UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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: 001-04169 |
TEXAS GAS TRANSMISSION, LLC |
(Exact name of registrant as specified in its charter) |
DELAWARE |
(State or other jurisdiction of incorporation or organization) |
06-1687421 |
(I.R.S. Employer Identification No.) |
3800 Frederica Street Owensboro, Kentucky 42301 (270) 926-8686 |
(Address and Telephone Number of Registrant’s Principal Executive Office) |
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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes__ NoX
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Not applicable
Texas Gas Transmission, LLC meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format.
TABLE OF CONTENTS
Form 10Q
June 30, 2005
TEXAS GAS TRANSMISSION, LLC
PART I – FINANCIAL INFORMATION
Note 3: Commitments and Contingencies
Item 2. Management’s Narrative Analysis of the Results of Operations
Results of Operations for the six months ended June 30, 2005 compared to June 30, 2004
Capital Resources and Liquidity
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
TEXAS GAS TRANSMISSION, LLC
CONDENSED STATEMENTS OF FINANCIAL POSITION
(Thousands of Dollars)
(Unaudited)
ASSETS | June 30, 2005 | December 31, 2004 | |
Current Assets: | |||
Cash and cash equivalents | $ 29,465 | $ 12,201 | |
Receivables, net: | |||
Trade | 15,688 | 26,900 | |
Affiliates | 67 | 1,527 | |
Other | 910 | 3,512 | |
Gas Receivables: | |||
Transportation and exchange | 572 | 1,792 | |
Transportation - affiliates | 108 | 375 | |
Storage | 6,219 | 13,948 | |
Inventories | 13,557 | 13,746 | |
Costs recoverable from customers | 2,705 | 2,611 | |
Deferred income taxes | - | 2,752 | |
Prepaid expenses and other current assets | 6,631 | 3,752 | |
Total current assets | 75,922 | 83,116 | |
Property, Plant and Equipment: | |||
Natural gas transmission plant | 623,065 | 595,182 | |
Other natural gas plant | 169,845 | 168,180 | |
792,910 | 763,362 | ||
Less—accumulated depreciation and amortization | 64,985 | 49,508 | |
Property, plant and equipment, net | 727,925 | 713,854 | |
Other Assets: | |||
Goodwill | 163,474 | 163,474 | |
Gas stored underground | 126,300 | 118,177 | |
Advances to affiliates | 200,446 | 166,668 | |
Deferred income taxes | 40,078 | 49,258 | |
Costs recoverable from customers | 38,145 | 35,984 | |
Other | 13,098 | 12,236 | |
Total other assets | 581,541 | 545,797 | |
Total Assets | $ 1,385,388 | $ 1,342,767 | |
| |||
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The accompanying notes are an integral part of these condensed financial statements. |
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TEXAS GAS TRANSMISSION, LLC
CONDENSED STATEMENTS OF FINANCIAL POSITION
(Thousands of Dollars)
(Unaudited)
LIABILITIES AND EQUITY | June 30, 2005 | December 31, 2004 | |
Current Liabilities: | |||
Payables: | |||
Trade | $ 6,190 | $ 8,867 | |
Affiliates | 1,059 | 1,659 | |
Other | 2,049 | 511 | |
Gas Payables: | |||
Transportation and exchange | 2,428 | 1,513 | |
Storage | 27,392 | 28,296 | |
Accrued income taxes | 8,644 | 1,286 | |
Deferred income taxes | 2,064 | - | |
Accrued taxes other | 8,863 | 5,822 | |
Accrued interest | 4,281 | 4,281 | |
Accrued payroll and employee benefits | 17,725 | 21,770 | |
Other accrued liabilities | 7,506 | 7,732 | |
Total current liabilities | 88,201 | 81,737 | |
| |||
Long –Term Debt | 347,889 | 347,802 | |
Other Liabilities and Deferred Credits: | |||
Postretirement benefits | 27,693 | 28,001 | |
Provision for other asset retirement | 31,765 | 29,700 | |
Other | 14,200 | 12,330 | |
Total other liabilities and deferred credits | 73,658 | 70,031 | |
Member’s Equity: | |||
Paid-in capital | 803,748 | 803,748 | |
