-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, aZj43HlGCibIm/+LgVFoAcnO0BvdZsEErwabuAzz2T7C74msB9nUr3n5pJSfaLRX ZjQT6BhbjAyCI6E8uYmGQA== 0000099231-94-000012.txt : 19940816 0000099231-94-000012.hdr.sgml : 19940816 ACCESSION NUMBER: 0000099231-94-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940815 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCO ENERGY CO CENTRAL INDEX KEY: 0000099231 STANDARD INDUSTRIAL CLASSIFICATION: 4922 IRS NUMBER: 741758039 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07513 FILM NUMBER: 94543969 BUSINESS ADDRESS: STREET 1: 2800 POST OAK BLVD STREET 2: P O BOX 1396 CITY: HOUSTON STATE: TX ZIP: 77051 BUSINESS PHONE: 7134392000 MAIL ADDRESS: STREET 1: 2800 POST OAK BLVD STREET 2: P O BOX 1396 CITY: HOUSTON STATE: TX ZIP: 77056 FORMER COMPANY: FORMER CONFORMED NAME: TRANSCO COMPANIES INC DATE OF NAME CHANGE: 19820818 10-Q 1 TRANSCO ENERGY CO. 2ND QTR 1994 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1994 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ......... to .......... Commission File Number 1-7513 TRANSCO ENERGY COMPANY (Exact name of registrant as specified in its charter) Delaware 74-1758039 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2800 Post Oak Boulevard P. O. Box 1396 Houston, Texas 77251 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (713) 439-2000 None (Former name, former address and former fiscal year, if changed since last report) 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 / / The number of shares of Common Stock, par value $0.50 per share, outstanding as of June 30, 1994 was 40,936,968. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED: TRANSCO ENERGY COMPANY AND SUBSIDIARIES (TRANSCO) The condensed consolidated financial statements included herein have been prepared by Transco, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of Transco's management, however, all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of the financial position as of the dates and results of operations for the periods included herein have been made and the disclosures contained herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, notes thereto and management's discussion contained in Items 7 and 8 of Transco's 1993 Annual Report on Form 10-K and included in Transco's 1994 First Quarter Report on Form 10-Q. TRANSCO ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
June 30, December 31, 1994 1993 ______________ _______________ ASSETS ______ Current Assets: Cash and temporary cash investments $ 134,205 $ 163,488 Deposits 12,375 34,133 Receivables 173,650 218,053 Transportation and exchange gas receivable 44,361 50,635 Gas supply realignment costs recoverable from customers 39,058 19,231 Inventories 88,859 118,550 Deferred income tax benefits 34,542 21,330 Other 44,977 41,301 ______________ _______________ Total current assets 572,027 666,721 ______________ _______________ Investments, at cost plus equity in undistributed earnings 31,491 31,454 ______________ _______________ Property, Plant and Equipment, at cost: Natural gas transmission plant-jurisdictional 5,101,578 5,058,546 Less-Accumulated depreciation and amortization 2,738,197 2,653,534 ______________ _______________ Natural gas transmission plant-jurisdictional, net 2,363,381 2,405,012 ______________ _______________ Natural gas gathering and liquids separation and fractionation plant 212,938 213,114 Less-Accumulated depreciation and amortization 14,345 11,412 ______________ _______________ Natural gas gathering and liquids separation and fractionation plant, net 198,593 201,702 ______________ _______________ Coal properties 408,441 409,695 Less-Accumulated depreciation, depletion and amortization 146,906 138,280 ______________ _______________ Coal properties, net 261,535 271,415 ______________ _______________ Other property, plant and equipment 5,534 5,280 Less-Accumulated depreciation and amortization 3,485 3,217 ______________ _______________ Other property, plant and equipment, net 2,049 2,063 ______________ _______________ Total property, plant and equipment, net 2,825,558 2,880,192 ______________ _______________ Other Assets: Nonoperating interest in coalbed methane properties, net 131,334 131,287 Notes receivable 14,736 14,929 Transportation and exchange gas receivable 89,569 92,960 Other 240,161 249,507 ______________ _______________ Total other assets 475,800 488,683 ______________ _______________ $ 3,904,876 $ 4,067,050 ______________ _______________ ______________ _______________ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCO ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
June 30, December 31, 1994 1993 ______________ _______________ LIABILITIES AND STOCKHOLDERS' EQUITY ____________________________________ Current Liabilities: Current maturities of long-term debt $ 4,864 $ 159,479 Payables 256,585 372,592 Transportation and exchange gas payable 33,105 16,258 Accrued federal income taxes 24,096 - Other accrued liabilities 217,909 214,121 Reserve for rate refunds 107,123 161,991 Other 57,674 62,133 ______________ _______________ Total current liabilities 701,356 986,574 ______________ _______________ Long-Term Debt, less current maturities 1,934,579 1,786,571 ______________ _______________ Other Liabilities and Deferred Credits: Income taxes 291,472 284,130 Income taxes refundable to customers 20,829 26,364 Transportation and exchange gas payable 41,230 64,976 Accrued pension cost 22,178 31,958 Other 143,468 154,585 ______________ _______________ Total other liabilities and deferred credits 519,177 562,013 ______________ _______________ Preferred Stock of Subsidiary, net-redeemable 72,958 75,191 ______________ _______________ Convertible Preferred Stock, net-non-redeemable 265,322 265,418 ______________ _______________ Common Stockholders' Equity: Common stock $0.50 par value: authorized 150,000,000 shares; issued and outstanding 41,431,419 and 41,386,861 shares in 1994 and 1993, respectively 20,716 20,693 Premium on capital stock and other paid-in capital 519,024 511,797 Retained earnings (deficit) (101,476) (115,447) ______________ _______________ 438,264 417,043 Less-Treasury stock, at cost, 494,451 and 15,156 shares in 1994 and 1993, respectively 7,346 207 Common stock held by Tran$tock, 380,868 and 524,045 shares in 1994 and 1993, respectively- Deferred compensation 12,520 14,395 Receivable from Tran$tock 4,762 9,383 Restricted stock, 126,228 and 91,964 shares in 1994 and 1993, respectively- Deferred compensation 2,152 1,775 ______________ _______________ Total common stockholders' equity 411,484 391,283 ______________ _______________ $ 3,904,876 $ 4,067,050 ______________ _______________ ______________ _______________ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCO ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Thousands, except per share amounts) (Unaudited)
For the Three Months Ended June 30, ___________________________________________ 1994 1993 _________________ _________________ Operating Revenues $ 694,986 $ 679,920 _________________ _________________ Operating Costs and Expenses: Cost of sales and transportation 451,808 431,504 Operation and maintenance 58,370 64,491 Administrative and general 61,241 62,643 Depreciation, depletion and amortization 48,598 46,624 Taxes - other than income taxes 13,403 13,146 _________________ _________________ Total operating costs and expenses 633,420 618,408 _________________ _________________ Operating Income 61,566 61,512 _________________ _________________ Other (Income) and Other Deductions: Interest expense 47,582 47,543 Interest income (1,952) (1,731) Capitalized interest and allowance for funds used during construction (969) (1,542) Dividends on preferred stock of subsidiary 1,572 2,112 Equity in earnings of unconsolidated affiliates (1,255) 202 Miscellaneous other (income) and deductions, net 3,338 2,570 _________________ _________________ Total other (income) and other deductions 48,316 49,154 _________________ _________________ Income from Continuing Operations Before Income Taxes 13,250 12,358 Provision for Income Taxes 5,073 4,274 _________________ _________________ Income from Continuing Operations 8,177 8,084 Loss from Operations of Discontinued Segment, Net of Income Taxes - (206) _________________ _________________ Net Income 8,177 7,878 Dividends on Convertible Preferred Stock 5,726 6,432 _________________ _________________ Common Stock Equity in Net Income $ 2,451 $ 1,446 _________________ _________________ _________________ _________________ Primary Earnings Per Share of Common Stock and Common Stock Equivalents - Continuing Operations $ 0.06 $ 0.04 Discontinued Operations - - _________________ _________________ $ 0.06 $ 0.04 _________________ _________________ _________________ _________________ Dividends Declared Per Share of Common Stock $ - $ - _________________ _________________ _________________ _________________ Average Shares of Common Stock and Common Stock Equivalents Outstanding 40,716 39,306 _________________ _________________ _________________ _________________ Shares of Common Stock Outstanding 40,937 40,359 _________________ _________________ _________________ _________________ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCO ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Thousands, except per share amounts) (Unaudited)
