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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| | | | | |
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2021
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: 1-7414
NORTHWEST PIPELINE LLC
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | | | | |
Delaware | | 26-1157701 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
295 Chipeta Way | | |
Salt Lake City | UT | | 84108 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (801) 583-8800
NO CHANGE
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) 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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | ¨ | | Accelerated filer | ¨ | | Non-accelerated filer | þ | | Smaller reporting company | ☐ | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
THE REGISTRANT 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.
NORTHWEST PIPELINE LLC
FORM 10-Q
INDEX
FORWARD-LOOKING STATEMENTS
The reports, filings, and other public announcements of Northwest Pipeline LLC may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, and other matters.
All statements, other than statements of historical facts, included in this report that address activities, events, or developments that we expect, believe, or anticipate will exist or may occur in the future are forward-looking statements. Forward-looking statements can be identified by various forms of words such as “anticipates,” “believes,” “seeks,” “could,” “may,” “should,” “continues,” “estimates,” “expects,” “forecasts,” “intends,” “might,” “goals,” “objectives,” “targets,” “planned,” “potential,” “projects,” “scheduled,” “will,” “assumes,” “guidance,” “outlook,” “in-service date,” or other similar expressions. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management and include, among others, statements regarding:
•Our and our affiliates’ future credit ratings;
•Amounts and nature of future capital expenditures;
•Expansion and growth of our business and operations;
•Expected in-service dates for capital projects;
•Financial condition and liquidity;
•Business strategy;
•Cash flow from operations or results of operations;
•Rate case filings;
•Natural gas prices, supply, and demand;
•Demand for our services; and
•The impact of the coronavirus (COVID-19) pandemic.
Forward-looking statements are based on numerous assumptions, uncertainties, and risks that could cause future events or results to be materially different from those stated or implied in this report. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:
•The impact of operational and developmental hazards and unforeseen interruptions;
•Development and rate of adoption of alternative energy sources;
•The strength and financial resources of our competitors and the effects of competition;
•Availability of supplies, including lower than anticipated volumes from third parties, and market demand;
•Volatility of pricing including the effect of lower than anticipated energy commodity prices;
•Changes in maintenance and construction costs, as well as our ability to obtain sufficient construction-related inputs, including skilled labor;
•The impact of existing and future laws and regulations, the regulatory environment, environmental matters, and litigation, as well as our ability to obtain necessary permits and approvals, and achieve favorable rate proceeding outcomes;
•Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social, and governance practices;
•The physical and financial risks associated with climate change;
•Our exposure to the credit risk of our customers and counterparties;
•Our ability to successfully expand our facilities and operations;
•Whether we are able to successfully identify, evaluate, and timely execute our capital projects and investment opportunities;
•Risks related to financing, including restrictions stemming from debt agreements, future changes in credit ratings as determined by nationally recognized credit rating agencies, and the availability and cost of capital;
•Inflation, interest rates, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on customers and suppliers);
•Our costs for defined benefit pension plans and other postretirement benefit plans sponsored by our affiliates;
•The risks resulting from outbreaks or other public health crises, including COVID-19;
•Changes in the current geopolitical situation;
•Changes in U.S. governmental administration and policies;
•Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities;
•Acts of terrorism, cybersecurity incidents, and related disruptions; and
•Additional risks described in our filings with the Securities and Exchange Commission (SEC).
Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.
In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.
Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on February 24, 2021.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWEST PIPELINE LLC
STATEMENT OF NET INCOME
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
OPERATING REVENUES: | | | | | | | | |
Natural gas transportation | | $ | 105,099 | | | $ | 107,149 | | | $ | 318,427 | | | $ | 325,315 | |
Natural gas storage | | 3,144 | | | 3,210 | | | 9,777 | | | 9,419 | |
Other | | 367 | | | 116 | | | 1,222 | | | 938 | |
Total operating revenues | | 108,610 | | | 110,475 | | | 329,426 | | | 335,672 | |
OPERATING EXPENSES: | | | | | | | | |
General and administrative | | 12,161 | | | 10,444 | | | 35,291 | | | 36,239 | |
Operation and maintenance | | 19,462 | | | 17,999 | | | 55,641 | | | 53,044 | |
Depreciation and amortization | | 28,398 | | | 28,000 | | | 84,666 | | | 83,881 | |
Regulatory debits | | 369 | | | 287 | | | 1,067 | | | 868 | |
Taxes, other than income taxes | | 4,099 | | | 4,547 | | | 12,596 | | | 12,381 | |
Regulatory charges resulting from tax rate changes | | 5,944 | | | 5,944 | | | 17,637 | | | 17,637 | |
Other (income) expenses, net | | 120 | | | (7) | | | 74 | | | (12) | |
Total operating expenses | | 70,553 | | | 67,214 | | | 206,972 | | | 204,038 | |
| | | | | | | | |
OPERATING INCOME | | 38,057 | | | 43,261 | | | 122,454 | | | 131,634 | |
| | | | | | | | |
OTHER (INCOME) AND OTHER EXPENSES: | | | | | | | | |
Interest expense | | 7,561 | | | 7,365 | | | 22,402 | | | 22,325 | |
Allowance for equity and borrowed funds used during construction (AFUDC) | | (543) | | | (511) | | | (1,182) | | | (1,131) | |
Miscellaneous other (income) expenses, net | | 5 | | | (133) | | | (340) | | | (1,389) | |
Total other (income) and other expenses | | 7,023 | | | 6,721 | | | 20,880 | | | 19,805 | |
| | | | | | | | |
NET INCOME | | $ | 31,034 | | | $ | 36,540 | | | $ | 101,574 | | | $ | 111,829 | |
See accompanying notes.
NORTHWEST PIPELINE LLC
BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
ASSETS | | | | |
| | | | |
CURRENT ASSETS: | | | | |
Cash | | $ | — | | | $ | — | |
Receivables: | | | | |
Trade | | 34,119 | | | 37,365 | |
Affiliated companies | | 170 | | | 51 | |
Advances to affiliate | | 292,630 | | | 247,869 | |
Other | | 1,156 | | | 840 | |
Materials and supplies | | 9,678 | | | 9,807 | |
Exchange gas due from others | | 9,310 | | | 4,466 | |
| | | | |
Prepayments and other | | 4,488 | | | 4,078 | |
Total current assets | | 351,551 | | | 304,476 | |
| | | | |
PROPERTY, PLANT AND EQUIPMENT | | 3,730,124 | | | 3,653,792 | |
Less-Accumulated depreciation and amortization | | 1,836,617 | | | 1,761,229 | |
Total property, plant and equipment, net | | 1,893,507 | | | 1,892,563 | |
| | | | |
OTHER ASSETS: | | | | |
Deferred charges and other non-current assets | | 9,882 | | | 3,775 | |
Regulatory assets | | 18,442 | | | 20,022 | |
Right-of-use assets | | 10,548 | | | 10,692 | |
Total other assets | | 38,872 | | | 34,489 | |
| | | | |
Total assets | | $ | 2,283,930 | | | $ | 2,231,528 | |
(continued)
See accompanying notes.
NORTHWEST PIPELINE LLC
BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 |
LIABILITIES AND MEMBER’S EQUITY | | | | |
| | | | |
CURRENT LIABILITIES: | | | | |
Payables: | | | | |
Trade | | $ | 23,230 | | | $ | 16,157 | |
Affiliated companies | | 15,845 | | | 4,110 | |
Accrued liabilities: | | | | |
Taxes, other than income taxes | | 15,575 | | | 10,905 | |
Interest | | 12,019 | | | 5,505 | |
Exchange gas due to others | | 5,761 | | | 4,557 | |
Customer advances | | 2,668 | | | 539 | |
Other | | 7,508 | | | 6,786 | |
| | | | |
Total current liabilities | | 82,606 | | | 48,559 | |
| | | | |
LONG-TERM DEBT | | 578,773 | | | 578,018 | |
| | | | |
OTHER NON-CURRENT LIABILITIES: | | | | |
Asset retirement obligations | | 121,041 | | | 95,777 | |
Regulatory liabilities | | 380,298 | | | 355,725 | |
Lease liability | | 8,335 | | | 8,341 | |
Other | | 3,908 | | | 4,713 | |
Total other non-current liabilities | | 513,582 | | | 464,556 | |
| | | | |
CONTINGENT LIABILITIES AND COMMITMENTS (Note 3) | | | | |
| | | | |
MEMBER’S EQUITY: | | | | |
Member’s capital | | 1,073,892 | | | 1,073,892 | |
Retained earnings | | 35,077 | | | 66,503 | |
| | | | |
Total member’s equity | | 1,108,969 | | | 1,140,395 | |
| | | | |
Total liabilities and member’s equity | | $ | 2,283,930 | | | $ | 2,231,528 | |
See accompanying notes.
