-----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, Wcd1XyuQZZB4zw8IZ+GjYOmeoQ3TzHgrh3dTq2h0mXO0yt16A8iV5+3PKHOc9EwD dxI2wPbSuI/CdZkiy8Vcww== 0000099250-00-000003.txt : 20000516 0000099250-00-000003.hdr.sgml : 20000516 ACCESSION NUMBER: 0000099250-00-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 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-Q SEC ACT: SEC FILE NUMBER: 001-07584 FILM NUMBER: 631218 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-Q 1 TRANSCO 1ST QTR 2000 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 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 BOULEVARD P. O. BOX 1396 HOUSTON, TEXAS 77251 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000 NONE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AS OF MARCH 31, 2000 WAS 100. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED: TRANSCONTINENTAL GAS PIPE LINE CORPORATION AND SUBSIDIARIES (TRANSCO) The accompanying interim condensed consolidated financial statements of Transco do not include all notes in annual financial statements and therefore should be read in conjunction with the consolidated financial statements and notes thereto in Transco's 1999 Annual Report on Form 10-K. The accompanying condensed consolidated financial statements have not been audited by independent auditors but include all adjustments both normal recurring and others which, in the opinion of Transco's management, are necessary to present fairly its financial position at March 31, 2000, and results of operations and cash flows for the three months ended March 31, 2000 and 1999. Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although Transco believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be achieved. Such statements are made in reliance on the "safe harbor" protections provided under the Private Securities Litigation Reform Act of 1995. Additional information about issues that could lead to material changes in performance is contained in Transco's 1999 Annual Report on Form 10-K. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
March 31, December 31, 2000 1999 ----------------- ----------------- ASSETS Current Assets: Cash $ 1,197 $ 843 Receivables: Affiliates 7,947 14,761 Others 28,182 46,394 Advances to affiliates 533,836 481,707 Transportation and exchange gas receivables: Affiliates 347 354 Others 36,408 45,611 Inventories 68,201 77,200 Deferred income taxes 74,736 68,081 Other 16,020 17,071 ----------------- ----------------- Total current assets 766,874 752,022 ----------------- ----------------- Long-term advances to affiliates 19,948 13,689 ----------------- ----------------- Investments, at cost plus equity in undistributed earnings 60,591 58,093 ----------------- ----------------- Property, Plant and Equipment : Natural gas transmission plant 4,488,339 4,452,101 Less-Accumulated depreciation and amortization 824,179 791,061 ----------------- ----------------- Total property, plant and equipment, net 3,664,160 3,661,040 ----------------- ----------------- Other Assets 173,476 174,336 ----------------- ----------------- $ 4,685,049 $ 4,659,180 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Thousands of Dollars) (Unaudited)
March 31, December 31, 2000 1999 ---------------- ---------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Payables: Affiliates $ 66,169 $ 53,440 Others 77,737 102,534 Advances from affiliates 6,388 - Transportation and exchange gas payables: Affiliates 3,377 868 Others 5,196 7,569 Accrued liabilities 130,012 133,176 Reserve for rate refunds 170,831 159,632 ---------------- ---------------- Total current liabilities 459,710 457,219 ---------------- ---------------- Long-Term Debt, less current maturities 975,214 975,330 ---------------- ---------------- Other Long-Term Liabilities: Deferred income taxes 874,758 879,506 Other 118,144 123,897 ---------------- ---------------- Total other long-term liabilities 992,902 1,003,403 ---------------- ---------------- Commitments and contingencies (Note 3) 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 1,652,430 Retained earnings 604,793 570,798 ---------------- ---------------- Total common stockholder's equity 2,257,223 2,223,228 ---------------- ---------------- $ 4,685,049 $ 4,659,180 ================ ================ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars) (Unaudited)
Three Months Ended March 31, ---------------------------------------- 2000 1999 ----------------- ----------------- Operating Revenues: Natural gas sales $ 201,082 $ 148,071 Natural gas transportation 172,490 168,061 Natural gas storage 36,243 35,002 Other 1,222 2,989 ----------------- ----------------- Total operating revenues 411,037 354,123 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 201,089 148,071 Cost of natural gas transportation 15,114 10,984 Operation and maintenance 43,634 41,533 Administrative and general 33,712 34,631 Depreciation and amortization 40,320 40,213 Taxes - other than income taxes 10,195 7,848 Other 1,272 1,016 ----------------- ----------------- Total operating costs and expenses 345,336 284,296 ----------------- ----------------- Operating Income 65,701 69,827 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 25,230 18,052 Interest income - affiliates (8,699) (5,732) Allowance for equity and borrowed funds used during construction (AFUDC) (2,717) (855) Equity in earnings of unconsolidated affiliates (1,893) (99) Miscellaneous other (income) deductions, net (174) 840 ----------------- ----------------- Total other deductions 11,747 12,206 ----------------- ----------------- Income before Income Taxes 53,954 57,621 Provision for Income Taxes 19,959 22,479 ----------------- ----------------- Net Income $ 33,995 $ 35,142 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) (Unaudited)
