10-Q 1 0001.txt TRANSCO 3RD 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 September 30, 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 September 30, 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 and 2000 first and second Quarterly Reports on Form 10-Q. 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 September 30, 2000, and results of operations for the three and nine months ended September 30, 2000 and 1999 and cash flows for the nine months ended September 30, 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 and 2000 first and second Quarterly Reports on Form 10-Q. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
September 30, December 31, 2000 1999 ----------------- ------------------ ASSETS Current Assets: Cash $ 425 $ 843 Receivables: Affiliates 6,344 14,761 Others 56,506 46,394 Advances to affiliates 615,538 481,707 Transportation and exchange gas receivables: Affiliates - 354 Others 28,290 45,611 Inventories 72,314 77,200 Deferred income taxes 59,273 68,081 Other 18,676 17,071 ----------------- ----------------- Total current assets 857,366 752,022 ----------------- ----------------- Long-Term advances to affiliates 20,679 13,689 ----------------- ----------------- Investments, at cost plus equity in undistributed earnings 61,781 58,093 ----------------- ----------------- Property, Plant and Equipment: Natural gas transmission plant 4,689,933 4,452,101 Less-Accumulated depreciation and amortization 934,095 791,061 ----------------- ----------------- Total property, plant and equipment, net 3,755,838 3,661,040 ----------------- ----------------- Other Assets 172,910 174,336 ----------------- ----------------- $ 4,868,574 $ 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)
September 30, December 31, 2000 1999 ---------------- ----------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Payables: Affiliates $ 153,293 $ 53,440 Others 81,457 102,534 Advances from affiliates 5,320 - Transportation and exchange gas payables: Affiliates 3,003 868 Others 5,545 7,569 Accrued liabilities 182,561 133,176 Reserve for rate refunds 118,704 159,632 Current maturities of long-term debt 200,000 - ---------------- ---------------- Total current liabilities 749,883 457,219 ---------------- ---------------- Long-Term Debt, less current maturities 774,974 975,330 ---------------- ---------------- Other Long-Term Liabilities: Deferred income taxes 865,529 879,506 Other 118,232 123,897 ---------------- ---------------- Total other long-term liabilities 983,761 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 707,526 570,798 ---------------- ---------------- Total common stockholder's equity 2,359,956 2,223,228 ---------------- ---------------- $ 4,868,574 $ 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 September 30, ---------------------------------------- 2000 1999 ----------------- ----------------- Operating Revenues: Natural gas sales $ 294,956 $ 195,715 Natural gas transportation 157,203 152,964 Natural gas storage 36,033 33,825 Other 3,270 1,705 ----------------- ----------------- Total operating revenues 491,462 384,209 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 294,956 195,715 Cost of natural gas transportation 10,405 6,893 Operation and maintenance 44,112 41,241 Administrative and general 27,185 31,242 Depreciation and amortization 42,359 40,268 Taxes - other than income taxes 8,736 9,107 Other 668 901 ----------------- ----------------- Total operating costs and expenses 428,421 325,367 ----------------- ----------------- Operating Income 63,041 58,842 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 20,738 20,282 Interest income - affiliates (11,157) (6,640) Allowance for equity and borrowed funds used during construction (AFUDC) (5,720) (1,479) Equity in earnings of unconsolidated affiliates (2,146) (442) Miscellaneous other (income) deductions, net (1,274) 37 ----------------- ----------------- Total other (income) deductions 441 11,758 ----------------- ----------------- Income before Income Taxes 62,600 47,084 Provision for Income Taxes 23,738 17,762 ----------------- ----------------- Net Income $ 38,862 $ 29,322 ================= ================= 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)
Nine Months Ended September 30, ---------------------------------------- 2000 1999 ----------------- ----------------- Operating Revenues: Natural gas sales $ 749,540 $ 512,063 Natural gas transportation 552,235 506,681 Natural gas storage 108,165 102,718 Other 5,805 6,571 ----------------- ----------------- Total operating revenues 1,415,745 1,128,033 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 749,547 512,063 Cost of natural gas transportation 36,415 28,534 Operation and maintenance 129,083 123,550 Administrative and general 90,583 98,806 Depreciation and amortization 123,205 120,655 Taxes - other than income taxes 29,203 26,116 Other 2,479 2,673 ----------------- ----------------- Total operating costs and expenses 1,160,515 912,397 ----------------- ----------------- Operating Income 255,230 215,636 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 57,521 52,209 Interest income - affiliates (30,170) (18,034) Allowance for equity and borrowed funds used during construction (AFUDC) (11,835) (3,473) Equity in earnings of unconsolidated affiliates (5,917) (1,155) Miscellaneous other (income) deductions, net (2,582) 1,756 ----------------- ----------------- Total other deductions 7,017 31,303 ----------------- ----------------- Income before Income Taxes 248,213 184,333 Provision for Income Taxes 93,430 70,458 ----------------- ----------------- Net Income $ 154,783 $ 113,875 ================= ================= 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)