NORTHWEST PIPELINE LLC
STATEMENT OF MEMBER’S EQUITY
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2021 | | 2020 | | |
MEMBER'S CAPITAL: | | | | | | |
Balance at beginning and end of period | | $ | 1,073,892 | | | $ | 1,073,892 | | | |
RETAINED EARNINGS: | | | | | | |
Balance at beginning of period | | 38,043 | | | 66,706 | | | |
Net income | | 31,034 | | | 36,540 | | | |
Cash distributions to parent | | (34,000) | | | (36,000) | | | |
Balance at end of period | | 35,077 | | | 67,246 | | | |
Total Member’s Equity | | $ | 1,108,969 | | | $ | 1,141,138 | | | |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 | | |
MEMBER'S CAPITAL: | | | | | | |
Balance at beginning and end of period | | $ | 1,073,892 | | | $ | 1,073,892 | | | |
RETAINED EARNINGS: | | | | | | |
Balance at beginning of period | | 66,503 | | | 79,417 | | | |
Net income | | 101,574 | | | 111,829 | | | |
Cash distributions to parent | | (133,000) | | | (124,000) | | | |
Balance at end of period | | 35,077 | | | 67,246 | | | |
Total Member’s Equity | | $ | 1,108,969 | | | $ | 1,141,138 | | | |
See accompanying notes.
NORTHWEST PIPELINE LLC
STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2021 | | 2020 |
Cash flows from operating activities: | | | | |
Net income | | $ | 101,574 | | | $ | 111,829 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
Depreciation and amortization | | 84,666 | | | 83,881 | |
Regulatory debits | | 1,067 | | | 868 | |
Regulatory charges resulting from tax rate changes | | 17,637 | | | 17,637 | |
Amortization of deferred charges and credits | | (2,784) | | | (2,633) | |
Allowance for equity funds used during construction (equity AFUDC) | | (960) | | | (914) | |
Changes in current assets and liabilities: | | | | |
Trade and other accounts receivable | | 4,769 | | | 3,507 | |
Affiliated receivables | | (119) | | | (68) | |
Materials and supplies | | 129 | | | (146) | |
Other current assets | | (5,253) | | | 1,533 | |
Trade accounts payable | | (774) | | | 1,233 | |
Affiliated payables | | 11,735 | | | (2,169) | |
Other accrued liabilities | | 13,109 | | | 3,569 | |
Changes in noncurrent assets and liabilities: | | | | |
Regulatory liabilities | | 3,179 | | | 3,175 | |
Other, net | | (2,489) | | | 415 | |
Net cash provided by operating activities | | 225,486 | | | 221,717 | |
| | | | |
Cash flows from financing activities: | | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Cash distributions to parent | | (133,000) | | | (124,000) | |
Net cash used in financing activities | | (133,000) | | | (124,000) | |
| | | | |
Cash flows from investing activities: | | | | |
Property, plant and equipment: | | | | |
Capital expenditures* | | (51,233) | | | (39,916) | |
Contributions and advances for construction costs | | 7,146 | | | 5,502 | |
Disposal of property, plant and equipment, net | | (3,638) | | | (911) | |
Advances to affiliate, net | | (44,761) | | | (62,392) | |
| | | | |
| | | | |
Net cash used in investing activities | | (92,486) | | | (97,717) | |
| | | | |
Net increase (decrease) in cash | | — | | | — | |
Cash at beginning of period | | — | | | — | |
Cash at end of period | | $ | — | | | $ | — | |
____________________________________ | | | | |
* Increases to property, plant and equipment, exclusive of equity AFUDC | | $ | (58,566) | | | $ | (54,060) | |
Changes in related accounts payable and accrued liabilities | | 7,333 | | | 14,144 | |
Capital expenditures | | $ | (51,233) | | | $ | (39,916) | |
See accompanying notes.
NORTHWEST PIPELINE LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Presentation
In this report, Northwest Pipeline LLC (Northwest) is at times referred to in the first person as “we,” “us,” or “our.”
Northwest is indirectly owned by The Williams Companies, Inc. (Williams).