Three Months Ended March 31, --------------------------------- 2000 1999 ------------- ------------- Cash flows from operating activities: Net income $ 33,995 $ 35,142 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 41,649 41,332 Deferred income taxes (11,403) (1,060) Allowance for equity funds used during construction (AFUDC) (1,939) (602) Changes in operating assets and liabilities: Receivables 18,926 2,570 Receivables sold 6,100 2,000 Transportation and exchange gas receivables 9,210 22,078 Inventories 8,999 5,894 Payables (4,260) 27,393 Transportation and exchange gas payables 136 (711) Accrued liabilities (3,019) (39,453) Reserve for rate refunds 11,199 (76,728) Other, net (5,996) (32,095) ------------- ------------- Net cash provided by (used in) operating activities 103,597 (14,240) ------------- ------------- Cash flows from financing activities: Advances from affiliate, net 1,164 - ------------- ------------- Net cash provided by financing activities 1,164 - ------------- ------------- Cash flows from investing activities: Property, plant and equipment: Additions, net of equity AFUDC (43,625) (25,093) Changes in accounts payable (7,804) (5,861) Advances to affiliates, net (53,165) 63,752 Investments in affiliates (608) (21,098) Other, net 795 2,109 ------------- ------------- Net cash provided by (used in) investing activities (104,407) 13,809 ------------- ------------- Net increase (decrease) in cash 354 (431) Cash at beginning of period 843 1,470 ------------- ------------- Cash at end of period $ 1,197 $ 1,039 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for : Interest (exclusive of amount capitalized) $ 23,839 $ 42,385 Income taxes paid 13,457 17,551 The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE STRUCTURE AND CONTROL Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned subsidiary of Williams Gas Pipeline Company (WGP). WGP is a wholly-owned subsidiary of The Williams Companies, Inc. (Williams). 2. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Transco and its 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. The condensed consolidated financial statements have been prepared from the books and records of Transco without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Transco's 1999 Annual Report on Form 10-K. 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. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities". This standard, as amended by SFAS No. 137, will be effective for Transco beginning January 1, 2001. This standard requires that all derivatives be recognized as assets or liabilities in the balance sheet and that those instruments be measured at fair value. The effect of this standard on Transco's results of operations and financial position is being evaluated. Certain reclassifications have been made in the 1999 financial statements to conform to the 2000 presentation. 3. CONTINGENT LIABILITIES AND COMMITMENTS There have been no new developments from those described in Transco's 1999 Annual Report on Form 10-K other than as described below. RATE AND REGULATORY MATTERS GENERAL RATE CASE (DOCKET NO. RP97-71) On November 1, 1996, Transco submitted to the FERC a general rate case filing principally designed to recover costs associated with increased capital expenditures. These increased capital expenditures primarily relate to system reliability, integrity and Clean Air Act compliance. When stated on a comparable basis, the rates Transco placed into effect on May 1, 1997, subject to refund, represented an annual cost of service increase of approximately $47 million over the cost of service underlying the rates contained in the settlement of Transco's last general rate filing (Docket No. RP95-197). The filing also included (1) a pro-forma proposal to roll-in the costs of Transco's Leidy Line and Southern expansion incremental projects and (2) a pro-forma proposal to make interruptible transportation (IT) backhaul rates equal to the IT forward haul rates. On November 29, 1996, the FERC issued an order accepting Transco's filing, suspending its effectiveness until May 2, 1997 (subsequently revised, on rehearing, to May 1, 1997) and establishing a hearing to examine the reasonableness of Transco's proposed rates. In addition, the order consolidated Transco's pro forma roll-in proposal with the Phase II hearing in Docket No. RP95-197. On January 20, 1998, Transco filed a Stipulation and Agreement for approval by the FERC, which resolves all cost of service, throughput and other issues in this proceeding, except rate of return, capital structure and certain minor cost allocation and rate design issues. On June 12, 1998, the FERC issued an order approving the settlement. On October 30, 1998, Transco issued refunds in connection with the settlement in the amount of $89.5 million, including