Retained earnings | 71,892 | 39,449 | |
Total member’s equity | 875,640 | 843,197 | |
Total Liabilities and Equity | $ 1,385,388 | $ 1,342,767 | |
| |||
The accompanying notes are an integral part of these condensed financial statements. |
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TEXAS GAS TRANSMISSION, LLC
CONDENSED STATEMENTS OF OPERATIONS
(Thousands of Dollars)
(Unaudited)
For the Three Months Ended June 30, | ||||
2005 | 2004 |
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TEXAS GAS TRANSMISSION, LLC
CONDENSED STATEMENTS OF OPERATIONS
(Thousands of Dollars)
(Unaudited)
For the Six Months Ended June 30, | ||||
2005 | 2004 |
Operating Revenues: | ||||
Gas transportation | $ 125,761 | $ 133,369 | ||
Gas storage | 2,433 | 2,589 | ||
Other | 686 | 1,640 | ||
Total operating revenues | 128,880 | 137,598 | ||
Operating Costs and Expenses: | ||||
Operation and maintenance | 21,782 | 20,093 | ||
Administrative and general | 22,680 | 26,292 | ||
Depreciation and amortization | 16,357 | 16,731 | ||
Taxes other than income taxes | 9,009 | 8,330 | ||
Total operating costs and expenses | 69,828 | 71,446 | ||
| ||||
Operating Income | 59,052 | 66,152 | ||
Other (Income) Deductions: | ||||
Interest expense | 9,770 | 10,269 | ||
Interest income from affiliates | (3,390) | (1,270) | ||
Miscellaneous other income, net | (1,129) | (486) | ||
Total other deductions | 5,251 | 8,513 | ||
Income before income taxes | 53,801 | 57,639 | ||
Charge-in-lieu of income taxes | 21,358 | 22,904 | ||
Net Income | $ 32,443 | $ 34,735 | ||
The accompanying notes are an integral part of these condensed financial statements. |
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TEXAS GAS TRANSMISSION, LLC
CONDENSED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
For the Six Months Ended June 30, | ||||
2005 | 2004 |
OPERATING ACTIVITIES: |
| |||
Net income | $ 32,443 | $ 34,735 | ||
Adjustments to reconcile to cash provided by | ||||
(used in) operations: | ||||
Depreciation and amortization | 16,357 | 16,731 | ||
Provision for deferred income taxes | 11,227 | 24,115 | ||
Changes in operating assets and liabilities: | ||||
Receivables | 22,763 | 20,550 | ||
Inventories | 189 | (876) | ||
Affiliates | 1,127 | (45) | ||
Other current assets | (2,973) | 3,283 | ||
Accrued income taxes | 10,127 | (1,209) | ||
Payables and accrued liabilities | (2,358) | (16,861) | ||
Other, including changes in noncurrent assets and liabilities | (9,748) | (401) | ||
Net cash provided by operating activities | 79,154 | 80,022 | ||
INVESTING ACTIVITIES: | ||||
Capital expenditures, net of allowance for funds used during construction | (30,555) | (6,958) | ||
Proceeds from sales and salvage values, net of costs of removal | 2,443 | (53) | ||
Advances to affiliates | (33,778) | (9,532) | ||
Net cash used in investing activities | (61,890) | (16,543) | ||
FINANCING ACTIVITIES: | ||||
Payment of long-term debt | - | (17,285) | ||
Dividends paid | - | (30,000) | ||
Net cash used in financing activities | - | (47,285) | ||
Increase in cash and cash equivalents | 17,264 | 16,194 | ||
Cash and cash equivalents at beginning of period | 12,201 | 19,171 | ||
Cash and cash equivalents at end of period | $ 29,465 | $ 35,365 | ||
The accompanying notes are an integral part of these condensed financial statements. |
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TEXAS GAS TRANSMISSION, LLC
Notes to Unaudited Condensed Financial Statements
Note 1: Corporate Structure
Texas Gas Transmission, LLC (Texas Gas) is a wholly owned subsidiary of Boardwalk Pipelines, LLC, (Boardwalk). Boardwalk is a wholly owned subsidiary of Boardwalk Pipelines Holding Corp. (Holding Corp.), which is wholly owned by Loews Corporation (Loews).
