-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MBAnG0AWTa3cwR3LY8e8krcNC0OzwwD0zwrxCf7/cROlKhDGeaGcg5m8rAMVKgKI 6vAE7c2+88i7jg2BcDLLPg== 0000950129-96-000486.txt : 19960329 0000950129-96-000486.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950129-96-000486 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCONTINENTAL GAS PIPE LINE CORP CENTRAL INDEX KEY: 0000099250 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 741079400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-07584 FILM NUMBER: 96540245 BUSINESS ADDRESS: STREET 1: 2800 POST OAK BLVD STREET 2: P O BOX 1396 CITY: HOUSTON STATE: TX ZIP: 77251 BUSINESS PHONE: 7134392000 MAIL ADDRESS: STREET 1: 2800 POST OAK BLVD STREET 2: P O BOX 1396 CITY: HOUSTON STATE: TX ZIP: 77251 10-K405 1 TRANSCONTINENTAL GAS PIPE LINE CORP. - FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 1-7584 TRANSCONTINENTAL GAS PIPE LINE CORPORATION ----------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 74-1079400 - ------------------------------ -------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2800 POST OAK BLVD., P. O. BOX 1396, HOUSTON, TEXAS 77251 - --------------------------------------------------- ----------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 439-2000 --------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO _____ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AT JANUARY 31, 1996 WAS 100. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (j)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED DISCLOSURE FORMAT. 2 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS. GENERAL Transcontinental Gas Pipe Line Corporation (Transco) is an interstate natural gas transmission company which owns and operates a natural gas pipeline system extending from Texas, Louisiana, Mississippi and the Gulf of Mexico through the states of Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania and New Jersey to the New York City metropolitan area. Transco's principal business is the transportation of natural gas. The number of full time employees of Transco at December 31, 1995 was 1,471. Prior to May 1, 1995, Transco was a wholly-owned subsidiary of Transco Gas Company (TGC). TGC is a wholly-owned subsidiary of Transco Energy Company (TEC). On December 12, 1994, TEC and The Williams Companies, Inc. (Williams) announced that they had entered into a merger agreement (Merger Agreement) pursuant to which Williams acquired through a cash tender offer 24.6 million shares, or approximately 60%, of the outstanding shares of TEC's common stock for $430.5 million. The cash tender offer was then followed by a stock merger (Merger) in which shares of TEC common stock not purchased in the tender offer were exchanged for approximately 10.4 million shares of Williams' common stock valued at $334 million. On the May 1, 1995 effective date of the Merger, TEC declared and paid as dividends to Williams all of TEC's interest in Transco. For the accounting treatment of the Merger, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - - B. Summary of Significant Accounting Policies." In connection with the Merger, in January 1995, the Boards of Directors of TEC and Williams approved a recapitalization plan for Transco. The following actions were completed during 1995 in connection with the recapitalization plan, as it impacts Transco: - Termination of TEC's Amended Bank Credit Facility dated December 31, 1993, replacing it with a credit agreement described below; - Termination of the program to sell monthly trade receivables of Transco, replacing itwith a new receivables program; 1 3 - Termination of TEC's Reimbursement Facility dated December 31, 1993; and - Redemption by Transco of all of its outstanding preferred stock at $100 per share plus accrued dividends. TEC's Amended Bank Credit Facility was replaced with a credit agreement among Williams and certain of its subsidiaries, including Transco (Credit Agreement). The Credit Agreement provides for an $800 million line of credit, under which Transco can borrow up to $400 million. Interest rates vary with current market conditions. The recapitalization plan, combined with TEC's dividend of its interest in Transco to Williams, is expected to provide Transco with greater ratemaking flexibility afforded by a stand-alone capital structure. In addition, in February 1995, Standard & Poor's Corporation and Moody's Investor Service upgraded Transco's debt securities from BB and Ba2 to BBB and Baa1, respectively and Transco's preferred stock from BB- and B1 to BBB- and Baa2, respectively. These upgrades should provide Transco with greater access to capital markets. A security rating is not a recommendation to buy, sell or hold securities; it may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. At December 31, 1995, Transco's system had a mainline delivery capacity of approximately 3.7 Bcf (1) of gas per day from production areas to its primary markets. Using its Leidy Line and market-area storage capacity, Transco can deliver an additional 2.7 Bcf of gas per day for a system-wide delivery capacity total of 6.4 Bcf of gas per day. The system is composed of approximately 10,500 miles of mainline and branch transmission pipelines, 37 compressor stations, five underground storage locations and four processing plants. Compression facilities at sea level rated capacity total approximately 1.2 million horsepower. Transco has natural gas storage capacity in five underground fields located on or near its pipeline system and/or market nd operates three of these storage fields and an additional storage areas a Liquified Natural Gas (LNG) storage facility. The total storag capacity available to Transco and its customers in such storage fields and LNG facility is - ---------------- (1) As used in this report, the term "Mcf" means thousand cubic feet, the term "MMcf" means million cubic feet, the term "Bcf" means billion cubic feet, the term "Tcf" means trillion cubic feet, the term "Mcf/d" means thousand cubic feet per day, the term "MMcf/d" means million cubic feet per day, the term "Bcf/d" means billion cubic feet per day, the term "MMBtu" means million British Thermal Units and the term "TBtu" means trillion British Thermal Units. 2 4 approximately 219 Bcf of gas. Storage capacity permits Transco's customers to inject gas into storage during the summer and off-peak periods for delivery during peak winter demand periods. Transco's gas pipeline facilities are generally owned in fee. However, a substantial portion of such facilities are constructed and maintained pursuant to rights-of-way, easements, permits, licenses or consents on and across real property owned by others. Compressor stations, with appurtenant facilities, are located in whole or in part either on lands owned or on sites held under leases or permits issued or approved by public authorities. The storage facilities are either owned or contracted for under long-term leases or easements. In 1992, the Federal Energy Regulatory Commission (FERC) issued Order 636 which made fundamental changes in the way natural gas pipelines conduct their businesses. The FERC's stated purpose of Order 636 was to improve the competitive structure of the natural gas pipeline industry by, among other things, unbundling a pipeline's merchant role from its transportation services; ensuring "equality" of transportation services including equal access to all sources of gas; providing "no-notice" firm transportation services that are equal in quality to bundled sales service; establishing a capacity release program and changing rate design methodology from modified fixed-variable (MFV) to straight fixed-variable (SFV), unless the pipeline and its customers agree to, and the FERC approves, a different form of rate design methodology. Effective November 1, 1993, Transco implemented its Order 636 restructuring plan. For a discussion of Order 636 see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - C. Contingent Liabilities and Commitments - Rate and Regulatory Matters - Order 636." After FERC approval in 1993, TEC realigned its gas marketing businesses under the common management of Transco Gas Marketing Company (TGMC), an affiliate of Transco, which, through an agency agreement, began to manage all jurisdictional merchant sales of Transco. In May 1995, Williams Energy Services Company (WESCO), an affiliate of Transco, succeeded to the TGMC agency agreement and began to manage Transco's jurisdictional merchant sales. In February 1996, Transco filed an application with the FERC for an order authorizing the abandonment of certain facilities located onshore and offshore in Texas, Louisiana and Mississippi by conveyance to a subsidiary of Williams Field Services Company (WFS), an affiliate of Transco. The net book value at December 31, 1995 of the original cost of the facilities proposed to be abandoned is approximately $230 million. The net book value at December 31, 1995 of the facilities including the purchase price allocation to Transco is approximately $600 million. Concurrently, the WFS subsidiary filed a petition for declaratory order requesting a determination that its gathering services and rates be exempt from FERC regulation under the Natural Gas Act. The filings are 3 5 part of an ongoing comprehensive restructuring plan by Williams to separate all gathering facilities from Williams' jurisdictional interstate natural gas pipeline transmission companies. MARKETS AND TRANSPORTATION Transco's natural gas pipeline system serves customers in Texas and eleven southeast and Atlantic seaboard states including major metropolitan areas in Georgia, North Carolina, New York, New Jersey and Pennsylvania. Transco's major gas transportation customers are public utilities and municipalities that provide residential service to approximately 35 million people and serve numerous commercial and industrial users. Shippers on Transco's pipeline system include public utilities, municipalities, intrastate pipelines, direct industrial users, electrical generators, marketers and producers. Transco's largest customer in 1995 accounted for approximately 11 percent of Transco's total operating revenues. No other customer accounted for more than 10 percent of total operating revenues. Transco's firm transportation agreements are generally long-term agreements with various expiration dates and account for the major portion of Transco's business. Additionally, Transco offers interruptible transportation services under agreements that are generally short term. Transco's total system deliveries for the years 1995, 1994 and 1993 are shown below.
Transco System Deliveries (TBtu) 1995 1994 1993 - ----------------------------- ---------- ---------- ---------- Market-area deliveries: Long-haul transportation . . . . . . . . . . . . . . 858.4 805.1 852.0 Market-area transportation . . . . . . . . . . . . . 467.3 453.6 387.4 ---------- ---------- ---------- Total market-area deliveries . . . . . . . . . . . . 1,325.7 1,258.7 1,239.4 Production-area transportation . . . . . . . . . . . . . 165.9 185.9 177.5 ---------- ---------- ---------- Total system deliveries . . . . . . . . . . . . . . . . . 1,491.6 1,444.6 1,416.9 ========== ========== ========== Average Daily Transportation Volumes (TBtu) . . . . . . . 4.1 4.0 3.9 Average Daily Firm Reserved Capacity (TBtu) . . . . . . . 5.2 4.9 4.8
Transco's facilities are divided into seven rate zones. Four are located in the production area and three are located in the market area. Long-haul transportation is gas that is received in one of the production-area zones and delivered in a market-area zone. Market-area transportation is gas that is both received and delivered within market-area zones. Production-area transportation is gas that is both received and delivered within production-area zones. 4 6 As shown in the table above, Transco's market-area deliveries for 1995 were 67.0 TBtu, or 5%, higher than 1994. The increased deliveries, primarily firm transportation volumes, were mainly due to market growth and Transco's new Southeast Expansion service which began in the fourth quarter of 1994. The production-area deliveries for 1995 decreased 20.0 TBtu, or 11%, when compared to 1994 due primarily to increased competition among pipelines, especially intrastate pipelines, for transportation of production area volumes and the release of firm transportation capacity in the post Order 636 era. Additionally, in 1994 there were greater volumes transported for electricity generation due to several nuclear plants being shut-in. As a result of the fundamental business changes resulting from FERC Order 636, especially the shifting of the responsibility for gas supply from the pipeline companies to local distribution companies (LDCs), maintaining committed proved gas reserves is no longer material to Transco's transportation business. PIPELINE PROJECTS SOUTHEAST EXPANSION PROJECTS In November 1993, Transco filed for FERC approval of its Southeast Expansion Projects to provide additional firm transportation capacity to growing southeastern markets in Alabama, Georgia, South and North Carolina and Virginia. The Southeast Expansion Projects will provide a total of 205 MMcf/d of firm transportation capacity to Transco's southeast customers by the 1996-1997 winter heating season. The new firm transportation capacity will extend from Transco's Mobile Bay lateral interconnect, near Butler, Alabama, to delivery points upstream of Transco's Compressor Station 165, near Chatham, Virginia. The expansion projects will include approximately 25 miles of pipeline replacement and looping and the installation of additional compression totaling approximately 70,000 horsepower. Transco estimates the cost of the expansion to be $125 million. By separate orders issued in 1994, the FERC authorized the 1994 Southeast Expansion Project (SE94) and the 1995/1996 Southeast Expansion Project (SE95/96). In February 1996, the FERC granted Transco's amendment to Phase II of SE95/96 to slightly increase the compression additions at three compressors stations and provide an additional 5 MMcf/d of firm transportation capacity beginning with the 1996-1997 winter heating season. SE94 was completed and placed into service in November 1994, and provides 35 MMcf/d of additional firm transportation capacity. Phase I of SE95/96 was completed and placed into service in December 1995, and provides 115 MMcf/d of additional firm transportation capacity. Phase II of SE95/96 will add the remaining 55 MMcf/d for the 1996-1997 winter heating season. Transco invested $63 million in these projects in 1995 and expects to invest approximately $21 million in these projects in 1996. 5 7 EMINENCE STORAGE FIELD EXPANSION PROJECT During 1995, Transco completed the third and final phase of its Eminence Storage Field Expansion Project, expanding the working capacity from 12 Bcf to 15 Bcf. The expansion of the salt-dome structure, located at Transco's Station 77 near Seminary, Mississippi, will give Transco additional flexibility to meet the load balancing and emergency gas supply demands of its customers. High deliverability from storage helps assure pipelines, such as Transco, of gas availability for their customers during adverse weather conditions. Transco invested $8 million in this project in 1995. MOBILE BAY LATERAL EXPANSION PROJECT In September 1993, the FERC issued an order authorizing the joint ownership and expansion of Transco's Mobile Bay lateral with Florida Gas Transmission Company (Florida Gas). The lateral transports gas from the prolific Mobile Bay gas supply basin to the Transco mainline, near Butler, Alabama. Construction of the compressor station authorized as part of the expansion was completed in November 1994 and the station was placed into service in December 1994. In March 1995, the expansion was fully placed into service and the joint ownership of the Mobile Bay Lateral with Florida Gas became effective. The expansion increased the capacity of the Mobile Bay lateral from 462 MMcf/d to 829 MMcf/d. The expansion increased the Transco portion of pipeline capacity by approximately 60 MMcf/d to 520 MMcf/d. The cost of the expansion project was funded entirely by Florida Gas, and Transco received approximately $13 million from Florida Gas for the sale of a partial interest in the lateral. SUNBELT EXPANSION PROJECT In October 1995, Transco filed for FERC approval of the SunBelt Expansion Project to provide additional firm transportation capacity to growing markets in Georgia, South Carolina and North Carolina. The SunBelt Expansion Project will provide a total of 146 MMcf/d of firm transportation capacity to existing and new Transco customers by the 1997-1998 winter heating season. The firm transportation capacity will extend from Transco's Station 65 in St. Helena Parish, Louisiana to Station 145 near the North and South Carolina state border. The SunBelt Expansion Project will include approximately 15 miles of pipeline looping and compression additions and uprating totaling 53,100 horsepower. Transco estimates the cost of the expansion to be approximately $85 million and expects to invest approximately $15 million in 1996. SEABOARD 97 EXPANSION PROJECT In August 1995, Transco announced its SeaBoard 97 Expansion Project, which is planned to provide 115 MMcf/d of additional firm transportation capacity from points of receipt on Transco's Leidy Line to Transco's northeastern market area by the 1997-1998 winter heating season. To render this service, Transco will construct compression and pipeline looping facilities at an estimated cost of 6 8 $115 million. Transco plans to file in mid-1996 for FERC approval of the project and expects to invest approximately $9 million in 1996. PINE NEEDLE LNG COMPANY, LLC In November 1995, Pine Needle LNG Company, LLC (Pine Needle), a North Carolina limited liability company, by and through its operator, Pine Needle Operating Company (PNOC), filed for FERC approval of a new liquefied natural gas (LNG) storage facility to be constructed and owned by Pine Needle near Transco's mainline system in Guilford County, North Carolina. The project is being proposed in response to strong market demand for winter peak heating service in the Southeast United States. The LNG facility will have a total storage capacity of 4 Bcf of gas. The facility will be able to liquefy gas at a net rate of 20 MMcf/d into storage, and vaporize and send out up to 400 MMcf/d. Transco will construct the necessary connections on its mainline system to enable it to deliver gas to and receive gas from the storage facility. Pine Needle estimates the total cost of the project to be $107 million. Pine Needle proposes a 50/50 debt to equity capital structure and will seek non-recourse project financing. Pine Needle proposes to place the LNG facility into service on or about May 1, 1999. Pine Needle was formed in 1995 between a wholly owned subsidiary of Transco, three North Carolina LDCs, a producer, and a Georgia gas authority. Transco's wholly owned subsidiary, TransCarolina LNG Company, holds a 35% ownership interest in Pine Needle. PNOC is also a wholly owned subsidiary of Transco. Transco expects to invest approximately $3 million in 1996. CARDINAL PIPELINE SYSTEM PROJECT In December 1995, Cardinal Extension Company, LLC (Cardinal), a North Carolina limited liability company, was formed between a wholly owned subsidiary of Transco and three North Carolina LDCs to acquire Cardinal Pipeline Company, LLC and expand that company's existing North Carolina pipeline system. The existing pipeline to be acquired consists of 37 miles of 24-inch pipeline extending from Transco's Station 160 to Burlington, North Carolina. Cardinal plans to file in late 1996 for regulatory approval to construct a 65-mile extension of the existing pipeline from Burlington to Raleigh, North Carolina, which will create 140 MMcf/d of new firm transportation capacity to Raleigh. Construction of the pipeline extension is planned to commence in early 1999 with a target in-service date of November 1, 1999. Cardinal Operating Company, a wholly owned subsidiary of Transco, will be responsible for constructing the pipeline extension and will serve as operator of the expanded pipeline system. Transco's wholly owned subsidiary, TransCardinal Company, will have a 45% ownership interest in Cardinal. The total costs for the acquisition and extension are expected to be $97 million. Cardinal proposes a 50/50 debt to equity capital structure and will seek non-recourse project financing. Transco expects to invest approximately $22 million in the project,including $2 million in 1996. 7 9 MID-ATLANTIC LNG STORAGE FACILITY In January 1996, Transco an LDC customer announced that they had signed a letter of intent to evaluate, develop, own and operate a liquefied natural gas facility. The LDC customer has recently informed Transco that it will not participate as an owner in the project, but the LDC has continued to express an interest in subscribing to the project's services. Transco is currently seeking a location for the four Bcf facility in Transco's northern market area. The preliminary estimated cost for the project is $125 million. REGULATORY MATTERS Transco's transportation rates are established through the FERC ratemaking process. Key determinants in the ratemaking process are (i) volume throughput assumptions, (ii) costs of providing service, including depreciation rates and (iii) allowed rate of return, including the equity component of a pipeline's capital structure. Rate design and the allocation of costs between the demand and commodity rates also impact profitability. As a result of the ratemaking process, a portion of Transco's revenues may have been collected subject to refund. Effective September 1, 1992, Transco changed from the MFV method of rate design to the SFV method of rate design. Under MFV rate design, all fixed costs, with the exception of return on equity and income taxes, are included in a demand charge to customers and return on equity and income taxes are recovered as part of a volumetric charge to customers. Accordingly, under MFV rate design, overall throughput has a significant impact on operating income. Under the SFV method of rate design, all fixed costs, including return on equity and income taxes, are included in a demand charge to customers and all variable costs are recovered through a commodity charge to customers. While the use of SFV rate design limits Transco's opportunity to earn incremental revenues through increased throughput, it also minimizes Transco's risk associated with fluctuations in throughput. For a discussion of current regulatory matters, see "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - - C. Contingent Liabilities and Commitments - Rate and Regulatory Matters." COMPETITION Competition for gas transportation has intensified in recent years due to customer access to other pipelines, rate competitiveness among pipelines, customers' desire to have more than one supplier and regulatory developments. The FERC's stated purpose of Order 636 is to improve the competitive structure of the natural gas pipeline industry. Transco implemented Order 636 on November 1, 1993. Future utilization of pipeline capacity will depend on competition from other pipelines and alternative fuels, the general level of natural gas demand and weather conditions. Electricity and distillate fuel oil are the 8 10 primary competitive forms of energy for residential and commercial markets. Coal and residual fuel oil compete for industrial and electric generation markets. Nuclear power purchased from grid arrangements among electric utilities also compete with gas-fired power generation in the markets served by Transco. Although a significant portion of Transco's firm customers have relatively secure residential and commercial end-users, virtually all of Transco's LDC customers have some price-sensitive end-users that could switch to alternate fuels. Approximately one-third of Transco's customer deliveries are at risk to such fuel switching; however, a recent survey of Transco's largest customers suggests that end-users will pay a premium to burn natural gas and that LDCs will aggressively price their system transportation to stay competitive in alternate-fuel markets. Transco and its primary market-area competitors implemented Order 636 on their respective systems during 1993. Transco and its major competitors all employ SFV rate design for firm transportation as mandated by Order 636. However, Transco has expressed to the FERC concerns that inconsistent treatment under Order 636 of Transco and its competitor pipelines with regard to rate design and cost allocation issues in Transco's production area may result in rates which could make Transco less competitive, both in terms of production-area and long-haul transportation rates. On July 19, 1995, Transco received an initial decision from a FERC Administrative Law Judge (ALJ) dealing with, among other things, Transco's production-area rate design. That decision rejected Transco's proposal to adopt the production-area rate design employed by its competitor pipelines. The decision of the ALJ is subject to review by FERC and Transco has filed exceptions to the decision with the FERC. Should the FERC issue an order consistent with the ALJ's recommendations, such order would be for prospective effect only. Transco is unable at this time to fully assess the competitive effect and resulting financial impact on Transco of having to maintain its current production-area rate design which is different than that of its competitors. Transco is aware that several state jurisdictions have been involved in implementation of changes similar to those that occurred at the federal level under Order 636. Such activity, frequently referred to as "LDC unbundling", has been most pronounced in the states of New York, New Jersey and Pennsylvania. In New York and New Jersey regulations regarding "LDC unbundling" were enacted during the past year and Pennsylvania is expected to act on an "LDC unbundling" program in the early spring of 1996. While it is expected that these regulations will encourage greater competition in the natural gas marketplace, it is not expected that they will have a material impact on Transco's transportation volumes or results of operations. Transco does not expect to incur gas supply realignment (GSR) costs associated with its firm sales service. Transco's non-GSR transition costs are to recpated to be insignificant; therefore, Transco believes the demand charges to recover these costs will 9 11 not make its rates noncompetitive in its markets. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - C. Contingent Liabilities and Commitments - Rate and Regulatory Matters - Order 636." SALES SERVICE After FERC approval in January 1993, TEC realigned its gas marketing businesses under the common management of TGMC, which, through an agency agreement, began to manage all jurisdictional merchant sales of Transco. In May 1995, WESCO succeeded to the TGMC agency agreement and began to manage Transco's jurisdictional merchant sales. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - B. Summary of Significant Accounting Policies and I. Transactions with Major Customers and Affiliates." Transco makes jurisdictional merchant sales to customers pursuant to a blanket sales certificate issued by the FERC, with most of those sales being made through a Firm Sales (FS) program which gives customers the option to purchase daily quantities of gas from Transco at market-responsive prices in exchange for a demand charge payment. Transco's gas sales volumes managed by WESCO and TGMC for the years 1995, 1994 and 1993 are shown below.
Gas Sales Volumes (TBtu) 1995 1994 1993 - ------------------------- ------- ------- ------- Long-term sales . . . . . . . . . . . . . . . . . 219.7 217.2 215.5 Short-term sales . . . . . . . . . . . . . . . . 95.5 109.7 37.0 ------- ------- ------- Total gas sales . . . . . . . . . . . . . . 315.2 326.9 252.5 ======= ======= =======
REGULATION INTERSTATE GAS PIPELINE OPERATIONS Transco's transmission and storage activities are subject to regulation by the FERC under the Natural Gas Act of 1938 (Natural Gas Act) and under the Natural Gas Policy Act of 1978 (NGPA), and, as such, Transco's rates and charges for the transportation of natural gas in interstate commerce, the extension, enlargement or abandonment of jurisdictional facilities, and accounting, among other things, are subject to regulation. Transco holds certificates of public convenience and necessity issued by the FERC authorizing ownership and operation of all pipelines, facilities and properties considered jurisdictional for which certificates are required under the Natural Gas Act. Transco is also subject to the Natural Gas Pipeline Safety Act of 1968, as amended by Title I of the Pipeline Safety Act of 1979, which regulates safety requirements in the design, construction, operation and maintenance of interstate gas transmission facilities. 10 12 ENVIRONMENTAL Transco is subject to the National Environmental Policy Act and federal, state and local laws and regulations relating to environmental quality control. Management believes that, with respect to any capital expenditures and operation and maintenance expenses required to meet applicable environmental standards and regulations, the FERC would grant the requisite rate relief so that, for the most part, such expenditures would be recoverable in rates. For this reason, management believes that compliance with applicable environmental requirements is not likely to have a material effect upon its earnings or competitive position. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - C. Contingent Liabilities and Commitments - Environmental Matters." TRANSACTIONS WITH AFFILIATES Transco engages in transactions with Williams and other Williams subsidiaries, characteristic of group operations. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - - B. Summary of Significant Accounting Policies and I. Transactions With Major Customers and Affiliates." ITEM 2. PROPERTIES. See "Item 1. Business." ITEM 3. LEGAL PROCEEDINGS. See "Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - C. Contingent Liabilities and Commitments - - Legal Proceedings." DAKOTA GASIFICATION LITIGATION On February 20, 1996, certain parties filed with the FERC a motion requesting that the FERC establish an additional proceeding to consider claims for additional refunds. The claimed additional refunds, which approximate $90 million net to Transco, pertain to amounts paid Dakota from November 1, 1988, to May 1, 1993. Transco and the other pipelines have filed with the FERC an answer opposing the motion. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Since Transco meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K, this information is omitted. 11 13 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Prior to May 1, 1995, all of the outstanding shares of Transco's common stock was owned by TGC, a wholly-owned subsidiary of TEC. On the May 1, 1995 effective date of the Merger, TEC declared and paid as dividends to Williams all of TEC's interest in Transco. Transco's common stock is not publicly traded and there exists no market for such common stock. ITEM 6. SELECTED FINANCIAL DATA. Since Transco meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K, this information is omitted. 12 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.) INTRODUCTION As discussed in Note A, Corporate Structure and Control, of the Notes to Consolidated Financial Statements included in Item 8 herein, TEC and Williams announced that they had entered into a Merger Agreement pursuant to which Williams acquired on January 18, 1995, through a cash tender offer 24.6 million shares, or approximately 60%, of the outstanding shares of TEC's common stock for $430.5 million. The cash offer was then followed by a Merger in which shares of TEC common stock not purchased in the tender offer were exchanged for approximately 10.4 million shares of Williams' common stock valued at $334 million. On the May 1, 1995 effective date of the Merger, TEC declared and paid as dividends to Williams all of TEC's interests in Transco. In recent years, Transco has improved its financial strength and has experienced strong operational results. Transco expects the Merger will further enhance its financial and operational strength, as well as allow it to take advantage of new opportunities for growth. CAPITAL RESOURCES AND LIQUIDITY METHOD OF FINANCING Transco funds its capital requirements with cash flows from operating activities, including the sale of trade receivables, by repayments of funds advanced to Williams, by borrowings under the Credit Agreement and short-term money market facilities and, if required, by advances from Williams. In 1996, Transco also plans to access capital markets to refinance current maturities of existing long-term debt. At December 31, 1995, there were no outstanding borrowings under the Credit Agreement or the short-term money market facilities and advances due Transco by Williams totaled $104.5 million. In connection with the Merger, in January 1995, the Boards of Directors of TEC and Williams approved a recapitalization plan for TEC. See Notes D and E of the Notes to Consolidated Financial Statements included in Item 8 herein, for a discussion of the actions completed during 1995 in connection with the recapitalization plan, as it impacts Transco. In February 1995, Standard & Poor's Corporation and Moody's Investors Service upgraded TGPL's debt securities from BB and Ba2 to BBB and Baa1, respectively. These upgrades should provide Transco with greater access to capital markets. A security rating is not a recommendation to buy, sell or hold securities; it may be subject to revision or 13 15 withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating. CAPITALIZATION AND CASH FLOWS As shown in the following table, at December 31, 1995, the percentage of total debt to total invested capital was 27.5%, compared to 42.7% at December 31, 1994. The increase in common stockholder's equity due to the allocation of the Williams purchase price, partially offset by the retirement of Transco's preferred stock, was the primary reason for the reduction of the percentage of total debt to total invested capital.