For the Six Months Ended June 30, ___________________________________________ 1994 1993 _________________ _________________ Operating Revenues $ 1,529,076 $ 1,459,594 _________________ _________________ Operating Costs and Expenses: Cost of sales and transportation 1,008,330 947,701 Operation and maintenance 112,877 120,522 Administrative and general 126,179 123,235 Depreciation, depletion and amortization 96,231 93,096 Taxes - other than income taxes 27,144 26,325 _________________ _________________ Total operating costs and expenses 1,370,761 1,310,879 _________________ _________________ Operating Income 158,315 148,715 _________________ _________________ Other (Income) and Other Deductions: Interest expense 94,256 96,205 Interest income (4,118) (4,815) Capitalized interest and allowance for funds used during construction (1,919) (2,496) Dividends on preferred stock of subsidiary 3,171 4,252 Equity in earnings of unconsolidated affiliates (1,508) (347) Miscellaneous other (income) and deductions, net 8,265 6,440 _________________ _________________ Total other (income) and other deductions 98,147 99,239 _________________ _________________ Income from Continuing Operations Before Income Taxes 60,168 49,476 Provision for Income Taxes 22,482 18,385 _________________ _________________ Income from Continuing Operations 37,686 31,091 Loss from Operations of Discontinued Segment, Net of Income Taxes - (93) _________________ _________________ Net Income 37,686 30,998 Dividends on Convertible Preferred Stock 11,452 12,865 _________________ _________________ Common Stock Equity in Net Income $ 26,234 $ 18,133 _________________ _________________ _________________ _________________ Primary Earnings Per Share of Common Stock and Common Stock Equivalents - Continuing Operations $ 0.64 $ 0.46 Discontinued Operations - - _________________ _________________ $ 0.64 $ 0.46 _________________ _________________ _________________ _________________ Dividends Declared Per Share of Common Stock $ 0.30 $ 0.30 _________________ _________________ _________________ _________________ Average Shares of Common Stock and Common Stock Equivalents Outstanding 40,702 39,307 _________________ _________________ _________________ _________________ Shares of Common Stock Outstanding 40,937 40,359 _________________ _________________ _________________ _________________ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCO ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) (Unaudited)
For the Six Months Ended June 30, ______________________________ 1994 1993 _____________ _____________ Cash flows from operating activities: Net income $ 37,686 $ 30,998 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 106,493 102,694 Deferred income taxes (11,609) (31,103) Tran$tock compensation expense 1,875 1,590 Other, net (612) 3,201 _____________ _____________ 133,833 107,380 Nonrecoverable producer settlements (512) (26,992) Changes in operating assets and liabilities: Deposits 21,758 (370) Receivables 46,972 69,459 Transportation and exchange gas receivable 9,665 8,751 Inventories 29,691 5,061 Payables (115,217) (87,309) Transportation and exchange gas payable (6,900) (4,622) Accrued liabilities 12,804 (20,459) Reserve for rate refunds (54,868) 51,547 Other, net (16,775) 10,143 _____________ _____________ Net cash provided by operating activities 60,451 112,589 _____________ _____________ Cash flows from financing activities: Net additions to long-term debt 146,753 - Retirement of long-term debt (154,717) (46,801) Retirement of preferred stock (3,391) - Dividends on common and preferred stock (26,933) (29,257) Other, net (1,927) (3,862) _____________ _____________ Net cash used in financing activities (40,215) (79,920) _____________ _____________ Cash flows from investing activities: Property, plant and equipment and investment in unconsolidated affiliates (54,010) (67,436) Recovery of producer settlements 848 33,557 Other, net 3,643 5,395 _____________ _____________ Net cash used in investing activities (49,519) (28,484) _____________ _____________ Net increase (decrease) in cash and cash equivalents (29,283) 4,185 Cash and cash equivalents at beginning of period 163,488 12,528 _____________ _____________ Cash and cash equivalents at end of period $ 134,205 $ 16,713 _____________ _____________ _____________ _____________ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of amount capitalized) $ 94,414 $ 94,529 Income taxes (net of amounts refunded) 8,075 26,193 The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCO ENERGY COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS A. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Transco Energy Company and its wholly-owned subsidiaries. As used herein, the terms "Transco" and the "Company" refer to Transco Energy Company and its wholly-owned subsidiaries unless the context otherwise requires. The condensed consolidated financial statements have been prepared from the books and records of Transco without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Transco's 1993 Annual Report on Form 10- K and included in Transco's 1994 First Quarter Report on Form 10-Q. As a result of its sale described in Transco's 1993 Annual Report on Form 10-K, the Power Generation segment has been classified in the 1993 Condensed Consolidated Statement of Operations as discontinued operations; and, as such, revenues and expenses of the Power Generation segment have been excluded from the results for continuing operations. Certain other reclassifications have been made in the 1993 financial statements to conform with the 1994 presentation. B. REGULATORY MATTERS There have been no new developments from those described in the 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q other than described below. Rate Matters ____________ Transcontinental Gas Pipe Line Corporation (TGPL) On November 4, 1993, the Federal Energy Regulatory Commission (FERC) issued an order accepting the Offer of Settlement (the Settlement) filed by TGPL on May 3, 1993 in connection with TGPL's general rate case (Docket No. RP92-137). On December 6, 1993, certain parties, including TGPL, filed requests for rehearing and clarification of the November 4 order. On December 16, 1993, TGPL filed a request to accelerate partial refunds under the Settlement on the ground that those refunds could be made without prejudice to the pending requests for rehearing or clarification. TGPL's request was granted by order of the FERC dated February 14, 1994, which order also acted on the pending requests for rehearing or clarification of the November 4 order. The Settlement became effective on April 1, 1994. One party has appealed the FERC's November 4 and February 14 orders to the United States Court of Appeals for the D.C. Circuit (D.C. Circuit Court). In the first six months of 1994, TGPL made partial refunds of approximately $123 million, including interest, under Docket No. RP92-137. TGPL had previously provided a reserve for these refunds. TGPL has also provided a reserve which it believes is sufficient for any additional refunds that may be required under Docket No. RP92-137. At June 30, 1994, these additional refunds, which are currently expected to be made during the fourth quarter of 1994, are estimated to be approximately $46 million, including interest. Such refund obligations increase with the passage of time until the refunds are made. Texas Gas Transmission Corporation (Texas Gas) On April 29, 1993, Texas Gas filed a general rate case (Docket No. RP93- 106), which became effective November 1, 1993, subject to refund. A settlement agreement was filed on June 14, 1994. The presiding Administrative Law Judge (ALJ) certified the agreement to the FERC on July 18, 1994 as an uncontested settlement. Texas Gas has provided a reserve of approximately $37 million at June 30, 1994 which it believes is adequate for any refunds, including interest, that may be required. Such refunds are currently expected to be made during the fourth quarter of 1994. These refund obligations increase with the passage of time until the refunds are made. On July 29, 1994, the FERC issued an order accepting the June 30, 1994 filing made by Texas Gas to resolve the transportation and exchange imbalances pre-dating the implementation of Order 636. The order approved the timetable proposed in the filing whereby such imbalances will be reconciled by December 31, 1994. Pursuant to the filing, these reconciled imbalances will be repaid in cash or through receipt or delivery of gas, upon agreements for allocation and as permitted by operating conditions, by the end of 1995. Other Regulatory Matters ________________________ Order 636 TGPL TGPL and certain other parties have filed appeals of certain of the FERC's orders on TGPL's Order 636 compliance filings to the D.C. Circuit Court. These appeals had been held in abeyance pending completion of the FERC's rehearing process and the expiration of the time to seek judicial review. On March 17, 1994, the FERC issued an order denying all requests for rehearing relating to TGPL's Order 636 restructuring proceedings, which ends the rehearing process at the FERC. On May 27, 1994, the D.C. Circuit Court issued an order directing parties to file statements of issues and continuing to hold these appeals in abeyance until the court establishes a briefing schedule for the review 