General
The accompanying unaudited financial statements have been prepared from our books and records. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. The unaudited financial statements include all normal recurring adjustments and others which, in the opinion of our management, are necessary to present fairly our interim financial statements. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto in our 2020 Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim financial statements and accompanying notes. Actual results could differ from those estimates.
A reclassification within Operating Revenues in the Statement of Net Income from the service line of Natural gas storage to Other of approximately $0.1 million and $1.0 million for the three and nine months ended September 30, 2020, respectively, has been made to conform to the 2021 presentations.
Note 2 – Revenue Recognition
Revenue by Category
Our revenue disaggregation by major service line includes Natural gas transportation, Natural gas storage, and Other, which are separately presented on the Statement of Net Income.
Contract Assets
The following table presents a reconciliation of our contract assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | |
| | (Thousands) |
Balance at beginning of period | | $ | 5,650 | | | $ | 1,794 | | | $ | 3,395 | | | $ | 554 | | |
Revenue recognized in excess of amounts invoiced | | 1,146 | | | 628 | | | 3,401 | | | 1,868 | | |
Balance at end of period | | $ | 6,796 | | | $ | 2,422 | | | $ | 6,796 | | | $ | 2,422 | | |
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | September 30, | | September 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | |
| | (Thousands) |
Balance at beginning of period | | $ | 4,144 | | | $ | 5,039 | | | $ | 4,610 | | | $ | 5,464 | | |
Recognized in Revenue | | (236) | | | (215) | | | (702) | | | (640) | | |
Balance at end of period | | $ | 3,908 | | | $ | 4,824 | | | $ | 3,908 | | | $ | 4,824 | | |
Remaining Performance Obligations
Our remaining performance obligations primarily include reservation charges on contracted capacity on our firm transportation and storage contracts with customers. Amounts from certain contracts included in the table below, which are subject to periodic review and approval by the Federal Energy Regulatory Commission (FERC), reflect the rates for such services in our current FERC tariffs for the life of the related contracts; however, these rates may change based on future rate cases or settlements approved by the FERC and the amount and timing of these changes is not currently known. This table excludes the variable consideration component for commodity charges. Certain of our contracts contain evergreen provisions for periods beyond the initial term of the contract. The remaining performance obligations, as of September 30, 2021, do not consider potential future performance obligations for which the renewal has not been exercised. The table below also does not include contracts with customers for which the underlying facilities have not received FERC authorization to be placed into service.
The following table presents the amount of the contract liabilities balance expected to be recognized as revenue when performance obligations are satisfied and the transaction price allocated to the remaining performance obligations under certain contracts as of September 30, 2021.
| | | | | | | | | | | |
| Contract Liabilities | | Remaining Performance Obligations |
| (Thousands) |
2021 (three months) | $ | 236 | | | $ | 107,321 | |
2022 (one year) | 1,029 | | | 416,890 | |
2023 (one year) | 1,120 | | | 376,453 | |
2024 (one year) | 1,218 | | | 338,118 | |
2025 (one year) | 305 | | | 331,136 | |
Thereafter | — | | | 2,842,720 | |
Total | $ | 3,908 | | | $ | 4,412,638 | |
Accounts Receivable
Receivables from contracts with customers are included within Receivables - Trade and Receivables - Affiliated companies and receivables that are not related to contracts with customers are included within the balance of Receivables - Advances to affiliate and Receivables - Other in our Balance Sheet.
Note 3 – Contingent Liabilities and Commitments
Environmental Matters
We are subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of our business. Except as discussed below, our management believes that we are in substantial compliance with existing environmental requirements. Environmental expenditures are expensed or capitalized depending on their future economic benefit and potential for rate recovery. We believe that, with respect to any expenditures required to meet applicable standards and regulations, the FERC would grant the requisite rate relief so that substantially all of such expenditures would be permitted to be recovered through rates.