interest, for which Transco had previously provided a reserve. The issues not resolved by the settlement were litigated by the parties before a FERC Administrative Law Judge (ALJ). On March 30, 1999, the ALJ issued her initial decision which is consistent with the rate of return and capital structure policies FERC announced in Docket No. RP95-197. Applying these policies, the ALJ recommended utilization of Transco's own capital structure, consisting of 60.2% equity, and a return on equity of 12.40%. On March 17, 2000, the FERC issued an order which, among other things, affirmed the ALJ's decision on the rate of return and capital structures issues. On April 17, 2000, several parties requested rehearing of, among other things, issues related to the FERC's rate of return decision in the March 17, 2000, order. Transco is evaluating the effect of the order and requests for rehearing. Transco believes its reserve for rate refunds is adequate for any refunds that may be required. 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 have generated additional annual jurisdictional revenues of approximately $132 million over the pre-filed rates in effect, based, among other things, on an increase in Transco's cost of capital resulting from an increase in the equity component of the capital structure used (the filing was 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% to the proposed rate of return on equity of 15.25%. 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. On June 19, 1996, Transco filed with the FERC a Stipulation and Agreement which resolved cost of service (except capital structure and rate of return), throughput level and mix, and certain cost allocation and rate design issues. The agreement also reserved certain other issues for hearing, including the issue of rolled-in pricing for incremental Leidy Line services. With the exception of one party that filed comments opposing the settlement and one party that took no position on the merits of the settlement, all active parties and the FERC's staff either supported the settlement or did not oppose it. Transco began billing the settlement rates to non-contesting parties effective August 1, 1996. On October 9, 1996, Transco filed with the FERC a Stipulation and Agreement which, subject to the outcome of the litigation of the reserved issues in this proceeding, settled the issues of cost of service and throughput with the one party that opposed the resolution of those issues in the June 19, 1996 settlement. On November 1, 1996, the FERC issued an order approving the June 19 agreement, and on December 23, 1996, FERC approved the October 9, 1996 agreement. On February 3, 1997, the FERC denied rehearing of its November 1, 1996 order. As a result, Transco made refunds on May 30, 1997 of approximately $79.0 million, including interest, under Docket No. RP95-197 for which Transco had previously provided a reserve. Following a hearing before an ALJ, the ALJ's initial decision and an August 1, 1997, order from the FERC, the FERC issued a rehearing order on July 29, 1998, addressing Transco's capital structure and rate of return for ratemaking purposes. As to capital structure, the FERC affirmed the use of Transco's own capital structure, consisting of 57.58% equity, in developing Transco's rate of return in this proceeding. As discussed in greater detail below, the FERC also modified its previously used methodology for determining return on equity. Applying its revised methodology to Transco in this proceeding, the FERC established a rate of return on equity for Transco of 12.49%. A joint request for rehearing of the July 29, 1998 order was filed with the FERC and, on December 1, 1998, the FERC denied rehearing. On January 29, 1999, most of the same parties that were involved in the joint request for rehearing filed a notice of appeal with the United States Court of Appeals for the District of Columbia (D.C. Circuit Court). Transco made refunds on March 1, 1999 of approximately $96.0 million, including interest, under Docket No. RP95-197 for which Transco had previously provided a reserve. During the first half of 1999, Transco engaged in an analysis of the court appeal and, particularly, its likely results. Based on developments in regulatory proceedings in the second quarter of 1999 involving Transco and others, and advice received from counsel, Transco adjusted its remaining reserve for rate refunds ($28.1 million of principal and $5.9 million of interest) in the second quarter of 1999 to take into account the FERC's revised rate of return methodology as applied in the July 29, 1998, and December 1, 1998 orders. On February 7, 2000, the D.C. Circuit Court denied the appeal filed in January 1999. The hearing concerning the other cost allocation and rate design issues not resolved by the June 19, 1996 and October 9, 1996 agreements concluded in November 1996. A supplemental hearing to consider Transco's roll-in proposal filed in Docket No. RP97-71, as discussed above, was completed in June 1997. On March 24, 1998, the ALJ issued an initial decision on all of these issues. As to the main issue addressed in the decision, rolled-in pricing, the ALJ determined that the proponents of roll-in, including Transco, must satisfy the burden under Section 5 of the NGA and demonstrate