Basis of Presentation
The accompanying condensed financial statements of Texas Gas were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, the accompanying condensed financial statements reflect all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2005 and December 31, 2004 and the Condensed Statements of Operations for the three and six months ended June 30, 2005 and 2004 and changes in cash flows for the six months ended June 30, 2005 and 2004.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. On an ongoing basis, Texas Gas evaluates its estimates, including those related to revenues subject to refund, bad debts, materials and supplies obsolescence, investments, intangible assets, goodwill, property and equipment and other long-lived assets, charge-in-lieu-of income taxes, workers' compensation insurance, pensions and other post-retirement and employment benefits and contingent liabilities. Texas Gas bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from such estimates.
Note 2: Accounting Policies
Regulatory Accounting
Texas Gas is regulated by the Federal Energy Regulatory Commission (FERC) and is subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,Accounting for the Effects of Certain Types of Regulation. Accordingly, it has recorded assets and liabilities on its Condensed Statements of Financial Position resulting from the effects of the ratemaking process, which would not be recorded under GAAP for non-regulated entities. Regulatory assets represent costs incurred that have been deferred because future recovery in customer rates is probable. Regulatory liabilities generally represent probable future reductions in revenue or refunds to customers. Texas Gas’ continued ability to meet the criteria for application of SFAS No. 71 may be affected in the future by competitive forces and restructuring in the natural gas industry. In the event that SFAS No. 71 no longer applied t o all, or a separable portion, of its operations, the related regulatory assets and liabilities would be written off unless an appropriate regulatory recovery mechanism is provided. None of our regulatory assets as of June 30, 2005 and December 31, 2004 were earning a return.
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The amounts recorded as regulatory assets and liabilities in the Texas Gas’ Condensed Statements of Financial Position as of June 30, 2005 and December 31, 2004, are summarized as follows (shown in thousands):
June 30, 2005 | December 31, 2004 | |||
Regulatory Assets: | ||||
Pension, non current | $ 1,628 | $ 128 | ||
Income tax | 6,890 | 6,526 | ||
Unamortized debt expense and premium on reacquired debt | 13,200 | 13,699 | ||
Post retirement benefits other than pension | 32,238 | 32,374 | ||
Fuel tracker | 95 | - | ||
Gas supply realignment costs | - | (432) | ||
Total regulatory assets | $ 54,051 | $ 52,295 |
Regulatory Liabilities: | ||||
Fuel tracker | $ - | $ 917 | ||
Gas supply realignment costs | 2 | - | ||
System management/cashout tracker | 653 | 77 | ||
Provision for other asset retirement | 31,765 | 29,700 | ||
Unamortized discount on long-term debt | (2,111) | (2,198) | ||
Total regulatory liabilities | $ 30,309 | $ 28,496 |
The table above includes amounts related to unamortized debt expense and unamortized discount on long-term debt. While these amounts are not regulatory assets or regulatory liabilities as defined by SFAS No. 71, they are a critical component of Texas Gas’ embedded cost of debt utilized in our rate proceedings. Certain amounts in the table are reflected as a negative, or a reduction, to be consistent with the manner in which we record these items in our regulatory books of account.
Asset Retirement Obligations
Asset retirement obligations exist for certain of Texas Gas’ utility assets; however, the fair value of the obligations cannot be determined because the end of the utility system life is not determinable with the degree of accuracy necessary to currently establish a liability for the obligations.
Depreciation rates for utility plants are approved by the FERC. The approved depreciation rates are comprised of two types; one based on economic service life (capital recovery) and one based on net costs of removal (negative salvage). Therefore, Texas Gas accrues estimated net costs of removal of long-lived assets through negative salvage expense. Accordingly, Texas Gas has collected a certain amount in rates representing estimated net costs of removal, which do not represent a legal obligation. It has reclassified $31.8 million and $29.7 million as of June 30, 2005 and December 31, 2004, respectively, in the accompanying Condensed Statements of Financial Position asProvision for other asset retirement.
In March 2005, the Financial Accounting Standards Board issued Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations, which clarifies when an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation and will be effective for fiscal years ending after December 15, 2005, with earlier adoption encouraged. Texas Gas is reviewing this interpretation to determine what, if any, effect this will have on its financial statements.
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Note 3: Commitments and Contingencies
Regulatory, Rate Matters and Related Litigation
Storage Expansion Project
Requests for additional storage capacity have exceeded the physical capabilities of Texas Gas’ system, thereby prompting it to expand its storage facilities. On February 11, 2005, Texas Gas received FERC approval to begin expanding its western Kentucky storage complex for service to two customers beginning November 1, 2005. Texas Gas estimates this project will cost approximately $22.0million and will allow the additional withdrawal of 82,000 MMBtu per day. Texas Gas has incurred $14.5 million of costs on this project through June 30, 2005.