Beginning in the mid-1980s, we evaluated many of our facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation might be necessary. We identified polychlorinated biphenyl (PCB) contamination in air compressor systems, soils, and related properties at certain compressor station sites. Similarly, we identified hydrocarbon impacts at these facilities due to the former use of earthen pits, lubricating oil leaks or spills, and excess pipe coating released to the environment. In addition, heavy metals have been identified at these sites due to the former use of mercury containing meters and paint and welding rods containing lead, cadmium, and arsenic. The PCBs were remediated pursuant to a Consent Decree with the U.S. Environmental Protection Agency (EPA) in the late 1980s, and we conducted a voluntary clean-up of the hydrocarbon and mercury impacts in the early 1990s. In 2005, the Washington Department of Ecology required us to re-evaluate our previous clean-ups in Washington. During 2006 to 2015, 129 meter stations were evaluated, of which 82 required remediation. As of September 30, 2021, all of the meter stations have been remediated. During 2006 to 2018, 14 compressor stations were evaluated, of which 11 required remediation. As of September 30, 2021, 5 compressor stations are still being remediated. At September 30, 2021, we had accrued liabilities totaling approximately $1.0 million, $0.1 million of which is recorded in Accrued liabilities - Other and $0.9 million of which is recorded in Other Noncurrent Liabilities - Other in the accompanying Balance Sheet. At December 31, 2020, we had accrued liabilities totaling approximately $1.1 million, $0.1 million of which is recorded in Accrued liabilities - Other and $1.0 million of which is recorded in Other Noncurrent Liabilities - Other in the accompanying Balance Sheet. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs.
The EPA and various state regulatory agencies routinely propose and promulgate new rules, and issue updated guidance to existing rules. These rulemakings include, but are not limited to, rules for reciprocating internal combustion engine and combustion turbine maximum achievable control technology, review and updates to the National Ambient Air Quality Standards, and rules for new and existing source performance standards for volatile organic compounds and methane. We continuously monitor these regulatory changes and how they may impact our operations. Implementation of new or modified regulations may result in impacts to our operations and increase the cost additions to Property, plant, and equipment - net in the Balance Sheet for both new and existing facilities in affected areas; however, due to regulatory uncertainty on final rule content and applicability timeframes, we are unable to reasonably estimate the cost of these regulatory impacts at this time.
Other Matters
Various other proceedings are pending against us and are considered incidental to our operations.
Summary
We estimate that for all matters for which we are able to reasonably estimate a range of loss, including those noted above and others that are not individually significant, our aggregate reasonably possible losses beyond amounts accrued for all of our contingent liabilities are immaterial to our expected future annual results of operations, liquidity and financial position. These calculations have been made without consideration of any potential recovery from third-parties. We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss.
Note 4 – Debt and Financing Arrangements
Commercial Paper
Williams participates in a commercial paper program and Williams’ management considers amounts outstanding under this program to be a reduction of available capacity under the credit facility. The program allows a maximum outstanding amount at any time of $4.0 billion of unsecured commercial paper notes. At September 30, 2021, Williams had no outstanding commercial paper. In connection with the amended and restated credit agreement described below, Williams reduced the size of its commercial paper program to $3.5 billion.
Credit Facility
In October 2021, we, along with Williams and Transcontinental Gas Pipe Line Company, LLC (Transco), the lenders named therein, and an administrative agent entered into an amended and restated credit agreement (Credit Agreement) that reduced aggregate commitments available from $4.5 billion to $3.75 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. The Credit Agreement was effective on October 8, 2021. The maturity date of the credit facility is October 8, 2026. However, the co-borrowers may request up to two extensions of the maturity date each for an additional one-year period to allow a maturity date as late as October 8, 2028, under certain circumstances. The Credit Agreement allows for swing line loans up to an aggregate of $200 million, subject to available capacity under the credit facility, and letters of credit commitments of $500 million. We and Transco are each able to borrow up to $500 million under this credit facility to the extent not otherwise utilized by the other co-borrowers. At September 30, 2021, and as of October 8, 2021, the effective date of the amended and restated Credit Agreement, no letters of credit have been issued and no loans were outstanding under the credit facility.
The Credit Agreement contains the following terms and conditions:
•Various covenants may limit, among other things, a borrower’s and its material subsidiaries’ ability to grant certain liens supporting indebtedness, merge or consolidate, sell all or substantially all of its assets in certain circumstances, make certain distributions during an event of default, and each borrower and each borrower’s respective material subsidiaries’ ability to enter into certain restrictive agreements.
•If an event of default with respect to a borrower occurs under the credit facility, the lenders will be able to terminate the commitments for the respective borrowers and accelerate the maturity of the loans of the defaulting borrower under the credit facility and exercise other rights and remedies.