that Transco's existing incremental rate treatment is unjust and unreasonable and that the proposed rolled-in rate treatment is just and reasonable. The ALJ ruled that neither Transco nor any of the other roll-in proponents had satisfied that burden and, therefore, that Transco's existing incremental rate treatment must remain in effect. On April 16, 1999, the FERC issued an order reversing the ALJ, concluding that Transco's proposal did not have to meet the Section 5 burden discussed above and that under the appropriate standard, Section 4, Transco had demonstrated that its proposal was just and reasonable. As a result, the FERC remanded to the ALJ issues regarding the implementation of Transco's roll-in proposal. Several parties have filed requests for rehearing of the FERC's April 16, 1999 order. On April 4, 2000, the ALJ issued an initial decision on the remanded issues relating to the implementation of Transco's roll-in proposal. The ALJ ruled in favor of Transco's positions, with the exception of one of Transco's proposed cost allocation changes and a requirement that the roll-in of the costs of the incremental projects into Transco's system rates be phased over a three-year period. The ALJ's initial decision is subject to review by the FERC. PRODUCTION AREA RATE DESIGN (DOCKET NOS. RP92-137, RP93-136 AND RP98-381) 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 (Docket Nos. RP92-137 and RP93-136), 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. On July 3, 1996, the FERC issued an order on review of the ALJ's initial decision concerning, among other things, Transco's production area rate design. The FERC rejected the ALJ's recommendations that Transco divide its costs between its production area and market area, and permit its customers to renominate their firm entitlements. The FERC also concluded that Transco may offer firm service on its supply laterals through an open season and eliminate its IT feeder service in favor of an interruptible service option that does not afford shippers feeding firm transportation on Transco's production area mainline a priority over other interruptible transportation. On December 18, 1996, the FERC denied rehearing of its July 3, 1996 Order. Several parties, including Transco, filed petitions for review in the D.C. Circuit Court of the FERC's orders addressing production area rate design issues. Those appeals were held in abeyance pending the outcome of the proceedings in Transco's Docket No. RP98-381. In light of the FERC's orders rejecting Transco's proposal in Docket No. RP98-381, Transco withdrew its appeal and the remaining appeal was restored to the active docket. On March 24, 2000, the D.C. Circuit Court issued its opinion in the remaining appeal. The court determined that the FERC failed to adequately explain its decision to reject Transco's production area rate design proposal for its supply laterals, and remanded the case back to the FERC for further action. TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (DOCKET NOS. CP98-236 AND 242) In February 1998, Transco filed an application with the FERC seeking authorization to abandon Transco's onshore Tilden/McMullen Gathering System located in Texas by conveyance to Williams Gas Processing - Gulf Coast Company (Gas Processing). Gas Processing filed a contemporaneous request that the FERC declare that the facilities sought to be abandoned would be considered nonjurisdictional gathering facilities upon transfer to Gas Processing. In May 1999, the FERC issued an order in which it determined that certain of the facilities would be gathering facilities upon transfer to Gas Processing, i.e., 1) those facilities upstream of and including the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream of the Tilden Plant, and 3) the small, short laterals which branch out from the McMullen Lateral downstream of the Tilden Plant at several points along its length. However, the FERC determined that the McMullen Lateral itself, as well as two compressor units, are jurisdictional facilities, but authorized their abandonment subject to Gas Processing obtaining a certificate to operate those facilities. On June 3, 1999, Transco and Gas Processing filed for rehearing of the order with regard to the facilities classified by the FERC as jurisdictional facilities, and on October 5, 1999, the FERC denied the rehearing request. On March 7, 2000, Transco filed a limited NGA Section 4 filing with the FERC, notifying the FERC that Transco intended to effectuate the spin-down to Gas Processing of the Tilden-McMullen facilities determined by the FERC to be gathering facilities to be effective April 1, 2000, and adjusting Transco's rates on a prospective basis effective with the spin-down to reflect a decrease in Transco's overall cost of service, rate base and operation and maintenance expense resulting from the spin-down. The net book value of the facilities included in this limited NGA filing is approximately $18 million and annual operating income associated with these facilities is estimated to be less than $1 million. On April 6, 2000, the FERC issued an order accepting the March 7, 2000, filing effective April 1, 2000, subject to refund and the outcome of the Docket No. RP97-71 proceeding. LEGAL PROCEEDINGS ROYALTY CLAIMS AND LITIGATION