General Rate Case
On April 29, 2005, Texas Gas filed a general rate case. The rate case reflects a requested increase in annual cost of service from $258.0 million to $300.0 million, primarily attributable to increases in the utility rate base, operating expenses, and rate of return and related taxes. On May 31, 2005, the FERC issued an order (the "Suspension Order") accepting and suspending the filed rates to become effective November 1, 2005, subject to refund in the event lower rates are finally established in the rate case. The Suspension Order rejected certain alternate tariff sheets filed by Texas Gas as moot due to the May 4, 2005 issuance of the FERC's policy statement on income tax allowances. The Suspension Order set the rate case for a hearing before an administrative law judge. The rate case is currently in the early stages of discovery with the hearing scheduled to commence April 25, 2006.
FERC Notice of Inquiry (Docket No. RM05-2-000)
On November 22, 2004, the FERC issued a Notice of Inquiry (Docket No. RM05-2-000) seeking comments on its policy regarding selective discounting by natural gas pipeline companies. Specifically, the FERC asked whether the FERC’s practice of permitting pipelines to adjust their ratemaking throughput downward in rate cases to reflect discounts given by pipelines for competitive reasons is appropriate when the discount is given to meet competition from another natural gas pipeline. Texas Gas responded in support of the current FERC discounting policies. On May 31, 2005, the FERC issued an order reaffirming its selective discounting policy and terminating the Notice of Inquiry. Certain parties have, however, filed timely requests for rehearing of that order.
Pipeline Integrity
Regulations adopted by the Office of Pipeline Safety (OPS) of the U.S. Department of Transportation require natural gas pipeline operators to assess, evaluate, repair and validate, through a comprehensive analysis, the integrity of pipeline segments that could affect high consequence areas in the event of a leak or failure. This process requires pipeline operators to incur costs to develop integrity management plans, prepare pipelines for inspection, conduct pipeline assessments, make subsequent repairs, and perform other ongoing activities of an integrity management program.
On June 30, 2005, the FERC issued an order addressing the proper accounting for the costs that pipeline operators will incur in implementing all aspects of pipeline integrity management programs in high consequence areas. FERC's general accounting rules provide that costs incurred to inspect, test and report on the condition of plant to determine the need for repairs or replacements are to be charged to maintenance expense in the period the costs are incurred. Therefore, costs to prepare a plan to implement an integrity management program, costs to identify high consequence areas, costs to inspect affected pipeline segments, and costs to develop and maintain a recordkeeping system to document program implementation and actions (other than costs to develop internal-use computer software during the application development stage) should be expensed. However, costs of pipeline additions or modifications undertake n to prepare for a pipeline assessment and costs of remedial and mitigation actions to correct an identified
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condition which could threaten a pipeline’s integrity may be capitalized consistent with the FERC's general accounting rules for the addition or replacement of plant.
FERC's accounting guidance is effective prospectively, beginning with integrity management costs incurred on or after January 1, 2006. Amounts capitalized in periods prior to January 1, 2006 will be permitted to remain as recorded. Texas Gas believes it is compliant with the FERC’s accounting guidance and does not expect any material impact from implementation of these guidelines.
Environmental and Safety Matters
Texas Gas is subject to federal, state, and local environmental laws and regulations in connection with the operation and remediation of various operating sites. It accrues for environmental expenses resulting from existing conditions that relate to past operations when the costs are probable and reasonably estimable.
Texas Gas considers environmental assessment, remediation costs, and costs associated with compliance with environmental standards to be prudent costs incurred in the ordinary course of business. Texas Gas’ environmental accrued liabilities could change substantially in the future due to factors such as the nature and extent of any contamination, changes in remedial requirements, technological changes, discovery of new information, and the involvement of and direction taken by the EPA, FERC and other governmental authorities on these matters.
As of June 30, 2005 Texas Gas had an accrued liability of approximately $4.1 million for estimated probable costs associated with environmental assessment and remediation, primarily for remediation associated with the historical use of polychlorinated biphenyls and hydrocarbons. This accrual represents management’s best estimate of the undiscounted future obligation based on evaluations and discussions with counsel and independent consultants, and the current facts and circumstances related to these matters. The assumptions are based on a substantial number of existing assessments and completed remedial activities by third party consultants including a Texas Gas systemwide assessment and/or cleanup of polychlorinated biphenyls, petroleum hydrocarbons, asbestos abatement, and mercury. Texas Gas 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. These costs are expected to occur over approximately the next five years.