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. Texas Gas Texas Gas currently estimates its transition costs under Order 636 will be primarily related to Gas Supply Realignment (GSR) contract termination costs, GSR pricing differential costs incurred pursuant to Texas Gas' auction process and unrecovered purchased gas costs. Through June 30, 1994, Texas Gas had paid or committed to pay a total of $41.9 million for GSR costs, primarily as a result of the GSR contract terminations. Texas Gas continues to make quarterly filings to recover its GSR costs as such costs are paid. As of June 30, 1994, Texas Gas had recovered $3.9 million of such costs. Consolidated Transco expects that any Order 636 transition costs incurred should be recovered from TGPL and Texas Gas' 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 500 and Order 528 Texas Gas On August 4, 1994, the FERC issued an order approving the settlement agreements of Texas Gas and its upstream pipelines in Texas Gas' pending Order 528 flowthrough proceedings. Pursuant to the settlements, Texas Gas will flow through to its former sales customers approximately $39 million, plus interest, which will resolve all of Texas Gas' issues related to the flowthrough of upstream pipelines take-or-pay costs. C. LEGAL PROCEEDINGS There have been no new developments from those described in the 1993 Annual Report on Form 10-K or in the 1994 First Quarter Report on Form 10-Q other than as described below. Producer Contract Litigation ____________________________ As discussed in the Company's 1993 Annual Report on Form 10-K, in TGPL's 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. The Federal District Court issued an order granting TGPL's motion for summary judgement, which was appealed by the producer to the United States Court of Appeals for the Fifth Circuit (Fifth Circuit Court). On July 1, 1994, the Fifth Circuit Court affirmed the judgment of the Federal District Court dismissing the producer's claims in all respects and on July 27, 1994, denied the producer's petition for rehearing. Other Litigation and Claims ___________________________ Dakota Gasification Litigation As discussed in the Company's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q, in October 1990, Dakota Gasification Company (Dakota), the owner of the Great Plains Coal Gasification Plant, filed suit in the United States District Court in North Dakota against TGPL and three other pipeline companies alleging that TGPL and the other pipelines had not complied with their respective obligations under certain gas purchase and gas transportation contracts. On March 30, 1994, the parties executed a definitive agreement which would settle the litigation subject to final nonappealable 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. In the event that the necessary regulatory approvals are not obtained, TGPL, Transco and Transco Coal Gas Company intend to vigorously defend the suit. Although no assurances can be given, Transco does not believe that the ultimate resolution of this litigation will have a material adverse effect on its financial position or results of operations. Royalty Claims As discussed in the Company's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q, in connection with TGPL and Texas Gas' renegotiations with producers to resolve take-or-pay and other contract claims and to amend gas purchase contracts, TGPL and Texas Gas have each entered into certain settlements which may require the indemnification by TGPL or Texas Gas of certain claims for "excess royalties" which producers may be required to pay as a result of such settlements. In the Duplantis excess royalties litigation, with respect to the claims against Transco Exploration Company (TXC) and TXP Operating Company (TXPO), the plaintiffs have alleged claims against TXC and TXPO of approximately $8.5 million. In the same litigation, TGPL, based on information supplied by the plaintiffs, believes the plaintiffs are asserting claims against it of approximately $14 million, inclusive of certain claims made against TXC and TXPO. Although no assurances can be given, Transco believes that the ultimate resolution of the TGPL and Texas Gas royalty claims and litigation will not have a material adverse effect on Transco's financial position or results of operations. D. ENVIRONMENTAL MATTERS There have been no new developments from those described in the 1993 Annual Report on Form 10-K with regard to environmental matters. E. FINANCING Long-term Debt Refinancing __________________________ On April 11, 1994, Texas Gas issued $150 million of 8 5/8% Notes (Notes) due April 1, 2004. The Notes are not redeemable prior to maturity and are general unsecured obligations of Texas Gas. Proceeds from the issuance were used to redeem Texas Gas' outstanding 10% Debentures on April 29, 1994. Restrictive Covenants _____________________ As described in the 1993 Annual Report on Form 10-K and in the First Quarter Report on Form 10-Q, certain of Transco's credit facilities and indentures contain restrictive covenants which could, among other things, affect Transco's ability to incur debt, pay dividends on its common and preferred stock and to make certain investments. F. INVESTMENT IN NONOPERATING INTEREST IN COALBED METHANE PROPERTIES As discussed in Transco's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q, the ultimate recovery of Transco's remaining investment through future production payments depends on production from the properties and future gas prices. The Company cannot predict at this time the ultimate results of these operations or the amounts of reserves that may ultimately be recoverable. If future development operations do not result in establishing sufficient reserves to recover the Company's remaining coalbed methane investment, or if other factors cause the Company's evaluation of its investment to diminish, additional reductions in the book value of the Company's investment would be required in future periods through non-cash charges to earnings. Any resulting non-cash charge to earnings could reduce the Company's financial flexibility, including its ability to remain in compliance with certain restrictive provisions in various debt instruments and to pay dividends on its capital stock. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements, notes and management's discussion contained in Items 7 and 8 of Transco's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q and with the condensed consolidated financial statements and notes contained in this report. INTRODUCTION Over the past two years, Transco has made significant progress in improving its results of operations and financial flexibility. The Company remains committed to deleveraging its balance sheet, further eliminating or mitigating the potentially adverse impact from the resolution of remaining litigation and contingencies and further improving financial results. CAPITAL RESOURCES AND LIQUIDITY Financing _________ Transco funds its capital requirements, including its working capital requirements, with cash flows from operating activities, including the sale of trade receivables, supplemented, when necessary, with borrowings under its $450 million working capital line. At June 30, 1994, the Company had $118 million in short-term investments and no outstanding borrowings under its $450 million working capital line. As of July 31, 1994, Transco had approximately $84 million in short-term investments and continued to have no outstanding borrowings under its $450 million working capital line. The Company expects to use the short-term investments later in 1994, primarily to fund any TGPL and Texas Gas refunds that may be required upon FERC approval of their respective general rate case settlements. On April 11, 1994, Texas Gas issued $150 million of 8 5/8% Notes due April 1, 2004. The Notes are not redeemable prior to maturity and are general unsecured obligations of Texas Gas. Proceeds from the issuance were used to redeem Texas Gas' outstanding 10% Debentures on April 29, 1994. Capitalization and Cash Flows _____________________________ As shown in the following table, at June 30, 1994, the percentage of total debt to total invested capital was 72.1% compared to 72.7% at December 31, 1993. Net income during the first six months of 1994, combined with a slight decline in total debt had the effect of reducing the percentage of total debt to total invested capital.
June 30, Dec. 31, 1994 1993 ____________ ____________ (In millions) Common Stockholders' Equity $ 411.5 $ 391.3 Preferred Stock 338.3 340.6 Long-term Debt, less Current Maturities 1,934.6 1,786.6 ____________ ____________ Total Capitalization 2,684.4 2,518.5 Current Maturities of Long-term Debt 4.9 159.5 ____________ ____________ Total Invested Capital $ 2,689.3 $ 2,678.0 ____________ ____________ ____________ ____________ Long-term Debt, less Current Maturities as a Percentage of Total Capitalization 72.1% 70.9% Common Stockholders' Equity as a Percentage of Total Capitalization 15.3% 15.5% Total Debt as a Percentage of Total Invested Capital 72.1% 72.7%
At June 30, 1994, Transco had a working capital deficit of $129 million, compared to a deficit of $320 million at December 31, 1993. The most significant factor influencing the reduction in the working capital deficit was the refinancing of Texas Gas' debt.