Transco was notified by Freeport-McMoRan, Inc. (FMP) in February 1995, that pursuant to a settlement with the Mineral Management Service (MMS) of the MMS' claim for royalties due under gas contracts between Transco and FMP which had been modified pursuant to settlement agreements made in 1986 and 1989, FMP was asserting a claim for indemnification of approximately $6 million, including interest, under the excess royalty provisions of those settlement agreements. On or about March 30, 1995, FMP filed a petition for specific performance seeking recovery against Transco for the sums claimed under the settlement agreements. In May 1998, FMP filed a motion for summary judgement which Transco opposed. In September 1998, the trial court granted FMP's motion finding that at least a portion of FMP's payment to the MMS was subject to indemnification. Transco appealed the trial court's ruling and in March, 2000, the appellate court reversed the trial court and remanded the case for trial. SUMMARY While no assurances may be given, Transco does not believe that the ultimate resolution of the foregoing matters and those described in Transco's 1999 Annual Report on Form 10-K, 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 or cash flow requirements. 4. DEBT AND FINANCING ARRANGEMENTS LONG-TERM DEBT Williams and certain of its subsidiaries, including Transco, are parties to a $1 billion credit agreement (Credit Agreement), under which Transco can borrow up to $400 million if the funds available under the Credit Agreement have not been borrowed by Williams or other subsidiaries. Interest rates vary with current market conditions based on the base rate of Citibank N.A., three-month certificates of deposit of major United States money market banks, federal funds rate or the London Interbank Offered Rate. The Credit Agreement contains restrictions which limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Transco. As of March 31, 2000, Transco had no outstanding borrowings under this agreement. SALE OF RECEIVABLES Transco is a party to an agreement that expires on January 26, 2001 pursuant to which Transco can sell to an investor up to $100 million of undivided interest in certain of its trade receivables. At March 31, 2000 and December 31, 1999, interests in these receivables held by the investor were $98 million and $92 million, respectively. ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements, notes and management's narrative analysis contained in Items 7 and 8 of Transco's 1999 Annual Report on Form 10-K and with the condensed consolidated financial statements and notes contained in this report. RESULTS OF OPERATIONS NET INCOME AND OPERATING INCOME Transco's net income for the three months ended March 31, 2000 was $34.0 million compared to net income of $35.1 million for the three months ended March 31, 1999. Operating income for the three months ended March 31, 2000 was $65.7 million compared to $69.8 million for the three months ended March 31, 1999. The lower operating income of $4.1 million was primarily the result of lower other operating revenues and higher operating costs and expenses, partly offset by higher gas transportation and storage revenues and lower administrative and general expense, as discussed below. In addition to lower operating income, the decrease in net income was attributable to higher net interest expense due primarily to adjustments to prior year estimates of interest associated with the recovery of prior years' tracked gas costs. This was partially offset by a higher allowance for funds used during construction due primarily to a greater amount of capital projects under construction and higher equity in earnings of unconsolidated affiliates due primarily to earnings from Pine Needle LNG Company and Cardinal Pipeline Company that were placed in service during 1999. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. TRANSPORTATION REVENUES Transco's operating revenues related to its transportation services for the three months ended March 31, 2000 were $172.5 million, compared to $168.1 million for the three months ended March 31, 1999. The higher transportation revenues were due to an increase in demand revenues ($6.4 million) due primarily to a lower reserve for rate refunds, partially offset by a decrease in commodity revenues ($1.5 million) due primarily to lower production-area interruptible transportation revenues. As shown in the table below, Transco's total market-area deliveries for the three months ended March 31, 2000 increased 11.4 trillion British Thermal Units (TBtu) (2.8%) when compared to the same period in 1999. This is primarily the result of increased deliveries related to incremental projects. Transco's production area deliveries for the three months ended March 31, 2000 increased 21.0 TBtu (47.0%) when compared to the same period in 1999 due primarily to increased liquifiables transportation. As a result of a straight fixed-variable (SFV) rate design, increases or decreases in firm transportation volumes in comparable facilities have no significant impact on operating income; however, because interruptible transportation rates have components of fixed and variable cost recovery, increases or decreases in interruptible transportation volumes do have an impact on operating income.