Nine Months Ended September 30, --------------------------------- 2000 1999 ------------- ------------- Cash flows from operating activities: Net income $ 154,783 $ 113,875 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 126,464 124,528 Deferred income taxes (5,168) 4,270 Reserve for transportation and exchange imbalances 6,429 - Equity in earnings of unconsolidated affiliates, net of distributions (1,662) (1,155) Allowance for equity funds used during construction (AFUDC) (8,163) (2,414) Changes in operating assets and liabilities: Receivables (9,799) (31) Receivables sold 8,100 13,000 Transportation and exchange gas receivables 11,246 25,593 Inventories 4,498 4,989 Payables 86,353 47,309 Transportation and exchange gas payables 111 2,780 Accrued liabilities 50,652 (28,470) Reserve for rate refunds (40,928) (78,994) Other, net (6,205) (36,571) ------------- ------------- Net cash provided by operating activities 376,711 188,709 ------------- ------------- Cash flows from financing activities: Advances from affiliate, net 97 - ------------- ------------- Net cash provided by financing activities 97 - ------------- ------------- Cash flows from investing activities: Property, plant and equipment: Additions, net of equity AFUDC (236,731) (108,590) Changes in accounts payable (8,936) (7,596) Advances to affiliates, net (135,598) (51,633) Investments in affiliates, net (2,049) (21,331) Other, net 6,088 895 ------------- ------------- Net cash used in investing activities (377,226) (188,255) ------------- ------------- Net increase (decrease) in cash (418) 454 Cash at beginning of period 843 1,470 ------------- ------------- Cash at end of period $ 425 $ 1,924 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (exclusive of amount capitalized) $ 55,327 $ 76,797 Income taxes paid 44,753 68,796 Income tax refunds received (118) - 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 and/or exercise significant influence 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 and 2000 first and second Quarterly Reports on Form 10-Q. 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. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137, which deferred the effective date of SFAS No. 133. This was followed in June 2000 by the issuance of SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which amends SFAS No. 133. SFAS No. 133 and 138 establish accounting and reporting standards for derivative financial instruments. The standards require that all derivative financial instruments be recorded on the balance sheet at their fair value. Changes in fair value of derivatives will be recorded each period in earnings if the derivative is not a hedge. If a derivative is a hedge, changes in the fair value of the derivative will either be recognized in earnings along with the change in fair value of the hedged asset, liability or firm commitment also recognized in earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. For a derivative recognized in other comprehensive income, the ineffective portion of a derivative's change in fair value will be recognized immediately in earnings. Transco will adopt these standards effective January 1, 2001. Based on Transco's implementation efforts to date and the fair value of its identified derivative positions existing at September 30, 2000, Transco does not expect that the impact of adopting the standards will be material to its financial position or results of operations. However, changing market prices and the possibility of entering into new derivative positions in the fourth quarter of 2000 and the fact that Transco continues to pursue its implementation efforts, causes the impact to Transco's financial position or results of operations to remain uncertain. The FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." This interpretation modifies the current practice of accounting for certain stock award agreements and is generally effective beginning July 1, 2000. The impact of this interpretation on Transco's results of operations and financial position was not material. 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 or 2000 first and second Quarterly Reports on Form 10-Q other than as described below. Legal Proceedings ROYALTY CLAIMS AND LITIGATION In August 1996, a lawsuit was filed against Transco and certain Transco affiliates by a royalty owner in a gas producing field in Brooks County, Texas alleging a claim for incorrect computation of royalties. Transco was alleged to have purchased gas from the field. Transco filed an answer denying liability for the claim. In August 2000, this lawsuit was settled. Although Transco did not make any contribution to the settlement, one producer participating in the settlement has asserted against Transco a claim for indemnification in the amount of approximately $6.7 million. Transco has denied the producer's claim. 