Six Months Ended June 30, __________________________ 1994 1993 __________ __________ (In millions) Cash Flows Provided By Operating Activities $ 60.5 $ 112.6 __________ __________ __________ __________
Excluding TGPL's rate refunds of $123 million in 1994 and Texas Gas' rate refund of $36 million in 1993, consolidated net cash flows from operating activities for the six months ended June 30, 1994, were $34 million higher than for the six months ended June 30, 1993. This increase in cash flows is primarily the result of lower cash payments in 1994 for producer settlements and the return of a collateralized deposit that was no longer needed due to the utilization of a new reimbursement facility that provides Transco with standby letters of credit.
Six Months Ended June 30, __________________________ 1994 1993 __________ __________ (In millions) Cash Flows Used in Financing Activities $ 40.2 $ 79.9 __________ __________ __________ __________
Consolidated net cash flows used in financing activities for the six months ended June 30, 1994 included cash outflows for dividends of $27 million on common and preferred stock, the retirement of $3 million of preferred stock, the retirement of $5 million of long-term debt by Transco and the retirement in April of Texas Gas' $150 million of 10% Debentures, partially offset by cash inflows from Texas Gas' issuance of $150 million of 8 5/8% Notes. Consolidated net cash flows used in financing activities for the six months ended June 30, 1993 included cash outflows for the retirement of $47 million of long-term debt by Transco, TGPL and Transco Coal Company and dividends of $29 million on common and preferred stock.
Six Months Ended June 30, __________________________ 1994 1993 __________ __________ (In millions) Cash Flows Used in Investing Activities $ 49.5 $ 28.5 __________ __________ __________ __________
For the six months ended June 30, 1994 and June 30, 1993, consolidated net cash flows used in investing activities primarily included cash outflows for capital expenditures for property, plant and equipment and investments in unconsolidated affiliates, as shown on the following table, partly offset, for the six months ended June 30, 1993, by cash inflows from the recovery of producer settlement costs by TGPL and Texas Gas.
Six Months Capital Expenditures and Investments in Ended June 30, __________________________ Unconsolidated Affiliates 1994 1993 _______________________________________ __________ __________ (In millions) Pipelines TGPL Market-Area Projects $ 3.7 $ 1.1 Supply-Area Projects 7.3 15.1 Maintenance of Existing Facilities and Other Projects 22.6 24.2 Texas Gas Market-Area Projects 4.6 1.4 Maintenance of Existing Facilities and Other Projects 12.5 6.8 Other 0.8 1.9 __________ _________ Total Pipelines 51.5 50.5 Gas Marketing 0.3 0.4 Coal 2.2 4.8 Other - 15.7 Intersegment Eliminations (TGPL Expenditures) - (4.0) __________ __________ Total Capital Expenditures and Investments in Unconsolidated Affiliates $ 54.0 $ 67.4 __________ __________ __________ __________
Other Capital Requirements and Contingencies ____________________________________________ Transco's capital requirements and contingencies are discussed in the Company's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q. Other than described in Notes B and C of the Notes to Condensed Consolidated Financial Statements and below, there have been no new developments from those described in the Company's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q with regard to other capital requirements and contingencies. Liberty Pipeline Company In 1992, Liberty Pipeline Company, a partnership of interstate pipelines and local distribution companies, filed for FERC approval to construct and operate a natural gas pipeline to provide 500 million cubic feet per day in firm transportation service to the greater New York City area. The partnership was comprised of subsidiaries of Transco and two other interstate pipelines and subsidiaries of three Transco customers in New York. On August 1, 1994, the partners of Liberty Pipeline Company sent a letter to the FERC, asking it to postpone indefinitely its review of the Liberty Pipeline project. The decision follows the withdrawal, in early June, of one key shipper and project partner and the recent withdrawal of another shipper. The partners also reaffirmed their belief that an additional delivery point to the New York facilities system, as proposed by Liberty, will be necessary in the future and advised the FERC that the Liberty partners will continue to pursue that goal. 1994 Southeast Expansion Project On June 6, 1994, TGPL accepted a final certificate from the FERC authorizing its 1994 Southeast Expansion Project. The FERC issued the certificate on May 27, 1994. Investment in Nonoperating Interest in Coalbed Methane Properties As discussed in Note F of the Notes to Condensed Consolidated Financial Statements, the ultimate recovery of Transco's remaining investment through future production payments depends on production from the properties and future gas prices. The Company cannot predict at this time the ultimate results of these operations or the amounts of reserves that may ultimately be recoverable. If future development operations do not result in establishing sufficient reserves to recover the Company's remaining coalbed methane investment, or if other factors cause the Company's evaluation of its investment to diminish, additional reductions in the book value of the Company's investment would be required in future periods through non-cash charges to earnings. Rate Refunds TGPL As discussed in Note B of the Notes to Condensed Consolidated Financial Statements, TGPL received a FERC order accepting its Settlement in connection with its general rate case (Docket No. RP92-137) on November 4, 1993. In the first six months of 1994, TGPL made partial refunds of approximately $123 million, including interest, under Docket No. RP92-137. TGPL had previously provided a reserve for these refunds. TGPL has also provided a reserve which it believes is sufficient for any additional refunds that may be required under Docket No. RP92-137. At June 30, 1994, these additional refunds, which are currently expected to be made during the fourth quarter of 1994, are estimated to be approximately $46 million, including interest. Such refund obligations increase with the passage of time until the refunds are made. Texas Gas As discussed in Note B of the Notes to Condensed Consolidated Financial Statements, the presiding ALJ certified a settlement agreement of Texas Gas' general rate case (Docket No. RP93-106) to the FERC on July 18, 1994 as an uncontested settlement. Texas Gas has provided a reserve of approximately $37 million at June 30, 1994 which it believes is adequate for any refunds, including interest, that may be required. Such refunds are currently expected to be made during the fourth quarter of 1994. These refund obligations increase with the passage of time until the refunds are made. CONCLUSION __________ Although no assurances can be given, the Company currently believes that the aggregate of cash flows from operating activities, supplemented, when necessary, by borrowings under the working capital line of the Amended Transco Bank Credit Facility, will provide sufficient liquidity to meet its capital requirements. RESULTS OF OPERATIONS CONSOLIDATED Transco's consolidated net income for the quarter and for the six months ended June 30, 1994 was $1.0 million ($0.02 per share) and $8.1 million ($0.18 per share) higher, respectively, than the same periods in 1993, primarily as a result of improved financial results from Gas Marketing and Gas Gathering and lower preferred dividends, offset in part by lower net income from Pipelines and Coal. In addition, operating losses from Transco's coalbed methane investment were significantly reduced due to the transfer of the Company's operating interest in that project to TECO Energy, Inc. in July 1993. Consolidated operating income for the quarter ended June 30, 1994 was approximately equal to operating income for the same period in 1993, but operating income for the six months ended June 30, 1994 was $9.6 million higher than for the six months ended June 30, 1993 primarily for the same reasons discussed above except for preferred dividends. Each segment's results of operations are discussed in more detail below. PIPELINES The table below shows the net income of Pipelines by company:
Three Months Six Months Net Income Ended June 30, Ended June 30, __________ ______________________ ______________________ 1994 1993 1994 1993 _________ ________ _________ ________ (In millions) TGPL $ 24.3 $ 21.6 $ 51.9 $ 48.9 Texas Gas 2.8 8.4 18.7 23.2 Other Companies ( 0.1) ( 0.1) 0.1 ( 0.1) ________ ________ ________ ________ Total Pipelines $ 27.0 $ 29.9 $ 70.7 $ 72.0 ________ ________ ________ ________ ________ ________ ________ ________