Post-Acquisition Pre-Acquisition ------------- ------------------------ 1995 1994 1993 ----------- ------------ ---------- (In millions) Common Stockholder's Equity . . . . . . . . . . $ 1,736.8 $ 814.8 $ 707.3 Preferred Stock . . . . . . . . . . . . . . . . - 49.4 75.2 Long-term Debt, less Current Maturities . . . . 382.0 644.2 643.8 ----------- ------------ ----------- Total Capitalization . . . . . . . . . . . 2,118.8 1,508.4 1,426.3 Current maturities of Long-Term Debt . . . . . 277.1 - - ----------- ------------ ----------- Total Invested Capital . . . . . . . . . . $ 2,395.9 $ 1,508.4 $ 1,426.3 =========== ============ =========== Long-term Debt, less Current Maturities as a percentage of Total Capitalization . . . . 18.0% 42.7% 45.1% Common Stockholder's Equity as a percentage of Total Capitalization . . . . . . . . . . . 82.0% 54.0% 49.6% Total Debt as a percentage of Total Invested Capital . . . . . . . . . . . . . . . . . . . 27.5% 42.7% 45.1%
For purposes of the discussion of variances between the year ended December 31, 1995 and the year ended December 31, 1994, the pre-acquisition and post-acquisition periods presented in the accompanying consolidated financial statements for the year ended December 31, 1995 have been combined for a pro forma presentation of cash flows for the year 1995.
1995 1994 1993 -------- -------- -------- (In millions) Cash Flows Provided By Operating Activities . . . . $ 270.6 $ 161.8 $ 259.3 ======== ======== ========
For the year ended December 31, 1995, cash flows from operating activities were $109 million higher than for the year ended December 31, 1994. This increase in cash flows was primarily the result of the timing of disbursements for payables ($73 million) and payments of federal income taxes to Williams ($48 million) in 1995 compared to 1994. Cash flows from operating activities for the year ended December 31, 1994 were $98 million lower than for the year ended December 31, 1993. This decrease in cash 14 16 flows was primarily the result of rate refunds made by Transco under its RP92-137 general rate case ($123 million) and higher collection of revenues in 1993 subject to refund ($83 million), partly offset by a net decrease in gas inventory of $26 million and no producer settlement cash payments being made in 1994 compared to $32 million in 1993.
1995 1994 1993 -------- -------- -------- (In millions) Cash Flows Used In Financing Activities . . . . . . $ 45.9 $ 32.3 $ 66.5 ======= ======= ========
The cash flows used in financing activities for the year ended December 31, 1995, reflect the retirement of $50 million of preferred stock, partially offset by the capital contribution from TEC of $6 million. The cash flows used in financing activities for the year ended December 31, 1994, reflect the retirement of $26 million of preferred stock and dividend payments of $6 million on preferred stock. The cash flows used in financing activities for the year ended December 31, 1993, were mainly due to the retirement of $30 million of Transco's long-term debt and $26 million of preferred stock and dividend payments of $8 million on preferred stock.
1995 1994 1993 -------- -------- -------- (In millions) Cash Flows Used In Investing Activities . . . . . . $ 223.9 $ 128.9 $ 193.0 ======== ======== ========
For the year ended December 31, 1995, cash flows used in investing activities reflect capital expenditures for property, plant and equipment of $245 million, as shown in the following table, partly offset by a net decrease of $11 million in advances to affiliates. For the year ended December 31, 1994, cash flows used in investing activities included cash outflows for capital expenditures for property, plant and equipment of $143 million, as shown in the following table, partly offset by a net decrease of $17 million in advances to affiliates. For the year ended December 31, 1993, cash flows used in investing activities were primarily for capital expenditures for property, plant and equipment of $110 million, as shown in the following table, and a net increase of $119 million in advances to affiliates, partly offset by the recovery of $30 million of producer settlement costs. 15 17
Budget Actual ---------- -------------------------------------- Capital Expenditures 1996 1995 1994 1993 ---------- ---------- ----------- ----------- (In millions) Market-Area Projects . . . . . . . $ 48.2 $ 67.4 $ 20.4 $ 13.1 Supply-Area Projects . . . . . . . - 7.7 13.7 27.3 Maintenance of Existing Facilities and Other Projects . . . . . . . 228.5 169.6 109.3 69.8 ---------- ---------- ----------- ----------- Total Capital Expenditures $ 276.7 $ 244.7 $ 143.4 $ 110.2 =========== =========== ============ ============
Included in Transco's capital expenditures for 1995 were $67 million for market-area expansion, primarily for the Southeast Expansion Projects, compared to $20 million in 1994; $8 million for supply projects, primarily for the Eminence Storage Field Expansion Project, compared to $14 million in 1994; and $170 million for maintenance of existing facilities and other projects, compared to $109 million in 1994. FUTURE CAPITAL EXPENDITURES As shown in the table above, Transco has budgeted approximately $277 million for 1996 capital expenditures related to the maintenance of existing facilities and market-area expansion projects, primarily for the completion of the Southeast Expansion Projects and initial expenditures for other major pipeline expansion projects discussed below. SOUTHEAST EXPANSION PROJECTS In November 1993, Transco filed for FERC approval of its Southeast Expansion Projects to provide additional firm transportation capacity to growing southeastern markets in Alabama, Georgia, South and North Carolina and Virginia. The Southeast Expansion Projects will provide a total of 205 MMcf/d of firm transportation capacity to Transco's southeast customers by the 1996-1997 winter heating season. The new firm transportation capacity will extend from Transco's Mobile Bay lateral interconnect, near Butler, Alabama, to delivery points upstream of Transco's Compressor Station 165, near Chatham, Virginia. The expansion projects will include approximately 25 miles of pipeline replacement and looping and the installation of additional compression totaling approximately 70,000 horsepower. Transco estimates the cost of the expansion to be $125 million. By separate orders issued in 1994, the FERC authorized the 1994 Southeast Expansion Project (SE94) and the 1995/1996 Southeast Expansion Project (SE95/96). In February 1996, the FERC granted Transco's amendment to Phase II of SE95/96 to slightly increase the compression additions at three compressors stations and provide an additional 5 MMcf/d of firm transportation capacity beginning with the 1996-1997 winter heating season. 16 18 SE94 was completed and placed into service in November 1994, and provides 35 MMcf/d of additional firm transportation capacity. Phase I of SE95/96 was completed and placed into service in December 1995, and provides 115 MMcf/d of additional firm transportation capacity. Phase II of SE95/96 will add the remaining 55 MMcf/d for the 1996- 1997 winter heating season. Transco invested $63 million in these projects in 1995 and expects to invest approximately $21 million in these projects in 1996. SUNBELT EXPANSION PROJECT In October 1995, Transco filed for FERC approval of the SunBelt Expansion Project to provide additional firm transportation capacity to growing markets in Georgia, South Carolina and North Carolina. The SunBelt Expansion Project will provide a total of 146 MMcf/d of firm transportation capacity to existing and new Transco customers by the 1997-1998 winter heating season. The firm transportation capacity will extend from Transco's Station 65 in St. Helena Parish, Louisiana to Station 145 near the North and South Carolina state border. The SunBelt Expansion Project will include approximately 15 miles of pipeline looping and compression additions and uprating totaling 53,100 horsepower. Transco estimates the cost of the expansion to be approximately $85 million and expects to invest approximately $15 million in 1996. SEABOARD 97 EXPANSION PROJECT In August 1995, Transco announced its SeaBoard 97 Expansion Project, which is planned to provide 115 MMcf/d of additional firm transportation capacity from points of receipt on Transco's Leidy Line to Transco's northeastern market area by the 1997-1998 winter heating season. To render this service, Transco will construct compression and pipeline looping facilities at an estimated cost of $115 million. Transco plans to file in mid-1996 for FERC approval of the project and expects to invest approximately $9 million in 1996. PINE NEEDLE LNG COMPANY, LLC In November 1995, Pine Needle LNG Company, LLC (Pine Needle), by and through its operator, Pine Needle Operating Company (PNOC), filed for FERC approval of a new liquefied natural gas (LNG) storage facility to be constructed and owned by Pine Needle near Transco's mainline system in Guilford County, North Carolina. The project is being proposed in response to strong market demand for winter peak heating service in the Southeast United States. The LNG facility will have a total storage capacity of 4 Bcf of gas. The facility will be able to liquefy gas at a net rate of 20 MMcf/d to storage, and vaporize and send out up to 400 MMcf/d. Transco will construct the necessary connections on its mainline system to enable it to deliver gas to and receive gas from the storage facility. Pine Needle estimates the total cost of the project to be $107 million. Pine Needle proposes a 50/50 debt to equity capital structure and will seek non-recourse project financing. Pine Needle proposes to place the LNG facility into service on or about May 1, 1999. Pine Needle is a North Carolina limited liability company formed in 1995 between wholly owned subsidiaries of Transco, three North Carolina local distribution companies (LDCs), a producer and a Georgia gas authority. Transco's wholly owned subsidiary, 17 19 TransCarolina LNG Company, holds a 35% ownership interest in Pine Needle. PNOC is also a wholly owned subsidiary of Transco. Transco expects to invest approximately $3 million in 1996. CARDINAL PIPELINE SYSTEM PROJECT In December 1995, Cardinal Extension Company, LLC (Cardinal), a North Carolina limited liability company, was formed between wholly owned subsidiaries of Transco and three North Carolina LDCs to acquire Cardinal Pipeline Company, LLC and expand that company's existing North Carolina pipeline system. The existing pipeline to be acquired consists of 37 miles of 24-inch pipeline extending from Transco's Station 160 to Burlington, North Carolina. Cardinal plans to file in late 1996 for regulatory approval to construct a 65-mile extension of the existing pipeline from Burlington to Raleigh, North Carolina, which will create 140 MMcf/d of new firm transportation capacity to Raleigh. Construction of the pipeline extension is planned to commence in early 1999 with a target in- service date of November 1, 1999. Cardinal Operating Company, a wholly owned subsidiary of Transco, will be responsible for constructing the pipeline extension and will serve as operator of the expanded pipeline system. Transco's wholly owned subsidiary, TransCardinal Company, will have a 45% ownership interest in Cardinal. The total costs for the acquisition and extension are expected to be $97 million. Cardinal proposes a 50/50 debt to equity capital structure and will seek non-recourse project financing. Transco expects to invest approximately $22 million in the project, including $2 million in 1996. OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES ORDER 636 TRANSITION COSTS As discussed in Note C of the Notes to Consolidated Financial Statements included in Item 8 herein, Transco implemented Order 636 services effective November 1, 1993. Transco does not expect to incur GSR costs associated with its firm sales service. Transco's non-GSR transition costs are anticipated to be insignificant. Order 636 provides that pipelines should be allowed the opportunity to recover all prudently incurred transition costs. Transco does not believe that Order 636 transition costs to be incurred by Transco will have a material adverse effect on its financial position or results of operations. RATE AND REGULATORY REFUNDS As discussed in Note C of the Notes to Consolidated Financial Statements included in Item 8 herein, Transco filed a general rate case (Docket No. RP95-197) on March 1, 1995 and placed new rates into effect on September 1, 1995. The new rates are being collected subject to refund. Transco has provided a reserve which it believes is adequate for any refunds that may be required under Docket No. RP95-197. REGULATORY AND LEGAL PROCEEDINGS As discussed in Notes C of the Notes to Consolidated Financial Statements included in Item 8 herein, Transco is involved in 18 20 several pending regulatory and legal proceedings. Because of the complexities of the issues involved in these proceedings, Transco cannot predict the actual timing of resolution or the ultimate amounts which might have to be refunded or paid in connection with the resolution of these pending regulatory and legal proceedings. ENVIRONMENTAL MATTERS As discussed in Note C of the Notes to Consolidated Financial Statements included in Item 8 herein, Transco is subject to extensive federal, state and local environmental laws and regulations which affect Transco's operations related to the construction and operation of its pipeline facilities. Transco 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. To date, Transco has been permitted recovery of environmental costs incurred and it is Transco's intent to continue seeking recovery of such costs, as incurred, through rate filings. LONG-TERM GAS PURCHASE CONTRACTS Transco has long-term gas purchase contracts containing either fixed prices or variable prices that are at a significant premium to the estimated market price. However, due to contract expirations and estimated deliverability declines, Transco's estimated purchase commitments under such gas purchase contracts are not material to Transco's total gas purchases. SUMMARY While no assurances may be given, Transco does not believe that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, recovery from customers, insurance coverage or other indemnification arrangements, will have a materially adverse effect upon Transco's future financial position, results of operations and cash flow requirements. CONCLUSION Although no assurances can be given, Transco currently believes that the aggregate of cash flows from operating activities, supplemented, when necessary, by repayments of funds advanced to Williams, advances or capital contributions from Williams and borrowings under the Credit Agreement or short-term money market facilities will provide Transco with sufficient liquidity to meet its capital requirements. When necessary, Transco also expects to be able to access public and private markets to finance its requirements. 19 21 RESULTS OF OPERATIONS As a result of the change in control of Transco on January 18, 1995 and the effects of the allocation of the purchase price, Transco's Consolidated Statement of Income for the year ended December 31, 1995 has been segregated into a pre-acquisition period ending January 17, 1995 and a post-acquisition period beginning January 18, 1995. For purposes of the discussion of variances between the year ended December 31, 1995 and the year ended December 31, 1994, the pre- acquisition and post-acquisition periods have been combined for a pro forma presentation of results of operations for the year 1995. The table below shows the results of operations of Transco for the years 1995, 1994 and 1993 and the effects of certain selected items that have impacted those results.
1995 1994 1993 --------------- --------------- -------------- (In millions) Common Stock Equity in Net Income Before Selected $ 107.6 $ 108.5 $ 99.6 Items . . . . . . . . . . . . . . . . . . . Provision for executive severance benefits . (15.3) - - Amortization of purchase price allocation . (16.3) - - Provision for regulatory issue . . . . . . . - (3.7) - Write-off of note receivable . . . . . . . . - - (12.5) Federal tax rate increase . . . . . . . . . - - (1.0) --------------- --------------- -------------- Common Stock Equity in Net Income . . . . . . $ 76.0 $ 104.8 $ 86.1 =============== =============== ==============
1995 COMPARED TO 1994 COMMON STOCK EQUITY IN NET INCOME AND OPERATING INCOME Transco's common stock equity in net income for 1995 was $28.8 million less than 1994. Selected items shown in the table above that affected the results for 1995 include net after-tax charges of $31.6 million related to the Merger for the amortization of amounts allocated to Transco from the Williams purchase price and to provide for executive severance and termination benefits, substantially all of which were not deductible for federal income tax purposes. Current FERC policy does not permit Transco to recover through rates the amortization of amounts attributable to the Williams purchase price allocation. Selected items affecting the results for 1994 include a provision for refunds of certain FERC Order 94 production related costs. Excluding the effects of the selected items shown in the table above, the common stock equity in net income for 1995 was comparable to common stock equity in net income for 1994. Operating income for 1995 was $183.6 million ($226.4 million excluding the selected items) compared to operating income of $223.4 million ($229.4 million excluding the selected item) for 1994. This $3.0 million decrease, excluding the selected items, was due to higher operating expenses (excluding the cost of sales and 20 22 transportation) of $16.3 million, partly offset by higher revenues, net of the related cost of sales and transportation, of $13.3 million. OPERATING EXPENSES Excluding the pre-tax effects of the selected items and the cost of sales and transportation of $744 million and $871 million for 1995 and 1994, respectively, Transco's operating expenses were approximately $16 million higher in 1995 than 1994. The increase was due primarily to costs for underground storage ($5 million), taxes other than income taxes ($4 million), corporate overhead expenses ($3 million) and depreciation and amortization expense ($3 million). TRANSPORTATION SERVICES Transco's operating revenues, excluding sales and storage services, increased $16 million to $703 million for 1995, when compared to 1994. Transportation revenues increased $22 million due primarily to additional revenues of $6 million from the Southeast Expansion Project which was placed into service in November 1994, lower credits to customers of $6 million related to refunds of previously over funded deferred federal income taxes and increased revenues related to certain increased costs included in Transco's rate filing effective September 1, 1995, subject to refund. Other revenues decreased $6 million due primarily to lower transportation of liquids and liquefiable hydrocarbons. As shown in the following table, Transco's market-area deliveries for 1995 were 67.0 TBtu, or 5%, higher than 1994. The increased deliveries, primarily firm transportation volumes, were mainly due to market growth and Transco's new Southeast Expansion service which began in the fourth quarter of 1994. The production-area deliveries for 1995 decreased 20.0 TBtu, or 11%, when compared to 1994 due primarily to increased competition among pipelines, especially intrastate pipelines, for transportation of production area volumes and the release of firm transportation capacity in the post Order 636 era. Additionally, in 1994 there were greater volumes transported for electricity generation due to several nuclear plants being shut-in. As a result of a straight fixed-variable (SFV) rate design and the interruptible transportation revenue crediting, both in effect since September 1, 1992, increases or decreases in the system deliveries have had no significant impact on operating income. The revenue crediting requirement was eliminated on September 1, 1995 when Transco placed into effect the rates in its general rate case in Docket No. RP95-197. As a result, beginning September 1, 1995, increases or decreases in interruptible transportation volumes can have an impact on operating income. 21 23
Transco System Deliveries (TBtu) 1995 1994 1993 - ----------------------------- ------- ------- ------- Market-area deliveries: Long-haul transportation . . . . . . . . . . . . . . 858.4 805.1 852.0 Market-area transportation . . . . . . . . . . . . . 467.3 453.6 387.4 ------- ------- ------- Total market-area deliveries . . . . . . . . . . . . 1,325.7 1,258.7 1,239.4 Production-area transportation . . . . . . . . . . . . . 165.9 185.9 177.5 ------- ------- ------- Total system deliveries . . . . . . . . . . . . . . . . . 1,491.6 1,444.6 1,416.9 ======= ======= ======= Average Daily Transportation Volumes (TBtu) . . . . . . . 4.1 4.0 3.9 Average Daily Firm Reserved Capacity (TBtu) . . . . . . . 5.2 4.9 4.8
Transco's facilities are divided into seven rate zones. Four are located in the production area and three are located in the market area. Long-haul transportation is gas that is received in one of the production-area zones and delivered in a market-area zone. Market-area transportation is gas that is both received and delivered within market-area zones. Production-area transportation is gas that is both received and delivered within production-area zones. SALES SERVICES Transco makes jurisdictional merchant gas sales to customers pursuant to a blanket sales certificate issued by the FERC, with most of those sales being made through a Firm Sales (FS) program which gives customers the option to purchase daily quantities of gas from Transco at market-responsive prices in exchange for a demand charge payment. After FERC approval in January 1993, TEC realigned its gas marketing businesses under the common management of TGMC, which, through an agency agreement, began to manage all jurisdictional merchant sales of Transco. In May 1995, WESCO succeeded to the TGMC agency agreement and began to manage Transco's jurisdictional merchant sales. Through the agency agreement, WESCO manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations. Transco's operating revenues related to its sales services decreased $136 million to $619 million for 1995, when compared to 1994. Of this decrease, $84 million was related to lower prices, $22 million was related to lower volumes, $12 million was related to the lower demand charges beginning in April 1995 and $18 million was related to storage gas sold in 1994. However, the decrease in revenues had no effect on Transco's operating or net income since these revenue variances were offset by corresponding variances in the cost of sales when compared to the prior year. 22 24
Gas Sales Volumes (TBtu) 1995 1994 1993 ------------------------ ----- ----- ----- Long-term sales . . . . . . . . . . . . 219.7 217.2 215.5 Short-term sales . . . . . . . . . . . 95.5 109.7 37.0 ----- ----- ----- Total gas sales . . . . . . . . . 315.2 326.9 252.5 ===== ===== =====
STORAGE SERVICES Transco's operating revenues related to storage services increased $7 million to $155 million in 1995, when compared to 1994. The increase reflects primarily an increase in Transco's storage rates effective in July 1994 due to higher storage rates charged to Transco by the operator of the Leidy and Wharton storage fields; however, this increase in revenues was substantially offset by a $5 million increase in underground storage costs included in operation and maintenance expenses. 1994 COMPARED TO 1993 COMMON STOCK EQUITY IN NET INCOME AND OPERATING INCOME Transco's common stock equity in net income for 1994 was $18.7 million higher than 1993. Selected items affecting the results for 1994 include a reserve for refunds of certain FERC Order 94 production-related costs and selected items affecting the results for 1993 include a write-off of a note receivable from Transco's prior sale of an interest in a gas field and related gas processing plant. Excluding the net income impact of the selected items shown in the table above, Transco's common stock equity in net income was higher by $8.9 million, due primarily to higher net revenues of $19.9 million (net of the related cost of sales and transportation) and lower dividends on preferred stock of $2.2 million, partly offset by higher operation and maintenance expenses of $14.3 million. Operating income for 1994 was $223.4 million ($229.4 million excluding the selected item), compared to operating income of $202.2 million ($222.3 million excluding the selected item) for 1993. This $7.1 million increase, excluding the selected items, was primarily due to higher net revenues of $19.9 million, partly offset by higher operation and maintenance expenses of $14.3 million. OPERATING EXPENSES Excluding the pretax effects of the selected items in 1994 and 1993 and the cost of sales and transportation of $871 million for 1994 and $822 million for 1993, Transco's operating expenses increased approximately $13 million over 1993. The increase for the year was primarily due to higher costs for platform rental space ($4 million) and labor ($6 million), partly offset by lower costs for postretirement benefits other than pensions ($3 million). TRANSPORTATION SERVICES Transco's operating revenues, excluding sales and storage services, decreased $6 million to $688 million for 1994, when compared to 1993. However, exclusive of the producer settlement surcharge discussed below, transportation revenues increased $20 million reflecting an increase of $10 million due to increased throughput on the Mobile Bay lateral as a result of the change from interruptible 23 25 transportation to firm transportation combined with additional demand revenues of $7 million from Phases I and II of the Eminence storage field expansion project. Other revenues increased $4 million, primarily due to higher transportation of liquid and liquefiable hydrocarbons. Transportation revenues also include a decrease of $29 million due to lower transportation rates resulting from the elimination of the producer settlement surcharge, which expired on May 31, 1993, although the decrease had no effect on Transco's operating or net income variances when compared with the prior year since it was offset by corresponding variances in the cost of transportation. SALES SERVICES Transco's operating revenues related to its sales service increased $73 million to $755 million for 1994, when compared to 1993. Of this increase $78 million was related to higher volumes sold through Transco's jurisdictional merchant sales services and $22 million was related to the cash settlement of historical transportation imbalances, partly offset by a decrease in non-merchant sales revenues of $27 million related to Transco's cash-out program for the settlement of current month transportation imbalances and the sale in 1993 of storage gas purchased for and sold to Transco's customers. However, the increase in revenues had no impact on Transco's operating or net income since these revenue variances were offset by corresponding variances in the cost of sales when compared to the prior year. STORAGE SERVICES Transco's operating revenues related to its storage services for 1994 were comparable to those for 1993. RATE AND REGULATORY MATTERS See Note C of the Notes to Consolidated Financial Statements, included in Item 8 herein, for a discussion of Transco's rate and regulatory matters. COMPETITION Competition for gas transportation has intensified in recent years due to customer access to other pipelines, rate competitiveness among pipelines, customers' desire to have more than one supplier and regulatory developments. The FERC's stated purpose of Order 636 is to improve the competitive structure of the natural gas pipeline industry. Transco implemented Order 636 on November 1, 1993. Future utilization of pipeline capacity will depend on competition from other pipelines and alternative fuels, the general level of natural gas demand and weather conditions. Electricity and distillate fuel oil are the primary competitive forms of energy for residential and commercial markets. Coal and residual fuel oil compete for industrial and electric generation markets. Nuclear power and power purchased from grid arrangements among electric utilities also compete with gas-fired power generation in the markets served by Transco. 24 26 Although a significant portion of Transco's firm customers have relatively secure residential and commercial end-users, virtually all of Transco's LDC customers have some price-sensitive end-users that could switch to alternate fuels. Approximately one-third of Transco's customer deliveries are at risk to such fuel switching; however, a recent survey of Transco's largest customers suggests that end-users will pay a premium to burn natural gas and that LDCs will aggressively price their system transportation to stay competitive in alternate-fuel markets. Transco and its primary market-area competitors, Texas Eastern, Columbia, Southern Natural, Tennessee and Iroquois, implemented Order 636 on their respective systems during the period June 1993 to November 1993. Transco and its major competitors all employ SFV rate design for firm transportation as mandated by Order 636. However, Transco has expressed to the FERC concerns that inconsistent treatment under Order 636 of Transco and its competitor pipelines with regard to rate design and cost allocation issues in Transco's production area may result in rates which could make Transco less competitive, both in terms of production-area and long-haul transportation. On July 19, 1995, Transco received an initial decision from an ALJ dealing with, among other things, Transco's production-area rate design. That decision rejected Transco's proposal to adopt the production-area rate design employed by its competitor pipelines. The decision of the ALJ is subject to review by the FERC and Transco has filed exceptions to the decision with the FERC. Should the FERC issue an order consistent with the ALJ's recommendations, such order would be for prospective effect only. Transco is unable at this time to fully assess the long-term competitive effect and resulting financial impact on Transco of having to maintain its current production-area rate design which is different than that of its competitors. Transco is aware that several state jurisdictions have been involved in implementation of changes similar to those that occurred at the federal level under Order 636. Such activity, frequently referred to as "LDC unbundling", has been most pronounced in the states of New York, New Jersey and Pennsylvania. In New York and New Jersey regulations regarding "LDC unbundling" were enacted during the past year and Pennsylvania is expected to act on an "LDC unbundling" program in the early spring of 1996. While it is expected that these regulations will encourage greater competition in the natural gas marketplace, it is not expected that they will have a material impact on Transco's transportation volumes or results of operations. 25 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Transcontinental Gas Pipe Line Corporation The Board of Directors We have audited the accompanying consolidated balance sheet of Transcontinental Gas Pipe Line Corporation as of December 31, 1995, and the related consolidated statements of income, common stockholder's equity, and cash flows for 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 audit. The consolidated balance sheet as of December 31, 1994, and the consolidated statements of income, common stockholder's equity, and cash flows for each of the two years in 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 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transcontinental Gas Pipe Line Corporation at December 31, 1995, and the consolidated results of its operations and its cash flows for 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. ERNST & YOUNG LLP Tulsa, Oklahoma February 9, 1996 26 28 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Transcontinental Gas Pipe Line Corporation: We have audited the accompanying consolidated balance sheet of Transcontinental Gas Pipe Line Corporation (a Delaware corporation) as of December 31, 1994, and the related statements of income, common stockholder's equity and cash flows for each of the two years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Transcontinental Gas Pipe Line Corporation as of December 31, 1994 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 20, 1995 27 29 The acquisition of Transco Energy Company and subsidiaries, including Transco, 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 financial position, results of operations and cash flows. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONSOLIDATED BALANCE SHEET THOUSANDS OF DOLLARS (NOTES B AND C)