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 and 2000 first and second Quarterly Reports on Form 10-Q, 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 $700 million 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. This agreement excludes Williams Communications Group Inc. (WCG). 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 September 30, 2000, Transco had no outstanding borrowings under this agreement. Current Maturities of Long-term Debt The $200 million of current maturities of long-term debt consists of 7.08% Debentures that mature on July 15, 2026, but are subject to redemption, at anytime after July 15, 2001, at Transco's option, in whole or part, at a specified redemption price, plus accrued and unpaid interest to the date of redemption. The holder of each 7.08% Debenture may elect between May 15, 2001 and June 15, 2001 to have such 7.08% Debenture repaid on July 15, 2001 at 100% of the principal amount. The 7.08% Debentures have no sinking fund provisions. If the holders of the 7.08% Debentures elect to have the 7.08% Debentures repaid, Transco intends to refinance the debt on a long-term basis by accessing public and private markets and utilizing any shelf availability under the registration statement previously filed with the Securities and Exchange Commission. 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 September 30, 2000 and December 31, 1999, interests in these receivables held by the investor were $100 million and $92 million, respectively. 5. FUEL TRACKER 1999 FUEL TRACKER (Docket No. TM99-6-29) On March 1, 1999, Transco made its annual filing pursuant to its FERC Gas Tariff to recalculate the fuel retention percentages applicable to Transco's transportation and storage rate schedules, to be effective April 1, 1999. Included in the filing were two adjustments that increased the estimated gas required for operations in prior periods by approximately 8 billion cubic feet. By letter order dated March 31, 1999, the FERC accepted the filing to be effective April 1, 1999, subject to refund and to further FERC action. On February 23, 2000, the FERC issued an order disallowing the major portions of the adjustments reflected in the March 1, 1999 filing. The FERC determined that Transco's tariff does not permit those adjustments, and as a result, the passthrough of those prior period adjustments must be determined on a case by case basis, based on the relative equities involved. Based on its analysis of the facts in this case, the FERC found in the February 23, 2000 order that the equities weighed against Transco. On October 30, 2000, the FERC issued an order granting rehearing. The FERC found that its decision to disallow the adjustments amounted to a "penalty" that is not equitable to Transco. The FERC therefore permits Transco to make the adjustments, but requires Transco to collect the revenue associated with the adjustments over a seven-year period. Transco must file tariff sheets and supporting documentation on or before November 29, 2000 to implement the FERC's decision. Transco is evaluating the effects of the decision. 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 in Transco's 2000 first and second Quarterly Reports on Form 10-Q 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 nine months ended September 30, 2000 was $154.8 million compared to net income of $113.9 million for the nine months ended September 30, 1999. Operating income for the nine months ended September 30, 2000 was $255.2 million compared to $215.6 million for the nine months ended September 30, 1999. The higher operating income of $39.6 million was primarily the result of higher gas transportation and storage revenues and lower administrative and general expenses, partly offset by higher cost of natural gas transportation, operations and maintenance expense, depreciation and amortization expense and taxes other than income taxes, as discussed below. The increase in net income was attributable to the increased operating income, as well as higher interest income from affiliates, 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, partially offset by higher net interest expense due primarily to adjustments to estimates of interest associated with the recovery of prior years' tracked gas costs. 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 nine months ended September 30, 2000 were $552.2 million, compared to $506.7 million for the nine months ended September 30, 1999. The higher transportation revenues of $45.5 million were due to a positive adjustment in the second quarter of 2000 to the reserve for rate refunds in Transco's general rate case Docket No. RP97-71 ($62.7 million), and higher demand revenues ($14.4 million) due to the FERC's March 17, 2000 order as discussed below. This was partly offset by a positive adjustment in the second quarter of 1999 to the reserve for rate refunds in Transco's general rate case Docket No. RP95-197 ($28.1 million) and a decrease in commodity revenues ($5.3 million) due primarily to lower production area interruptible transportation revenues and the spin down of the Tilden/McMullen facilities effective April 1, 2000. Based on Transco's evaluation of the FERC's March 17, 2000 order and requests by several parties for rehearing of the FERC's order, Transco reduced its reserve for rate refunds ($62.7 million of principal and $8.5 million of