•Other than swing line loans, each time funds are borrowed, the applicable borrower may choose from two methods of calculating interest: a fluctuating base rate equal to an alternative base rate as defined in the Credit Agreement plus an applicable margin or a periodic fixed rate equal to the London Interbank Offered Rate (LIBOR) plus an applicable margin. Williams is required to pay a commitment fee based on the unused portion of the credit facility. The applicable margin is determined by reference to a pricing schedule based on the applicable borrower’s senior unsecured long-term debt ratings and the commitment fee is determined by reference to a pricing schedule based on Williams’ senior unsecured long-term debt ratings. The Credit Agreement also includes customary provisions to provide for replacement of LIBOR with an alternative benchmark rate when LIBOR ceases to be available.
The ratio of debt to capitalization (defined as net worth plus debt), each as defined in the Credit Agreement, must be no greater than 65 percent for each of Transco and Northwest.
At September 30, 2021, we are in compliance with this covenant.
Note 5 – Financial Instruments
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Short-term financial assets—The carrying values of short-term financial assets that have variable interest rates (advances to affiliate), accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments.
Long-term debt—The disclosed fair value of our long-term debt, which we consider as a level 2 measurement, is determined by a market approach using broker quoted indicative period-end bond prices. The quoted prices are based on observable transactions in less active markets for our debt or similar instruments. The carrying amount and estimated fair value of our long-term debt were $578.8 million and $657.5 million, respectively, at September 30, 2021, and $578.0 million and $680.6 million, respectively, at December 31, 2020.
Note 6 – Transactions with Affiliates
We are a participant in Williams’ cash management program, and we make advances to and receive advances from Williams. At September 30, 2021 and December 31, 2020, our advances to Williams totaled approximately $292.6 million and $247.9 million, respectively. These advances are represented by demand notes and are classified as Receivables - Advances to affiliate in the accompanying Balance Sheet. The interest rate on these intercompany demand notes is based upon the daily overnight investment rate paid on Williams’ excess cash at the end of each month, which was 0.01 percent at September 30, 2021. The interest income from these advances was minimal for the three months and nine months ended September 30, 2021, respectively, and minimal for the three months ended and $0.6 million for the nine months ended September 30, 2020, respectively. Such interest income is included in Other (Income) and Other Expenses – Miscellaneous other (income) expenses, net on the accompanying Statement of Net Income.
Included in Operating Revenues in the accompanying Statement of Net Income are revenues received from affiliates of $0.3 million and $0.9 million for the three and nine months ended September 30, 2021, respectively, and $0.2 million and $0.6 million for the three and nine months ended September 30, 2020, respectively. The rates charged to provide services to affiliates are the same as those that are charged to similarly-situated nonaffiliated customers.
We have no employees. Services necessary to operate our business are provided to us by Williams and certain affiliates of Williams. We reimburse Williams and its affiliates for all direct and indirect expenses incurred or payments made (including salary, bonus, incentive compensation, and benefits) in connection with these services. Employees of Williams also provide general, administrative and management services to us, and we are charged for certain administrative expenses incurred by Williams. These charges are either directly identifiable or allocated to our assets. Direct charges are for goods and services provided by Williams at our request. Allocated charges are based on a three-factor formula, which considers revenues; property, plant, and equipment; and payroll. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing business incurred by Williams. In the accompanying Statement of Net Income, we have recorded approximately $21.5 million and $61.8 million in the three and nine months ended September 30, 2021, and $18.1 million and $60.9 million in the three and nine months ended September 30, 2020, respectively, for these service expenses which are primarily included in General and administrative and Operation and maintenance expenses.
During the nine months ended September 30, 2021 and 2020, we declared and paid cash distributions to our parent of $133.0 million and $124.0 million, respectively. During October 2021, we declared and paid an additional cash distribution of $33.5 million to our parent.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion should be read in conjunction with the Management’s Discussion and Analysis, Financial Statements, and Notes contained in Items 7 and 8 of our 2020 Annual Report on Form 10-K and with the Financial Statements and Notes contained in this Form 10-Q.
Results of Operations
Analysis of Financial Results
This analysis discusses financial results of our operations for the nine-month periods ended September 30, 2021 and 2020. Variances due to changes in natural gas prices and transportation volumes have little impact on revenues, because under our rate design methodology, the majority of overall cost of service is recovered through firm capacity reservation charges in our transportation rates.