Post-Acquisition | Pre-Acquisition ---------------- | --------------- December 31, | December 31, 1995 | 1994 ---------------- | --------------- | ASSETS | | Current Assets: | Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,557 | $ 1,628 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 6,426 | 7,218 Receivables: | Trade (Notes D and H) . . . . . . . . . . . . . . . . . . 44,655 | 40,257 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 2,848 | 15,149 Advances to affiliates . . . . . . . . . . . . . . . . . . 104,499 | 115,974 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 4,826 | 5,707 Transportation and exchange gas receivables: | Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 28,309 | 19,328 Others . . . . . . . . . . . . . . . . . . . . . . . . . . 113,310 | 92,424 Inventories: | Gas in storage, at LIFO . . . . . . . . . . . . . . . . . 21,943 | 12,691 Materials and supplies, at lower of average cost or market 34,336 | 42,747 Gas available for customer nomination . . . . . . . . . . 548 | 1,341 Deferred income tax benefits (Note G) . . . . . . . . . . . 37,640 | 34,578 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,170 | 20,628 ----------- | ----------- Total current assets . . . . . . . . . . . . . . . . . . . 424,067 | 409,670 ----------- | ----------- | Investments, at cost . . . . . . . . . . . . . . . . . . . . . 11,256 | 351 ----------- | ----------- | Property, Plant and Equipment: | Natural gas transmission plant . . . . . . . . . . . . . . . 3,455,154 | 4,340,912 Less - Accumulated depreciation and amortization . . . . . . 170,417 | 2,578,069 ----------- | ----------- Total property, plant and equipment, net . . . . . . . . . 3,284,737 | 1,762,843 ----------- | ----------- | Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 201,728 | 97,764 ----------- | ----------- | $ 3,921,788 | $ 2,270,628 =========== | ===========
The accompanying notes are an integral part of these consolidated financial statements. 28 30 The acquisition of Transco Energy Company and subsidiaries, including Transco, 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 financial position, results of operations and cash flows. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONSOLIDATED BALANCE SHEET THOUSANDS OF DOLLARS (NOTES B AND C)
Post-Acquisition | Pre-Acquisition ---------------- | --------------- December 31, | December 31, 1995 | 1994 ---------------- | --------------- | LIABILITIES AND STOCKHOLDERS' EQUITY | | Current Liabilities: | Current maturities of long-term debt (Note D) . . . . . . . $ 277,126 | $ - Payables: | Trade . . . . . . . . . . . . . . . . . . . . . . . . . . 82,049 | 109,176 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 84,590 | 28,286 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 46,708 | 33,476 Transportation and exchange gas payable: | Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 841 | 2,687 Others . . . . . . . . . . . . . . . . . . . . . . . . . . 76,459 | 47,218 Accrued liabilities: | Federal income taxes . . . . . . . . . . . . . . . . . . . 55,868 | 6,494 Other taxes . . . . . . . . . . . . . . . . . . . . . . . 9,135 | 11,299 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 15,396 | 15,396 Employee benefits (Note F) . . . . . . . . . . . . . . . . 41,994 | 24,122 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 31,843 | 25,758 Reserve for rate refunds . . . . . . . . . . . . . . . . . . 55,123 | 79,229 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 | 4,652 ------------- | ----------- Total current liabilities . . . . . . . . . . . . . . . . 777,223 | 387,793 ------------- | ----------- Long-Term Debt, less current maturities (Note D) . . . . . . . 382,045 | 644,238 ------------- | ----------- Other Liabilities: | Deferred income taxes (Note G) . . . . . . . . . . . . . . . 840,189 | 302,846 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,500 | 71,549 ------------- | ----------- Total other liabilities . . . . . . . . . . . . . . . . . 1,025,689 | 374,395 ------------- | ----------- Commitments and contingencies (Note D) | | Cumulative Redeemable Preferred Stock, without par value: (Note E) | Authorized 10,000,000 shares: | Stated value $100 per share, issued and outstanding | -0- and 497,444 shares in 1995 and 1994, | respectively, net of issue expense . . . . . . . . . . . . - | 49,375 ------------- | ----------- Cumulative Redeemable Second Preferred Stock, | without par value: (Note E) | Authorized 2,000,000 shares: none issued or outstanding . . - | - ------------- | ----------- Common Stockholder's Equity: | Common Stock $1.00 par value: | 100 shares authorized, issued and outstanding . . . . . . - | - Premium on capital stock and other paid-in capital . . . . . 1,652,430 | 285,792 Retained earnings . . . . . . . . . . . . . . . . . . . . . . 84,401 | 529,035 ------------- | ----------- Total common stockholder's equity . . . . . . . . . . . . 1,736,831 | 814,827 ------------- | ----------- $ 3,921,788 | $ 2,270,628 ============= | ===========
The accompanying notes are an integral part of these consolidated financial statements. 29 31 The acquisition of Transco Energy Company and subsidiaries, including Transco, 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 financial position, results of operations and cash flows. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONSOLIDATED STATEMENT OF INCOME THOUSANDS OF DOLLARS (NOTE B)
Post-Acquisition Pre-Acquisition -------------------- | -------------------------------------------------------- | For the Years Ended For the Period | For the Period December 31, January 18, 1995 | January 1, 1995 ----------------------------------- to December 31, 1995 | to January 17, 1995 1994 1993 -------------------- | ------------------- --------------- ----------------- | Operating Revenues: | Natural gas sales . . . . . . . . . . . . . . $ 587,568 | $ 31,701 $ 754,984 $ 681,839 Natural gas transportation . . . . . . . . . . 667,601 | 32,775 678,561 687,808 Natural gas storage . . . . . . . . . . . . . 147,398 | 7,452 148,290 146,416 Other . . . . . . . . . . . . . . . . . . . . 2,584 | 133 9,127 5,470 ------------ | -------------- ----------- ----------- Total operating revenues . . . . . . . . . . 1,405,151 | 72,061 1,590,962 1,521,533 ------------ | -------------- ----------- ----------- | Operating Costs and Expenses: | Cost of natural gas sales . . . . . . . . . . 586,878 | 31,691 752,495 681,482 Cost of natural gas transportation . . . . . . 119,455 | 6,279 118,865 140,358 Operation and maintenance . . . . . . . . . . 194,441 | 8,722 190,501 176,171 Administrative and general . . . . . . . . . . 129,294 | 7,063 146,740 148,186 Provision for executive severance benefits . . - | 16,048 - - Depreciation and amortization . . . . . . . . 151,711 | 5,560 120,797 119,495 Taxes - other than income taxes . . . . . . . 33,818 | 1,558 31,061 32,593 Provision for regulatory issue (Note C) . . . - | - 6,000 - Write-off of note receivable (Note H) . . . . - | - - 20,125 Other . . . . . . . . . . . . . . . . . . . . 1,057 | 53 1,079 952 ------------ | -------------- ------------ ----------- Total operating costs and expenses . . . . . 1,216,654 | 76,974 1,367,538 1,319,362 ------------ | -------------- ------------ ----------- | Operating Income (Loss) . . . . . . . . . . . . . 188,497 | (4,913) 223,424 202,171 ------------ | -------------- ------------ ----------- | | Other (Income) and Other Deductions: | Interest expense - affiliates . . . . . . . . 305 | 2 - 221 - other . . . . . . . . . . 56,132 | 2,678 61,128 64,015 Interest income - affiliates . . . . . . . (1,821) | (207) (6,122) (3,177) - other . . . . . . . . . . (630) | (12) (567) (1,928) Allowance for equity and borrowed funds | used during construction (AFUDC) . . . . . (6,870) | (234) (4,184) (5,126) Miscellaneous other (income) and | deductions, net . . . . . . . . . . . . . . 315 | 213 4,710 4,600 ------------ | -------------- ------------ ----------- Total other (income) and other deductions . 47,431 | 2,440 54,965 58,605 ------------ | -------------- ------------ ----------- | Income (Loss) before Income Taxes . . . . . . 141,066 | (7,353) 168,459 143,566 Provision for Income Taxes (Note G) . . . . . 54,478 | 2,309 57,733 49,341 ------------ | -------------- ------------ ----------- Net Income (Loss) . . . . . . . . . . . . . . 86,588 | (9,662) 110,726 94,225 Dividends on Preferred Stock . . . . . . . . . 722 | 194 5,944 8,107 ------------ | -------------- ------------ ----------- Common Stock Equity in Net Income (Loss) . . . $ 85,866 | $ (9,856) $ 104,782 $ 86,118 ============ | ============== ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 30 32 The acquisition of Transco Energy Company and subsidiaries, including Transco, 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 financial position, results of operations and cash flows. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY THOUSANDS OF DOLLARS (NOTES B AND C)
Post-Acquisition Pre-Acquisition -------------------- | -------------------------------------------------------- | For the Years Ended For the Period | For the Period December 31, January 18, 1995 | January 1, 1995 ----------------------------------- to December 31, 1995 | to January 17, 1995 1994 1993 -------------------- | ------------------- --------------- ----------------- | Common Stock: | Balance at beginning and end of period . . $ - | $ - $ - $ - ------------ | -------------- -------------- ------------- | Premium on Capital Stock and Other Paid-in | Capital: | Balance at beginning of period . . . . . . 285,792 | 285,792 283,037 280,600 Add (deduct): | TranStock contribution . . . . . . . . . - | - 2,901 2,227 Acquisition adjustment to eliminate | retained earnings . . . . . . . . . . . 519,179 | - - - Acquisition adjustment to record | assets and liabilities at | fair value . . . . . . . . . . . . . . 837,446 | - - - Capital contribution by parent . . . . . 5,539 | - - - Non-cash capital contribution by | parent . . . . . . . . . . . . . . . . . 5,541 | - 37 393 Non-cash return of capital to parent . . (698) | - - - Loss on reacquired preferred stock . . (369) | - (183) (183) ------------ | -------------- -------------- ------------- Balance at end of period . . . . . . . . . 1,652,430 | 285,792 285,792 283,037 ------------ | -------------- -------------- ------------- | Retained Earnings: | Balance at beginning of period . . . . . . 519,179 | 529,035 424,253 338,135 Add (deduct): | Net income (loss) . . . . . . . . . . . 86,588 | (9,662) 110,726 94,225 Dividends on preferred stock . . . . . . (722) | (194) (5,944) (8,107) Acquisition adjustment to eliminate | retained earnings . . . . . . . . . . . (519,179) | - - - Non-cash dividend to parent . . . . . . . (1,465) | - - - ------------ | -------------- -------------- ------------- Balance at end of period . . . . . . . . . 84,401 | 519,179 529,035 424,253 ------------ | -------------- -------------- ------------- Total Common Stockholder's Equity . . . . . $ 1,736,831 | $ 804,971 $ 814,827 $ 707,290 ============ | ============== ============== =============
The accompanying notes are an integral part of these consolidated financial statements. 31 33 The acquisition of Transco Energy Company and subsidiaries, including Transco, 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 financial position, results of operations and cash flows. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS THOUSANDS OF DOLLARS (NOTE B)
Post-Acquisition Pre-Acquisition -------------------- | -------------------------------------------------------- | For the Years Ended For the Period | For the Period December 31, January 18, 1995 | January 1, 1995 ----------------------------------- to December 31, 1995 | to January 17, 1995 1994 1993 -------------------- | ------------------- --------------- ----------------- | Cash flows from operating activities: | Net income (loss) . . . . . . . . . . . . . . . $ 86,588 | $ (9,662) $ 110,726 $ 94,225 Adjustments to reconcile net income (loss) | to net cash provided by (used in) operating | activities: | Depreciation and amortization . . . . . . . . 166,691 | 6,165 134,363 133,202 Deferred income taxes (Note G) . . . . . . . . (18,168) | 5,348 (24,466) 4,788 Provision for (payment of) executive | severance benefits . . . . . . . . . . . . . (14,849) | 16,048 - - Allowance for equity funds used during | construction (Equity AFUDC) . . . . . . . . (5,769) | (190) (3,410) (2,801) Provision for regulatory issue (Note C) - | - 6,000 - Write-off of note receivable (Note H) . . . . - | - - 20,125 Nonrecoverable producer settlements . . . . . - | - - (31,600) Changes in operating assets and liabilities: | Receivables . . . . . . . . . . . . . . . . 17,120 | (7,114) 32,067 (28,884) Transportation and exchange gas receivable. (24,166) | (5,701) 35,363 45,308 Inventories . . . . . . . . . . . . . . . . (752) | (2,647) 17,131 (8,616) Payables . . . . . . . . . . . . . . . . . 50,468 | (8,059) (30,836) 15,497 Transportation and exchange gas payable . . 22,461 | 4,934 (27,798) (56,428) Accrued liabilities . . . . . . . . . . . 49,748 | (4,755) 7,527 (1,896) Reserve for rate refunds . . . . . . . . . (10,749) | (26,846) (68,041) 103,724 Other, net . . . . . . . . . . . . . . . . (15,569) | 71 (26,831) (27,295) ---------- | ------------ ------------ ------------ Net cash provided by (used in) operating | activities . . . . . . . . . . . . . . 303,054 | (32,408) 161,795 259,349 ---------- | ------------ ------------ ------------ | Cash flows from financing activities: | (Notes D and E) | Capital contribution by parent . . . . . . . . . 5,539 | - - - Additions to long-term debt . . . . . . . . . . . 50,000 | - - - Retirement of long-term debt . . . . . . . . . . (50,000) | - - (29,856) Retirement of preferred stock . . . . . . . . . . (49,744) | - (25,999) (25,998) Advances from affiliates, net . . . . . . . . . . (8,195) | 8,195 - - Dividends on preferred stock . . . . . . . . . . (1,647) | - (6,320) (8,483) Other, net . . . . . . . . . . . . . . . . . . . - | - - (2,161) ---------- | ------------ ------------ ------------ Net cash provided by (used in) financing | activities . . . . . . . . . . . . . . (54,047) | 8,195 (32,319) (66,498) ---------- | ------------ ------------ ------------
32 34 The acquisition of Transco Energy Company and subsidiaries, including Transco, 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 financial position, results of operations and cash flows. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS THOUSANDS OF DOLLARS (NOTE B)
Post-Acquisition Pre-Acquisition -------------------- | -------------------------------------------------------- | For the Year Ended For the Period | For the Period December 31, January 18, 1995 | January 1, 1995 ----------------------------------- to December 31, 1995 | to January 17, 1995 1994 1993 -------------------- | ------------------- ---------------- --------------- | Cash flows from investing activities: | Additions to property, plant and equipment, | net of equity AFUDC . . . . . . . . . . . (239,773) | (4,896) (143,440) (110,227) Recovery of producer settlements . . . . . . - | - - 30,412 Sale of assets . . . . . . . . . . . . . . . 8,154 | - - - Advances to affiliates, net . . . . . . . . (52,124) | 63,599 17,331 (118,804) Other, net . . . . . . . . . . . . . . . . . 1,199 | (24) (2,833) 5,603 ----------- | --------------- ------------- ------------ Net cash provided by (used in) | investing activities . . . . . . (282,544) | 58,679 (128,942) (193,016) ----------- | --------------- ------------- ------------ | | Net increase (decrease) in cash . . . . . . (33,537) | 34,466 534 (165) Cash at beginning of period . . . . . . . . 36,094 | 1,628 1,094 1,259 ----------- | --------------- ------------- ------------ Cash at end of period . . . . . . . . . . . $ 2,557 | $ 36,094 $ 1,628 $ 1,094 =========== | =============== ============= ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (exclusive of amount $ 52,450 $ 5,552 $ 59,485 $ 61,275 capitalized) . . . . . . . . . . . . Income taxes paid . . . . . . . . . . 28,576 19,427 60,663 101,802 Income tax refunds received . . . . . (22,454) - (29,558) (7,655)
The accompanying notes are an integral part of these consolidated financial statements. 33 35 TRANSCONTINENTAL GAS PIPE LINE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Corporate Structure and Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 B. Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . 35 C. Contingent Liabilities and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 39 D. Debt, Financing Arrangements and Leases . . . . . . . . . . . . . . . . . . . . . . . . . 50 E. Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 F. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 G. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 H. Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 I. Transactions with Major Customers and Affiliates . . . . . . . . . . . . . . . . . . . . 61 J. Quarterly Information (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
A. CORPORATE STRUCTURE AND CONTROL Prior to May 1, 1995, Transcontinental Gas Pipe Line Corporation (Transco) was a wholly-owned subsidiary of Transco Gas Company (TGC). TGC is a wholly-owned subsidiary of Transco Energy Company (TEC). On December 12, 1994, TEC and The Williams Companies, Inc. (Williams) announced that they had entered into a merger agreement (Merger Agreement) pursuant to which Williams acquired through a cash tender offer 24.6 million shares, or approximately 60%, of the outstanding shares of TEC's common stock for $430.5 million. The cash tender offer was then followed by a stock merger (Merger) in which shares of TEC common stock not purchased in the tender offer were exchanged for approximately 10.4 million shares of Williams' common stock valued at $334 million. The tender offer began on December 16, 1994 and expired on January 17, 1995. Approximately 35.2 million shares, or approximately 86.7%, of the outstanding shares of TEC's common stock were tendered to Williams for purchase. Pursuant to the Merger Agreement, on January 18, 1995, Williams accepted for payment 24.6 million shares of TEC's common stock for $17.50 per share as the first step in acquiring the entire equity interest of TEC. The exchange of the remainder of the outstanding shares of TEC's common stock for Williams' common stock was approved by a majority of TEC's stockholders on April 28, 1995 and occurred on the May 1, 1995 effective date of the Merger. On May 1, 1995, TEC declared and paid as dividends to Williams all of TEC's interest in Transco. Transco's Board of Directors declared a non-cash common stock dividend of $1.5 million and non-cash return of capital of $.7 million to Williams in 1995. No common stock dividends were declared in 1994 or 1993. 34 36 B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Transco is an interstate natural gas transmission company which owns and operates a natural gas pipeline system extending from Texas, Louisiana, Mississippi and the Gulf of Mexico through the states of Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania and New Jersey to the New York City metropolitan area. The system serves customers in Texas and the eleven southeast and Atlantic seaboard states mentioned above, including major metropolitan areas in Georgia, North Carolina, New York, New Jersey and Pennsylvania. Additional information about Transco's operations is contained throughout this report. BASIS OF PRESENTATION The acquisition of TEC and its subsidiaries, including Transco, 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 Transco based on their estimated fair values. The accompanying post-acquisition consolidated financial statements reflect Transco's share of the purchase price. The purchase price allocation to Transco primarily consisted of a $1.5 billion allocation to property, plant and equipment, which is being amortized on a straight-line basis, and adjustments to deferred taxes based upon the book basis of the net assets recorded as a result of the acquisition. Current Federal Energy Regulatory Commission (FERC) policy does not permit Transco to recover through rates amounts in excess of original cost. Further, as a result of the change in control of Transco on January 18, 1995 and the effects of the allocation of the purchase price, Transco's Consolidated Statement of Income, Consolidated Statement of Common Stockholder's Equity and Consolidated Statement of Cash Flows for the twelve months 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. Prior to May 1, 1995 and as a subsidiary of TEC, Transco engaged in transactions with TEC and other TEC subsidiaries, characteristic of group operations. For consolidated cash management purposes, Transco made interest- bearing advances to TEC and received interest-bearing advances and capital contributions from TEC. These advances were represented by demand notes and Transco recorded such advances as current in the accompanying Consolidated Balance Sheet. As general TEC corporate policy, the interest rate on intercompany demand notes was 1-1/2% below the prime rate of Citibank, N.A. Effective May 1, 1995, Transco began participation in Williams' cash management program. On that date, the balance of the advances due to TEC were transferred by TEC to Williams. Subsequent to May 1, 1995, Transco repaid advances due Williams and made advances to Williams. These advances are represented by demand notes. Transco currently expects to receive payment of these advances within the next twelve months and has recorded such advances as current in the accompanying Consolidated Balance Sheet. 35 37 The interest rate on intercompany demand notes is the London Interbank Offered Rate on the first day of the month plus an adder ranging from 0.35% to 1.15%. Through an agency agreement, Williams Energy Services Company (WESCO), an affiliate of Transco, manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Transco and majority-owned subsidiaries. Companies in which Transco and its subsidiaries own 20 percent to 50 percent of the voting common stock are accounted for under the equity method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at cost, adjusted in 1995 to reflect the allocation of the purchase price as discussed above. Gains or losses from the ordinary sale or retirement of property, plant and equipment are credited or charged to accumulated depreciation; other gains or losses are recorded in net income. The Financial Accounting Standards Board (FASB) has issued a new accounting standard, 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", effective for fiscal years beginning after December 15, 1995. The standard, which will be adopted in the first quarter of 1996, is not expected to have a material effect on Transco's financial position or results of operation. Depreciation rates used for major regulated gas plant facilities at year-end 1995, 1994 and 1993 were:
Category of Property 1995 1994 1993 - --------------------- ----------- ----------- ----------- Gathering facilities . . . . . . . . . . . . . 6.22% 6.22% 6.22% Storage facilities . . . . . . . . . . . . . . 2.50% 2.50% 2.50% Onshore transmission facilities . . . . . . . . 2.65% 2.65% 2.50%-2.65% Offshore transmission facilities . . . . . . . 3.75%-7.78% 3.75%-7.78% 3.75%-7.78%