Three Months Ended March 31, ------------------------- Transco System Deliveries (TBtu) 2000 1999 ---------- ---------- Market-area deliveries: Long-haul transportation 213.3 235.6 Market-area transportation 210.1 176.4 ---------- ---------- Total market-area deliveries 423.4 412.0 Production-area transportation 65.7 44.7 ---------- ---------- Total system deliveries 489.1 456.7 ========== ========== Average Daily Transportation Volumes (TBtu) 5.4 5.1 Average Daily Firm Reserved Capacity (TBtu) 6.5 6.0
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. See Note 3 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent developments in Transco's rate and regulatory matters. On March 17, 2000, Transco received a favorable order from the FERC related to the rate of return and capital structure issues in Docket No. RP97-71. In April 2000, requests for rehearing of the March 17, 2000, order were filed with the FERC. Based on an initial review of the requests for rehearing and preliminary calculations of the financial impact of the FERC's March 17 order, Transco estimates that its reserve for rate refunds will be reduced by $45 million to $50 million in the second quarter of 2000. SALES REVENUES 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. Through an agency agreement with Transco, WESCO, an affiliate of Transco, manages Transco's jurisdictional merchant gas sales. The long-term purchase agreements managed by WESCO remain in Transco's name, as do the corresponding sales of such purchased gas. Therefore, Transco continues to record natural gas sales revenues and the related accounts receivable and cost of natural gas sales and the related accounts payable for the jurisdictional merchant sales that are managed by WESCO. Through the agency agreement, WESCO receives all margins associated with jurisdictional merchant gas sales 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 Transco's operating income or results of operations. Transco's operating revenues for the three months ended March 31, 2000 related to its sales services, including Transco's cash out sales in settlement of gas imbalances, increased $53.0 million to $201.1 million, when compared to the same period in 1999. The increase was primarily due to higher cash out sales related to the settlement of imbalances, higher sales volumes, and a higher average sales price of $2.55 per dekatherm for the three months ending March 31, 2000, versus $1.76 for the same period of 1999. Three Months Ended March 31, ------------------------- Gas Sales Volumes (TBtu) 2000 1999 -------- -------- Long-term sales 50.2 51.5 Short-term sales 8.7 4.1 -------- -------- Total gas sales 58.9 55.6 ======== ======== STORAGE REVENUES Transco's operating revenues related to storage services increased $1.2 million to $36.2 million for the three months ended March 31, 2000 when compared to the same period in 1999. This revenue increase is attributable to a $0.5 million increase from higher underground storage rates charged by others and $0.7 million higher storage demand charges. OTHER OPERATING REVENUES Other operating revenues decreased $1.8 million to $1.2 million for the three months ended March 31, 2000 when compared to the same period in 1999. This decrease is primarily due to lower Parking and Borrowing Service revenues ($1.0 million) and lower liquids transportation ($0.6 million). OPERATING COSTS AND EXPENSES Excluding the cost of natural gas sales of $201 million for the three months ended March 31, 2000 and $148 million for the comparable period in 1999, Transco's operating expenses for the three months ended March 31, 2000, were approximately $8.0 million higher than the comparable period in 1999. This increase was primarily attributable to higher cost of natural gas transportation, operation and maintenance expense and taxes other than income taxes, partially offset by lower administrative and general expense. The higher cost of natural gas transportation was due to a $4.1 million loss accrual associated with the settlement of historical transportation and exchange gas imbalances. The higher operation and maintenance expense was primarily attributable to higher labor ($0.4 million), materials ($0.3 million), employee expenses ($0.5 million), and underground gas storage rates charged by others ($0.6 million). The higher taxes other than income taxes was due to a 1999 adjustment ($2.4 million) to a prior year estimate for franchise, payroll and sales and use tax accruals. Lower administrative and general expense was due to lower professional services ($1.9 million), resulting from lower year 2000 computer systems costs, partially offset by higher labor ($0.3 million) and employee expenses ($0.4 million). 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 accessing capital markets, by repayments of funds advanced to Williams or WGP, by borrowings under the Credit Agreement and short-term money market facilities and, if required, advances from Williams. At March 31, 2000, there were no outstanding borrowings under the Credit Agreement and no short-term money market facilities were in place. In 1997, Transco filed a registration statement with Securities and Exchange Commission and, at March 31, 2000, the amount of $200 million of shelf availability remains under this registration statement which may be used to issue debt securities. Interest rates and market conditions will affect amounts borrowed, if any, under this arrangement. Transco believes any additional financing arrangements, if required, can be obtained on reasonable terms. As a participant in Williams' cash management program, Transco has made advances to Williams or WGP. At March 31, 2000, there were no advances due Transco by Williams. At March 31, 2000, the advances due Transco by WGP totaled $553.8 million of which $19.9 million associated with WGP's long-term investments was classified as a long-term advance in the accompanying Condensed Consolidated Balance Sheet. CAPITAL EXPENDITURES As shown in the table below, Transco's capital expenditures and investments in affiliates for the three months ended March 31, 2000 were $52.0 million, compared to $52.1 million for the three months ended March 31, 1999.
