to resolve take-or-pay and other contract claims, the Company has entered into certain settlements which may require the indemnification by the Company of certain claims for royalties which a producer may be required to pay as a result of such settlements. The Company has been made aware of demands on producers for additional royalties and may receive other demands which could result in claims against the Company pursuant to the indemnification provision in its settlements. Indemnification for royalties will depend on, among other things, the specific lease provisions between the producer and the lessor and the terms of the settlement between the producer and the Company. The Company may file to recover 75 percent of any such amounts it may be required to pay pursuant to indemnifications for royalties under the provisions of FERC Order 528. The Company has provided reserves for the estimated settlement costs of its royalty claims and litigation.
On March 3, 1995, Ergon, Inc. and Ergon Exploration (Ergon) filed a lawsuit against the Company in the U.S. District Court, West District Louisiana, seeking approximately $45,000 in damages for gas purchased in calendar year 1994, a declaratory judgment concerning the proper construction of the pricing provisions of a gas purchase contract, unspecified future damages and, alternatively, a reformation of or rescission of an agreement amending the gas purchase contract. The gas purchase contract was terminated and the lawsuit dismissed, with prejudice, by court order issued December 2, 1996, pursuant to a settlement between the Company and Ergon. Amounts paid Ergon to terminate the gas purchase contract are included in the GSR costs discussed above.
Other Litigation
On July 18, 1996, an individual filed a lawsuit in the United States District Court for the District of Columbia against 70 natural gas pipelines and other gas purchasers or former gas purchasers. All of Williams' natural gas pipeline subsidiaries, including the Company, are named as defendants in the lawsuit. The plaintiff claims, on behalf of the United States under the False Claims Act, that the pipelines have incorrectly measured the heating value or volume of gas purchased by the defendants. The plaintiff claims that the United States has lost royalty payments as a result of these practices. The Williams' natural gas pipeline subsidiaries, as well as other natural gas pipelines, intend to vigorously defend against these claims.
Environmental Matters
As of December 31, 1996, the Company had a reserve of approximately $4 million for estimated costs associated with environmental assessment and remediation. This estimate depends upon a number of assumptions concerning the scope of remediation that will be required at certain locations and the cost of remedial measures to be undertaken. The Company is continuing to conduct environmental assessments and is implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs.
The Company used lubricating oils containing polychlorinated biphenyls (PCBs) and, although the use of such oils was discontinued in the 1970's, has discovered residual PCB contamination in equipment and soils at certain gas compressor station sites. The Company continues to work closely with the U. S. Environmental Protection Agency (EPA) and state regulatory authorities regarding PCB issues and has programs to assess and remediate such conditions where they exist, the costs of which are a significant portion of the reserve discussed above.
The Company currently is either named as a potentially responsible party or has received an information request regarding its potential involvement at certain Superfund and state waste disposal sites. The anticipated remediation costs, if any, associated with these sites have been included in the reserve discussed above.
The Company considers environmental assessment and remediation costs and costs associated with compliance with environmental standards to be recoverable through rates, as they are prudent costs incurred in the ordinary course of
business. The actual costs incurred will depend on the actual amount and extent of contamination discovered, the final cleanup standards mandated by the EPA or other governmental authorities, and other factors. The Company's current rate design incorporates the recovery of anticipated environmental costs, and it is the Company's intent to continue seeking recovery of such costs, as anticipated, through rate filings. Therefore, the estimated recoveries of environmental assessment and remediation costs have been recorded as regulatory assets in the accompanying balance sheets.
Summary of Contingent Liabilities and Commitments
While no assurances may be given, the Company does not believe that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, insurance coverage, potential recovery from customers or other indemnification arrangements, will have a materially adverse effect on the Company's future financial position, results of operations or cash flow requirements.