Operating Revenues decreased $6.2 million, or approximately 2 percent, in the first nine months of 2021 as compared to the same period in 2020 primarily due to:
Natural gas transportation decreased $6.9 million for the nine months ended September 30, 2021 compared to the same period in 2020. The decrease was primarily attributable to:
•$13.7 million lower firm transportation revenue primarily resulting from the termination of two base agreements in the third quarter of 2020,
•Partially offset by an increase of $2.7 million in short-term firm transportation demand as a result of colder weather in February 2021,
•$2.5 million from three new contracts executed in the third quarter of 2020, and
•$1.3 million from a project placed in service in November 2020.
Natural gas storage increased $0.4 million for the nine months ended September 30, 2021, compared to the same period in 2020. The increase was primarily a result of customers injecting more gas into storage.
Transportation services accounted for 97 percent and gas storage services accounted for 3 percent of our operating revenues for both periods ended September 30, 2021 and 2020.
Operating Expenses increased $2.9 million, or 1 percent, in the first nine months of 2021 as compared to the same period in 2020 primarily due to:
•$1.2 million increase in employee labor and benefits costs, including charges associated with higher expected performance under the Williams incentive compensation plan in 2021, partially offset by the absence of severance and relocation costs and benefit plan changes recorded in 2020,
•$0.8 million higher depreciation and $0.2 million higher property taxes as a result of plant additions,
•$0.3 million higher operating, maintenance and general and administrative costs including charges from affiliates, and
•$0.2 million increase in levelized depreciation.
Other (income) and other expenses, net had an unfavorable change of $1.1 million, or approximately 5 percent, in the first nine months of 2021 as compared to the same period in 2020 primarily due to lower interest income on our note with Williams.
Recent Developments
COVID-19
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. We continue to monitor the COVID-19 pandemic and have taken steps intended to protect the safety of our customers, employees and communities, and to support the continued delivery of safe and reliable service to our customers and the communities we serve. Our financial condition, results of operations, and liquidity have not been materially impacted by direct effects of COVID-19.
Item 4. Controls and Procedures
Our management, including our Senior Vice President and our Vice President and Chief Accounting Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) (Disclosure Controls) or our internal control over financial reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Senior Vice President and our Vice President and Chief Accounting Officer. Based upon that evaluation, our Senior Vice President and our Vice President and Chief Accounting Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
On July 1, 2021, our parent implemented a new enterprise resource planning (ERP) system on a company-wide basis. We will continue to evaluate and test control changes in order to provide certification on the effectiveness, in all material respects, of our internal controls over financial reporting for the year ending December 31, 2021.
Other than as set forth above, there have been no changes during the third quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our Internal Control over Financial Reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental
While it is not possible for us to predict the final outcome of any pending legal proceedings involving governmental authorities under federal, state, and local laws regulating the discharge of materials into the environment, we do not anticipate a material effect on our financial position if we were to receive an unfavorable outcome in any one or more of such proceedings. Our threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
Other
The additional information called for by this item is provided in Note 3 – Contingent Liabilities and Commitments, included in the Notes to Financial Statements included under Part 1, Item 1. Financial Statements of this Form 10-Q, which information is incorporated by reference into this item.
Item 1A. Risk Factors
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020 includes certain risk factors that could materially affect our business, financial condition, or future results. Those Risk Factors have not materially changed.
Item 6. Exhibits
The following instruments are included as exhibits to this report.
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Exhibit | | Description |
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2 | | |
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3.1 | | |
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3.2 | | |
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10.1 | | Credit Agreement dated as of October 8, 2021, between The Williams Companies, Inc., Northwest Pipeline LLC, and Transcontinental Gas Pipe Line Company, LLC, as co-borrowers, the lenders named therein, and Wells Fargo Bank, National Association, as Administrative Agent (filed on October 8, 2021 as Exhibit 10.1 to The Williams Companies, Inc.’s Current Report on Form 8-K (File No. 001-04174) and incorporated herein by reference). |
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31.1* | | |
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31.2* | | |
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32** | | |
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101.INS* | | XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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101.SCH* | | XBRL Taxonomy Extension Schema. |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase. |
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101.DEF* | | XBRL Taxonomy Definition Linkbase. |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase. |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase. |
104* | | Cover Page Interactive Data File. The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document (contained in Exhibit 101). |
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* | Filed herewith. |
** | Furnished herewith. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | NORTHWEST PIPELINE LLC |
| | | | Registrant |
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Date: | November 1, 2021 | By: | | /s/ Billeigh W. Mark |
| | | | Billeigh W. Mark |
| | | | Controller |
| | | | (Principal Accounting Officer) |