The two major operating companies in this segment, TGPL and Texas Gas, provide substantially all of the segment's revenues, operating income and net income. As discussed in Transco's 1993 Annual Report on Form 10-K and in the 1994 First Quarter Report on Form 10-Q, effective January 1, 1993 for TGPL and November 1, 1993 for Texas Gas, substantially all sales revenues and the related costs, including gas costs applicable to TGPL and Texas Gas' sales service, are reported by Transco in Gas Marketing. The financial performance of TGPL (excluding its 1993 and 1994 sales service) and Texas Gas (excluding its 1994 variable-market-based sales service) is discussed below. TGPL ____ Net and Operating Income TGPL's net income was higher by $2.7 million and $3.0 million for the three months and six months ended June 30, 1994 , respectively, than net income for the three months and six months ended June 30, 1993, due primarily to lower operating expenses, lower net interest expense, higher allowance for equity funds used during construction and lower dividends on preferred stock. Operating income for the three months and six months ended June 30, 1994 was $53.8 million and $114.2 million, respectively, compared to operating income of $51.7 million and $112.8 million for the same periods in 1993, which reflected lower operating expenses, partially offset by slightly lower net transportation revenues (net of the related cost of transportation and surcharges). Operating Revenues TGPL's operating revenues increased $4 million to $218 million for the quarter ended June 30, 1994, when compared to the same period in 1993 due primarily to non-merchant sales revenues related to TGPL's cash-out program for the settlement of current month transportation imbalances. However, this increase in revenues had no effect on TGPL's operating or net income since this increase also resulted in a corresponding increase in cost of sales and transportation. TGPL's operating revenues decreased $19 million to $438 million for the six months ended June 30, 1994, when compared to the six months ended June 30, 1993, due primarily to lower transportation rates resulting from the elimination of the producer settlement surcharge which expired on May 31, 1993. However, the decrease in transportation rates related to this surcharge did not affect TGPL's operating or net income since the expiration of the producer settlement surcharge also resulted in lower cost of sales and transportation when compared with the prior year. Operating Costs and Expenses Excluding the cost of sales and transportation of $45 million and $88 million for the three months and six months ended June 30, 1994, respectively, and $39 million and $106 million for the three months and six months ended June 30, 1993, respectively, TGPL's operating expenses for the quarter were $4 million lower than the same period in 1993 and for the first six months of 1994, were $2 million lower than the comparable period in 1993. The decrease in operating expenses for the quarter and the six-month period was primarily due to lower costs for miscellaneous contractual services, other supplies and expenses and postretirement benefits other than pensions, somewhat offset by higher costs for main engine repairs. System Deliveries As shown in the table below, TGPL's total market-area deliveries for the three months ended June 30, 1994 were 8.1 billion cubic feet (Bcf), or 3 percent, higher than the same period in 1993. The increased deliveries, primarily firm transportation volumes, are higher than the same period in 1993 primarily due to the extremely warm weather experienced on the East Coast during June 1994. TGPL's total market-area deliveries for the six months ended June 30, 1994 were 16.8 Bcf, or 3%, higher than the six months ended June 30, 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 the extremely warm weather during June 1994. The production-area deliveries for the three months and six months ended June 30, 1994, increased 3.0 Bcf, or 6%, and 11.8 Bcf, or 15%, respectively, when compared to the same periods in 1993, due to TGPL's decreased rates resulting from the elimination of the producer settlement surcharge which expired on May 31, 1993. However, as a result of a straight fixed-variable (SFV) rate design, these increased deliveries had no significant impact on operating income.
Three Months Six Months TGPL System Deliveries (Bcf) Ended June 30, Ended June 30, ____________________________ ______________________ _____________________ 1994 1993 1994 1993 _________ ________ ________ ________ Market-area deliveries: Long-haul transportation 186.2 194.4 417.0 429.5 Market-area transportation 90.3 74.0 224.5 195.2 ________ ________ ________ ________ Total market-area deliveries 276.5 268.4 641.5 624.7 Production-area transportation 52.0 49.0 88.3 76.5 ________ ________ ________ ________ Total system deliveries 328.5 317.4 729.8 701.2 ________ ________ ________ ________ ________ ________ ________ ________
TGPL's facilities are divided into six rate zones. Three are located in the production area and three are located in the market area. Long-haul transportation is gas that is received in one of the production-area zones and delivered in a market-area zone. Market-area transportation is gas that is both received and delivered within market-area zones. Production- area transportation is gas that is both received and delivered within production-area zones. Rates 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 will submit 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. For a discussion of TGPL's Order 636 compliance filing, see Note B of the Notes to Condensed Consolidated Financial Statements. Texas Gas _________ Net and Operating Income Texas Gas' net income was $5.6 million lower and $4.5 million lower for the quarter and six months ended June 30, 1994, respectively, than the same periods in 1993. Operating income for the quarter and six months ended June 30, 1994 was $9.2 million and $40.3 million, respectively, compared to $18.0 million and $46.9 million for the same periods in 1993. The decrease in both net income and operating income was primarily due to lower interruptible transportation revenues resulting from the implementation of Order 636, seasonal demand revenues that are lower in the second and third quarters than in the first and fourth quarters, and reserving for an expected stated pre-tax rate of return under Texas Gas' pending general rate case settlement which is lower than that included in Texas Gas' previous rates. As a result of reduced interruptible transportation revenues due to the implementation of Order 636 and the expected lower stated pre-tax rate of return under Texas Gas' pending general rate case settlement, Texas Gas' interim operating income during the third quarter of 1994 could be lower than the comparable period in 1993 and 1994 annual operating income could be lower than the prior year. Additionally, Texas Gas' interim operating results are impacted by customers' ability to reserve firm transportation levels on a seasonal basis; which, combined with SFV rate design, results in lower operating income in the second and third quarters than in the first and fourth quarters. Operating Revenues Total operating revenues decreased $29 million in the second quarter of 1994 and $96 million for the six months ended June 30, 1994 compared to the same periods in 1993. The decrease was primarily the result of lower gas sales revenues due to the implementation of Order 636, which ended Texas Gas' bundled sales service and the subsequent realignment of Texas Gas' variable-market-based sales service under Transco Gas Marketing Company (TGMC) effective November 1, 1993, partially offset by higher gas transportation revenues. In 1994, the only sales administered by Texas Gas are from volumes purchased from a limited number of contracts with pricing provisions that are not variable market based which are auctioned each month to the highest bidder pursuant to Order 636. The increase in gas transportation revenues was primarily due to higher firm transportation demand revenues as a result of the conversion of customers' firm sales service to firm transportation service due to the implementation of Order 636. Although long-haul transportation volumes increased, the decrease in average commodity transportation rates, which resulted from the implementation of Order 636, SFV rate design, reduced interruptible transportation revenues, more than offset the effect on transportation revenues of the higher transportation volumes. Operating Costs and Expenses Cost of gas sold for the second quarter and six months ended June 30, 1994 was $22 million lower and $99 million lower than in the same periods in 1993, respectively. The decrease was primarily due to the realignment of Texas Gas' variable-market-based sales service under TGMC effective November 1, 1993. Texas Gas' operation and maintenance expenses for the quarter and six months ended June 30, 1994 were virtually unchanged in comparison to the same periods in 1993. For the quarter ended June 30, 1994, administrative and general expenses were $1 million lower than for the same period in 1993, primarily due to a provision for uncollectible accounts in 1993. Administrative and general expenses for the six months ended June 30, 1994 were $1 million higher than 1993, primarily due to the higher cost of postretirement benefits other than pensions, which is included in Texas Gas' transportation rates. System Deliveries As shown in the table below, Texas Gas' total mainline deliveries for the six months ended June 30, 1994 increased 23.8 Bcf, or 8%, compared to the six months ended June 30, 1993, primarily due to increased service to other interstate natural gas pipelines and slightly colder weather on a degree-day basis during the first quarter of 1994 in Texas Gas' primary market area. Mainline deliveries for the second quarter ended June 30, 1994 were unchanged from the same period in 1993. The revenues associated with short-haul transportation volumes are not material to Texas Gas.