Depreciation of general plant is provided at straight-line rates. In Transco's general rate case in Docket No. RP95-197, effective September 1, 1995, subject to refund, the FERC Staff has proposed a reduction in the depreciation rates of certain categories of property. Reductions in depreciation rates would have no effect on operating or net income, but would result in lower cash flows from operations. 36 38 ACCOUNTING FOR INCOME TAXES Williams and its wholly-owned subsidiaries, which includes Transco, file a consolidated federal income tax return. It is Williams' policy to charge or credit each subsidiary with an amount equivalent to its federal income tax expense or benefit computed as if each subsidiary had filed a separate return. During 1994 and 1993 TEC and its wholly-owned subsidiaries, which included Transco through its ownership by TGC, filed a consolidated federal income tax return. It was TEC's policy to charge or credit each subsidiary with an amount equivalent to its federal income tax expense or benefit computed as if each subsidiary filed a separate return, but including benefits from each subsidiary's losses and tax credits that may be utilized only on a consolidated basis. Transco uses the liability method of accounting for deferred taxes which requires, among other things, provisions for all temporary differences between the financial basis and the tax basis in Transco's assets and liabilities and adjustments to the existing deferred tax balances for changes in tax rates, whereby such balances will more closely approximate the actual taxes to be paid. REVENUE RECOGNITION Transco recognizes revenues for the sale of its commodities in the period of delivery and recognizes revenue for the transportation of gas in the period the service is provided based upon contractual terms. Transco is subject to FERC regulations and, accordingly, certain revenues are collected subject to possible refunds pending final FERC orders. Transco records rate refund accruals based on management's estimate of the expected outcome of these proceedings. ALLOWANCES FOR DOUBTFUL RECEIVABLES Due to its customer base, Transco has not historically experienced recurring credit losses in connection with its receivables. As a result, receivables determined to be uncollectible are reserved or written off in the period of such determination. At December 31, 1995 and 1994, Transco had no allowance for doubtful accounts. 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH FLOWS FROM OPERATING ACTIVITIES Transco uses the indirect method to report cash flows from operating activities, which requires adjustments to net income to reconcile to net cash flows provided by operating activities. Transco includes short-term, highly-liquid investments that have a maturity of three months or less as cash equivalents. RESTRICTED DEPOSITS At December 31, 1995 and 1994, Transco had approximately $6 million and $7 million, respectively, of restricted deposits that are classified on the accompanying Consolidated Balance Sheet in current assets as Deposits. These restricted 37 39 deposits serve as collateral for various standby letters of credit, regulatory trusts and legal proceedings. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The allowance for funds used during construction (AFUDC) represents the cost of funds applicable to regulated natural gas transmission plant under construction as permitted by FERC regulatory practices. The allowance for borrowed funds used during construction was $1.1 million, $0.8 million and $2.3 million for 1995, 1994 and 1993, respectively. The allowance for equity funds was $6.0 million, $3.4 million and $2.8 million for 1995, 1994 and 1993, respectively. GAS IN STORAGE Transco utilizes the last-in, first-out (LIFO) method of accounting for inventory gas in storage. The 1995 and 1994 inventory values approximated current replacement cost. GAS IMBALANCES In the course of providing transportation services to customers, Transco may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. Additionally, Transco transports gas on various pipeline systems which may deliver different quantities of gas on behalf of Transco than the quantities of gas received from Transco. These transactions result in gas transportation and exchange imbalance receivables and payables which are recovered or repaid in cash or through the receipt or delivery of gas in the future and are recorded in the accompanying Consolidated Balance Sheet. 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. Transco's rate structure includes a method whereby most imbalances generated after August 1, 1991 are settled on a monthly basis. Imbalances predating August 1, 1991 are being recovered or repaid in cash or through the receipt or delivery of gas in the future upon agreements of allocation and as permitted by operating conditions. These imbalances have been classified as current assets or current liabilities at December 31, 1995. DERIVATIVE FINANCIAL INSTRUMENTS Transco, through WESCO as its agent (and formerly through Transco Gas Marketing Company (TGMC), an affiliate), has been a party to various futures contracts and option and commodity price swap agreements (derivatives) used to manage price volatility in its natural gas marketing activities related to WESCO's management of Transco's jurisdictional merchant sales service. Transco does not use derivatives for trading purposes. During 1995 and 1994 derivatives designated as hedges have been carried at market value with gains and losses deferred until the hedged marketing activity is included in current net income or loss. Open contracts on natural gas marketing activity designated as hedges at December 31, 1995 were not material. WESCO will record all future derivatives activity related to the management of Transco's jurisdictional merchant sales service and will be at risk for all such derivative activity. 38 40 RECLASSIFICATIONS Certain reclassifications have been made in the 1994 and 1993 financial statements to conform to the 1995 presentation. C. CONTINGENT LIABILITIES AND COMMITMENTS RATE AND REGULATORY MATTERS GENERAL RATE CASE (DOCKET NO. RP95-197) On March 1, 1995, Transco filed with the FERC a general rate case that proposed changes in the rates for Transco's transportation, sales and storage service rate schedules effective April 1, 1995. The changes in rates, if accepted as proposed, would generate additional annual jurisdictional revenues of approximately $132 million over the pre-filed rates in effect, based primarily on: (1) an increase in rate base resulting from additional plant and higher working capital requirements and a reduction in historical accumulated deferred income taxes; (2) an increase in operation and maintenance expenses; and (3) an increase in Transco's cost of capital resulting from an increase in the equity component of the capital structure used (the filing is based on Transco's own capital structure) and in the cost of equity from the pre-filed rate of return on equity of 14.45 percent to the proposed rate of return on equity of 15.25 percent. Transco also proposed to: (1) eliminate the non-gas demand charge under Rate Schedule FS; (2) refunctionalize certain jointly owned transmission facilities to the gathering function; and (3) eliminate the interruptible transportation (IT) crediting mechanism. Transco also filed pro forma tariff sheets, to be effective on a prospective basis, for two new Part 284 services, an interconnect transfer service and a gas management service, and a pro forma tariff sheet to reflect market-based rates for its non-IT feeder transactions, should the FERC decide to set Transco's IT rates for hearing in this docket. Transco further proposed to eliminate the "at risk" certificate condition governing its Mobile Bay facilities on a prospective basis. Finally, Transco proposed certain other changes to the terms and conditions of its tariff, none of which would have a significant impact on operating income. On March 31, 1995, the FERC issued an order on Transco's filing which accepted and suspended the tariff sheets relating to Transco's rates, to be effective September 1, 1995, subject to refund, and established hearing procedures. The March 31 order also accepted, effective April 1, 1995, the tariff sheets changing Transco's terms and conditions of service, subject to the outcome of a technical conference. In that regard, on June 13, 1995, the FERC granted Transco's motion to transfer consideration of issues relating to the proposed new services from the technical conference to the second phase of the hearing established for this proceeding, described below. As to market-based IT rates, the FERC accepted Transco's pro forma tariff sheet but deferred action until after the FERC has completed its generic review of market-based rates. As to the elimination of the IT crediting mechanism, the FERC permitted Transco to eliminate the IT crediting 39 41 mechanism subject to the outcome of the hearing where the reasonableness of Transco's test period throughput projections for interruptible services must be examined. On August 31, 1995, Transco filed to place the rates filed on March 1, 1995 into effect on September 1, 1995, as adjusted to reflect certain changes subsequent to the March 1 filing. The FERC accepted Transco's filing subject to the outcome of the hearing and technical conference established by the FERC's March 31 order. The September 1 rates are being collected subject to refund. At a prehearing conference on April 18, 1995, the presiding Administrative Law Judge (ALJ) adopted a procedural schedule establishing a phased hearing for the rate issues raised by Transco's filing. The first phase of the hearing was limited to the issues of the rate of return and capital structure in the filing, and concluded in December 1995. Transco is awaiting the outcome of this hearing. The second phase will address the remaining rate issues with a hearing to commence in July 1996. On October 4, 1995, the FERC issued an order on the tariff issues addressed at a technical conference held pursuant to the FERC's March 31 order. The FERC required that Transco make certain tariff changes consistent with the October 4 order (most of which were agreed to by Transco at the technical conference), and as to other issues has directed that Transco continue discussions with its customers. GENERAL RATE CASE (DOCKET NO. RP92-137) On March 2, 1992, Transco filed with the FERC a general rate case that proposed an increase in transportation rates, based primarily on increases in operating and maintenance costs, including those associated with additional services provided to Transco's markets since its last general rate filing, and increased cost of capital. The filing also included a change to straight-fixed-variable (SFV) rate design and an increase in rate base resulting from additional plant and equipment costs and higher working capital requirements. On September 1, 1992, the increased rates went into effect, subject to refund. On May 3, 1993, Transco filed with the FERC a Settlement with regard to Docket No. RP92-137. On November 4, 1993, the FERC issued an order accepting the Settlement. The Settlement resolved all issues in Docket No. RP92-137 except (i) issues relating to Transco's rate of return (see discussion below), and (ii) the issue of the appropriate load factor for the design of Transco's interruptible rates, which the FERC referred to a hearing in Docket No. RP92-137, for prospective effect only (see Order 636 discussion for additional issues referred to this hearing). In addition, in the Settlement, Transco agreed to file a new general section 4 rate case to be effective no later than September 1, 1995 (see discussion above of Docket No. RP95-197). The Settlement became effective on April 1, 1994. One party has appealed the FERC's orders related to the Settlement to the United States Court of Appeals for the D.C. Circuit (D.C. Circuit Court) on an issue not affecting Transco's cost recovery; however, that appeal was 40 42 remanded by the D. C. Circuit to the FERC at the FERC's request. During 1995, Transco made refunds of approximately $62.2 million, including interest, under Docket No. RP92-137 for which Transco had previously provided a reserve. On September 17, 1992, the FERC issued a decision addressing the single issue of the appropriate rate of return in Docket No. RP92-137. The FERC, using a hypothetical capital structure based on the average capital structure of a group of seven publicly-traded companies with pipeline subsidiaries, determined Transco's appropriate after-tax rate of return on equity to be 14.45%. The FERC did not determine Transco's cost of debt and preferred stock, suggesting that this issue should be the subject of further proceedings in the context of the general rate case. Consequently, Transco's settlement rates in Docket No. RP92-137 reflected an after-tax rate of return on equity of 14.45% but, consistent with the FERC order, the rates reflect the cost of debt and preferred stock originally filed in the general rate case. The issue of the appropriate rate of return for Transco was appealed to the D.C. Circuit Court. Transco appealed, seeking to increase the rate of return, and certain other parties appealed, seeking to lower the rate of return. On December 23, 1994, the D.C. Circuit Court issued an opinion remanding to the FERC for further consideration the FERC's September 17, 1992 order. The D.C. Circuit Court determined that the FERC had failed to explain adequately its decisions to use a hypothetical capital structure for Transco, to select a rate of return on equity at the top range of reasonableness, and to use as a proxy group to develop Transco's hypothetical capital structure a group of publicly-traded parent companies with pipeline subsidiaries rather than a group of regulated pipelines. On June 7, 1995, the FERC issued an order on remand, stating that it was considering using Transco's capital structure, but seeking comments on a number of issues related to the D. C. Circuit Court's remand. On August 7, 1995, Transco filed initial comments in response to the June 7 order, generally in support of the FERC's September 17, 1992 order but urging the FERC to impute a capital structure for Transco based on the average capital structure of a proxy group of natural gas pipeline companies, not unregulated pipeline parents utilized by the FERC. On September 15, 1995, Transco filed reply comments, responding to the initial comments of parties that were inconsistent with Transco's position. As discussed below, the issue of the allocation of certain costs to Transco's merchant sales service, among others, was referred to the hearing in Docket No. RP92-137 by the FERC orders approving Transco's implementation of Order 636. In an initial decision issued on October 20, 1994, the ALJ determined that there is no genuine issue of material fact warranting a trial-type hearing on the issue, and directed Transco to remove from its gathering function approximately $5.6 million of indirect costs and to reassign this amount to its merchant sales service. In late February 1995, the FERC issued an order affirming the ALJ's October 20, 1994 decision. Transco filed for rehearing of the FERC's February 1995 order, and on May 24, 1995, the FERC denied TGPL's request for rehearing. On June 1, 1995, TGPL filed revised tariff sheets to comply with the FERC's orders, and on June 29, 1995, the FERC issued an order accepting that filing, effective July 1, 1995, 41 43 subject to certain corrections by TGPL which were filed on July 14, 1995. The revised tariff sheets were in effect from July 1, 1995, until September 1, 1995 when the Docket No. RP95-197 rates became effective. ORDER 636 On November 1, 1993, Transco implemented Order 636. Prior to its implementation of Order 636, Transco received orders from the FERC which, among other things, (i) required Transco to revise its throughput projection for rate purposes to reflect a mix of throughput that includes a higher level of interruptible transportation, (ii) accepted Transco's proposal for rolled-in rate treatment of its Mobile Bay facilities and exempted Transco from having to reflect Mobile Bay transportation volumes and related revenues in a separate interruptible revenue crediting mechanism, (iii) approved a Stipulation and Agreement filed with the FERC by Transco and its sales customers resolving certain sales service issues and mooting potential issues regarding Transco's recovery of gas supply realignment (GSR) costs associated with Transco's firm sales service, and (iv) referred to the hearing in Docket No. RP92-137 the following issues: Transco's limited section 4 filing with the FERC relating to Transco's production-area rate design, the allocation of certain costs to Transco's merchant sales service, Transco's use of a system-wide cost of service and the level of Transco's gathering rates and aggregation/pooling services in Transco's production area. Any changes in Transco's rates or services resulting from this hearing would have a prospective effect only. Transco and certain other parties have filed appeals of certain of the FERC's orders to the D.C. Circuit Court. On February 13, 1995, the D.C. Circuit Court issued an order holding all appeals of restructuring orders arising out of Order 636 in abeyance until the court renders an opinion in the appeals of Order 636. Among the issues raised by the parties are whether the separately stated gathering rates charged by Transco should be subject to refund and issues related to Transco's storage tracker authority. Transco has expressed to the FERC concerns that inconsistent treatment under Order 636 of Transco and its competitor pipelines with regard to rate design and cost allocation issues in the production area may result in rates which could make Transco less competitive, both in terms of production-area and long-haul transportation. A hearing before an ALJ, dealing with, among other things, Transco's production-area rate design, concluded in June 1994. On July 19, 1995, the ALJ issued an initial decision finding that Transco's proposed production area rate design, and its existing use of a system wide cost of service and allocation of firm capacity in the production area are unjust and unreasonable. The ALJ therefore recommended that Transco divide its costs between its production area and market area, and permit its customers to renominate their firm entitlements. The ALJ's decision is subject to review by the FERC, and on August 18, 1995, Transco filed exceptions to the ALJ's decision with the FERC. Should the FERC issue an order consistent with the ALJ's recommendations, such order would be for prospective effect only. 42 44 Order 636 provides that pipelines should be allowed the opportunity to recover all prudently incurred transition costs. Transco does not expect to incur GSR costs associated with its firm sales service and Transco's non-GSR transition costs are anticipated to be insignificant. However, Transco expects that any Order 636 transition costs incurred should be recovered from its customers subject only to the costs and other risks associated with the difference between the time such costs are incurred and the time when those costs may be recovered from customers. GATHERING FACILITIES On October 26, 1994, the FERC issued a notice of a request for initiation of a complaint proceeding in Transco's Order 636 restructuring docket, stating that Fina Natural Gas Company (Fina) had filed a complaint requesting that the FERC initiate a proceeding under section 5 of the Natural Gas Act of 1938 (NGA) to investigate the functionalization of Transco's production-area facilities. Fina asserted that some of Transco's production-area facilities have been misfunctionalized as transmission, and that under recent gathering orders, those facilities should properly be functionalized as gathering facilities. Transco filed an answer requesting that the FERC defer action on Fina's complaint until June 1, 1995, and advised the FERC that, in light of the FERC's evolving policies on gathering and production-area rate design, Transco is evaluating which, if any, of its Gulf Coast gathering facilities could be spun down into a nonjurisdictional subsidiary. On June 1, 1995, Transco advised the FERC that, in light of certain outstanding issues concerning the FERC's gathering policies, Transco has not yet determined the precise form that a gathering proposal to the FERC might take, or the ultimate timing of any such proposal. If the FERC elects to initiate a proceeding, any change in classification of the function of plant facilities between transmission and gathering would be prospective only. In February 1996, Transco plans to file an application with the FERC for an order authorizing the abandonment of certain facilities located onshore and offshore in Texas, Louisiana and Mississippi by conveyance to a subsidiary of Williams Field Services Company (WFS), an affiliate of Transco. The net book value at December 31, 1995 of the original cost of the facilities proposed to be abandoned is approximately $230 million. The net book value at December 31, 1995 of the facilities including the purchase price allocation to Transco is approximately $600 million. Concurrently, the WFS subsidiary plans to file a petition for declaratory order requesting a determination that its gathering services and rates be exempt from FERC regulation under the Natural Gas Act. The filings will be part of an ongoing comprehensive restructuring plan by Williams to separate all gathering facilities from Williams' jurisdictional interstate natural gas pipeline transmission companies. ORDER 94-A In 1983, the FERC issued Order 94-A, which permitted producers to collect certain production-related gas costs from pipelines on a retroactive basis. The FERC subsequently issued orders allowing several pipelines, including Transco, to direct bill their customers for such production-related costs through fixed monthly charges based 43 45 on a customer's historical purchases. In 1990, the D.C. Circuit Court overturned the FERC's authorization for pipelines to direct bill production-related costs to customers based on gas purchased in prior periods and remanded the matter to the FERC to determine an appropriate recovery mechanism. Under the terms of a Settlement, Transco's customers, with the exception of Columbia Gas Transmission Corporation (Columbia), agreed not to contest the Order 94-A payments previously made to Transco by them. Transco had billed to and recovered from Columbia approximately $7 million of Order 94-A costs. In October 1993, Transco and Columbia filed with the FERC for approval a letter agreement in which Transco agreed to refund $1.4 million to Columbia, which amount is inclusive of principal and interest, in full and final settlement of all issues in this proceeding. On January 26, 1994, Columbia filed a letter with the FERC stating that, due to developments in other pipeline company proceedings involving settlements of the issue of recovery of Order 94-A costs from Columbia, Columbia could no longer support the settlement between Transco and Columbia. On February 13, 1995, the FERC issued an order rejecting the October 1993 settlement and requiring Transco to refund to Columbia the principal amount of the Order 94-A costs collected from Columbia. Both Transco and Columbia requested rehearing of the February 13 order, and on May 1, 1995, the FERC issued an order denying both Transco's and Columbia's requests. On May 31, 1995, Transco made the required refund for which Transco had previously provided a reserve. On June 30, 1995, Transco and Columbia each filed with the D. C. Circuit a petition for review of the FERC's orders. LEGAL PROCEEDINGS DAKOTA GASIFICATION LITIGATION In October 1990, Dakota Gasification Company (Dakota), the owner of the Great Plains Coal Gasification Plant (Plant), filed suit in the United States District Court in North Dakota against Transco and three other pipeline companies alleging that Transco and the other pipeline companies had not complied with their respective obligations under certain gas purchase and gas transportation contracts. Specifically at issue is the proper price to be paid by Transco and the other pipelines for synthetic gas since August 1989, the proper rate to be charged by Dakota for transportation through the Great Plains pipeline since October 1987, and the proper quantity of synthetic gas required to be taken-or-paid for by Transco and the other pipelines. On September 8, 1992, Dakota and the United States Department of Justice on behalf of the Department of Energy (DOJ) filed a Third Amended Complaint in the U.S. District Court in North Dakota naming as defendants in the suit, in addition to Transco and the other pipelines, Transco Energy Company (TEC) and Transco Coal Gas Company, the subsidiary of TEC that was the partner in Great Plains Gasification Associates (Partnership), the partnership that originally constructed the Plant. In addition, Dakota and DOJ named as defendants all of the other partners in the Partnership and each of the parent companies of these entities. In the Third Amended Complaint, Dakota and DOJ 44 46 charged: (i) the pipeline defendants with breach of contract for failure to pay for volumes of gas tendered but not taken, for underpayment for gas purchased and for failure to pay for transportation services; (ii) all defendants with breach of representations and warranties, misrepresentation and breach of an implied covenant of good faith and fair dealing; and (iii) all parent company defendants and the affiliated partner defendants of each of the pipeline defendants with intentional interference with contractual relations. Dakota and DOJ are seeking declaratory and injunctive relief; the recovery of damages, alleging that the four pipeline defendants have underpaid for gas, collectively, as of June 30, 1992, by more than $232 million plus interest and for additional damages for transportation services; and costs and expenses, including attorney's fees. On October 30, 1992, Dakota invoiced Transco $70.5 million for "all synthetic gas costs" Dakota claims are due from Transco. On March 30, 1994, the parties executed definitive agreements which would settle the litigation subject to final non-appealable regulatory approvals. The settlement is also subject to a FERC ruling that Transco'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 Transco will pay Dakota under the terms of the settlement. On June 23, 1994, Transco filed a petition with the FERC seeking approval of the settlement provisions and the contract amendment including pass-through of all costs to Transco's customers. On October 18, 1994, the FERC issued an order consolidating Transco's petition with the petitions filed by two of the other three pipeline companies (the third pipeline having entered into a settlement) and setting the matter for hearing before an ALJ. The hearing was limited to the issues of (i) whether the revised agreements are prudent, and (ii) the level of Dakota costs to be recovered in the proceeding. The FERC, among other things, directed the ALJ to issue an initial decision by December 31, 1995 in order that final FERC approval may take place by December 31, 1996. The hearing before the ALJ concluded in July 1995. On December 29, 1995, the ALJ rejected the settlement agreements between the pipeline companies and Dakota. The ALJ determined that the settlement agreements were not prudent, and ordered the pipeline companies to refund to ratepayers amounts collected since May 1993, in excess of the amounts determined by the ALJ to be appropriate. Transco estimates that its share of the amounts the ALJ would have the pipelines refund to ratepayers is approximately $75 million. The pipelines would be entitled to collect the amount of any such ratepayer refunds from Dakota. The ALJ's decision is subject to review by the FERC. Although no assurances can be given, Transco believes that it has substantially complied with its obligation under the contracts with Dakota and that Transco and Transco Coal Gas Company have not breached representations, warranties or implied covenants and have not intentionally interfered with the parties' contractual relations. The ALJ's decision will be appealed; however, in the event that the necessary regulatory approvals are not 45 47 obtained, Transco, TEC and Transco Coal Gas Company intend to vigorously defend the suit. ROYALTY CLAIMS In connection with Transco's renegotiations with producers to resolve take-or-pay and other contract claims and to amend gas purchase contracts, Transco has entered into certain settlements which may require the indemnification by Transco of certain claims for additional royalties which the producers may be required to pay as a result of such settlements. In October 1992, the Fifth Circuit and the Louisiana Supreme Court, with respect to the same litigation in applying Louisiana law, determined that royalties are due on take-or-pay payments under the royalty clauses of the specific mineral leases reviewed by the courts. Thereafter, the State Mineral Board of Louisiana passed a resolution directing the state's lessees to pay to the state royalties on gas contract settlement payments. As a result of these and related developments, Transco has been made aware of demands on producers for additional royalties and such producers may receive other demands which could result in claims against Transco pursuant to the indemnification provisions in their respective settlements. Indemnification for royalties will depend on, among other things, the specific lease provisions between the producer and the lessor and the terms of the settlement between the producer and Transco. In December 1992, a lawsuit was filed in the United States District Court for the Southern District of Texas (Vaquillas Ranch Company, Ltd., et al vs. Texaco Exploration and Production, Inc. (Vaquillas Ranch)) in which royalty owners have made allegations against the producer for breach of express obligations under the leases; breach of the covenant to reasonably market gas; breach of the covenant to reasonably develop; breach of the covenant to protect against drainage; and failure to deal in good faith. In August 1993, a lawsuit was filed in the United States District Court for the Southern District of Texas (Floyd C. Billings, et al vs. Texaco Exploration and Production Inc., et al (Billings)), in which the royalty owners' claims are virtually identical to the ones made in the Vaquillas Ranch lawsuit. However, the royalty owners did not claim that the producer breached any covenant to develop or protect against drainage. In addition, in the Billings lawsuit the royalty owners have sued the parent and an affiliate of the producer and Transco for allegedly conspiring to tortiously interfere with their lease. The producer defendants in each of the Billings and Vaquillas Ranch lawsuits have cross-claimed against Transco. While the two complaints do not specify monetary damages, the royalty owners have verbally alleged that their claims against the producers could approximate $100 million as of the date asserted. Both the Vaquillas Ranch and the Billings lawsuits have been remanded to state court. Trial has been set for June 1996. On July 5, 1994, the plaintiffs in the Vaquillas Ranch lawsuit filed a separate lawsuit in the 111th Judicial District Court of Webb County, Texas (Vaquillas Ranch Company, Ltd., et al vs. Transcontinental Gas Pipe Line Corporation and Transco Gas Supply Company) in which the plaintiffs contend that Transco tortiously interfered with the plaintiffs' lease by inducing the producer to enter into certain agreements that reduced 46 48 Transco's take-or-pay obligations and the price Transco was obligated to pay for the gas it purchased. The plaintiffs requested an unspecified amount of actual and punitive damages for the alleged tortious interference. This lawsuit has been abated. On January 14, 1994, a lawsuit was filed in the 4th Judicial District Court of Rusk County, Texas (Marathon Oil Company vs. Transcontinental Gas Pipe Line Corporation and Transco Energy Company (Marathon)) and, on March 15, 1994, a lawsuit was filed in the 189th Judicial District Court of Harris County, Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line Corporation (Texaco)). In the Marathon and Texaco lawsuits, the plaintiffs have made claims of approximately $3.6 million and $14.7 million, plus interest and attorneys' fees, respectively, against Transco for reimbursements of settlement amounts paid to royalty owners. In the Marathon lawsuit, on July 17, 1995, the Court granted Transco's motion for partial summary judgement thereby rejecting a major portion of one of Marathon's claims against Transco. The Texaco lawsuit is scheduled to go to trial in May 1996. Transco has denied liability in the litigation and believes that it has meritorious defenses to the claims which it intends to pursue vigorously. Transco believes at this time that its exposure, if any, under the provisions of its settlements with the producers is substantially less than the amounts claimed by the royalty owners. In addition, Transco has been advised by Freeport-McMoRan, Inc. (FMP) that the Minerals Management Service (MMS) has made claims for royalties due under certain gas contracts. FMP has asserted that Transco's royalty reimbursement obligation to FMP is approximately $5.7 million, including interest through February 6, 1995. Transco has denied any liability to FMP. On or about March 3, 1995, Transco filed suit against FMP, FM Properties Operating Co. and FMP Operating Company in the 53rd Judicial District Court of Travis County, Texas, under the Texas Uniform Declaratory Judgements Act seeking a determination that Transco is not liable to defendants under the terms of the gas contracts. On April 3, 1995, the defendants filed their answer and a plea in abatement. On or about March 30, 1995, FMP and FM Properties Operating Co. filed a petition for specific performance seeking recovery against Transco for the sums claimed under the gas contracts. On May 4, 1995, Transco filed an answer denying any liability to plaintiffs. ENVIRONMENTAL MATTERS Transco is subject to extensive federal, state and local environmental laws and regulations which affect Transco's operations related to the construction and operation of its pipeline facilities. Appropriate governmental authorities may enforce these laws and regulations with a variety of civil and criminal enforcement measures, including monetary penalties, assessment and remediation requirements and injunctions as to future compliance. Transco's use and disposal of hazardous materials are subject to the requirements of the federal Toxic Substances Control Act (TSCA), the federal