D. Income Taxes
Following is a summary of the provision for income taxes for the year ended December 31, 1996, the period January 18, 1995 to December 31, 1995, the period January 1, 1995 to January 17, 1995, and the year ended December 31, 1994 (expressed in thousands):
Reconciliations from the income tax provision at the statutory rate to the Company's income tax provision are as follows (expressed in thousands):
Significant components of deferred tax liabilities and assets as of December 31 are as follows (expressed in thousands):
E. Financing
Long-term Debt
At December 31, 1996 and 1995, long-term debt issues were outstanding as follows (expressed in thousands):
For financial statement reporting purposes, a $100 million current debt obligation has been classified as noncurrent based on the Company's intent and ability to refinance on a long-term basis. Although the amount available under the $1 billion credit agreement, as discussed below, is sufficient to meet this obligation, the Company plans to issue new long-term debt by July 15, 1997 to replace its maturing debt.
The Company's debt was revalued to fair value at the date of acquisition as part of the allocation of the purchase price following the Company's acquisition by Williams. Fair value in excess of historical face value reflects the Company's lower borrowing costs as a result of improved external debt ratings.
The Company's debentures and notes have restrictive covenants which provide that neither the Company nor any subsidiary may create, assume or suffer to exist any lien upon any property to secure any indebtedness unless the debentures and notes shall be equally and ratably secured.
The Company is a participant with other Williams subsidiaries in a $1 billion credit agreement under which the Company may borrow up to $200 million, subject to borrowings by other affiliated companies. Interest rates vary with current market conditions. To date, the Company has no amounts outstanding under this facility.
F. Employee Benefit Plans
Retirement Plan
Substantially all of the Company's employees are covered under a non-contributory retirement plan (Retirement Plan) offered by the Company. The benefits under the Retirement Plan are determined by a formula based upon years of service and the employee's highest average base compensation. The Retirement Plan provides for vesting of employees' benefits after five years of credited service. The Company's general funding policy is to contribute amounts deductible for federal income tax purposes. Due to its fully funded status, the Company has not been required to fund the Retirement Plan since 1986. The Retirement Plan's assets are held in a master trust, which is managed by external investment organizations and consists primarily of domestic and foreign common and preferred stocks, United States government securities, corporate bonds and commercial paper.
In connection with the Company's acquisition by Williams, the Retirement Plan was amended effective March 8, 1995, to provide a Voluntary Window Retirement Program with special retirement benefits for those eligible members who elected to retire during the Window Period. The Window Period began March 8, 1995, and ended April 17, 1995. The special window retirement benefits were available only to those employees who, as of May 1, 1995, were active members in the Retirement Plan, age 50 or older, credited with at least five years of service and elected during the Window Period to retire. There were 107 employees who elected to retire under the special retirement program.
The accounting for the effects of the acquisition by Williams included the recognition of the difference between
Retirement Plan assets and the benefit obligations related to pensions, including the effects of the special retirement program discussed above. The recognition of these amounts was offset by an equal reduction to the Company's regulatory liability to customers for prepaid pension costs.
The following table sets forth the funded status of the Retirement Plan at December 31, 1996 and 1995, and the prepaid pension costs as of December 31, 1996 and 1995, (expressed in thousands):
Prepaid pension costs related to the Retirement Plan have been classified as other assets in the accompanying balance sheets.
The following table sets forth the components of the Company's net periodic pension cost, net of regulatory deferrals, which is included in the accompanying financial statements, for the years ended December 31, 1996, 1995 and 1994 (expressed in thousands):
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 years 1996 and 1995:
1996 1995
Discount rate 7.50% 7.25% Rate of increase in future compensation levels 5.00% 5.00% Expected long-term rate of return on assets 10.00% 10.00%
The Company recognizes expense concurrent with the recovery in rates. Since the Company's Retirement Plan is fully funded, the Company is not currently recovering any amounts through rates.
Postretirement Benefits Other than Pensions
Effective January 1, 1996, the Company began participation in Williams' health care plan which provides postretirement medical benefits to retired employees who were employed full time, hired prior to January 1, 1996, and have met certain other requirements. Net postretirement benefit expense for 1996 related to the Company's participation in the Williams' plan is $10.7 million, including $6.9 million of amortization of a regulatory asset. The regulatory asset represents unrecovered costs from prior years, including the unamortized transition obligation under SFAS No. 106, which was recognized at the date of acquisition by Williams. This asset is being amortized concurrent with the recovery of these costs through rates. As a result of the acquisition by Williams, the Company recognized the unamortized transition obligation as a regulatory asset. The regulatory asset balances as of December 31, 1996 and 1995 were $52 million and $59 million, respectively. Based on the 1996 level of amortization, the regulatory asset balance should be recovered through rates in approximately 9 years.