Three Months Six Months Texas Gas System Deliveries (Bcf) Ended June 30, Ended June 30, _________________________________ _____________________ _____________________ 1994 1993 1994 1993 ________ ________ ________ ________ Sales - 7.9 - 39.6 Long-haul transportation 128.9 121.1 321.1 257.7 ________ ________ ________ ________ Total mainline deliveries 128.9 129.0 321.1 297.3 Short-haul transportation 46.8 48.4 97.7 101.8 ________ ________ ________ ________ Total system deliveries 175.7 177.4 418.8 399.1 ________ ________ ________ ________ ________ ________ ________ ________
Texas Gas' facilities are divided into five rate zones. Generally, gas delivered in the northern four zones is classified as long-haul transportation. Gas delivered in the remaining southernmost zone is classified as short-haul transportation. Auction sales made under the Order 636 environment by Texas Gas are generally made in the southernmost zone; however, the sales are made off system and, therefore, do not constitute system deliveries. Rates Effective November 1, 1993, Texas Gas placed rates into effect, subject to refund, under a new general rate case as discussed in the Company's Annual Report on Form 10-K, 1994 First Quarter Report on Form 10-Q and Note B of the Notes to Condensed Consolidated Financial Statements. A settlement agreement was filed on June 14, 1994. The presiding ALJ certified the settlement agreement of Texas Gas' general rate case (Docket No. RP93-106) to the FERC on July 18, 1994 as an uncontested settlement. Texas Gas' November 1, 1993 implementation of Order 636 included a change in its rate design method from modified fixed-variable (MFV) to SFV. Under the MFV method, all fixed costs, with the exception of equity return and income taxes, were included in the demand component of the charge to customers; the equity return and income tax components of cost of service were included as part of the volumetric charge to customers. Under the SFV method, all fixed costs, including equity return and income taxes, are included in the demand charge to customers. Accordingly, under SFV, overall throughput has a less significant impact on Texas Gas' results of operations. There are various factors which may affect Texas Gas' actual operating results, including, but not limited to, competition from other pipelines, its rate design structure, cost management, and, to a lesser extent, fluctuations in its throughput which may result from a number of factors, including weather. Furthermore, while the use of SFV rate design limits Texas Gas' opportunity to earn incremental revenues through increased throughput, it also minimizes Texas Gas' risk associated with fluctuations in throughput. Texas Gas believes that under Order 636, with SFV rate design and its anticipated transition cost recovery, its rate structure will remain competitive. GAS MARKETING TGMC, through agency management agreements with TGPL and Texas Gas, has assumed operation of substantially all of TGPL and Texas Gas' sales service. Accordingly, effective January 1, 1993, and November 1, 1993, substantially all sales service for TGPL and Texas Gas, respectively, is being reported in Gas Marketing. The tables below show the results of operations and sales volumes for Gas Marketing for the periods presented:
Three Months Six Months Net Income (Loss) Ended June 30, Ended June 30, _________________ _____________________ _____________________ 1994 1993 1994 1993 ________ ________ ________ ________ (In millions) Natural Gas Marketing $ 1.8 $( 4.3) $ 7.5 $( 3.1) Natural Gas Liquids Marketing ( 0.3) 1.1 ( 0.9) 1.8 ________ ________ ________ ________ Total Gas Marketing 1.5 $( 3.2) $ 6.6 $( 1.3) ________ ________ ________ ________ ________ ________ ________ ________
Three Months Six Months Sales Volumes Ended June 30, Ended June 30, _____________ _____________________ _____________________ 1994 1993 1994 1993 ________ ________ ________ ________ Gas (Bcf) Long-term 92.2 73.5 212.8 168.5 Short-term 75.9 48.4 136.1 101.6 ________ ________ ________ ________ Total gas sales 168.1 121.9 348.9 270.1 ________ ________ ________ ________ ________ ________ ________ ________ Liquids (million gallons) 18.8 37.0 68.7 86.7 ________ ________ ________ ________ ________ ________ ________ ________
Gas sales volumes increased due primarily to the inclusion of Texas Gas' sales service volumes of 8.0 Bcf and 18.6 Bcf for the second quarter and the first six months of 1994, respectively, incremental spot sales and higher demand as a result of colder weather during the first quarter of 1994. Net and Operating Income Gas Marketing reported a $4.7 million and $7.9 million positive net income variance for the second quarter of 1994 and the first six months of 1994, respectively, compared to the same periods in 1993. The segment also reported operating income of $0.8 million for the second quarter of 1994 and $8.5 million for the six months ended June 30, 1994 compared to an operating loss of $5.7 million for the second quarter of 1993 and $3.9 million for the six months ended June 30, 1993. As discussed below, the improvement in 1994 over 1993 is due to improved results from natural gas marketing operations, somewhat offset by a decline in the results from natural gas liquids marketing operations. Natural Gas Marketing Operating income from natural gas marketing increased $9.5 million and $16.4 million for the quarter and six months ended June 30, 1994, respectively, compared to the prior year periods, primarily due to increased volumes and the positive effect of restructuring, in 1993, certain long-term gas purchase contracts with prices formerly at a premium to market prices. In addition, the 1993 results include a charge of $3.8 million to reflect transportation and exchange imbalances at current market prices. While the 1994 periods reflect the substantial progress made in 1993 to restructure certain long-term gas purchase contracts with prices at a premium to market prices and to find alternatives for currently underutilized firm transportation capacity, additional progress needs to be made toward permanent utilization of Gas Marketing's firm transportation capacity. Natural Gas Liquids Marketing Operating income from natural gas liquids marketing declined $3.0 million and $3.9 million for the second quarter and six months ended June 30, 1994, respectively, compared to the prior year periods primarily due to decreased sales volumes and margins. Operating Revenues Gas Marketing's operating revenues increased to $392 million in the second quarter of 1994 from $329 million in the second quarter of 1993. Operating revenues increased to $906 million for the first six months of 1994 compared to $685 million for the first six months of 1993. The higher revenues were due to higher gas sales volumes and the inclusion of Texas Gas' sales service revenues of $28 million and $68 million in Gas Marketing for the second quarter and six months ended June 30, 1994, respectively. Operating Costs and Expenses Gas Marketing's costs of sales and transportation of $385 million and $885 million for the quarter and six months ended June 30, 1994 increased from $328 million and $676 million for the same periods in 1993, respectively, due to higher gas purchase volumes and the inclusion of Texas Gas' sales service costs in Gas Marketing in 1994. Gas Marketing's other operating expenses for the second quarter and six months ended June 30, 1994 were comparable to the same periods in 1993. COAL Coal reported net income of $1.4 million and $2.4 million for the second quarter and six months ended June 30, 1994, compared to net income of $2.6 million and $3.3 million for the same periods in 1993. The negative net income variance was primarily due to a reduction in the operating margin due to a lower average sales price, partially offset by lower interest expense and higher income tax benefits in 1994. In addition, the results for the second quarter of 1993 included the effects of favorable price adjustments in a long-term sales contract. Coal's operating income decreased to $0.9 million for the second quarter and to $1.4 million for six months ended June 30, 1994 from $2.9 million and $4.0 million for the same periods of 1993 due primarily to the lower average sales price and price adjustments discussed above. GAS GATHERING Gas Gathering's net loss was $1.4 million and $2.5 million compared to a $2.3 million and 4.9 million net loss for the second quarter and the first six months of 1994 and 1993, respectively. The operating loss was $0.4 million and $0.6 million compared to operating losses of $1.2 million and $2.4 million for the second quarter and the first six months in 1994 and 1993, respectively. The improvement was primarily due to lower interruptible transportation expense charged by other pipelines and a transportation rate refund. This positive variance was partially offset by an increase in depreciation expense due to the acquisition of interests held by Corpus Christi Gas Gathering, Inc. and certain affiliates (Corpus Christi) in jointly-owned gas gathering and intrastate pipeline partnerships in the third quarter of 1993. Also contributing to the net loss reduction was the increase in equity in earnings of unconsolidated affiliates of $0.6 million and $1.7 million for the quarter and six months ended June 30, 1994 compared to the prior year periods. This positive variance was primarily attributable to losses in 1993 associated with Gas Gathering's 50% interest in the Corpus Christi pipeline partnerships, the assets of which are now wholly-owned by Gas Gathering due to the aforementioned Corpus Christi acquisition. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. See discussion of legal proceedings in Note C of the Notes to Condensed Consolidated Financial Statements included herein. ITEM 2. CHANGES IN SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Shareholders was held on May 17, 1994 in Owensboro, Kentucky. Shareholders voted on the election of two Directors for a three-year term expiring in 1997, the ratification of the appointment of independent accountants for the year 1994 and an Amended and Restated 1991 Incentive Stock Plan. The voting results on these matters are as follows: 1. Election of Directors:
Votes Votes Against or Broker Nominees For Abstentions Withheld Non-Votes ________ __________ ___________ ___________ __________ William H. Luers 36,199,445 0 1,997,701 0 Frederick H. Schultz 36,455,195 0 1,741,951 0 Directors whose term of office continues after the meeting: Term expiring 1995: Gordon F. Ahalt, Benjamin F. Bailar and John P. DesBarres Term expiring 1996: Robert W. Fri and J. David Grissom
2. Appointment of Arthur Andersen & Co. as the Company's Independent Auditors:
Votes Votes Against or Broker For Abstentions Withheld Non-Votes __________ ___________ __________ __________ 37,062,901 299,828 834,417 0
3. Adoption of Amended and Restated 1991 Incentive Stock Plan:
Votes Votes Against or Broker For Abstentions Withheld Non-Votes __________ ___________ __________ __________ 29,683,960 924,065 7,589,121 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 4.1 Amended and Restated Credit Agreement dated December 31, 1993 among Transco, the Banks named therein, Citibank, N.A. as Agent and Bank of Montreal, as Co-Agent (Exhibit (4) - 5(c) to Transco Form 10-K for 1993 Commission File Number 1-7513). (a) First Amendment Agreement dated as of June 30, 1994 among Transco, the Banks named therein, Citibank, N.A. as Agent and Bank of Montreal, as Co-Agent. 4.2 Reimbursement Agreement dated as of December 31, 1993 among Transco, the Banks named therein 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) First Amendment Agreement dated as of June 30, 1994 among Transco, the Banks named therein and Bank of Montreal as Agent and Issuing Bank. (b) Reports on Form 8-K. Transco filed a Form 8-K, Current Report dated April 7, 1994, to report that Transco and TGPL, along with pipeline units of the Coastal Corporation, MidCon Corp. and Tenneco Inc., announced that each have signed settlement agreements to resolve litigation with Dakota Gasification Company and the Department of Energy related to their respective contracts, signed in 1982, to purchase gas from the Great Plains Gasification Plant. The settlements are subject to the approval of the Federal Energy Regulatory Commission. See Note C of the Notes to Condensed Consolidated Financial Statements. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TRANSCO ENERGY COMPANY Dated: August 12, 1994 By /s/ Larry J. Dagley __________________________________ (Signature) Larry J. Dagley Senior Vice President and Chief Financial Officer (Principal Financial Officer) EX-4 2 EX 4.1 FOR TRANSCO ENERGY CO 2ND QTR 1994 10-Q EXHIBIT 4.1 FIRST AMENDMENT June 30, 1994 This First Amendment dated as of June 30, 1994 (this "First Amendment") is by and among Transco Energy Company, a Delaware corporation (the "Borrower"), the banks (the "Banks") and co-agent ("Co-Agent") parties to that certain Amended and Restated Credit Agreement dated as of December 31, 1993 among the Borrower, the Banks, the Co-Agent and Citibank, N.A., as agent (the "Agent") for the Banks (the "Credit Agreement"), and Citibank, N.A., as Agent. In consideration of the mutual promises contained herein, the parties hereto agree as follows: PRELIMINARY STATEMENT. The Borrower, the Banks, the Co-Agent and the Agent have agreed to amend the Credit Agreement as hereinafter set forth. Unless otherwise defined herein, the terms defined in the Credit Agreement shall be used herein as therein defined. Section 1. Amendment to Credit Agreement. The date "December 31, 1994" set forth in clause (i)(b) of Section 5.02(m), and in clause (b) of the proviso in the definition of Consolidated Net Worth in Section 1.01, of the Credit Agreement is hereby deleted and, in both such instances, the date "June 30, 1995" is inserted in replacement thereof. Section 2. Conditions of Effectiveness. This First Amendment shall become effective when, and only when, the Agent shall have received counterparts of, or telecopied signature pages of, this First Amendment executed by the Borrower and the Required Banks in accordance with Section 8.01 of the Credit Agreement. Section 3. Representations. The Borrower represents and warrants to each of the Banks, the Co-Agent and the Agent that: (a) the representations and warranties contained in Article IV of the Credit Agreement, the representations and warranties set forth in Section 5 of the TGPL Guaranty and the representations and warranties set forth in Section 5 of the TXG Guaranty are true and correct on and as of the date hereof (except that representations and warranties which expressly related to a specific date or specific dates shall continue to relate to such dates) and shall have the same force and effect as if set forth in full herein; and (b) after giving effect to this First Amendment, no event has occurred and is continuing which constitutes a Default or an Event of Default. Section 4. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of this First Amendment on and after the date hereof, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Credit Agreement and each reference in the Notes to the "Credit Agreement", "thereunder", "thereof" or words of like import referring to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. (b) The Credit Agreement, as amended by this First Amendment, is and shall remain in full force and effect and is hereby ratified and confirmed. (c) Except as expressly provided herein, the execution, delivery and effectiveness of this First Amendment shall not operate as a waiver of any right, power or remedy of any Bank or the Agent under the Credit Agreement, nor constitute a waiver of any provision of the Credit Agreement. Section 5. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all reasonable costs and expenses in connection with the preparation, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable out-of-pocket expenses of the Agent and the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities hereunder and under the Loan Documents. In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder, and agree to save the Agent and each Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. Section 6. Execution in Counterparts. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 7. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this First Amendment and to agree to the various matters set forth herein. Each Bank also acknowledges that it will, inde- pendently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropri- ate at the time, continue to make its own credit decisions in taking or not taking any action under the Credit Agreement as amended hereby. Section 8. Authority, etc. The Borrower hereby represents and warrants to the Agent, the Co-Agent and the Banks that (i) the Borrower and each Restricted Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) the execution, delivery and performance of this First Amendment, and the performance of the Credit Agreement, as amended hereby, by the Borrower are within the power of the Borrower, have been duly authorized by all necessary corpor- ate action and do not contravene (A) the Borrower's certificate of incorporation or by-laws, (B) any applicable rule, regulation, order, writ, injunction or decree, or (C) law or any contractual restriction binding on or affecting the Borrower, and will not result in or require the creation or imposition of any Lien prohibited by the Credit Agreement, as amended hereby, (iii) this First Amendment has been duly executed and delivered by the Borrower, (iv) this First Amendment and the Credit Agreement, as amended hereby, constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally, (v) no authorization, consent or approval of, or other action by, and no notice to or filing with, any governmental authority, regulatory body or other Person not a party hereto is required for the due execution, delivery and performance of this First Amendment or the performance of the Credit Agreement, as amended hereby. Section 9. Default. Without limiting any other event which may constitute an Event of Default, in the event any representation or warranty set forth herein shall be incorrect or misleading in any material respect when made, such event shall constitute an "Event of Default" under the Credit Agreement, as amended hereby. Section 10. Governing Law. This First Amendment and