Resource 47 49 Conservation and Recovery Act (RCRA) and comparable state statutes. The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as "Superfund," imposes liability, without regard to fault or the legality of the original act, for release of a "hazardous substance" into the environment. Because these laws and regulations change from time to time, practices that have been acceptable to the industry and to the regulators have to be changed and assessment and monitoring have to be undertaken to determine whether those practices have damaged the environment and whether remediation is required. Since 1989, Transco has had studies underway to test certain of its facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation may be necessary. On the basis of the findings to date, Transco estimates that environmental assessment and remediation costs that will be incurred over the next five years under TSCA, RCRA, CERCLA and comparable state statutes will total approximately $40 million to $50 million. This estimate depends upon a number of assumptions concerning the scope of remediation that will be required at certain locations and the cost of remedial measures to be undertaken. Transco is continuing to conduct environmental assessments and is implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs. At December 31, 1995, Transco had a reserve of approximately $40 million for these estimated costs. Transco considers environmental assessment and remediation costs and costs associated with compliance with environmental standards to be recoverable through rates, since they are prudent costs incurred in the ordinary course of business. To date, Transco has been permitted recovery of environmental costs incurred, and it is Transco's intent to continue seeking recovery of such costs, as incurred, through rate filings. Therefore, these estimated costs of environmental assessment and remediation have been recorded as regulatory assets in the accompanying Consolidated Balance Sheet. Transco has used lubricating oils containing polychlorinated biphenyls (PCBs) and, although the use of such oils was discontinued in the 1970s, has discovered residual PCB contamination in equipment and soils at certain gas compressor station sites. Transco has worked closely with the U. S. Environmental Protection Agency (EPA) and state regulatory authorities regarding PCB issues, and has a program to assess and remediate such conditions where they exist, the costs of which are a significant portion of the $40 million to $50 million range discussed above. Civil penalties have been assessed by the EPA against other major pipeline companies for the alleged improper use and disposal of PCBs. Transco has received and responded to an information request from the EPA. Although penalties have not presently been asserted, no assurances can be given that the EPA will not seek such penalties in the future. Transco has been identified as a potentially responsible party (PRP) at various Superfund and state waste disposal sites. Based on present volumetric estimates and other factors, Transco's estimated aggregate exposure for remediation of these sites is less than 48 50 $600,000. The estimated remediation costs for all such sites have been included in Transco's environmental reserve discussed above. Liability under CERCLA (and applicable state law) can be joint and several with other PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability could be substantially greater than the amounts described above. Transco is also subject to the federal Clean Air Act and to the federal Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly to the existing requirements established by the federal Clean Air Act. The 1990 Amendments required that the EPA issue new regulations, mainly related to mobile sources, air toxics, ozone non-attainment areas and acid rain. Transco is acquiring all necessary permits and installing new emission control devices required for new or modified facilities in areas designated as attainment by EPA. Transco operates facilities in some areas of the country currently designated as nonattainment and it is possible that the EPA may additionally designate new nonattainment areas which might impact Transco's operations. Pursuant to nonattainment area requirements of the 1990 Amendments, Transco is completing scheduled installation of new air pollution controls on existing sources at certain facilities in order to achieve attainment of air quality standards in regions where they are not currently achieved, and anticipates that additional facilities may be subject to increased controls within five years. For many of these facilities, Transco is completing installation of more cost effective, innovative compressor engine control designs developed by the Company, and it is therefore not possible to precisely determine the control costs pending completion of performance testing and final state approval. The control additions described above, required to comply with current federal Clean Air Act requirements and the 1990 Amendments, are estimated to cost in the range of $25 million to $35 million over the next five years and will be recorded as additions to property, plant and equipment as the facilities are added. Transco considers costs associated with compliance with the federal Clean Air Act and the 1990 Amendments to be prudent costs incurred in the ordinary course of business and, therefore, recoverable through its rates. In February 1995, three citizens filed suit against Transco in federal district court in Virginia for alleged violations of several provisions of both federal and state law. Since 1991, Transco has worked with the appropriate Virginia authorities to resolve certain emissions issues also raised by the citizens. In March 1995, Transco filed a motion to dismiss based on lack of subject matter jurisdiction and failure to state a claim. On October 13, 1995, the court dismissed all counts of plaintiffs' complaint provided that plaintiffs could amend their complaint to salvage the state law nuisance claim by inclusion of appropriate allegations establishing diversity of citizenship jurisdiction. Plaintiffs did so amend their complaint. Transco believes the citizens' claims are without merit and is prepared to vigorously defend the suit brought by the citizens. Transco settled as a defendant in the Combustion, Inc. toxic tort class action that was pending in U. S. District Court in Baton Rouge, Louisiana. The District Court Judge 49 51 approved the settling parties' Joint Motion and Preliminary Settlement Agreement, and the tort settlement was approved at the settlement fairness hearing held in September 1995. SUMMARY While no assurances may be given, Transco does not believe that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, recovery from customers, insurance coverage or other indemnification arrangements, will have a materially adverse effect upon Transco's future financial position, results of operations and cash flow requirements. OTHER COMMITMENTS COMMITMENTS FOR CONSTRUCTION Transco has commitments for construction and acquisition of property, plant and equipment of approximately $52 million at December 31, 1995 of which the majority relates to compliance with Clean Air Act requirements as discussed above. D. DEBT, FINANCING ARRANGEMENTS AND LEASES LONG-TERM DEBT At December 31, 1995 and 1994, long-term debt issues were outstanding as follows (in thousands):
Post-Acquisition | Pre-Acquisition ---------------- | --------------- 1995 | 1994 ------------ | ------------ | Debentures: | 9-1/8% due 1998-2017 . . . . . . . . . . . . . . . . . . . $ 150,000 | $ 150,000 ------------ | ------------ Notes: | 9% due 1996 . . . . . . . . . . . . . . . . . . . . . . . . 150,000 | 150,000 8-1/8% due 1997 . . . . . . . . . . . . . . . . . . . . . . 99,000 | 99,000 6.21% due 2000 (subject to remarketing in 1996) . . . . . . 125,000 | 125,000 8-7/8% due 2002 . . . . . . . . . . . . . . . . . . . . . . 125,000 | 125,000 ------------ | ------------ Total notes . . . . . . . . . . . . . . . . . . . . . . 499,000 | 499,000 ------------ | ------------ Total long-term debt issues . . . . . . . . . . . . . . . . . . 649,000 | 649,000 Less: Unamortized debt (premium) discount . . . . . . . . . (10,171) | 4,762 Current maturities . . . . . . . . . . . . . . . . . 277,126 | - ------------ | ------------ | Total long-term debt, less current maturities . . . . . . . . . $ 382,045 | $ 644,238 ============ | ============
The allocation of the purchase price to the assets and liabilities of Transco based on their estimated fair values resulted in the elimination of the historical debt discount of $4.7 million and the recording in 1995 of a debt premium of $10.3 million. 50 52 Sinking fund, prepayment or remarketing requirements applicable to long-term debt outstanding at December 31, 1995 are as follows (in thousands): 1996: 9% Notes . . . . . . . . . . . . . . . . . . . . . . $ 150,000 6.21% Notes . . . . . . . . . . . . . . . . . . . . . 125,000 --------- Total . . . . . . . . . . . . . . . . . . . . . . $ 275,000 ========= 1997: 8-1/8% Notes . . . . . . . . . . . . . . . . . . . . $ 99,000 ========= 1998: 9-1/8% Debentures . . . . . . . . . . . . . . . . . . $ 7,500 ========= 1999: 9-1/8% Debentures . . . . . . . . . . . . . . . . . . $ 7,500 ========= 2000: 9-1/8% Debentures . . . . . . . . . . . . . . . . . . $ 7,500 =========
No property is pledged as collateral under any of the long-term debt issues. RECAPITALIZATION In connection with the Merger, in January 1995, the Boards of Directors of TEC and Williams approved a recapitalization plan for Transco. The following actions were completed during 1995 in connection with the recapitalization plan, as it impacts Transco: - Termination of TEC's Amended Bank Credit Facility dated December 31, 1993, replacing it with a credit agreement described below; - Termination of the program to sell monthly trade receivables of Transco, replacing it with a new receivables program described below; - Termination of TEC's Reimbursement Facility dated December 31, 1993; and - Redemption by Transco of all of its outstanding preferred stock at $100 per share plus accrued dividends. TEC's Amended Bank Credit Facility was replaced with a credit agreement among Williams and certain of its subsidiaries, including Transco (Credit Agreement). The Credit Agreement provides for an $800 million line of credit, under which Transco can borrow up to $400 million. Interest rates vary with current market conditions. As of December 31, 1995, Transco had no outstanding borrowings under this agreement. SHORT-TERM DEBT During 1995, Transco entered into three short-term money market facilities, under which Transco can borrow up to an aggregate of $115 million. Interest rates vary with current market conditions. As of December 31, 1995, Transco had no 51 53 outstanding borrowings under these agreements. The weighted average interest rate on short-term debt during 1995 was 6.1%. RESTRICTIVE COVENANTS Certain of Transco's debt instruments restrict the amount of dividends distributable. As of December 31, 1995, approximately $515 million of Transco's common stockholder's equity of $1,737 million was restricted. SALE OF RECEIVABLES In May 1995, Transco entered into a one year agreement pursuant to which Transco can sell to an investor up to $100 million of undivided interests in certain of its trade receivables. As of December 31, 1995, interests in $100 million of these receivables were held by the investor. As of December 31, 1994, interests in $85 million of trade receivables were held by the investor under the former receivables program that was terminated in January 1995. LEASE OBLIGATIONS Transco has a 20-year lease agreement with Transco Tower Limited for its headquarters building (Transco Tower) which expires in 2004. Transco has an option to renew and extend the existing lease term under the same provisions for three successive renewal terms of five years each. Transco has entered into sublease agreements with certain Williams affiliates and nonaffiliates that also expire in 2004. Transco is currently negotiating with additional Williams affiliates and nonaffiliates to sublease additional space in the Transco Tower. The future minimum lease payments under Transco's Transco Tower lease, net of future minimum sublease receipts under Transco's existing sublease agreements, are as follows (in thousands): 1996 . . . . . . . . . . . . . . . . . $ 25,109 1997 . . . . . . . . . . . . . . . . . 24,985 1998 . . . . . . . . . . . . . . . . . 24,985 1999 . . . . . . . . . . . . . . . . . 24,967 2000 . . . . . . . . . . . . . . . . . 24,532 Thereafter . . . . . . . . . . . . . . . . . 82,203 ----------- Total net minimum obligations . . . . . $ 206,781 ===========
The allocation of the purchase price to the assets and liabilities of Transco based on their estimated fair values resulted in the recording in 1995 of a liability of $53.0 million for the estimated unused space and the amount that Transco's Transco Tower lease obligation was in excess of fair value. Transco's lease expense was $20.1 million in 1995, $36.0 million in 1994 and $32.3 million in 1993. The reduced Transco Tower lease expense in 1995 reflects the effects of the purchase price allocation discussed above. 52 54 E. PREFERRED STOCK Transco has authorized 10,000,000 shares of cumulative first preferred stock without par value, of which none were outstanding at December 31, 1995 and 497,444 shares were outstanding at December 31, 1994. Transco has authorized 2,000,000 shares of cumulative second preferred stock without par value. None of the second preferred had been issued at December 31, 1995. The first preferred stock issued and outstanding at December 31, 1994, included the following series:
Stated Value Amounts Per Share Shares (in thousands) ------------ -------- -------------- $4.80 Series . . . . . . . . . . . . . . . . $100 10,000 $ 1,000 $6.65 Series . . . . . . . . . . . . . . . . $100 37,444 3,744 $8.75 Series . . . . . . . . . . . . . . . . $100 450,000 45,000 ------- --------- Preferred stock outstanding . . . . . . . 49,744 Less - issue expense . . . . . . . . . . 369 --------- Total . . . . . . . . . . . . . . . 497,444 $ 49,375 ======= =========
Transco redeemed all outstanding shares of its three cumulative preferred stock series in March 1995 for $49.7 million, or $100 per share, plus accrued dividends of $0.6 million. The changes in the total Transco preferred stock in each of the years 1995, 1994 and 1993 are (in thousands):
1995 1994 1993 ------------------ -------------------- ------------------ Shares Amount Shares Amount Shares Amount ------ --------- ------ --------- ------ --------- Balance at beginning of year . . . . . . . . 497 $ 49,744 757 $ 75,743 1,017 $101,741 Retirements . . . . . . . 497 49,744 260 25,999 260 25,998 --- --------- --- --------- ----- -------- Balance at end of year . . - $ - 497 $ 49,744 757 $ 75,743 === ========= === ========= ===== ========
F. EMPLOYEE BENEFIT PLANS RETIREMENT PLANS Transco participates in a retirement plan (Retirement Plan) with TEC and certain of its subsidiaries that covers substantially all of Transco's officers and regular employees. Transco's officers and employees comprise a majority of the total officers and employees of TEC and its subsidiaries. The benefits under the Retirement Plan are determined by a formula based on the employee's years of service and average final compensation. The Retirement Plan provides for the vesting of employees after five years of credited service. Transco's funding policy is to contribute an amount at least equal to the minimum funding requirements actuarially determined by an independent actuary in accordance with the 53 55 Employee Retirement Income Security Act of 1974. Plan assets consist primarily of commingled funds and assets held in a master trust. The master trust is comprised primarily of domestic and foreign common and preferred stocks, corporate bonds, United States government securities and commercial paper. The following table sets forth the funded status of the Retirement Plan at December 31, 1995 and October 1, 1994, and the amount of accrued pension liability for Transco and TEC as of December 31, 1995 and 1994 (in thousands):
Post-Acquisition | Pre-Acquisition ---------------- | --------------- 1995 | 1994 ---------------- | --------------- | Actuarial present value of accumulated benefit obligation, | including vested benefits of $128,783 at December 31, 1995 | and $105,418 at October 1, 1994 . . . . . . . . . . . . . . $( 145,949) | $( 122,244) ============== | ============== Actuarial present value of projected benefit obligation . . . $( 201,425) | $( 161,625) Plan assets at market value . . . . . . . . . . . . . . . . . 155,821 | 130,419 ------------- | ------------- Projected benefit obligation in excess of plan assets . . . . ( 45,604) | ( 31,206) Unrecognized net loss . . . . . . . . . . . . . . . . . . . . 16,591 | 9,965 Unrecognized net asset at October 1, 1984 being recognized | over 15 years . . . . . . . . . . . . . . . . . . . . . . . - | ( 5,249) Unrecognized prior service cost . . . . . . . . . . . . . . . ( 5,147) | ( 3,109) Activity subsequent to measurement date . . . . . . . . . . . - | 2,723 -------------- | ------------- Accrued pension liability . . . . . . . . . . . . . . . . . . $( 34,160) | $( 26,876) ============== | =============
The allocation of the purchase price to the assets and liabilities of Transco and TEC based on their estimated fair values resulted in the recording of an additional pension liability of $19.2 million, $17.3 million of which was recorded by Transco, representing the amount that the projected benefit obligation exceeded the plan assets. The amount of pension costs deferred as a regulatory asset at December 31, 1995 was $6.5 million and is expected to be recovered through future rates. The following table sets forth the components of the Retirement Plan's net pension cost, including Transco's, for the years ended December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993 -------------- ------------ ----------- Service cost-benefits earned during the period $ 4,716 $ 7,361 $ 6,664 Interest cost on projected benefit obligation . 12,111 11,046 9,950 Actual return on plan assets . . . . . . . . . ( 37,958) ( 3,228) ( 15,155) Net amortization and deferral . . . . . . . . . 25,666 ( 10,250) 3,563 -------------- ------------ ----------- Net pension cost . . . . . . . . . . . . . . . $ 4,535 $ 4,929 $ 5,022 ============== ============ ===========
54 56 Transco's share of the Retirement Plan's net pension cost for 1995, 1994 and 1993 was $4.2 million each year. The projected unit credit method is used to determine the actuarial present value of the accumulated benefit obligation and the projected benefit obligation. The following table summarizes the various assumptions used to determine the projected benefit obligation for the Retirement Plan for the years 1995, 1994 and 1993(1):
1995 1994 1993 ------ ------ ------ Discount rate . . . . . . . . . . . . . . . . . . . . . 7.25% 7.5% 7.25% Rate of increase in future compensation levels . . . . 5.0% 5.0% 5.0% Expected long-term rate of return on assets . . . . . . 10% 10% 10%
(1) Pension costs are determined using the assumptions as of the beginning of the year. The funded status is determined using the assumptions as of the end of the year. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Prior to January 1, 1996, Transco participated in a plan with TEC and certain of its subsidiaries (TEC Plan) that provided certain health care and life insurance benefits for retired employees of Transco. Effective January 1, 1996, Transco began participation in a plan with Williams and its subsidiaries (Williams Plan) that provides similar benefits for retired employees of Transco that were hired prior to January 1, 1996. The plans provide benefits to retired Transco employees who worked full-time for five years, attained age 55 while in service and participated in Transco's Retirement Plan. The plans provide for retiree contributions and contain other cost-sharing features such as deductibles and coinsurance. The accounting for the plans anticipates future cost-sharing changes to the written plans that are consistent with Williams' expressed intent to increase the retiree contribution rate annually, generally in line with health care cost increases, except for certain retirees whose premiums are fixed. The benefits for all retired Transco employees are currently funded monthly to the extent recovery from customers can be achieved. Plan assets consist primarily of domestic and foreign common stocks, commercial paper and government bonds held in a trust established under the provisions of section 501(c)(9) of the Internal Revenue Code. 55 57 The following table sets forth the funded status of the TEC Plan at December 31, 1995 and 1994, reconciled with the prepaid/accrued postretirement benefits for Transco and TEC at December 31, 1995 and 1994 (in thousands):
Post-Acquisition | Pre-Acquisition ---------------- | --------------- 1995 | 1994 ---------------- | --------------- | Accumulated postretirement benefit obligation: | Retirees . . . . . . . . . . . . . . . . . . . . . . . . $( 88,731) | $( 63,715) Fully eligible active plan participants . . . . . . . . ( 7,801) | ( 38,125) Other active plan participants . . . . . . . . . . . . . ( 21,065) | ( 11,640) ------------ | ------------- ( 117,597) | ( 113,480) Plan assets at market value . . . . . . . . . . . . . . . . . 51,776 | 32,372 ------------ | ------------ Accumulated postretirement benefit obligation in excess of | plan assets . . . . . . . . . . . . . . . . . . . . . . ( 65,821) | ( 81,108) Unrecognized net gain . . . . . . . . . . . . . . . . . . . . ( 10,107) | ( 12,104) Unrecognized prior service cost . . . . . . . . . . . . . . . ( 2,168) | - Unrecognized transition obligation . . . . . . . . . . . . . - | 95,645 ------------- | ------------- Prepaid (accrued) postretirement benefits . . . . . . . . . . $( 78,096) | $ 2,433 ============= | =============
The allocation of the purchase price to the assets and liabilities of Transco and TEC based on their estimated fair values resulted in the recording of a postretirement benefits liability of $86.9 million representing the amount that the accumulated postretirement benefit obligation exceeded the plan assets. The amount of postretirement benefits costs deferred as a regulatory asset at December 31, 1995 was $71.7 million and is expected to be recovered through future rates. The following table sets forth the components of the TEC Plan's net periodic postretirement benefit cost, including Transco's, for the years ended December 31, 1995, 1994 and 1993 (in thousands):
1995 1994 1993 -------------- ------------- ------------ Service cost-benefits earned during the period $ 2,619 $ 2,915 $ 2,812 Interest cost on accumulated postretirement benefit obligation . . . . . . . . . . 8,929 8,218 9,483 Actual return on plan assets . . . . . . . . ( 7,651) ( 895) ( 428) Amortization of unrecognized transition obligation . . . . . . . . . . . . . . - 5,314 6,034 Net amortization and deferral . . . . . . . . 9,623 ( 516) ( 28) -------------- ------------- ------------ Net periodic postretirement benefit cost . . $ 13,520 $ 15,036 $ 17,873 ============== ============= ============
Transco's share of the TEC Plan's net periodic postretirement benefit cost for 1995, 1994 and 1993 was $12.7 million, $13.7 million and $16.2 million, respectively. The annual rate of increase in the per capita cost of covered health care benefits for 1996 was assumed to be 10 to 11%. The rate was assumed to decrease gradually to 5% for the year 2006 and remain at that level thereafter. The health care cost trend rate 56 58 assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed health care cost trend rate by one percent in each year would increase the accumulated postretirement benefit obligation for health care benefits as of December 31, 1995 by $19.9 million and the aggregate of the service and interest cost components of the net periodic postretirement health care benefit cost for 1995 by $1.4 million. The following table summarizes the various assumptions used to determine the accumulated postretirement benefit obligation for the TEC Plan for the years 1995, 1994 and 1993(1):
1995 1994 1993 ------ ------ ------ Discount rate . . . . . . . . . . . . . . . . . . . . . . 7.25% 7.75% 7.25% Rate of increase in future compensation levels . . . . . 5.0% 5.0% 5.0% After-tax expected long-term rate of return on assets . . 6% 7% 7%
(1) Postretirement benefits costs are determined using the assumptions as of the beginning of the year. The funded status is determined using the assumptions as of the end of the year. In December 1992, the FERC issued a Statement of Policy which allows jurisdictional pipelines to recognize allowances for prudently incurred costs of postretirement benefits other than pensions on an accrual basis consistent with the accounting principles set forth in SFAS No. 106. Transco believes that all costs of providing postretirement benefits to its employees are necessary and prudent operating expenses and that such costs are recoverable in rates. TRAN$TOCK In January 1987, TEC's Board of Directors approved the establishment of an employee stock ownership plan called Tran$tock, which subsequently purchased 3,966,942 shares of newly issued TEC common stock at $45-3/8 per share. Tran$tock was funded by a $180 million loan which was extinguished at year-end 1994. Tran$tock used $120 million of the funds received from the restructuring of TEC's retirement plan, tax deductible dividends paid on the common stock held in the plan and contributions by TEC to service the loan. The final allocation of shares was made to eligible participants in January 1995 applicable to the 1994 plan year; therefore, no compensation expense was recognized in 1995. Compensation expense of $2.9 million and $2.2 million related to Tran$tock was recognized by Transco in 1994 and 1993, respectively. This expense represents the shares of TEC common stock allocated to employees of Transco for 1994 and 1993, respectively. In each of these respective years, Transco recorded a capital contribution from TEC in the amount of the expense. Effective January 1, 1996, the Tran$tock participants' share balances were merged with a Williams defined contribution plan. 57 59 THRIFT PLAN During 1995, Transco sponsored a defined-contribution plan (Thrift Plan) covering substantially all employees. Company contributions were based on employees' compensation and, in part, matched employee contributions. Compensation expense of $3.3 million was recognized by Transco in 1995. Effective January 1, 1996, the Thrift Plan was merged with a Williams defined-contribution plan and Transco employees became eligible to participate in the Williams plan. G. INCOME TAXES Following is a summary of the provision for income taxes for 1995, 1994 and 1993 (in thousands):
Post-Acquisition Pre-Acquisition ------------------ | ------------------------------------------------- January 18, 1995 | January 1, 1995 to | to December 31, 1995 | January 17, 1995 1994 1993 ------------------ | ---------------- -------------- -------------- | Federal: | Current . . . . . . . . $ 66,819 | $( 2,734) $ 72,364 $ 38,593 Deferred . . . . . . . . ( 17,404) | 4,577 ( 23,669) 1,767 ----------------- | --------------- -------------- -------------- 49,415 | 1,843 48,695 40,360 ----------------- | --------------- -------------- -------------- State and municipal: | Current . . . . . . . . 5,827 | ( 305) 9,835 5,961 Deferred . . . . . . . . ( 764) | 771 ( 797) 3,020 ----------------- | --------------- -------------- -------------- 5,063 | 466 9,038 8,981 ----------------- | --------------- -------------- -------------- | Provision for income taxes $ 54,478 | $ 2,309 $ 57,733 $ 49,341 ================= | =============== ============== ==============
58 60 Following is a reconciliation of the provision for income taxes at the federal statutory rate to the provision for income taxes (amounts in thousands):
Post-Acquisition Pre-Acquisition ------------------ | -------------------------------------------------- January 18, 1995 | January 1, 1995 to | to December 31, 1995 | January 17, 1995 1994 1993 ------------------ | ---------------- --------------- --------------- | Taxes computed by applying | the federal statutory rate . . $ 49,373 | $( 2,573) $ 58,961 $ 50,248 Amortization of over | funded tax liabilities . . . - | - ( 7,675) ( 7,675) Tran$tock compensation . . . . . - | - 1,015 779 Pre-acquisition executive | severance benefits . . . . . - | 4,913 - - State and municipal income | taxes . . . . . . . . . . . . 3,291 | 303 5,874 5,838 Other, net . . . . . . . . . . . 1,814 | ( 334) ( 442) 151 ----------------- | --------------- -------------- -------------- Provision for income taxes . . . $ 54,478 | $ 2,309 $ 57,733 $ 49,341 ================= | =============== ============== ==============
Deferred income taxes result from temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years, or temporary differences resulting from events that have been recognized in the financial statements that will result in taxable or deductible amounts in future years. The tax effect of each type of temporary difference and carryforward reflected in deferred income tax benefits and liabilities as of December 31, 1995 and 1994 are as follows (in thousands):
Post-Acquisition Pre-Acquisition ---------------- | --------------- 1995 | 1994 ---------------- | --------------- | Deferred tax liabilities | - ------------------------ | | Property, plant and equipment . . . . . . . . . . . . . . . . $ 881,906 | $ 309,561 Other postretirement benefits . . . . . . . . . . . . . . . . 28,190 | - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,535 | 18,189 ----------- | ----------- Total deferred tax liabilities . . . . . . . . . . . . . . . 953,631 | 327,750 ----------- | ----------- | Deferred tax assets | - ------------------- | | Deferred revenues . . . . . . . . . . . . . . . . . . . . . . 2,246 | 2,145 Rate refunds . . . . . . . . . . . . . . . . . . . . . . . . 25,604 | 23,832 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . 89,073 | 21,936 State deferred taxes . . . . . . . . . . . . . . . . . . . . 34,159 | 11,569 ----------- | ----------- Total deferred tax assets . . . . . . . . . . . . . . . . . . 151,082 | 59,482 ----------- | ----------- | Net deferred tax liabilities . . . . . . . . . . . . . . . . $ 802,549 | $ 268,268 =========== | ===========