GSR Settlement
Effective November 1, 1993, Texas Gas restructured its business to implement the provisions of FERC Order 636, which, among other things, required pipelines to unbundle their merchant role from their transportation services. FERC Order 636 also provided that pipelines should be allowed the opportunity to recover a portion of prudently incurred transition costs which, for Texas Gas, were primarily related to gas supply realignment (GSR) costs and unrecovered purchased gas costs. On November 19, 2004, Texas Gas filed a final GSR reconciliation report with the FERC and revised tariff sheets to remove the GSR recovery mechanism from its rates. Per the settlement, Texas Gas refunded $0.4 million during March 2005 to customers.
Mineral Interest in Storage Field
In the purchase agreement between Boardwalk and The Williams Company (Williams) for the acquisition of Texas Gas in 2003, Williams agreed to indemnify Texas Gas for any liabilities or obligations in connection with certain litigation or potential litigation including, among others, a claim by certain parties for back rental associated with their alleged ownership of a partial mineral interest in a tract of land in a gas storage field owned by Texas Gas. In December 2003, a lawsuit was filed against Texas Gas in Muhlenberg County, Kentucky seeking unspecified damages related to this claim.
As a result, Williams is defending this action on behalf of Texas Gas. On April 18, 2005, in the first phase of this lawsuit, the court entered an order granting partial summary judgment against Texas Gas related to the vesting of legal title to the disputed acreage. Williams continues to defend Texas Gas as the lawsuit moves into its next phase. Since Williams has retained responsibility for this claim, it is not likely to have a material affect upon our future financial condition, results of operations or cash flows.
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Other Legal Matters
Texas Gas is party to various legal actions arising in the normal course of business. Management believes that the disposition of outstanding legal actions will not have a material adverse impact on its future financial condition, results of operations or cash flows.
Note 4: Financing
Texas Gas’ long-term debt issues were outstanding as follows (expressed in thousands):
June 30, 2005 | December 31, 2004 | ||||
Debentures: | |||||
7.25% due 2027 | $100,000 | $100,000 | |||
Notes: | |||||
4.60% due 2015 | 250,000 | 250,000 | |||
350,000 | 350,000 | ||||
Unamortized debt discount | (2,111) | (2,198) | |||
Total long-term debt | $347,889 | $347,802 |
Texas Gas’ debentures and notes have restrictive covenants which provide that, with certain exceptions, Texas Gas may not create, assume or suffer to exist any lien upon any property to secure any indebtedness unless the debentures and notes shall be equally and ratably secured. All its obligations are unsecured.
Note 5. Employee Benefits
Substantially all of Texas Gas’ employees are covered under a non-contributory, defined benefit retirement plan offered by Texas Gas. Texas Gas’ general funding policy is to contribute amounts deductible for federal income tax purposes. Due to its fully funded status, Texas Gas has not been required to fund the Retirement Plan since 1986. As of June 30, 2005, no contributions had been made for the current year. Texas Gas also provides life insurance and health care plans which accord postretirement medical benefits to certain retired Texas Gas employees.
Net periodic benefit cost components are as follows (expressed in thousands):
Pension Benefits | Other Postretirement Benefits | ||||||
For the Three Months Ended June 30, | For the Three Months Ended June 30, | ||||||
2005 | 2004 | 2005 | 2004 |
Service Cost | $ 975 |
| $ 900 | $ 519 | $ 524 | ||
Interest Cost | 1,500 |
| 1,425 | 1,806 | 1,478 | ||
Expected return on plan assets | (1,675) |
| (1,675) | (1,158) | (1,313) | ||
Amortization of accumulated loss (gains) | - |
| - | 90 | (16) | ||
Regulatory accrual | (800) |
| (650) | 68 | 652 | ||
Estimated net periodic benefit cost | $ - |
| $ - | $ 1,325 | $ 1,325 |
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Pension Benefits | Other Postretirement Benefits | ||||||
For the Six Months Ended June 30, | For the Six Months Ended June 30, | ||||||
2005 | 2004 | 2005 | 2004 |
Service Cost | $ 1,950 |
| $ 1,800 | $ 1,038 | $ 1,048 | ||
Interest Cost | 3,000 |
| 2,850 | 3,612 | 2,956 | ||
Expected return on plan assets | (3,450) |
| (3,350) | (2,316) | (2,626) | ||
Amortization of accumulated loss (gains) | - |
| - | 180 | (33) | ||
Regulatory accrual | (1,500) |
| (1,300) | 136 | 1,305 | ||
Estimated net periodic benefit cost | $ - |
| $ - | $ 2,650 | $ 2,650 |
Note 6. Related Parties
Texas Gas makes advances to Boardwalk. At June 30, 2005 and December 31, 2004, the advances due Texas Gas by Boardwalk totaled $200.4 million and $166.7 million, respectively. The advances are represented by demand notes. The interest rate on intercompany demand notes is the LIBOR on the first day of each three-month period plus one percent and is compounded monthly.