Three Months Ended March 31, ---------------------- Capital Expenditures and Investments in Affiliates 2000 1999 --------- --------- (In Millions) Market-area projects $ 23.1 $ 5.2 Supply-area projects 2.0 1.3 Maintenance of existing facilities and other projects 26.3 24.5 Investment in affiliates 0.6 21.1 --------- --------- Total capital expenditures and investments in affiliates $ 52.0 $ 52.1 ========= =========
Transco's capital expenditures budget for 2000 and future capital projects are discussed in its 1999 Annual Report on Form 10-K. The following describes significant developments related to those projects and any new projects proposed by Transco. MARKETLINK EXPANSION PROJECT On May 13, 1998, Transco filed an application with the FERC for approval to construct and operate mainline and Leidy Line facilities to create an additional 676 MMcf/d of firm transportation capacity to serve increased demand in the mid-Atlantic and south Atlantic regions of the United States by a targeted in-service date of November 1, 2000. The estimated cost of the proposed facilities is $529 million. On December 17, 1999, the FERC issued an interim order giving Transco conditional approval for MarketLink, along with the Independence Pipeline Project and ANR Pipeline Company's Supply Link Project, but withholding final certificate authorization until Independence Pipeline Company (Independence) and ANR Pipeline Company (ANR) file long-term, executed contracts with nonaffiliated shippers for at least 35% of the capacity of their respective projects. Transco filed for rehearing of the interim order. On April 26, 2000, the FERC issued an order on rehearing which authorized Transco to proceed with the Market Link project subject to certain conditions. INDEPENDENCE PIPELINE PROJECT On April 26, 2000, the FERC issued an order denying rehearing and requiring that Independence submit by June 26, 2000, agreements with nonaffiliated shippers for at least 35% of the capacity of the project, or the application seeking authorization to build the project will be dismissed. SUNDANCE EXPANSION PROJECT On April 3, 2000, Transco filed an application with the FERC for its Sundance Expansion Project, which would create approximately 228 MMcf/d of additional firm transportation capacity from Transco's Station 65 in Louisiana to delivery points in Georgia, South Carolina and North Carolina. Approximately 38 miles of new pipeline along the existing mainline system will be installed along with modifications to existing compressor stations in Georgia, South Carolina and North Carolina. The project has a target in-service date of May 2002 and an estimated cost of approximately $134 million. OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES Transco's capital requirements and contingencies are discussed in its 1999 Annual Report on Form 10-K. Other than as described in Note 3 of the Notes to Condensed Consolidated Financial Statements, there have been no new developments from those described in Transco's 1999 Annual Report on Form 10-K with regard to other capital requirements and contingencies. RATE AND REGULATORY REFUNDS Transco has provided reserves which it believes are adequate for any rate refunds that may be required. 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 or WGP, advances or capital contributions from Williams and borrowings under the Credit Agreement will provide Transco with sufficient liquidity to meet its capital requirements. When necessary, Transco also expects to access public and private markets on reasonable terms to finance its capital requirements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. See discussion in Note 3 of the Notes to Condensed Consolidated Financial Statements included herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. None (b) Reports on Form 8-K. None SIGNATURE 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. TRANSCONTINENTAL GAS PIPE LINE CORPORATION (Registrant) Dated: May 12, 2000 By /s/ James C. Bourne ---------------------- James C. Bourne Controller (Principal Accounting Officer) EX-27 2 FDS 1ST QTR 2000
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2000, CONTAINED IN TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 2000 FIRST QUARTER REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 1,197 0 16,335 0 68,201 766,874 4,488,339 824,179 4,685,049 459,710 975,214 0 0 0 2,257,223 4,685,049 201,082 411,037 201,089 310,352 0 0 25,230 53,954 19,959 33,995 0 0 0 33,995 0 0
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