59 61 The increase in the net deferred tax liabilities is primarily due to deferred tax adjustments attributable to the increase in the book basis of Transco's net assets recorded as a result of the acquisition of Transco by Williams. H. FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS CARRYING AMOUNT AND FAIR VALUES The carrying amount and estimated fair values of Transco's financial instruments as of December 31, 1995 and 1994 are as follows (in thousands):
Carrying Amount Fair Value ---------------------- --------------------- 1995 1994 1995 1994 ---------- ---------- --------- --------- Financial assets: Cash and short-term financial assets . . $ 113,482 $ 124,820 $ 113,482 $ 124,820 Receivables (derivatives) . . . . . . . . 92 3,185 92 3,185 Financial liabilities: Long-term debt . . . . . . . . . . . . . 659,171 644,238 693,173 612,517 Payables (derivatives) . . . . . . . . . 17 1,299 17 1,299
FAIR VALUE METHODS The following methods and assumptions were used in estimating fair values: For cash and short-term financial assets, the carrying amount is a reasonable estimate of fair value due to the short maturity of those instruments. The amounts shown as receivables and payables (derivatives) relate to Transco's natural gas futures, options and commodity price swaps. The carrying amount of these derivatives approximates fair value for all periods. The estimated fair value of these derivative financial instruments is based on the estimated consideration that would be received to terminate those agreements and contracts in a gain position and the estimated cost that would be incurred to terminate those agreements and contracts in a loss position. Effectively, all of Transco's debt is publicly traded, therefore estimated fair value of long-term debt is based on quoted market prices at year end. CREDIT AND MARKET RISK TRADE RECEIVABLES As of December 31, 1995, 1994 and 1993, Transco had trade receivables of $45 million, $40 million and $54 million, respectively. These trade receivables primarily are due from local distribution companies and other pipeline companies predominantly located in the eastern United States. Transco's credit risk exposure in the event of nonperformance by the other parties is limited to the face value of the receivables. No collateral is required on these receivables. Transco has not historically experienced significant credit losses in connection with its trade receivables. 60 62 Transco sells, with limited recourse, certain trade receivables. The aggregate limit under the receivables facilities was $100 million at December 31, 1995 and 1994. Transco received $108 million of proceeds in 1995, $80 million in 1994 and $9 million in 1993. At December 31, 1995 and 1994, $100 million and $85 million, respectively, of such receivables had been sold. Based on amounts outstanding at December 31, 1995 and 1994 the maximum contractual credit loss under these arrangements is approximately $16 million and $13 million, respectively, but the likelihood of loss is considered to be remote. NOTES RECEIVABLE In 1991, Transco accepted a note receivable in consideration for the conveyance of certain interests in a gas field and related processing plant to a producer. The note was to be repaid out of proceeds from the field production and plant revenues. However, in 1993, the producers sold the gas field and related processing plant. Transco's portion of the sales proceeds was used to reduce the outstanding note receivable. The remaining balance plus certain associated costs were written off in 1993 resulting in an after-tax non-cash charge of $12.5 million. I. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES MAJOR CUSTOMER The sales, transportation and storage revenues received from Public Service Electric and Gas Company, the major customer of Transco, were $166.7 million in 1995, $180.5 million in 1994 and $189.8 million in 1993. The gas sold for resale in 1995 was sold to customers under executed Firm Sales Agreements with primary terms of not less than two years (1997) but not greater than six years (2001). AFFILIATES Included in Transco's sales and transportation revenues for 1995, 1994 and 1993 are revenues applicable to sales and transportation for affiliates, Transco Energy Marketing Company (TEMCO), a WESCO subsidiary, TXG Gas Marketing Company (TXG Marketing), a WESCO subsidiary, Texas Gas Transmission Corporation (Texas Gas), Transco Offshore Gathering Company (TOGCO), and Transco Energy Ventures Company (TEVCO), an affiliate until it was sold on September 13, 1993, as follows (in millions):
1995 1994 1993 ------------- ------------ ------------ TEMCO . . . . . . . . . . . . . $ 173.2 $ 195.9 $ 49.8 TXG Marketing . . . . . . . . . - 12.0 9.3 Texas Gas . . . . . . . . . . . - - 0.2 TEVCO . . . . . . . . . . . . . - - 0.9 TOGCO . . . . . . . . . . . . . 0.7 1.5 1.6 ------------- ------------ ------------ $ 173.9 $ 209.4 $ 61.8 ============= ============ ============
61 63 The rates charged to provide sales and transportation services to affiliates are the same as those that are charged to similarly-situated nonaffiliated customers. The significant increase in 1995 and 1994 sales and transportation revenue from TEMCO reflects the consolidation of TEC's gas marketing businesses, including all jurisdictional merchant sales of Transco, under the common management of WESCO and TGMC, as discussed below. After FERC approval in January 1993, TEC realigned its gas marketing businesses under the common management of TGMC, which, through an agency agreement, began to manage all jurisdictional merchant sales of Transco. In May 1995, WESCO succeeded to the TGMC agency agreement and began to manage Transco's jurisdictional merchant sales. For the years ended December 31, 1995, 1994 and 1993, included in Transco's cost of sales is $20.6 million, $24.4 million and $25.1 million, respectively, representing agency fees billed to Transco by WESCO and TGMC under the agency agreement. Included in Transco's cost of sales and transportation for 1995, 1994 and 1993 is purchased gas cost from affiliates, TEMCO and TXG Marketing, as follows (in millions):
1995 1994 1993 ----------- ----------- ----------- TEMCO . . . . . . . . . . . . . . . . $ 115.2 $ 83.6 $ 54.5 TXG Marketing . . . . . . . . . . . . 16.3 10.0 1.7 --------- --------- --------- $ 131.5 $ 93.6 $ 56.2 ========= ========= =========
All gas purchases are made at market or contract prices. The significant increase in 1995 and 1994 for purchased gas cost from TEMCO reflects the consolidation of TEC's gas marketing businesses, including all jurisdictional merchant sales of Transco, under the common management of WESCO and TGMC, as discussed above. Transco has long-term gas purchase contracts containing either fixed prices or variable prices that are at a significant premium to the estimated market price. However, due to contract expirations and estimated deliverability declines, Transco's estimated purchase commitments under such gas purchase contracts are not material to Transco's total gas purchases. Furthermore, through the agency agreement with Transco, WESCO has assumed management of Transco's merchant sales service and, as Transco's agent, is at risk for any above-spot-market gas costs that it may incur. Also included in Transco's cost of transportation is transportation expense of $36.4 million in 1995, $36.3 million in 1994 and $32.9 million in 1993 applicable to the transportation of gas by Texas Gas. Texas Gas is regulated by the FERC and its transportation rates charged to Transco are approved by the FERC. TEC had a policy of charging subsidiary companies for management services provided by the parent company and other affiliated companies. Included in Transco's administrative and general expenses for January through April, 1995 and the years 1994 and 1993, was $10.9 million, $15.2 million and $14.6 million, respectively, for 62 64 management services charged by TEC. Effective May 1, 1995, Williams began charging corporate expenses to Transco for services similar to those previously provided by TEC or incurred directly by Transco. Included in Transco's administrative and general expenses was $8.5 million for such corporate expenses charged by Williams in 1995. Management considers the cost of these services reasonable. Transco entered into an operating agreement with WFS effective May 1, 1995 whereby WFS, as Transco's agent, assumed operational control of Transco's gas gathering facilities. Included in Transco's operation and maintenance expenses for 1995 is $24.4 million charged by WFS to operate Transco's gas gathering facilities in 1995. 63 65 J. QUARTERLY INFORMATION (UNAUDITED) The following summarizes selected quarterly financial data for 1995 and 1994 (in thousands):
Pre-Acquisition Post-Acquisition ---------------- | ---------------------------------------------------------------- January 1, 1995 | January 18, 1995 to | to January 17, 1995 | March 31, 1995 Second Third Fourth ---------------- | ---------------- ------------- ------------ ------------ | 1995 (1) | Operating revenues . . . . $ 72,061 | $ 295,659 $ 356,242 $ 340,351 $ 412,899 Operating expenses . . . . 76,974(2) | 249,655 305,905 301,946 359,148 ---------- | --------------- ------------ ------------ ------------ Operating income (loss) . . ( 4,913) | 46,004 50,337 38,405 53,751 ---------- | --------------- ------------- ------------ ------------ Other (income) deductions: | Interest expense . . . . 2,680 | 12,849 14,247 14,303 15,038 Other (income) and | deductions, net . . . ( 240) | ( 1,088) ( 1,978) ( 1,507) ( 4,433) ---------- | --------------- ------------- ------------ ------------ Total other | deductions . . . . 2,440 | 11,761 12,269 12,796 10,605 ---------- | --------------- ------------- ------------ ------------ Income (loss) before income | taxes . . . . . . . . . . ( 7,353) | 34,243 38,068 25,609 43,146 Provision for income taxes 2,309 | 13,236 14,171 9,076 17,995 ---------- | --------------- ------------- ------------ ------------ Net income (loss) . . . . . ( 9,662) | 21,007 23,897 16,533 25,151 Dividends on preferred stock 194 | 722 - - - ---------- | --------------- ------------- ------------ ------------ Common stock equity in net | income (loss) . . . . . $( 9,856) | $ 20,285 $ 23,897 $ 16,533 $ 25,151 ========== | =============== ============= ============ ============
(1) Certain reclassifications have been made to prior quarters to conform to the fourth quarter 1995 presentation. (2) Includes a provision of $16,048 for executive severance benefits.
Pre-Acquisition ----------------------------------------------- First Second Third Fourth -------- -------- -------- -------- 1994 (1) Operating revenues . . . . . . . . . . . . $431,915 $398,661 $368,485 $391,901 Operating expenses . . . . . . . . . . . . 371,946 345,082 317,217 333,293 (2) -------- -------- -------- -------- Operating income . . . . . . . . . . . . . 59,969 53,579 51,268 58,608 -------- -------- -------- -------- Other (income) deductions: Interest expense . . . . . . . . . . . . 16,259 14,973 15,281 14,615 Other (income) and deductions, net . . . ( 1,561) ( 1,117) ( 1,625) ( 1,860) -------- -------- -------- -------- Total other deductions . . . . . . . . 14,698 13,856 13,656 12,755 -------- -------- -------- -------- Income before income taxes . . . . . . . . 45,271 39,723 37,612 45,853 Provision for income taxes . . . . . . . . 16,023 13,874 13,068 14,768 -------- -------- -------- -------- Net income . . . . . . . . . . . . . . . . 29,248 25,849 24,544 31,085 Dividends on preferred stock . . . . . . . 1,599 1,572 1,551 1,222 -------- -------- -------- -------- Common stock equity in net income . . . . . $ 27,649 $ 24,277 $ 22,993 $ 29,863 ======== ======== ======== ========
(1) Certain reclassifications have been made to conform to the 1995 presentation. (2) Includes a provision of $6,000 for a regulatory issue. 64 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Since Transco meets the conditions set forth in General Instruction (J)(1)(a) and (b) of Form 10-K, this information is omitted. 65 67 =============================================================================== PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE REFERENCE TO 1995 10-K ------------ A. INDEX 1. FINANCIAL STATEMENTS: Report of Independent Auditors - Ernst & Young LLP 26 - Arthur Andersen LLP 27 Consolidated Balance Sheet as of December 31, 1995 and 1994 28-29 Consolidated Statement of Income for the Periods January 1, 1995 to January 17, 1995, and January 18, 1995 to December 31, 1995, and the Years Ended December 31, 1994 and 1993 30 Consolidated Statement of Common Stockholder's Equity for the Periods January 1, 1995 to January 17, 1995, and January 18, 1995 to December 31, 1995, and the Years Ended December 31, 1994 and 1993 31 Consolidated Statement of Cash Flows for the Periods January 1, 1995 to January 17, 1995, and January 18, 1995 to December 31, 1995, and the Years Ended December 31, 1994 and 1993 32-33 Notes to Consolidated Financial Statements 34-64
66 68 2. FINANCIAL STATEMENT SCHEDULES: The following schedules are omitted because of the absence of the conditions under which they are required: I, II, III, IV, and V. 3. EXHIBITS: The following instruments are included as exhibits to this report. Those exhibits below incorporated by reference herein are indicated as such by the information supplied in the parenthetical thereafter. If no parenthetical appears after an exhibit, copies of the instrument have been included herewith. (3) - 1 Second Restated Certificate of Incorporation, as amended, of Transco. (Exhibit 3.1 to Transco Form 8-K dated January 23, 1987 Commission File Number 1-7584) a) Certificate of Amendment, dated July 30, 1992, of the Second Restated Certificate of Incorporation (Exhibit (10)-17(a) to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) b) Certificate of Amendment, dated December 22, 1986, of the Second Restated Certificate of Incorporation (Exhibit (10)-17(b) to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) c) Certificate of Amendment, dated August 5, 1987, of the Second Restated Certificate of Incorporation (Exhibit (10)-17(c) to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 2 By-Laws of Transco, as Amended and Restated May 2, 1995. (4) - 1 Certificate of Designation, Preferences and Rights relating to Registrant's Cumulative Preferred Stock, $8.75 Series. (Exhibit 3.1 to Transco Form 8-K dated January 23, 1987 Commission File Number 1-7584) 67 69 - 2 Indenture, dated as of June 1, 1983, between Transco and RepublicBank Houston, National Association, as Trustee. (Exhibit (4)-5 to Transco Form 10-K for 1989 Commission File Number 1-7584) a) First Supplemental Indenture, dated September 20, 1984, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5a to Transco Form 10-K for 1989 Commission File Number 1-7584) b) Second Supplemental Indenture, dated as of May 31, 1985, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5b to Transco Form 10-K for 1989 Commission File Number 1-7584) c) Third Supplemental Indenture, dated as of December 3, 1985, from Transco to RepublicBank Houston, National Association related to the Indenture dated as of June 1, 1983. (Exhibit (4)-5c to Transco Form 10-K for 1989 Commission File Number 1-7584) d) Certified Resolutions of a Special Committee of the Board of Directors dated October 31, 1986. (Exhibit (4)-5d to Transco Form 10-K for 1989 Commission File Number 1-7584) e) Fourth Supplemental Indenture, dated as of November 7, 1986, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5e Transco Form 10-K for 1989 Commission File Number 1-7584) f) Fifth Supplemental Indenture, dated as of January 15, 1987, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5f to Transco Form 10-K for 1989 Commission File Number 1-7584) g) Certified Resolutions of a Special Committee of the Board of Directors dated January 29, 1987. (Exhibit (4)-5g to Transco Form 10-K for 1989 Commission File Number 1-7584) h) Sixth Supplemental Indenture, dated as of September 15, 1987, from Transco to First RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5h to Transco Form 10-K for 1989 Commission File Number 1-7584) 68 70 - 3 Indenture dated September 15, 1992 between Transco and the Bank of New York, as Trustee (Exhibit 4.2 to Transco Form 8-K dated September 17, 1992 Commission File Number 1-7584) - 4 Amended and Restated Credit Agreement dated as of December 31, 1993 among Transco Energy Company, the Banks named therein, Citibank, N.A. as Agent and Bank of Montreal, as Co-Agent (Exhibit (4)-5c to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) (i) Second Amendment dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Citibank, N.A., as Agent. (Exhibit 30 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) (ii) Third Amendment Agreement dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Citibank, N.A., as Agent (Exhibit 31 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) - 5 Reimbursement Agreement dated as of December 31, 1993 among Transco Energy Company, the Banks named herein and Bank of Montreal as Agent and Issuing Bank (Exhibit (4)-7 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) (a) Second Amendment dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Bank of Montreal as Agent and Issuing Bank. (Exhibit 32 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) (b) Third Amendment dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Bank of Montreal as Agent and Issuing Bank. (Exhibit 33 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) - 6 Credit Agreement dated as of February 23, 1995 by and among Transco, Texas Gas Transmission Corporation, The Williams Companies, Inc., Northwest Pipeline Corporation, Williams Pipe Line Company and Citibank, N.A. as agent and the Banks named therein (Exhibit (4)-7 to Transco Energy Company Form 10-K for 1994 Commission File Number 1-7513) 69 71 - 7 Non-Committal Loan Facility Letter dated as of July 12, 1995 between Transco and The Fuji Bank, Limited. - 8 Uncommitted Short Term Money Market Facility dated as of September 20, 1995 between Transco and First Interstate Bank. - 9 Uncommitted Short Term Funding Facility dated as of November 15, 1995 between Transco and Lyon Short Term Funding Corp. (10) - 1 1983 Incentive Plan of Transco Energy Company (Transco Energy Company Registration Statement No. 2-85895) - 2 Transco Energy Company Tran$tock Employee Stock Ownership Plan (Transco Energy Company Registration Statement No. 33-11721) - 3 Incentive Compensation Plan of Transco Energy Company (Exhibit (10)-4 to Transco Energy Company Form 10-K for 1989 Commission File Number 1-7513) - 4 Benefit Restoration Plan of Transco Energy Company (Exhibit (10)-4 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 5 Lease Agreement, dated October 5, 1981, between Transco and Post Oak/Alabama, a Texas partnership. (Exhibit (10)-7 to Transco Energy Company Form 10-K for 1989 Commission File Number 1-7513) - 6 1991 Incentive Plan of Transco Energy Company. (Transco Energy Company Registration Statement No. 33-40495) - 7 Amended and Restated 1991 Incentive Stock Plan (Exhibit (10)-3 to Transco Energy Company Form 10-K for 1994 Commission File Number 1-7513) - 8 Form of Supplemental Retirement Agreement which Transco Energy Company has entered into with Messrs. Dagley and Varner (Exhibit (10)-7 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 9 Form of Termination Agreement which Transco Energy Company has entered into with Messrs. Best, Dagley and Varner (Exhibit (10)-8 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 10 Severance Agreement between Transco Energy Company and John P. Des Barres, effective as of September 14, 1991 (Exhibit (10)-10 to 70 72 Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 11 Termination Agreement between Transco Energy Company and John P. Des Barres, effective as of September 14, 1991 (Exhibit (10)-11 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 12 Severance Agreement, dated as of March 25, 1992, by and between Transco Energy Company and Robert W. Best (Exhibit (10)-12 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 13 Severance Agreement, dated as of March 17, 1993, by and between Transco Energy Company and David E. Varner and schedule identifying substantially similar Severance Agreements between Transco Energy Company and other executive officers (Exhibit (10)-13 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 14 Indemnification Agreement between Transco Energy Company and David E. Varner and schedule identifying substantially similar Indemnification Agreements between Transco Energy Company and other executive officers (Exhibit (10)-16 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 15 Termination Agreement dated as of December 11, 1994 between Transco Energy Company and Nicholas J. Neuhausel (Exhibit 7 to Schedule 14D-9 Commission File Number 005-19963) - 16 Amendment dated as of December 11, 1994 to the Termination Agreement between Transco Energy Company and Larry J. Dagley dated as of March 25, 1992 (Exhibit 8 to Schedule 14D-9 Commission File Number 005-19963) - 17 Amendment dated as of December 11, 1994 to the Termination Agreement between Transco Energy Company and David E. Varner dated as of March 25, 1992 (Exhibit 10 to Schedule 14D-9 Commission File Number 005-19963) - 18 Amendment dated as of December 11, 1994 to the Termination Agreement between Transco Energy Company and John P. Des Barres dated as of October 31, 1991 (Exhibit 11 to Schedule 14D-9 Commission File Number 005-19963) 71 73 - 19 Amendment dated as of December 11, 1994 to the Severance Agreement between Transco Energy Company and Robert W. Best dated March 25, 1992 (Exhibit 12 to Schedule 14D-9 Commission File Number 005-19963) - 20 Senior Executive Special Bonus and Retention Plan (Exhibit 13 to Schedule 14D-9 Commission File Number 005-19963) - 21 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and Larry J. Dagley (Exhibit 14 to Schedule 14D-9 Commission File Number 005-19963) - 22 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and David E. Varner (Exhibit 15 to Schedule 14D-9 Commission File Number 005-19963) - 23 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and Nicholas Neuhausel (Exhibit 16 to Schedule 14D-9 Commission File Number 005-19963) - 24 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and John P. Des Barres (Exhibit 19 to Schedule 14D-9 Commission File Number 005-19963) 4. REPORTS ON FORM 8-K: None. 72 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 27th day of March, 1996. TRANSCONTINENTAL GAS PIPE LINE CORPORATION Registrant /s/ NICK A. BACILE By:______________________________________ Nick A. Bacile Vice President and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on this 27th day of March, 1996, below by the following persons on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE --------- ----- /s/ KEITH E. BAILEY Chairman of the Board ------------------------------------------------- (Keith E. Bailey) /s/ BRIAN E. O'NEILL Director, President and Chief Executive Officer ------------------------------------------------- (Principal Executive Officer) (Brian E. O'Neill) /s/ CUBA WADLINGTON, Jr. Director ------------------------------------------------- (Cuba Wadlington, Jr.) /s/ NICK A. BACILE Director, Vice President and Controller ------------------------------------------------- (Principal Accounting and Financial Officer) (Nick A. Bacile) /s/ RONALD L. ADAMS Director ------------------------------------------------- (Ronald L. Adams) /s/ FRANK J. FERAZZI Director ------------------------------------------------- (Frank J. Ferazzi) /s/ LEWIS A. POSEKANY, Jr. Director ------------------------------------------------- (Lewis A. Posekany) /s/ THOMAS P. GRIFFIN Director ------------------------------------------------- (Thomas P. Griffin)
73 75 EXHIBITS INDEX (3) - 1 Second Restated Certificate of Incorporation, as amended, of Transco. (Exhibit 3.1 to Transco Form 8-K dated January 23, 1987 Commission File Number 1-7584) a) Certificate of Amendment, dated July 30, 1992, of the Second Restated Certificate of Incorporation (Exhibit (10)-17(a) to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) b) Certificate of Amendment, dated December 22, 1986, of the Second Restated Certificate of Incorporation (Exhibit (10)-17(b) to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) c) Certificate of Amendment, dated August 5, 1987, of the Second Restated Certificate of Incorporation (Exhibit (10)-17(c) to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 2 By-Laws of Transco, as Amended and Restated May 2, 1995. (4) - 1 Certificate of Designation, Preferences and Rights relating to Registrant's Cumulative Preferred Stock, $8.75 Series. (Exhibit 3.1 to Transco Form 8-K dated January 23, 1987 Commission File Number 1-7584) 76 - 2 Indenture, dated as of June 1, 1983, between Transco and RepublicBank Houston, National Association, as Trustee. (Exhibit (4)-5 to Transco Form 10-K for 1989 Commission File Number 1-7584) a) First Supplemental Indenture, dated September 20, 1984, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5a to Transco Form 10-K for 1989 Commission File Number 1-7584) b) Second Supplemental Indenture, dated as of May 31, 1985, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5b to Transco Form 10-K for 1989 Commission File Number 1-7584) c) Third Supplemental Indenture, dated as of December 3, 1985, from Transco to RepublicBank Houston, National Association related to the Indenture dated as of June 1, 1983. (Exhibit (4)-5c to Transco Form 10-K for 1989 Commission File Number 1-7584) d) Certified Resolutions of a Special Committee of the Board of Directors dated October 31, 1986. (Exhibit (4)-5d to Transco Form 10-K for 1989 Commission File Number 1-7584) e) Fourth Supplemental Indenture, dated as of November 7, 1986, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5e Transco Form 10-K for 1989 Commission File Number 1-7584) f) Fifth Supplemental Indenture, dated as of January 15, 1987, from Transco to RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5f to Transco Form 10-K for 1989 Commission File Number 1-7584) g) Certified Resolutions of a Special Committee of the Board of Directors dated January 29, 1987. (Exhibit (4)-5g to Transco Form 10-K for 1989 Commission File Number 1-7584) h) Sixth Supplemental Indenture, dated as of September 15, 1987, from Transco to First RepublicBank Houston, National Association related to Indenture dated as of June 1, 1983. (Exhibit (4)-5h to Transco Form 10-K for 1989 Commission File Number 1-7584) 77 - 3 Indenture dated September 15, 1992 between Transco and the Bank of New York, as Trustee (Exhibit 4.2 to Transco Form 8-K dated September 17, 1992 Commission File Number 1-7584) - 4 Amended and Restated Credit Agreement dated as of December 31, 1993 among Transco Energy Company, the Banks named therein, Citibank, N.A. as Agent and Bank of Montreal, as Co-Agent (Exhibit (4)-5c to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) (i) Second Amendment dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Citibank, N.A., as Agent. (Exhibit 30 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) (ii) Third Amendment Agreement dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Citibank, N.A., as Agent (Exhibit 31 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) - 5 Reimbursement Agreement dated as of December 31, 1993 among Transco Energy Company, the Banks named herein and Bank of Montreal as Agent and Issuing Bank (Exhibit (4)-7 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) (a) Second Amendment dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Bank of Montreal as Agent and Issuing Bank. (Exhibit 32 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) (b) Third Amendment dated as of December 12, 1994 among Transco Energy Company, the Banks named therein and Bank of Montreal as Agent and Issuing Bank. (Exhibit 33 to Amendment No. 3 to Transco Energy Company Schedule 14D-9 Commission File Number 005-19963) - 6 Credit Agreement dated as of February 23, 1995 by and among Transco, Texas Gas Transmission Corporation, The Williams Companies, Inc., Northwest Pipeline Corporation, Williams Pipe Line Company and Citibank, N.A. as agent and the Banks named therein (Exhibit (4)-7 to Transco Energy Company Form 10-K for 1994 Commission File Number 1-7513) 78 - 7 Non-Committal Loan Facility Letter dated as of July 12, 1995 between Transco and The Fuji Bank, Limited. - 8 Uncommitted Short Term Money Market Facility dated as of September 20, 1995 between Transco and First Interstate Bank. - 9 Uncommitted Short Term Funding Facility dated as of November 15, 1995 between Transco and Lyon Short Term Funding Corp. (10) - 1 1983 Incentive Plan of Transco Energy Company (Transco Energy Company Registration Statement No. 2-85895) - 2 Transco Energy Company Tran$tock Employee Stock Ownership Plan (Transco Energy Company Registration Statement No. 33-11721) - 3 Incentive Compensation Plan of Transco Energy Company (Exhibit (10)-4 to Transco Energy Company Form 10-K for 1989 Commission File Number 1-7513) - 4 Benefit Restoration Plan of Transco Energy Company (Exhibit (10)-4 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 5 Lease Agreement, dated October 5, 1981, between Transco and Post Oak/Alabama, a Texas partnership. (Exhibit (10)-7 to Transco Energy Company Form 10-K for 1989 Commission File Number 1-7513) - 6 1991 Incentive Plan of Transco Energy Company. (Transco Energy Company Registration Statement No. 33-40495) - 7 Amended and Restated 1991 Incentive Stock Plan (Exhibit (10)-3 to Transco Energy Company Form 10-K for 1994 Commission File Number 1-7513) - 8 Form of Supplemental Retirement Agreement which Transco Energy Company has entered into with Messrs. Dagley and Varner (Exhibit (10)-7 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 9 Form of Termination Agreement which Transco Energy Company has entered into with Messrs. Best, Dagley and Varner (Exhibit (10)-8 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 10 Severance Agreement between Transco