Loews charges Texas Gas for all direct and indirect expenses incurred on its behalf, including overhead allocated to Texas Gas by Loews in amounts allowable consistent with accounting and allocation methodologies generally permitted by the FERC for rate making purposes. For the three and six months ended June 30, 2005, Texas Gas was charged $1.3 million and $2.2 million, respectively. For the same periods in 2004, Texas Gas was charged $1.5 million and $3.2 million, respectively.
Texas Gas provides interruptible transportation services to Gulf South Pipeline Company, LP (Gulf South), a subsidiary of Boardwalk. For the three and six months ended June 30, 2005, Texas Gas recorded revenue of $0.2 million and $0.3 million, respectively, for these services. Since the interruptible transportation agreement was executed in 2005, there were no revenues from Gulf South in 2004.
The accompanying Condensed Statements of Financial Position includeReceivables, Affiliates andTransportation, Affiliates of $0.2 million and $1.9 million at June 30, 2005 and December 31, 2004, respectively, for transportation services and reimbursable costs and Payables-Affiliatesof $1.1 million and $1.7 million at June 30, 2005 and December 31, 2004, respectively, related to management and transportation services.
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Item 2. Management’s Narrative Analysis of the Results of Operations
Texas Gas Transmission, LLC (Texas Gas) is a wholly owned subsidiary of Boardwalk Pipelines, LLC, (Boardwalk). Boardwalk is a wholly owned subsidiary of Boardwalk Pipelines Holding Corp. (Holding Corp.), which is wholly owned by Loews Corporation (Loews).
Results of Operations for the six months ended June 30, 2005 compared to June 30, 2004
Operating revenues decreased $8.7 million for the six months ended June 30, 2005 compared to the six months ended June 30, 2004, primarily due to unfavorable market conditions during the 2004-2005 winter season. January - February of 2005 was 20% warmer than the comparable period in 2004 (based on degree days), resulting in excess capacity and a reduction in storage flexibility due to high storage levels. As a result, commodity based revenues were $0.8 million lower, storage and Park and Loan services were $2.1 million lower and demand revenues were $4.9 million lower.
Operating costs and expenses decreased $1.6 million, due primarily to lower employee benefit expenses of $1.6 million related to lower medical claims and $0.9 million lower corporate overhead costs. These decreases were partially offset by $0.7 million higher property and franchise taxes due primarily to higher state assessments.
Net income decreased $2.3 million during the period in 2005 compared to 2004 primarily due to the changes mentioned above. Total other deductions were lower for the period in 2005 than 2004 due to lower incremental debt, an increase in interest income due to higher cash balances, an increase in the advance with Boardwalk, and an increase in the rate of return on those balances.
Capital Resources and Liquidity
Texas Gas funds its operations and capital requirements with cash flows primarily from operating activities. In addition, the notes payable from Boardwalk are demand notes which Texas Gas can demand to be repaid at any time.
Texas Gas’ capital expenditures, net, for the first six months of 2005 and 2004 were $28.1 million and $7.0 million, respectively. Capital expenditures in 2005 have increased primarily due to the storage expansion project. Texas Gas’ capital expenditures for the full-year 2005 are expected to approximate $54.4 million and are expected to be funded through cash flows from operating activities.