interest) in the second quarter of 2000 to reflect its conclusion that the risk associated with certain of the issues in this proceeding has been eliminated. As shown in the table below, Transco's total market-area deliveries for the nine months ended September 30, 2000 increased 29.8 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 nine months ended September 30, 2000 increased 54.0 TBtu (33.5%) when compared to the same period in 1999 due primarily to increased liquefiables 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. Nine months Ended September 30, ------------------------- Transco System Deliveries (Tbtu) 2000 1999 ---------- ---------- Market-area deliveries: Long-haul transportation 571.8 626.8 Market-area transportation 520.0 435.2 ---------- ---------- Total market-area deliveries 1,091.8 1,062.0 Production-area transportation 215.0 161.0 ---------- ---------- Total system deliveries 1,306.8 1,223.0 ========== ========== Average Daily Transportation Volumes (TBtu) 4.8 4.5 Average Daily Firm Reserved Capacity (TBtu) 6.3 6.3 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 5 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent developments in Transco's rate and regulatory matters. On October 30, 2000, Transco received a favorable order from the FERC related to its 1999 fuel tracker filing in Docket No. TM99-6-29. Transco is evaluating the effects of the decision. 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, excluding Transco's cash out sales in settlement of gas imbalances. 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 nine months ended September 30, 2000, related to its sales services, including Transco's cash out sales in settlement of gas imbalances, increased $237.5 million to $749.5 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, and a higher average sales price of $3.42 per dekatherm (dt) for the nine months ending September 30, 2000, versus $2.19 for the same period of 1999, partially offset by lower merchant gas sales volumes. Nine months Ended September 30, ------------------------- Gas Sales Volumes (TBtu) 2000 1999 -------- -------- Long-term sales 140.0 150.1 Short-term sales 30.4 28.1 -------- -------- Total gas sales 170.4 178.2 ======== ======== Storage Revenues Transco's operating revenues related to storage services increased $5.4 million to $108.2 million for the nine months ended September 30, 2000 when compared to the same period in 1999. This revenue increase is primarily due to $4.2 million of higher storage demand charges and a $1.4 million increase to recover higher underground storage rates charged by others. Other Operating Revenues Other operating revenues decreased $0.8 million to $5.8 million for the nine months ended September 30, 2000 when compared to the same period in 1999, primarily due to lower Parking and Borrowing Service revenues. Operating Costs and Expenses Excluding the cost of natural gas sales of $749.5 million for the nine months ended September 30, 2000 and $512.1 million for the comparable period in 1999, Transco's operating expenses for the nine months ended September 30, 2000, were approximately $10.6 million higher than the comparable period in 1999. This increase was primarily attributable to higher cost of natural gas transportation, operation and maintenance expense, depreciation and amortization 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 $6.4 million loss accrual associated with the settlement of historical transportation and exchange gas imbalances in the first and second quarters. The higher operation and maintenance expense was primarily attributable to higher underground gas storage rates charged by others ($1.6 million), employee expenses ($0.8 million), labor ($0.8 million), professional services ($0.8 million), and materials ($0.9 million). The higher depreciation and amortization was due primarily to plant and property additions. 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 ($3.6 million), resulting from lower year 2000 computer systems costs, lower pension expense ($2.3 million), lower postretirement benefits other than pensions expense ($1.6 million) and lower office rent ($0.8 million), partially offset by higher employee expenses ($1.1 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 WGP. At September 30, 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 the Securities and Exchange Commission and, at September 30, 2000, $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 September 30, 2000, there were no advances due Transco by Williams. At September 30, 2000, the advances due Transco by WGP totaled $636.2 million of which $20.7 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 nine months ended September 30, 2000 were $247.7 million, compared to $137.5 million for the nine months ended September 30, 1999. Nine months Ended September 30, ---------------------- Capital Expenditures and Investments in Affiliates 2000 1999 -------- --------- (In Millions) Market-area projects $ 101.6 $ 25.5 Supply-area projects 2.1 (1.8) Maintenance of existing facilities and other projects 142.0 92.5 Investment in affiliates 2.0 21.3 -------- --------- Total capital expenditures and investments in affiliates $ 247.7 $ 137.5 ======== ========= Transco's capital expenditures budget for 2000 and future capital projects are