Effective January 1, 1997, Williams' health care plan was amended to increase the cost-sharing provisions. This amendment decreased the accumulated postretirement benefit obligation related to the Company by approximately $9 million.
Prior to January 1, 1996, the Company maintained its own plan which provided medical and life insurance benefits to Company employees who retired under the Company's Retirement Plan with at least five years of service. The plan was contributory for medical benefits and for life insurance benefits in excess of specified limits.
The following table sets forth the funded status of the Company's plan at December 31, 1995, reconciled with the accrued postretirement benefit cost included in the accompanying balance sheet (expressed in thousands):
The following table sets forth the components of the net periodic postretirement benefit cost, net of regulatory amortization, which is included in the accompanying financial statements for the years ended December 31, 1995 and 1994 (expressed in thousands):
The following table summarizes the various assumptions used to determine the projected benefit obligation for 1995:
Discount rate 7.25% Rate of increase in future compensation levels 5.00% Expected long-term rate of return on assets 6.00%
The medical benefits are funded for all retired Company employees at a specified amount per quarter through a master trust established under the provisions of section 501(c)(9) of the Internal Revenue Code. The master trust is managed by external investment organizations and consists primarily of domestic and foreign common stocks, government bonds and commercial paper.
Other
The Company maintains various defined contribution plans covering substantially all employees. Company contributions are based on employees' compensation and, in part, match employee contributions. Since the acquisition, Company contributions are invested primarily in Williams common stock. The Company's contributions to these plans were $2.5 million in 1996, $2.5 million in 1995 and $1.9 million in 1994.
G. Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair-value disclosures for financial instruments:
Cash and Short-Term Financial Assets and Liabilities: For short-term instruments, the carrying amount is a reasonable estimate of fair value due to the short maturity of those instruments.
Long-Term Notes Receivable: The carrying amount for the long- term notes receivable, which are shown as advances to affiliates in the accompanying balance sheets, is a reasonable estimate of fair value. As discussed in Note A, the notes earn a variable rate of interest which is adjusted regularly to reflect current market conditions.
Long-Term Debt: All of the Company's long-term debt is publicly traded; therefore, estimated fair value is based on quoted market prices at December 31, 1996 and 1995.
The carrying amount and estimated fair values of the Company's financial instruments as of December 31, 1996 and 1995, are as follows (expressed in thousands):
Sale of Receivables
The Company sells, with limited recourse, certain receivables. The limit under the revolving receivables facility was $35 million at December 31, 1996 and 1995. The Company received $13.9 million of proceeds in 1996, $27.7 million in 1995 and $34.5 million in 1994. At December 31, 1996 and 1995, $24.2 million and $27.1 million of such receivables had been sold, respectively. Based on amounts outstanding at December 31, 1996, the maximum contractual credit loss under these arrangements is approximately $4 million, but the likelihood of loss is remote.
The Financial Accounting Standards Board has issued a new accounting standard, SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," effective for transactions occurring after December 31, 1996. The adoption of this standard is not expected to have a materially adverse impact on the Company's future financial position, results of operations, or cash flow requirements.
Significant Group Concentrations of Credit Risk
The Company's trade receivables are primarily due from local distribution companies and other pipeline companies predominantly located in the Midwestern United States. The Company's credit risk exposure in the event of nonperformance by the other parties is limited to the face value of the receivables. As a general policy, collateral is not required for receivables, but customers' financial condition and credit worthiness are evaluated regularly.
H. Major Customers
The Company did not have any major customer which accounted for more than ten percent of total operating revenues in 1996 or 1994. Listed below are sales and transportation revenues received from the Company's major customer in 1995, Transcontinental Gas Pipe Line Corporation, an affiliate of the Company, portions of which are included in the refund reserves discussed in Note C (expressed in thousands):
I. Stock-Based Compensation
Williams has several plans providing for common stock-based awards to its employees and employees of its subsidiaries. The plans permit the granting of various types of awards including, but not limited to, stock options, stock appreciation rights, restricted stock and deferred stock. The purchase price per share for stock options may not be less than the market price of the underlying stock on the date of grant. Stock options generally become exercisable after five years, subject to accelerated vesting if certain future stock prices are achieved. Stock options expire 10 years after grant.