Critical Accounting Policies
See Management’s Narrative Analysis of Results of Operations (MD&A) in our Annual Report on Form 10-K for the year ended December 31, 2004 for a detailed discussion of our critical accounting policies. These policies include Regulations, Contingencies, Purchase Price Allocation and Impairment of Goodwill, and Employee Benefits. Texas Gas also considers environmental liabilities to be a critical accounting policy as discussed below.
Environmental Liabilities:
Texas Gas considers environmental assessment, remediation costs, and costs associated with compliance with environmental standards to be prudent costs incurred in the ordinary course of business. Such accruals are management’s best estimate of the undiscounted future obligation for probable costs associated with environmental assessment and remediation of our operating sites. These estimates are based on evaluations and discussions with counsel and independent consultants and the current facts and circumstances related to these environmental matters.
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Texas Gas’ environmental accrued liabilities could change substantially in the future due to factors such as the nature and extent of any contamination, changes in remedial requirements, technological changes, discovery of new information, and the involvement of and direction taken by the EPA, FERC and other governmental authorities on these matters. Texas Gas 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 environmental costs.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this Report as well as some statements in periodic press releases and some oral statements made by officials of Texas Gas are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (Act). Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result,” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions by Texas which may be provided by manageme nt are also forward-looking statements as defined by the Act.
Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond Texas Gas’ control, that could cause actual results to differ materially from those anticipated or projected. These risks and uncertainties include, among others:
·
Texas Gas’ transmission and storage operations are subject to government regulations and rate proceedings that could have an adverse impact on their ability to recover the costs of operating their pipeline facilities.
·
Texas Gas is subject to environmental and safety regulation in all jurisdictions in which it operates, and any changes in such regulations could negatively affect Texas Gas’ results of operations.
·
Gas transmission and storage activities involve numerous risks that might result in accidents and other operating risks and costs.
·
Terrorist activities and the potential for military and other actions could adversely affect Texas Gas’ business.
·
Increased competition could have a significant financial impact on Texas Gas.
·
New natural gas supply sources may fail to develop.
·
Texas Gas may not be able to maintain or replace gas transportation service and storage contracts at favorable rates as existing contracts expire.
·
A significant portion of Texas Gas’ revenues is from a small number of customers.
·
No assurances can be given as to the financial outcome of Texas Gas’ rate case relative to their current rates structure.
Developments in any of these areas, which are more fully described elsewhere in this Report, could cause Texas Gas’ results to differ materially from results that have been or may be anticipated or projected. Forward-looking statements speak only as of the date of this Report and Texas Gas expressly disclaims any obligation or undertaking to update these statements to reflect any change in Texas Gas’ expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is based.
Item 3. Quantitativeand Qualitative Disclosures About Market Risk
Our market risk is limited to our long-term debt. All interest on long-term debt is fixed in nature. Total long-term debt at June 30, 2005, had a carrying value of $347.9 million and a fair value of $359.0 million. Total long-term debt at December 31, 2004, had a carrying value of $347.8 million and a fair value of$356.0 million.
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Item 4. Controls and Procedures
Texas Gas maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed in reports filed or submitted under the federal securities laws, including this report, is recorded, processed, summarized and reported on a timely basis. These disclosure controls and procedures are designed to ensure that information required to be disclosed under the federal securities laws is accumulated and communicated to its management on a timely basis to allow assessment of required disclosures.
Texas Gas’ principal executive officer and principal financial officer have conducted an evaluation of the disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer have each concluded that the disclosure controls and procedures are effective for their intended purpose.
There were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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PART II – OTHER INFORMATION
The documents listed below are being filed on behalf of Texas Gas Transmission, LLC and are incorporated herein by reference from the documents indicated and made a part hereof. Copies of the instruments below have been included herewith.
Exhibit Designation | ||||
Registrant | Nature of Exhibit | |||
31.1 | Texas Gas Transmission, LLC | Certification of H. Dean Jones II, President, pursuant to Rule 13a-14(a) and Rule 15d-14(a) | ||
31.2 | Texas Gas Transmission, LLC | Certification of Jamie L. Buskill, Vice President and Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) | ||
32.1 | Texas Gas Transmission, LLC | Certification of H. Dean Jones II, President, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
32.2 | Texas Gas Transmission, LLC | Certification of Jamie L. Buskill, Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Texas Gas Transmission, LLC |
Registrant |
Dated: July 29, 2005 | /s/ Jamie L. Buskill Jamie L. Buskill | |
Vice President and Chief Financial Officer |
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