Energy Company and John P. Des Barres, effective as of September 14, 1991 (Exhibit (10)-10 to 79 Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 11 Termination Agreement between Transco Energy Company and John P. Des Barres, effective as of September 14, 1991 (Exhibit (10)-11 to Transco Energy Company Form 10-K for 1992 Commission File Number 1-7513) - 12 Severance Agreement, dated as of March 25, 1992, by and between Transco Energy Company and Robert W. Best (Exhibit (10)-12 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 13 Severance Agreement, dated as of March 17, 1993, by and between Transco Energy Company and David E. Varner and schedule identifying substantially similar Severance Agreements between Transco Energy Company and other executive officers (Exhibit (10)-13 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 14 Indemnification Agreement between Transco Energy Company and David E. Varner and schedule identifying substantially similar Indemnification Agreements between Transco Energy Company and other executive officers (Exhibit (10)-16 to Transco Energy Company Form 10-K for 1993 Commission File Number 1-7513) - 15 Termination Agreement dated as of December 11, 1994 between Transco Energy Company and Nicholas J. Neuhausel (Exhibit 7 to Schedule 14D-9 Commission File Number 005-19963) - 16 Amendment dated as of December 11, 1994 to the Termination Agreement between Transco Energy Company and Larry J. Dagley dated as of March 25, 1992 (Exhibit 8 to Schedule 14D-9 Commission File Number 005-19963) - 17 Amendment dated as of December 11, 1994 to the Termination Agreement between Transco Energy Company and David E. Varner dated as of March 25, 1992 (Exhibit 10 to Schedule 14D-9 Commission File Number 005-19963) - 18 Amendment dated as of December 11, 1994 to the Termination Agreement between Transco Energy Company and John P. Des Barres dated as of October 31, 1991 (Exhibit 11 to Schedule 14D-9 Commission File Number 005-19963) 80 - 19 Amendment dated as of December 11, 1994 to the Severance Agreement between Transco Energy Company and Robert W. Best dated March 25, 1992 (Exhibit 12 to Schedule 14D-9 Commission File Number 005-19963) - 20 Senior Executive Special Bonus and Retention Plan (Exhibit 13 to Schedule 14D-9 Commission File Number 005-19963) - 21 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and Larry J. Dagley (Exhibit 14 to Schedule 14D-9 Commission File Number 005-19963) - 22 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and David E. Varner (Exhibit 15 to Schedule 14D-9 Commission File Number 005-19963) - 23 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and Nicholas Neuhausel (Exhibit 16 to Schedule 14D-9 Commission File Number 005-19963) - 24 Agreement dated as of December 11, 1994 between Transco Energy Company, The Williams Companies, Inc. and John P. Des Barres (Exhibit 19 to Schedule 14D-9 Commission File Number 005-19963) EX-3.2 2 BY-LAWS OF TRANSCO, AS AMENDED & RESTATED 05/02/95 1 EXHIBIT (3)-2 BY-LAWS OF TRANSCONTINENTAL GAS PIPE LINE CORPORATION (AS AMENDED AND RESTATED MAY 2, 1995) ARTICLE I STOCKHOLDERS Section 1.1. Annual Meetings. The Annual Meeting of Stockholders shall be held for the election of Directors on the third Thursday in October in each year, beginning with the year 1995, if such day be not a legal holiday in the state where such meeting is to be held, or, if a legal holiday, then at the same time on the next succeeding business day at the principal office of the Corporation in the State of Delaware or at such other place either within or without the State of Delaware as may be designated by the Board of Directors from time to time. Any proper business may be transacted at the Annual Meeting. Section 1.2. Special Meetings. Special meetings of stockholders, to be held at the principal office of the Corporation in the State of Delaware or at such other place within or without the State of Delaware and at such date and time as may be stated in the notice of the meeting, and for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Board of Directors or by the Chairman of the Board or by the President, and shall be called by the President or the Secretary at the request in writing of stockholders owning a majority of the issued and outstanding shares of capital stock of the Corporation of the class or classes which would be entitled to vote on the matter or matters proposed to be acted upon at such special meeting of stockholders. Any such request shall state the purpose or purposes of the proposed meeting. Section 1.3. Notices of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, except as provided by Section 7.3 hereof, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 1.4. Adjournments. Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be 2 given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 1.5. Quorum. At any meeting of stockholders, except where otherwise provided by law or the Certificate of Incorporation or these By-laws, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum the stockholders so present may, by majority vote, adjourn the meeting from time to time in the manner provided by Section 1.4 of these By-laws until a quorum shall attend. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. Section 1.6. Organization. Meetings of stockholders shall be presided over by the Chairman of the Board, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons by a chairman designated by the Board of Directors, or in the absence of such designation by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 1.7. Voting; Proxies. Unless otherwise provided in the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by him which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the -2- 3 Secretary of the Corporation. The vote for Directors and, upon the demand of any stockholder, the vote upon any question before the meeting shall be by written ballot. All elections shall be had and all questions decided, unless otherwise provided by law, the Certificate of Incorporation or these By-laws, by a plurality vote. Section 1.8. Fixing Date for Determination of Stock-holders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (2) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board is necessary, shall be on the day on which the first written consent is expressed; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. Section 1.9. List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. -3- 4 ARTICLE II BOARD OF DIRECTORS Section 2.1. Powers; Numbers; Qualifications. The business and affairs of the Corporation shall be managed by the Board of Directors, except as may be otherwise provided by law or in the Certificate of Incorporation. The number of Directors constituting the whole Board shall be not more than fifteen nor less than three. The authorized number of Directors within the limits above specified shall be determined by resolution of the Board of Directors. Section 2.2. Election; Term of Office; Resignation; Vacancies. Each Director shall hold office until the Annual Meeting of Stockholders next succeeding his election and until his successor is elected and qualified or until his earlier resignation or removal. Any Director may resign at any time upon written notice to the Board of Directors or to the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein, no acceptance of such resignation shall be necessary to make it effective. Unless otherwise provided in the Certificate of Incorporation or these By-laws, vacancies and newly created directorships resulting from any increase in the authorized number of Directors or from any other cause may be filled by a majority of the Directors then in office, although less than a quorum. Section 2.3. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board may from time to time determine, and if so determined, notice thereof need not be given. Section 2.4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board or the President or a majority of the Directors then in office. Reasonable notice thereof shall be given by the person or persons calling the meeting. Section 2.5. Telephonic Meetings Permitted. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this By-law shall constitute presence in person at such meeting. Section 2.6. Quorum; Vote Required for Action. At all meetings of the Board of Directors, Directors constituting a majority of the entire Board shall constitute a quorum for the transaction of business. The vote of a majority of the Directors -4- 5 present at a meeting at which a quorum is present shall be the act of the Board unless the Certificate of Incorporation or these By-laws shall require a vote of a greater number. In case at any meeting of the Board a quorum shall not be present, the members of the Board present may adjourn the meeting from time to time until a quorum shall attend. Section 2.7. Organization. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chairman of the meeting may appoint any person to act as secretary of the meeting. Section 2.8. Informal Action by Directors. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. ARTICLE III COMMITTEES Section 3.1. Committees of the Board. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the Directors. The Board may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Vacancies in any such committee shall be filled by the Board, but in the absence or disqualification of a member of such committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, indemnifying Directors or amending these By-laws; and, unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. -5- 6 Section 3.2. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board may make, alter and repeal rules for the conduct of its business. In the absence of a provision by the Board or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such if a quorum is then present shall be the act of such committee, and in other respects such committee shall conduct its business in the same manner as the Board conducts its business pursuant to Article II of these By-laws. ARTICLE IV OFFICERS Section 4.1. General. The officers of the Corporation shall be elected by the Board of Directors and shall be a Chairman of the Board of Directors, a President and one or more Vice Presidents, a Secretary, a Treasurer and such other officers as the Board of Directors may from time to time elect. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these By-laws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be Directors of the Corporation. Section 4.2. Election. The Board of Directors shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their death, resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. Section 4.3. Chairman of the Board of Directors. The Chairman of the Board of Directors shall direct the policy of the Corporation, subject, however, to the control of the Board of Directors and of any duly authorized committee of Directors. The Chairman shall, if present, preside at all meetings of the Board of Directors and of the stockholders. The Chairman may, with the Treasurer or the Secretary, or an Assistant Treasurer or an Assistant Secretary, sign certificates for stock of the Corporation. The Chairman may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by a duly authorized committee of Directors, or by these By-laws to some other officer or agent of the Corporation, or shall be -6- 7 required by law otherwise to be signed or executed. The Chairman shall have the power to appoint, determine the duties and fix the compensation of such agents and employees as in the Chairman's judgment may be necessary or proper for the transaction of the business of the Corporation, including the right of removal of any officer (other than an officer who is also a Director), with or without cause, and the termination of employment of any employee. In general, the Chairman shall perform all duties incident to the office of Chairman of the Board, and such other duties as may from time to time be assigned by the Board of Directors or by any duly authorized committee of Directors. Section 4.4. Chief Executive Officer. The Chief Execu-tive Officer of the Corporation, if other than the Chairman of the Board, shall, during the absence or disability of the Chairman of the Board, exercise all powers and discharge all the duties of the Chairman of the Board. The Chief Executive Officer may, with the Treasurer or the Secretary, or an Assistant Treasurer or an Assistant Secretary, sign certificates for stock of the Corporation. The Chief Executive Officer may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by a duly authorized committee of Directors, or by these By-laws, to some other officer or agent of the Corporation, or shall be required by law otherwise to be signed or executed. The Chief Executive Officer shall have the power to appoint, determine the duties and fix the compensation of such agents and employees as in the judgment of the Chief Executive Officer may be necessary or proper for the transaction of the business of the Corporation, including the right of removal of any officer (other than an officer who is also a Director), with or without cause, and the termination of employment of any employee. In general, the Chief Executive Officer shall perform all duties incident to the office and such other duties as may from time to time be assigned by the Board of Directors, the Chairman of the Board or by any duly authorized committee of Directors. Section 4.5. President. The President shall have general supervision of the business of the Corporation. During the absence or disability of the Chairman of the Board and the Chief Executive Officer, the President shall exercise all the powers and discharge all the duties of the Chairman of the Board and the Chief Executive Officer. The President may, with the Treasurer or the Secretary, or an Assistant Treasurer or an Assistant Secretary, sign certificates for stock of the Corporation. The President may sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by a duly authorized committee of Directors, or by these By-laws, to some other officer or agent of the Corporation, or shall be required by law otherwise to be signed or executed. The President shall have the power to appoint, determine the duties and fix the compensation of such agents and employees as in the judgment of the President may be necessary or proper for the -7- 8 transaction of the business of the Corporation, including the right of removal of any officer (other than an officer who is also a Director), with or without cause, and the termination of employment of any employee. In general, the President shall perform all duties incident to the office of President, and such other duties as may from time to time be assigned by the Board of Directors, the Chairman of the Board or by any duly authorized committee of Directors. Section 4.6. Vice Presidents. At the request of the President or in his absence or in the event of his inability or refusal to act, any Vice President shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President; any Vice President may also sign and execute in the name of the Corporation deeds, mortgages, bonds, contracts and other instruments, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by a duly authorized committee of Directors, or by these By-laws, to some other officer or agent of the Corporation, or shall be required by law otherwise to be signed or executed; and each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. Section 4.7. Secretary. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committee appointed by the Board in books provided for that purpose; he shall see that all notices are duly given in accordance with the provisions of these By-laws or as required by law; he shall be custodian of the records and of the corporate seal or seals of the Corporation; he shall see that the corporate seal is affixed to all documents, the execution of which, on behalf of the Corporation, under its seal, is duly authorized, and when so affixed may attest the same; he may sign, with the President or a Vice President, certificates of stock of the Corporation; and, in general, he shall perform all duties incident to the office of a secretary of a corporation, and such other duties as, from time to time, may be assigned to him by the Board of Directors. Section 4.8. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; he may sign, with the President or Vice President, certificates of stock of the Corporation; and, in general, he shall perform all duties incident to the office of a treasurer of a corporation, and such other duties as, from time to time, may be assigned to him by the Board of Directors. -8- 9 Section 4.9. Assistant Officers. The Board of Directors may appoint one or more assistant officers. Each assistant officer shall, at the request of or in the absence or disability of the officer to whom he is an assistant, perform the duties of such officer and he shall have such other authority and perform such other duties as the Board of Directors may prescribe. Section 4.10. Subordinate Officers. The Board of Directors may appoint such subordinate officers as it may deem desirable. Each such officer shall hold office for such period, have such authority and perform such duties as the Board of Directors may prescribe. The Board of Directors may, from time to time, authorize any officer to appoint and remove subordinate officers and prescribe the powers and duties thereof. Section 4.11. Officers Holding Two or More Offices. Any number of the above offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law or by these By-laws to be executed, acknowledged or verified by two officers. Section 4.12. Removal. Any officer of the Corporation may be removed, with or without cause, by a vote of a majority of the entire Board of Directors at a meeting for that purpose. Section 4.13. Signatures. Any corporate instrument signed by an officer shall be presumed to have been so signed (a) at the request of the Board of Directors or the President, as the case may be, or (b) in the absence or because of the disability of the officer or officers otherwise authorized to so sign, or (c) because of expressly delegated or assigned authority to the officer so signing, and such signature may be relied upon by the person to whom the instrument is delivered without establishing the authority or power of the officer to so sign. ARTICLE V STOCK Section 5.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman of the Board or the President or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. -9- 10 Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE VI INDEMNIFICATION Section 6.1. Power to Indemnify in Actions, Suits or Proceedings Other Than Those by or in the Right of the Corporation. Subject to Section 6.3 of this Article VI, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the conduct was unlawful. Section 6.2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 6.3 of this Article VI, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or -10- 11 settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. Section 6.3. Authorization of Indemnification. Any indemnification under this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 6.1 or Section 6.2 of this Article VI, as the case may be. Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. To the extent, however, that a Director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred in connection therewith, without the necessity of authorization in the specific case. Section 6.4. Good Faith Defined. For purposes of any determination under Section 6.3 of this Article VI, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person's conduct was unlawful, if such person's action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The term "another enterprise" as used in this Section 6.4 shall mean any other corporation or any partnership, joint venture, trust or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. The provision of this Section 6.4 shall not be deemed to be exclusive or to limit in any way the circumstances in -11- 12 which a person may be deemed to have met the applicable standard of conduct set forth in Sections 6.1 or 6.2 of this Article VI, as the case may be. Section 6.5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 6.3 of this Article VI, and notwithstanding the absence of any determination thereunder, any Director, officer, employee or agent may apply to any court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Sections 6.1 and 6.2 of this Article VI. The basis of such indemnification by a court shall be a determination by such court that indemnification of the Director, officer, employee or agent is proper in the circumstances because such person has met the applicable standards of conduct set forth in Sections 6.1 or 6.2 of this Article VI, as the case may be. Notice of any application for indemnification pursuant to this Section 6.5 shall be given to the Corporation promptly upon the filing of such application. Section 6.6. Expenses Payable in Advance. Expenses incurred by an officer or Director in defending a civil or criminal action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VI. Such expenses incurred by other employees and agents shall be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. Section 6.7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by or granted pursuant to this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, contract, vote of stockholders or disinterested Directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 6.1 and 6.2 of this Article VI shall be made to the fullest extent permitted by law. The provisions of this Article VI shall not be deemed to preclude the indemnification of any person who is not specified in Sections 6.1 and 6.2 of this Article VI but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware, or otherwise. Section 6.8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability -12- 13 asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VI. Section 6.9. Meaning of "Corporation" and "Other Enterprises" for the Purposes of Article VI. For purposes of this Article VI, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its Directors, officers, employees or agents so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article VI with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Article VI, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a Director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such Director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VI. Section 6.10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. ARTICLE VII MISCELLANEOUS Section 7.1. Fiscal Year. The fiscal year of the Corporation shall end on the thirty-first day of December in each year, or on such other day as may be fixed from time to time by the Board of Directors. -13- 14 Section 7.2. Seal. The Corporation may have a corporate seal which shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware." The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. Section 7.3. Waiver of Notice of Meetings of Stockholders, Directors and Committees. Whenever notice is required to be given by law or under any provision of the Certificate of Incorporation or these By-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or committees of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these By-laws. Section 7.4. Interested Directors, Quorum. No contract or transaction between the Corporation and one or more of its Directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its Directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the Director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose; if: (1) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested Directors, even though the disinterested Directors be less than a quorum; or (2) the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board, a committee thereof or the stockholders. Common or interested Directors may be counted in determining the presence of a quorum at a meeting of the Board or of a committee which authorizes the contract or transaction. -14- 15 Section 7.5. Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 7.6. Amendment of By-laws. These By-laws may be altered or repealed, and new By-laws made, by the affirmative vote of a majority of the entire Board of Directors, but the stockholders may make additional By-laws and may alter or repeal any By-law whether or not adopted by them. -15- EX-4.7 3 NON-COMMITTAL LOAN FACILITY LETTTER-FUJI BANK, LTD 1 EXHIBIT (4)-7 [THE FUJI BANK, LIMITED LOGO] THE FUJI BANK,LIMITED Houston Agency One Houston Center, Suite 4100 1221 McKinney Houston, Texas 77010 Tel: (713) 759-1800 Fax: (713) 759-0048 NON-COMMITTAL LOAN FACILITY LETTER July 12, 1995 Mr. Nick A. Bacile Vice President Finance and Controller Transcontinental Gas Pipe Line Corporation 2800 Post Oak Blvd. Houston, Texas 77056-6106 Dear Mr. Bacile We, The Fuji Bank, Limited, Houston Agency, (the "Bank") are pleased to offer Transcontinental Gas Pipe Line Corporation, hereinafter referred to as the "Borrower", a line of credit (the "Credit Facility") to be used for money market borrowings under the following terms and conditions: 1. TERM OF THE FACILITY: This Credit Facility is available until further notice effective from the date hereof, provided, however, notwithstanding anything herein or in the Promissory Note to the contrary, that the Bank shall have the continuing right, in its sole and absolute discretion, to accept or reject each loan requested by the Borrower hereunder. 2. AMOUNT: The aggregate principal amount of loans outstanding hereunder shall not exceed US$50,000,000 at any time. 3. LOAN MATURITIES: The maturity of any loan hereunder shall be for a period of up to 93 days as mutually agreed upon by the Borrower and the Bank, exercised at the initiation of each loan transaction. 4. INTEREST RATE: Each loan hereunder shall bear interest at the rate per annum (computed on a 360 day basis and actual days elapsed) quoted by the Bank upon request of the Borrower. 2 All verbal instructions and communications given to the Bank by the Borrower will be promptly confirmed by the Borrower in writing. The interest payment on each loan shall be made at the maturity of each loan. 5. COLLATERAL: None. 6. PURPOSE: General Corporate Purposes. 7. COMPENSATING BALANCE: None. 8. NOTIFICATION OF BORROWER: When desiring to make a drawing or to renew a loan for an additional period under this facility, the Borrower will notify the Bank by telephone of its intention to do so by 11:00 a.m., Houston time, on the date of drawdown or renewal. 9. PROMISSORY NOTE: All advances made by the Bank under this Non-Committal Loan Facility Letter shall be evidenced by a "grid" Promissory Note executed by the Borrower. The Borrower acknowledges that this Credit Facility is being established at the Borrower's request and for the Borrower's convenience. Accordingly, the Bank shall incur no liability to the Borrower in acting upon any telephone, telex, or letter request or other communication which the Bank believes in good faith to be duly authorized; in acting in good faith by endorsing the grids attached to the Promissory Note; or in otherwise acting in good faith under this Credit Facility, except for willful misconduct or gross negligence. In the event that any of the loans evidenced by the Promissory Note reaches maturity by its terms, or by acceleration declared by the Bank upon occurrence of any of the Events of Default as hereinafter defined, and payment thereunder falls due on a Saturday, Sunday, or public holiday under the laws of the State of Texas, such payment shall be made on the next succeeding business day and the period of such extension of time for payment shall be included for the purpose of computing the interest due upon payment of such borrowing. 10. PREPAYMENT: Prepayment prior to the maturity of each drawing will not be permitted. 11. DOCUMENTATION: Prior to the initial drawdown, the Bank shall have received the following documents, properly executed: 3 (A) Non-Committal Loan Facility Letter, (B) Transcontinental Gas Pipe Line Corporation Promissory Note, (C) Transcontinental Gas Pipe Line Corporation Telephonic Transaction Authority form (Exhibit A), (F) Corporate Resolutions of Transcontinental Gas Pipe Line Corporation authorizing the Borrower to borrow funds under this Credit Facility, (G) Certificate of Incumbency of the Borrower authorizing the Borrower's signees, (H) Authorized wiring instructions for the Borrower's receipt of funds, (I) Transcontinental Gas Pipe Line Corporation written confirmation form (Exhibit B). 12. EVENTS OF DEFAULT: If any of the following events ("Events of Default") shall occur: (A) Failure of the Borrower to pay when due principal or interest upon borrowings made by it under this Credit Facility; or (B) Failure of the Borrower to perform or observe any other terms or provisions of this agreement and such failure is to continue unremedied for 30 days after such failure; or (C) The Borrower shall fail to pay any principal of or premium or interest on any borrowed indebtedness (i) which is outstanding in a principal amount of at least $5,000,000 in the aggregate or (ii) which is owing to the Bank under any other agreement or instrument (but excluding, in each case, indebtedness described in Section 12 (A)) (the indebtedness described in (i) and (ii) hereinafter referred to as the "Other Debt"), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Other Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Other Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such Other Debt; or any such Other Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), redeemed, purchased or defeased, or an offer to prepay, redeem, purchase or defease such Other Debt shall be required to be made, in each case prior to the stated maturity thereof and by reason of a default by the Borrower in respect of such Other Debt; or 4 (D) The dissolution or termination of the existence of the Borrower; or (E) The commencement by the Borrower under any bankruptcy, insolvency, debtor's or other similar Law of Bankruptcy or Insolvency proceedings or other proceedings seeking the Borrower's liquidation, reorganization, arrangement, re-adjustment of debt or composition, or the commencement against the Borrower of any such proceeding which is not controverted within 20 days and dismissed or stayed within 60 days; or (F) Admission of the Borrower in writing of its inability to pay its debts as they mature or its failure to pay its creditors generally; or (G) The taking of the title to, or possession of, or assumption of control over, all or a substantial part of the property or management of the Borrower by the United States Government, any other government (de facto or de jure) or any governmental agency or instrumentality; or (H) Any representation herein or by other written notice made by the Borrower to the Bank shall prove to have been incorrect in any material respect when made; then, and in any event, the Bank may, by notice to the Borrower, (i) declare the willingness of the Bank to consider further requests by the Borrower that the Bank make further loans hereunder to the Borrower to be terminated, whereupon the same shall forthwith terminate, and (ii) may, by notice to the Borrower, declare the Note, all interest thereon and all other amounts payable by the Borrower under the Note and this Non-Committal Loan Facility Letter to be forthwith due and payable, whereupon the Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the willingness of the Bank to consider further loans to the Borrower hereunder shall be automatically terminated and (B) the Borrower's Note, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by such Borrower. 