Williams' employee stock-based awards are accounted for under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Williams' fixed plan common stock options do not result in compensation expense because the exercise price of the stock options equals the market price of the underlying stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that companies who continue to apply APB Opinion No. 25 disclose pro forma net income assuming that the fair-value method in SFAS No. 123 had been applied in measuring compensation cost. Pro forma net income for the Company, beginning with 1995 employee stock-based awards was $46.1 million and $24.1 million for 1996 and 1995, respectively. Reported net income was $46.2 million and $25.0 million for 1996 and 1995, respectively. Pro forma amounts for 1995 reflect total compensation expense from the awards made in 1995 as these awards fully vested as a result of the accelerated vesting provisions. Pro forma amounts for 1996 reflect compensation expense that may not be representative of future years amounts because the compensation expense from stock options is recognized in future years over the vesting period, and additional awards generally are made each year.
Stock options granted to employees of the Company in 1996 were 242,250 shares at a weighted average grant date fair value of $7.84. At December 31, 1996, stock options outstanding and options exercisable for employees of the Company were 551,070 shares and 293,461 shares, respectively.
J. Quarterly Information (Unaudited)
The following summarizes selected quarterly financial data for 1996 and 1995 (expressed in thousands):
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure.
Not Applicable.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1.* Financial Statements
Included in Item 8, Part II of this Report
Reports of Independent Auditors on Financial Statements
Balance Sheets at December 31, 1996 and 1995
Statements of Income for the year ended December 31, 1996, for the period January 18, 1995 to December 31, 1995, for the period January 1, 1995 to January 17, 1995 and for the year ended December 31, 1994
Statements of Retained Earnings and Paid-In Capital for the year ended December 31, 1996, for the period January 18, 1995 to December 31, 1995, for the period January 1, 1995 to January 17, 1995 and for the year ended December 31, 1994
Statements of Cash Flows for the year ended December 31, 1996, for the period January 18, 1995 to December 31, 1995, for the period January 1, 1995 to January 17, 1995 and for the year ended December 31, 1994
Notes to Financial Statements
Schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto.
(a) 3. Exhibits
3.1 Copy of Certificate of Incorporation of the Corporation (incorporated by reference to Exhibit 3.1 of the 1987 Form 10-K - File No. 1-4169).
3.2 Copy of Bylaws of the Corporation (incorporated by reference to Exhibit 3.2 of the 1995 Form 10-K - File No. 1-4169).
4.1 Indenture dated July 8, 1992, securing 9 5/8% Notes due July 15, 1997 (incorporated by reference to Form 8-K dated July 16, 1992 - File No. 1-4169).
4.2 Indenture dated April 11, 1994, securing 8 5/8% Notes due April 1, 2004 (incorporated by reference to Form 8-K dated April 13, 1994 - File No. 1-4169).
(b) Reports on Form 8-K
None. ______________
* Filed herewith
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.
TEXAS GAS TRANSMISSION CORPORATION
By: /s/ E. J. Ralph E. J. Ralph, Vice President, Treasurer, Controller and Assistant Secretary
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ Brian E. O'Neill * President and Chief Executive Officer Brian E. O'Neill (Principal Executive Officer)
/s/ E. J. Ralph * Vice President, Treasurer, Controller, and E. J. Ralph Assistant Secretary (Principal Financial and Accounting Officer)
/s/ Keith E. Bailey * Director Keith E. Bailey
/s/ Gary D. Lauderdale * Director Gary D. Lauderdale
/s/ Kim R. Cocklin * Director Kim R. Cocklin
/s/ Norris E. McDivitt * Director Norris E. McDivitt
/s/ Lewis A. Posekany, Jr. * Director Lewis A. Posekany, Jr.
/s/ Frank M. Semple * Director Frank M. Semple
*By: /s/ E. J. Ralph Vice President, Treasurer, Controller, E. J. Ralph and Assistant Secretary
Dated: March 27, 1997