discussed in its 1999 Annual Report on Form 10-K and 2000 first and second Quarterly Reports on Form 10-Q. The following describes significant developments related to those projects and any new projects proposed by Transco. SOUTHCOAST EXPANSION PROJECT Transco's SouthCoast Expansion Project was placed in service on November 1, 2000. SouthCoast creates approximately 200 million cubic feet per day (MMcf/d) of additional firm transportation capacity on Transco's system from the terminus of Transco's existing Mobile Bay Lateral in Choctaw County, Alabama, to delivery points in Transco's Rate Zone 4 (Alabama and Georgia). The project has an estimated cost of approximately $108 million. MOMENTUM EXPANSION PROJECT In August 2000, Transco announced an open season for parties interested in subscribing to firm transportation service under its Momentum Expansion Project, a proposed expansion of the Transco pipeline system from Station 65 in Louisiana to Station 165 in Virginia designed to meet increasing natural gas demand in the southeastern United States. The project has a target in-service date of May 1, 2003. Transco plans to file for FERC approval of the project during the second quarter of 2001. 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. On May 23, 2000, Transco filed a letter with the FERC accepting the MarketLink certificate. On June 22, 2000, Congressman Bill Pascrell, Jr. and the State of New Jersey filed separate petitions with the U.S. Court of Appeals for the District of Columbia seeking review of the FERC orders relating to this project. On August 10, 2000, Transco filed a motion to dismiss, for lack of jurisdiction, the petitions for review because petitioners failed to file requests for rehearing of the FERC's final certificate order prior to initiating court review of such order as required by the Natural Gas Act. On September 20, 2000, Transco filed an application to amend the certificate of public convenience and necessity issued in this proceeding to enable Transco to (a) phase the construction of the MarketLink project to satisfy phased in-service dates requested by the project shippers, and (b) redesign the recourse rate based on phased construction of the project. The initial two phases of the project would consist of 286 MMcf/d of firm transportation service with in-service dates of November 1, 2001 and November 1, 2002. Transco did not propose in the amendment to change the overall facilities certificated by the FERC in this proceeding. INDEPENDENCE PIPELINE PROJECT In March 1997, as amended in December 1997, Independence filed an application with FERC for approval to construct and operate a new pipeline consisting of approximately 400 miles of 36-inch pipe from ANR Pipeline Company's existing compressor station at Defiance, Ohio to Transco's facilities at Leidy, Pennsylvania. The Independence Pipeline Project is proposed to provide approximately 916 MMcf/d of firm transportation capacity by a requested in-service date of November 2000. Independence is owned equally by wholly-owned subsidiaries of Transco, ANR, and National Fuel Gas Company. The estimated cost of the project is $678 million, and Transco's equity contributions are estimated to be approximately $68 million based on its expected one-third ownership interest in the project. As mentioned above in connection with the MarketLink Project, on December 17, 1999 the FERC gave conditional approval for the Independence Pipeline project, subject to Independence filing long-term, executed contracts with nonaffiliated shippers for at least 35% of the capacity of the project. Independence filed for rehearing of the interim order. 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. Independence met this requirement, and on July 12, 2000, the FERC issued an order granting the necessary certificate authorizations for the Independence Pipeline Project. On September 28, 2000, the FERC issued an order denying all requests for rehearing and requests for reconsideration of the Independence certificate order filed by various parties. 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. On September 29, 2000, the FERC made a preliminary determination that the Sundance expansion project is required by the public convenience and necessity, and that Transco should be granted a certificate subject to the completion of the FERC's pending environmental review. Other Capital Requirements and Contingencies Transco's capital requirements and contingencies are discussed in its 1999 Annual Report on Form 10-K and 2000 first and second Quarterly Reports on Form 10-Q. 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 and 2000 first and second Quarterly Reports on Form 10-Q with regard to other capital requirements and contingencies. Rate and Regulatory Refunds On November 1, 2000, Transco made rate refunds of $95 million, including interest, for the period May 1, 1997 through February 29, 2000 under its Docket No. RP97-71 general rate case. Transco has provided reserves which it believes are adequate for any additional 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 WGP, advances or capital contributions from WGP 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: November 13, 2000 By /s/ James C. Bourne ---------------------- James C. Bourne Controller (Principal Accounting Officer)