the Credit Agreement, as amended hereby, shall be governed by and construed in accordance with the law of the State of New York. Section 11. Headings. Section headings in this First Amend- ment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: TRANSCO ENERGY COMPANY By: /s/ R. Scott Amann Authorized Officer AGENT: CITIBANK, N.A. as Agent By: /s/ Barbara A. Cohen Authorized Officer CO-AGENT: BANK OF MONTREAL as Co-Agent By: /s/ Donald G. Warmington Authorized Officer BANKS: CITIBANK, N.A. By: /s/ Barbara A. Cohen Authorized Officer BANK OF MONTREAL By: /s/ Donald G. Warmington Authorized Officer THE BANK OF NOVA SCOTIA By: /s/ A. S. Norsworthy Authorized Officer BARCLAYS BANK, PLC By: /s/ Nancy L. Forster Authorized Officer THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION) By: /s/ Bettylou Robert Authorized Officer CHEMICAL BANK By: /s/ Cliff Wilson, III Authorized Officer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Lee E. McKinstrey Authorized Officer THE BANK OF NEW YORK By: /s/ Daniel T. Gates Authorized Officer THE FIRST NATIONAL BANK OF BOSTON By: /s/ Richard A. Low Authorized Officer NATIONSBANK OF TEXAS, N.A. By: /s/ Kristin B. Palmer Authorized Officer CIBC INC. By: /s/ Jeff D. Westland Authorized Officer CONTINENTAL BANK N.A. By: /s/ Robert W. Bolt Authorized Officer THE NIPPON CREDIT BANK, LTD. By: /s/ Hideaki Mori Authorized Officer SOCIETE GENERALE, SOUTHWEST AGENCY By: /s/ R. A. Erbert Authorized Officer SWISS BANK CORPORATION, NEW YORK BRANCH By: /s/ Nancy A. Hanrahan Authorized Officer By: /s/ Clark Worthley Authorized Officer CREDIT LYONNAIS CAYMAN ISLAND BRANCH By: /s/ Xavier Ratouis Authorized Officer EX-4 3 EX 4.2 FOR TRANSCO ENERGY CO 2ND QTR 1994 10-Q EXHIBIT 4.2 FIRST AMENDMENT TO REIMBURSEMENT AGREEMENT June 30, 1994 This First Amendment to Reimbursement Agreement dated as of June 30, 1994 (this "First Amendment") is by and among Transco Energy Company, a Delaware corporation (the "Borrower"), the banks (the "Banks") parties to that certain Reimbursement Agreement dated as of December 31, 1993 among the Borrower, the Banks and Bank of Montreal, as agent and issuing bank (the "Agent") for the Banks (the "Reimbursement Agreement"), and Bank of Montreal, as Agent. In consideration of the mutual promises contained herein, the parties hereto agree as follows: PRELIMINARY STATEMENT. The Borrower, the Banks and the Agent have agreed to amend the Reimbursement Agreement as hereinafter set forth. Unless otherwise defined herein, the terms defined in the Reimbursement Agreement shall be used herein as therein defined. Section 1. Amendment to Reimbursement Agreement. The date "December 31, 1994" set forth in clause (i)(b) of Section 5.02(m), and in clause (b) of the proviso in the definition of Consolidated Net Worth in Section 1.01, of the Reimbursement Agreement is hereby deleted and, in both such instances, the date "June 30, 1995" is inserted in replacement thereof. Section 2. Conditions of Effectiveness. This First Amendment shall become effective when, and only when, the Agent shall have received counterparts of, or telecopied signature pages of, this First Amendment executed by the Borrower and the Required Banks in accordance with Section 9.01 of the Reimbursement Agreement. Section 3. Representations. The Borrower represents and warrants to each of the Banks and the Agent that: (a) the representations and warranties contained in Article IV of the Reimbursement Agreement, the representations and warranties set forth in Section 5 of the TGPL Guaranty and the representations and warranties set forth in Section 5 of the TXG Guaranty are true and correct on and as of the date hereof (except that representations and warranties which expressly related to a specific date or specific dates shall continue to relate to such dates) and shall have the same force and effect as if set forth in full herein; and (b) after giving effect to this First Amendment, no event has occurred and is continuing which constitutes a Default or an Event of Default. Section 4. Reference to and Effect on the Loan Documents. (a) Upon the effectiveness of this First Amendment on and after the date hereof, each reference in the Reimbursement Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import referring to the Reimbursement Agreement and each reference in the Notes to the "Reimbursement Agreement", "thereunder", "thereof" or words of like import referring to the Reimbursement Agreement shall mean and be a reference to the Reimbursement Agreement as amended hereby. (b) The Reimbursement Agreement, as amended by this First Amendment, is and shall remain in full force and effect and is hereby ratified and confirmed. (c) Except as expressly provided herein, the execution, delivery and effectiveness of this First Amendment shall not operate as a waiver of any right, power or remedy of any Bank or the Agent under the Reimbursement Agreement, nor constitute a waiver of any provision of the Reimbursement Agreement. Section 5. Costs, Expenses and Taxes. The Borrower agrees to pay on demand all reasonable costs and expenses in connection with the preparation, execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder, including, without limitation, the reasonable out-of-pocket expenses of the Agent and the Issuing Bank and the reasonable fees and out-of-pocket expenses of counsel for the Agent and the Issuing Bank with respect thereto and with respect to advising the Agent and the Issuing Bank as to its rights and responsibilities hereunder and under the Loan Documents. In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this First Amendment and the other instruments and documents to be delivered hereunder, and agree to save the Agent and the Issuing Bank and each Bank harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. Section 6. Execution in Counterparts. This First Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 7. Bank Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this First Amendment and to agree to the various matters set forth herein. Each Bank also acknowledges that it will, inde- pendently and without reliance upon the Agent or any other Bank and based on such documents and information as it shall deem appropri- ate at the time, continue to make its own credit decisions in taking or not taking any action under the Reimbursement Agreement as amended hereby. Section 8. Authority, etc. The Borrower hereby represents and warrants to the Agent and the Banks that (i) the Borrower and each Restricted Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (ii) the execution, delivery and performance of this First Amendment, and the performance of the Reimbursement Agreement, as amended hereby, by the Borrower are within the power of the Borrower, have been duly authorized by all necessary corpor- ate action and do not contravene (A) the Borrower's certificate of incorporation or by-laws, (B) any applicable rule, regulation, order, writ, injunction or decree, or (C) law or any contractual restriction binding on or affecting the Borrower, and will not result in or require the creation or imposition of any Lien prohibited by the Reimbursement Agreement, as amended hereby, (iii) this First Amendment has been duly executed and delivered by the Borrower, (iv) this First Amendment and the Reimbursement Agreement, as amended hereby, constitute legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as such enforceability may be limited by any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally, (v) no authorization, consent or approval of, or other action by, and no notice to or filing with, any governmental authority, regulatory body or other Person not a party hereto is required for the due execution, delivery and performance of this First Amendment or the performance of the Reimbursement Agreement, as amended hereby. Section 9. Default. Without limiting any other event which may constitute an Event of Default, in the event any representation or warranty set forth herein shall be incorrect or misleading in any material respect when made, such event shall constitute an "Event of Default" under the Reimbursement Agreement, as amended hereby. Section 10. Governing Law. This First Amendment and the Reimbursement Agreement, as amended hereby, shall be governed by and construed in accordance with the law of the State of New York. Section 11. Headings. Section headings in this First Amend- ment are included herein for convenience of reference only and shall not constitute a part of this First Amendment for any other purpose. WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. BORROWER: TRANSCO ENERGY COMPANY By: /s/ R. Scott Amann Name: R. Scott Amann Title: Vice President of Finance AGENT: BANK OF MONTREAL as Agent By: /s/ Donald G. Warmington Name: Donald G. Warmington Title: Director BANKS: BANK OF MONTREAL By: /s/ Donald G. Warmington Authorized Officer THE BANK OF NOVA SCOTIA By: /s/ A. S. Norsworthy Authorized Officer CIBC INC. By: /s/ Jeff D. Westland Authorized Officer CONTINENTAL BANK N.A. By: /s/ Robert W. Bolt Authorized Officer SWISS BANK CORPORATION, NEW YORK BRANCH By: /s/ Nancy A. Hanrahan Authorized Officer By: /s/ Clark Worthley Authorized Officer -----END PRIVACY-ENHANCED MESSAGE-----