13. WAIVERS: The Borrower hereby waives presentment, protest and all notices with respect to the debt instruments made by the Borrower as evidence of its borrowing pursuant to this Credit Facility. 5 14. GOVERNING LAW: THIS AGREEMENT AND EACH OF THE NOTES ISSUED IN CONNECTION WITH THIS CREDIT FACILITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 15. PARI PASSU: The Borrower's obligations under the Credit Facility will rank pari passu with all other senior unsecured indebtedness of the Borrower. 16. FINANCIAL INFORMATION: The Borrower will promptly deliver to the Bank such information reflecting the business affairs, assets and liabilities of the Borrower as the Bank may from time to time reasonably request. 17. INDEMNIFICATION: The Borrower hereby indemnities, defends and saves and holds harmless the Bank, and its officers, directors, employees and agents (each an "Indemnified Party") from and against all claims, actions and suits, and all expenses, damages, costs and penalties which an Indemnified Party may sustain or incur by reason of or arising out of the execution and delivery by such Borrower of this Non-Committal Loan Facility Letter and the consummation of the transactions with the Borrower contemplated hereby, except to the extent gross negligence or willful misconduct by an Indemnified Party contributed to their loss. 18. CROSS DEFAULT: There shall be no cross default to obligations of any person besides the Borrower and Borrower shall not be required to indemnify for loss arising out of any transaction between the Bank and any other person (including, but not limited to, the Borrower's affiliates). 19. THIS WRITTEN LETTER AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. 20. The Borrower may not assign, sell or transfer any of its rights or obligations hereunder or under its Note without the prior written consent of the Bank. 21. THE BORROWER HEREBY EXPRESSLY ACKNOWLEDGES AND AGREES THAT THIS NON-COMMITTAL LOAN FACILITY LETTER IS TERMINABLE AT WILL BY THE BANK AT ANY TIME IN THE SOLE AND ABSOLUTE DISCRETION OF THE BANK AND THAT THE BANK HAS NO COMMITMENT OR OBLIGATION, EXPRESSED OR IMPLIED TO MAKE LOANS HEREUNDER. 6 If you are in agreement with the above offer, please sign and return the attached copy hereof by August 15, 1995 or at your earliest convenience, whereupon this letter shall constitute an agreement between us. Very Truly Yours, THE FUJI BANK, LIMITED, HOUSTON AGENCY By: /s/ KENICHI TATARA ----------------------------------- Kenichi Tatara Vice President and Manager AGREED TO AND ACCEPTED: Transcontinental Gas Pipe Line Corporation (as Borrower) By: /s/ NICK A. BACILE ----------------------------------- Name: Nick A. Bacile --------------------------------- Title: Vice President and Controller -------------------------------- 7 EXHIBIT A TELEPHONIC TRANSACTION AUTHORITY Listed below is (are) the individual(s) authorized to conduct banking activities with THE FUJI BANK, LIMITED, HOUSTON AGENCY (the "Bank") by telephonic communication on behalf of Transcontinental Gas Pipe Line Corporation (the "Borrower"). It is understood that by applying our signature to this Telephonic Transaction Authority, we, Transcontinental Gas Pipe Line Corporation, assume full responsibility for the transactions described hereunder, entered into by our Authorized Representative(s). As agreed to in the Non-Committal Loan Facility Letter dated July 12, 1995 all verbal instructions communicated to the Bank by the Borrower will be promptly confirmed by the Bank in writing. Authorized transactions include: Draws on Money Market Line of Credit within terms set forth in the Non-Committal Loan Facility Letter, dated July 12, 1995. Authorized Borrower Representatives: Name Title Phone Restriction ---- ----- ----- ----------- 1) ------------------------------------------------------------------------------ 2) ------------------------------------------------------------------------------ 3) ------------------------------------------------------------------------------ Transcontinental Gas Pipe Line Corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 8 EXHIBIT B FORM OF WRITTEN CONFIRMATION This notice is to confirm the following money market transaction between Transcontinental Gas Pipe Line Corporation and THE FUJI BANK, LIMITED, HOUSTON AGENCY. Transaction Date: Maturity Date: Principal: Interest Rate: Interest Due at Maturity: Please review the above information for accuracy. If you believe an error has been made in the recording of this transaction, contact the undersigned at _______________. Very Truly Yours, Transcontinental Gas Pipe Line Corporation By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- 9 July 12,1995 PROMISSORY NOTE For value received, the undersigned (the "Borrower"), hereby promises to pay to the order of THE FUJI BANK, LIMITED, HOUSTON AGENCY (the "Bank"), the principal sum of FIFTY MILLION U.S. Dollar" (US $50,000,000) or, if less, the aggregate unpaid principal amount of all advances made hereunder by the Bank to the Borrower in accordance with the Non-Committal Loan Facility Letter referred to below and outstanding on the date of any payment due hereunder as a result of a default under paragraph 12 of the Non-Committal Loan Facility Letter or upon maturity, together with interest (computed on the basis of a year of 360 days for the actual number of days elapsed) on any and all principal amounts hereunder from time to time outstanding from and including the date hereof until said principal amounts are paid in full, payable, as to each advance, if any, on the maturity date thereof as determined pursuant to the Non-Committal Loan Facility Letter, at a fixed interest rate per annum equal at all times to the lesser of (i) the maximum rate allowed by applicable law (the "Maximum Rate") or (ii) the rate quoted by the Bank upon a request for advance by the Borrower for a term mutually agreeable to the Borrower and the Bank (the "Quoted Rate"). Promptly after the Borrower and the Bank mutually agree upon the Quoted Rate and the term of the requested advance, the Borrower shall send to the Bank a written confirmation (substantially in the form of Exhibit C to the Non-Committal Loan Facility Letter) of such Quoted Rate, such term and the unpaid principal amount subject thereto, and, provided, that after any such mutually agreed term for an advance expires and the advance remains unpaid, such unpaid principal amount of such advance shall bear interest at the lesser of (a) the Prime Rate+2%, and (b) the Maximum Rate until paid. The duration of any term used in connection with a Quoted Rate shall in no way affect the Bank's right to demand payment hereunder pursuant to Paragraph 12 of the Non- Committal Loan Facility Letter referred to below, provided, however, that unless the Bank shall have made a demand hereunder for payment, the Borrower shall have no right to repay any unpaid principal amount bearing interest at a Quoted Rate prior to the last day of the term therefor. For purposes of this Promissory note, Prime Rate shall mean the rate of interest per annum quoted by The Fuji Bank, Limited, New York Branch as its prime lending rate as such rate changes from time to time. If the principal of and interest on this Promissory Note or any costs and expenses incurred by the Bank in enforcing this Promissory Note are not paid when due, in lieu of the Quoted Rate all such overdue amounts of principal, interest costs and expenses shall bear interest at the lesser of(a) the Prime Rate+2%, and (b) the Maximum Rate until paid. Both principal and interest hereunder are payable prior to 11:00 AM (Houston time) on the day for payment thereof (whether upon a demand made as a result of a default under paragraph 12 of the Non-Committal Loan Facility Letter or upon maturity) in lawful money of the United States of America to the Bank at One Houston Center, 1221 McKinney Street Suite 4100, Houston,Texas 77010 in same day funds. Whenever any payment to be made hereunder shall be otherwise due on a Saturday, Sunday or a public holiday under the laws of the State of Texas (any other day being a "Business Day") such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. All advances made by the Bank to the Borrower hereunder the applicable Quoted Rate and the duration of the term therefor, and all payments made on account of principal hereof, shall be recorded by the Bank, and prior to any transfer hereof endorsed on the grid attached hereto which is part of the Promissory Note. The Borrower also agrees to pay on demand all reasonable costs and expenses (including fees and expense of counsel) incurred by the Bank in enforcing this Promissory Note. This Promissory Note is the "grid" note referred to in the Non-Committal Loan Facility Letter agreement dated July 12, 1995, between the Borrower and the Bank. In any legal action or proceeding in respect of any amount due hereunder, the Borrower agrees that the entries posted on the attached grid shall be prima facie evidence of the principal and interest owing hereunder absent manifest error, provided, however, that the Borrower agrees that failure by the Bank to endorse any such entry shall not affect the validity of the Promissory Note or any other rights of the Bank or any subsequent holder with respect hereto. It is contemplated that, by reason of the various stated maturities of each advance hereunder, there may be times when no indebtedness is owing under this Promissory Note, but notwithstanding such occurrence,this Promissory Note shall remain valid and be in full force and effect as to (i) advances made hereunder subsequent to each such occurrence and (ii) all other obligations and indebtedness of the Borrower intended to be evidenced hereby unless the Borrower has repaid all its advances, all interest and costs and otherwise satisfied all its obligations under this Promissory Note and the Non-Committal Loan Facility Letter is terminated by Bank or Borrower, in which event this Promissory Note shall terminate and be forthwith canceled by the Bank and returned to the Borrower. Chapter 15, Subtitle 3, Title 79, of the Revised Civil Statutes of Texas, 1925, as amended, shall not apply to this Promissory Note and the advances evidenced hereby. The Bank and the Borrower further agree that, insofar as the provisions of Article 1.04, Subtitle 1, Title 79, of the Revised Civil Statutes of Texas, 1925, as amended are relevant to the determination of the Maximum Rate in respect of this Promissory Note and the advances made hereunder, the indicated rate ceiling computed from time to time pursuant to Section (a) of such article shall apply to this Promissory Note and the advances made hereunder; provided, however, that to the extent permitted by such Article, the Bank from time to time by notice from the Bank to the Borrower may revise its election of such interest rate ceiling as such ceiling affects the then current or future balances of advances outstanding hereunder. Anything in this Promissory Note to the contrary notwithstanding, the Borrower shall never be required to pay unearned interest on this Promissory Note and shall never be required to pay interest on this Promissory Note at a rate in excess of the Maximum Rate, and if the effective rate of interest which would otherwise be payable hereunder would exceed the Maximum Rate, or if the Bank or any holder of this Promissory Note shall receive any unearned interest or shall receive monies that are deemed to constitute interest which would increase the effective rate of interest payable under this Promissory Note to a rate in excess of the Maximum Rate, then the Borrower agrees that (i) the amount of interest which would otherwise be payable under this Promissory Note shall be automatically reduced to the Maximum Rate, and (ii) any earned interest paid by the Borrower or any interest paid by the Borrower in excess of the Maximum Rate shall, at the option of the Bank or any holder of this Promissory Note be either refunded to the Borrower or credited on the principal of this Promissory Note; provided, however, that if the rate of interest payable hereunder shall subsequently fall below the Maximum Rate, the Bank or any holder shall not reduce its accrual of interest at the Maximum Rate until the amount of interest so accrued equals the total amount of interest which would have accrued if there had been no Maximum Rate applicable to this Promissory Note. The Borrower irrevocably consents to the nonexclusive jurisdiction of the United States Federal Courts in, or state courts of, the State of Texas, at the election of the Bank. The Borrower represents and warrants to the Bank or other holder hereof that it is generally subject to suit and that neither it nor its property has any right to immunity from legal proceedings or execution on the ground of sovereignty or otherwise. 10 Except to the extent specifically set out in the Non-Committal Loan Facility Letter, the Borrower and any and all endorsers, guarantors and sureties severally waive grace, presentment for payment, notice of dishonor, protest and notice of protest and diligence in collecting and bringing of suit against any party hereto, and agree to all modifications, renewals, extensions or partial payments hereon to any release or substitution of security, if any, hereof, in whole or in part, with or without notice, before or after maturity. In the event of a default hereunder the Borrower shall reimburse the Bank or other holder hereof for its reasonable costs of collection, including court costs and attorneys' fees. The failure of the Bank or other holder hereof to exercise any of its rights hereunder in any instance shall not constitute a waiver thereof in that or any other instance. This Promissory Note shall be governed by and construed in accordance with the laws of the State of Texas. Transcontinental Gas Pipe Line Corporation By: /s/ NICK A. BACILE ----------------------------------- RNP Name: Nick A. Bacile --------------------------------- Title: Vice President and Controller -------------------------------- EX-4.8 4 UNCOMMITTED SHORT TERM MONEY MARKET FACILITY 1 EXHIBIT (4)-8 [FIRST INTERSTATE BANK LOGO] First Interstate Bank of California 707 Wilshire Blvd. Los Angeles, CA 90017 September 20,1995 Mr. Nick A. Bacile Vice President Finance and Controller Transcontinental Gas Pipe Line Corporation 2800 Post Oak Boulevard Houston, TX 77251-1396 Attention: Nick A. Bacile - Vice President Finance and Controller Dear Nick: I am pleased to advise you that First Interstate Bank of California ("FICAL") has approved for use by Transcontinental Gas Pipe Line Corporation an uncommitted short term money market facility in the principal amount of up to twenty-five million dollars ($25,000,000), subject to the following terms and conditions: BORROWER: Transcontinental Gas Pipe Line Corporation ("BORROWER") PRINCIPAL AMOUNT: Up to dollars twenty-five million ($25,000,000). Advances under this facility shall be made in multiples of one million dollars ($1,000,000) up to an aggregate of $25,000,000 outstanding at any one time. FICAL shall not have any commitment or obligation to make any advances and each advance will be made only, in FICAL's sole discretion. INTEREST RATE: A fixed rate of interest as quoted by FICAL on the date of each advance. TERM OF ADVANCE: As mutually agreed by FICAL and BORROWER at the time of each advance provided that no advance shall have a term exceeding ninety (90) days and no advance shall mature after May 31, 1996. Principal and interest of each advance shall be payable at the maturity of each advance. FICAL shall have the option of assigning or selling participations in any advances. PURPOSE: For general corporate purposes, including working capital requirements. EFFECTIVE DATE: September 20, 1995. TERMINATION DATE: At any time upon written notice by either BORROWER or FICAL, provided, however, that such termination shall not affect any advance outstanding at the time of termination. In any event, this line of credit will expire no later than February 28, 1996. 2 September 20, 1995 Page 2 DOCUMENTATION: 1. Note as enclosed. 2. Supporting documentation, including Board Resolution, Certificate of Incumbency and Authorized Signatures. OTHER TERMS: 1. Continued maintenance of a financial conditional satisfactory to FICAL. 2. Provision in a timely manner to FICAL of quarterly, unaudited financial statements and an audited fiscal year-end report certified by a nationally recognized accounting firm. Provision of 10-Q and 10-K reports as available. WIRE INSTRUCTIONS: FICAL will wire monies to the following instructions only. Any changes must by communicated to FICAL in writing and signed by an authorized signer. Bank Name : Citibank, N. A. ------------------------------------- ABA Number : 021000089 ------------------------------------- Credit To : Transcontinental Gas Pipe Line Corp. ------------------------------------- Account Number : 38490818 ------------------------------------- Reference : FICAL Proceeds ------------------------------------- COMMITMENT FEE: It is understood that this facility does not constitute a commitment by FICAL to lend at any time and that an advance hereunder shall be at FICAL's sole discretion. Accordingly, no commitment fee will be payable to FICAL. If the above terms and conditions are acceptable to you, please indicate by signing and returning the enclosed copy of this letter and the original note. We sincerely appreciate the opportunity to provide you with this competitive source of short-term funding and look forward to your active use of this facility. FIRST INTERSTATE BANK 0F CALIFORNIA By: /s/ WILLIAM J. BAIRD ----------------------------------- William J. Baird Senior Vice President Accepted By: Transcontinental Gas Pipe Line Corporation By: /s/ NICK A. BACILE ----------------------------------- Nick A. Bacile - -------------------------------------- Name Vice President & Controller - -------------------------------------- Title 3 NOTE $25,000,000 September 20, 1995 For value received, the undersigned, Transcontinental Gas Pipe Line Corporation ("Borrower"), hereby promises to pay to the order of FIRST INTERSTATE BANK OF CALIFORNIA ("Bank"), in immediately available funds at 707 Wilshire Boulevard, Los Angeles, California, the principal sum of twenty-five million dollars ($25,000,000) or so much thereof as may be outstanding hereunder, whichever is less, together with interest from the date of each advance on the daily unpaid principal balance of said advance. Each advance hereunder shall be repaid on the date mutually agreed by Company and Bank at the time of making such advance, together with interest thereon at the rate per annum mutually agreed by Company and Bank at the time of making of such advance, provided that all principal and interest outstanding on February 28, 1996 shall be due and payable on such date. Bank shall not be obligated to make any advance hereunder and any advances will be made solely in Bank's discretion. Interest on each advance hereunder shall be computed on the basis of a year of 360 days for the actual number of days elapsed. Any amount of principal not paid when due hereunder shall thereafter bear interest at a rate per annum equal to 1% in excess of the rate announced by Bank from time to time as its "Prime" rate. Interest not paid when due shall thereafter bear like interest as the principal. In the event any advance hereunder is prepaid prior to the maturity date agreed upon for that advance, the Company shall reimburse the Bank on demand for any loss incurred by the Bank as a result of such prepayment, including any loss of income resulting from Bank's reinvestment or reemployment of the amount prepaid at a rate which is less than the interest rate agreed upon for such advance. Bank is authorized to record on the schedule attached to and made a part of this Note (a) the date, amount, maturity date and rate of interest agreed upon by Bank and Company with respect to each advance and (b) all payments received by Bank hereunder. Such schedule shall be prima facie evidence of the matters so recorded, provided that Bank's failure to make any such entries shall not affect Company's obligations hereunder. Company hereby waives diligence, presentment, demand, protest and notice of any kind whatsoever. Company promises to pay costs of collection and reasonable attorneys' fees if default is made in the payment of this Note. The right to plead any and all statutes of limitation as a defense to this Note or to any agreement to pay the same, is hereby expressly waived by the undersigned to the full extent permitted by law. In the event of nonpayment when due of principal of or interest on this Note, the whole amount of principal and interest shall, at the option of the holder of this Note, become immediately, due and payable without diligence, demand, presentment, protest or notice of any kind whatsoever. 4 Advances under this Note may be requested, and the interest rate quoted by the Bank agreed to, by any authorized officer of the undersigned. The undersigned hereby authorizes the Bank to rely upon the telephonic or written instruction of any person identifying himself or herself as an authorized officer of the undersigned without any obligation on the part of the Bank to confirm the identity or authority of such persons. This Note shall be governed by and construed under the laws of the State of California. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by its officer or officers thereunto duly authorized and directed by appropriate corporate authority. Transcontinental Gas Pipe Line Corporation ------------------------------------------ Company Name By: /s/ NICK A. BACILE --------------------------------------- Nick A. Bacile ------------------------------------------ Name Vice President Finance & Controller ------------------------------------------ Title 5 SCHEDULE TO NOTE OF TRANSCONTINENTAL GAS PIPE LINE CORPORATION DATED SEPTEMBER 20,1995
Principal Maturity Principal Interest Paid Date of Amount of Date of Amount Amount Through Principal Notation Advance Advance Advance Paid Paid Date Balance Made By - ------- ------- ------- ---- ---- ---- ------- -------
EX-4.9 5 UNCOMMITTED SHORT TERM FUNDING FACILITY 1 EXHIBIT (4)-9 GRID PROMISSORY NOTE For value received, Transcontinental Gas Pipe Line Corporation, a Delaware corporation (the "Borrower"), promises to pay to the order of Lyon Short Term Funding Corp. (the "Lender"), in lawful money of the United States of America at the office of the Lender, the principal amount of each Advance ("Advance") endorsed on the schedule or schedules attached hereto as Exhibit A (the "Schedules") on the maturity date of such Advance as shown in the applicable Schedule, provided that the failure to so endorse shall not affect the obligations of the Borrower to the Lender, and to pay, at said principal office, interest on the unpaid balance of the principal amount of such Advance from and including the date of such Advance (as shown in the applicable Schedule) to such maturity date at the rate per annum in respect of such Advance quoted by the Lender and agreed to by the undersigned and specified in the applicable Schedule, such interest to be payable on the maturity date of each Advance. Interest shall be calculated on the basis of a year of 360 days and actual days elapsed. Each request by the Borrower for an Advance shall constitute a representation and warranty by the Borrower, as of the making of such Advance and after giving effect to the application of the proceeds therefrom, that this Note is the legal, binding and enforceable obligation of the Borrower. The Borrower shall have no right to prepay any unpaid principal amount of any Advance. All Advances made hereunder shall be credited to the account of the Borrower at Citibank, N.A., Account No. 38490818, ABA No.021000089. The Borrower shall make each payment hereunder on or before 1:00 p.m. (New York City time) on the day when due in lawful money of the United States of America to the Lender at Credit Lyonaiss New York Branch, 1301 Avenue of the Americas, New York, New York 10019, ABA No.026008073, for Lyon Account No.0127440000500, in same day funds. Whenever any payment to be made hereunder shall be otherwise due on a Saturday, a Sunday or a public or bank holiday in (a) New York or (b) the city in which the principal office of the Lender is located (any other day being a "Business Day"), such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest. This is not a commitment to lend but rather sets forth the procedures to be used in connection with your requests for our making of Advances to you from time to time and, in the event we make Advances to you hereunder, your obligations to us with respect thereto. The Borrower shall at all times maintain, and each request for an Advance shall constitute a representation and warranty that the Borrower has 1 2 maintained, unused and undedicated bank facilities or alternative sources of liquidity from one or more commercial banks which together are at least equal to the then outstanding amount of credit extended hereunder (giving effect to such Advance) and such Advance is being incurred, and will be repaid, in the ordinary course of the Borrower's business and financial affairs and in accordance with ordinary business terms. If the Borrower shall not pay the Lender said principal and interest when due, or if the Borrower shall become insolvent, commit any act of bankruptcy, or make a general assignment for the benefit of creditors, or if the transaction of usual business of the Borrower shall be suspended, or any proceeding, procedure or remedy supplementary to or in enforcement of judgment shall be resorted to or commenced against, or with respect to, any property of the Borrower, or if a petition of bankruptcy or for any relief under any law relating to the relief of debtors, adjustment of indebtedness, reorganization, composition or extension shall be filed, or any proceeding shall be instituted under any such law, by or against the Borrower, or any court shall take possession of any substantial part of the property of, or assume control over the affairs or operations of, or a receiver shall be appointed for all or any substantial part of the property of, the Borrower, or if any indebtedness of the Borrower for borrowed money shall not be paid when due or shall become due and payable by acceleration of maturity thereof, or if the Borrower shall be dissolved or be a party, to any merger or consolidation in which the Borrower is not the survivor without the written consent of the Lender, then the principal amount of this Note and all interest due thereon to the maturity date, as appropriate, of each Advance shall, unless the Lender shall otherwise elect, forthwith be due and payable without presentment, demand, protest or notice of any kind. The Borrower shall be liable hereunder and all provisions hereof shall apply to the Borrower. The Borrower shall not institute against, or, join any other person in instituting against, the Lender any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding under any federal or state bankruptcy or similar law for one year and one day after the latest maturing commercial paper note issued by the Lender is paid in full. The Borrower agrees to pay on demand all costs, expenses and losses, if any, incurred by the Lender in connection with the enforcement of this Note. Any overdue principal amount and overdue amount of interest, fees or other amounts payable hereunder shall bear interest, payable on demand, at a fluctuating interest rate-per annum equal at all times to the sum of (i) the rate 2 3 of interest otherwise payable with respect to such amount hereunder and (ii) two percent (2%). The Lender may assign to one or more banks or other entities all or any part of, or may grant participations to one or more banks or other entities in or to all or any part of, any Advance or Advances hereunder. The Borrower may not assign its rights or obligations hereunder or any interest herein without the Lender's prior written consent and any such assignment without the Lender's consent shall be null and void. This Note shall be construed according to and governed by the internal laws of the State of New York without giving effect to the conflict of laws principles thereof. TRANSCONTINENTAL GAS PIPE LINE CORPORATION Dated: 11-15-95 ----------- By: /s/ NICK A. BACILE ----------------------------------- Name: NICK A. BACILE --------------------------------- V P FINANCE & CONTROLLER 3 4 Exhibit A
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EX-27 6 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1995 DEC-31-1995 2,557 0 44,655 0 56,827 424,067 3,455,154 170,417 3,921,788 777,223 382,045 0 0 0 1,736,831 3,921,788 619,269 1,477,212 618,569 1,140,113 0 16,048 59,117 133,713 56,787 76,926 0 0 0 76,926 0 0 Before preferred dividends of $916.
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