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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 March 31, 2022
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 Company, LLC
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Delaware | | 74-1079400 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
2800 Post Oak Boulevard | | |
Houston, Texas | | 77056 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (713) 215-2000
(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 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 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 INSTRUCTIONS H (1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Transcontinental Gas Pipe Line Company, LLC
Index
Forward Looking Statements
The reports, filings, and other public announcements of Transcontinental Gas Pipe Line Company, 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, including the Russian invasion of Ukraine;
•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, 2021, as supplemented by the disclosure in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Transcontinental Gas Pipe Line Company, LLC
Condensed Statement of Net Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | | | |
| | | | | (Thousands) | | | | |
Operating Revenues: | | | | | | | | | | | |
Natural gas sales | | | | | $ | 15,645 | | | $ | 14,224 | | | | | |
Natural gas transportation | | | | | 621,537 | | | 582,557 | | | | | |
Natural gas storage | | | | | 44,158 | | | 42,502 | | | | | |
Other | | | | | 5,128 | | | 4,494 | | | | | |
Total operating revenues | | | | | 686,468 | | | 643,777 | | | | | |
| | | | | | | | | | | |
Operating Costs and Expenses: | | | | | | | | | | | |
Cost of natural gas sales | | | | | 15,645 | | | 14,224 | | | | | |
| | | | | | | | | | | |
Operation and maintenance | | | | | 111,296 | | | 96,084 | | | | | |
Administrative and general | | | | | 51,549 | | | 50,753 | | | | | |
Depreciation and amortization | | | | | 132,562 | | | 117,797 | | | | | |
Taxes — other than income taxes | | | | | 27,114 | | | 24,528 | | | | | |
| | | | | | | | | | | |
Regulatory credit resulting from tax rate changes | | | | | (7,688) | | | (7,688) | | | | | |
Other (income) expense, net | | | | | (10,888) | | | 1,423 | | | | | |
Total operating costs and expenses | | | | | 319,590 | | | 297,121 | | | | | |
| | | | | | | | | | | |
Operating Income | | | | | 366,878 | | | 346,656 | | | | | |
| | | | | | | | | | | |
Other (Income) and Other Expenses: | | | | | | | | | | | |
Interest expense | | | | | 82,437 | | | 80,175 | | | | | |
Allowance for equity and borrowed funds used during construction (AFUDC) | | | | | (4,857) | | | (3,997) | | | | | |
| | | | | | | | | | | |
Miscellaneous other expense, net | | | | | 897 | | | 52 | | | | | |
Total other (income) and other expenses | | | | | 78,477 | | | 76,230 | | | | | |
| | | | | | | | | | | |
Net Income | | | | | $ | 288,401 | | | $ | 270,426 | | | | | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Condensed Balance Sheet
(Unaudited)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Thousands) |
ASSETS | | | |
Current Assets: | | | |
Cash | $ | — | | | $ | — | |
Receivables: | | | |
Affiliates | 5,575 | | | 6,978 | |
Advances to affiliate | 1,941,659 | | | 1,669,368 | |
Trade | 216,736 | | | 234,680 | |
Other (less allowance of $6,229 and $6,222 in 2022 and 2021, respectively) | 10,685 | | | 12,977 | |
Transportation and exchange gas receivables | 3,623 | | | 7,685 | |
Inventories | 58,147 | | | 54,437 | |
Regulatory assets | 132,401 | | | 114,351 | |
Other | 14,179 | | | 17,058 | |
Total current assets | 2,383,005 | | | 2,117,534 | |
| | | |
Property, Plant and Equipment: | | | |
Natural gas transmission plant | 17,750,482 | | | 17,713,050 | |
Less-Accumulated depreciation and amortization | 5,293,340 | | | 5,227,128 | |
Total property, plant and equipment, net | 12,457,142 | | | 12,485,922 | |
| | | |
Other Assets: | | | |
Regulatory assets | 275,356 | | | 253,081 | |
Right-of-use assets | 65,985 | | | 68,817 | |
Other | 280,336 | | | 292,957 | |
Total other assets | 621,677 | | | 614,855 | |
| | | |
Total assets | $ | 15,461,824 | | | $ | 15,218,311 | |
(continued)
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Condensed Balance Sheet
(Unaudited)
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| (Thousands) |
LIABILITIES AND MEMBER’S EQUITY | | | |
Current Liabilities: | | | |
Payables: | | | |
Affiliates | $ | 57,882 | | | $ | 69,128 | |
Trade and other | 113,094 | | | 184,405 | |
Transportation and exchange gas payables | 6,112 | | | 10,125 | |
Regulatory liabilities | 57,781 | | | 57,369 | |
Accrued liabilities | 184,153 | | | 223,013 | |
Long-term debt due within one year | 26,182 | | | 25,594 | |
Total current liabilities | 445,204 | | | 569,634 | |
| | | |
Long-Term Debt | 5,265,835 | | | 5,269,024 | |
| | | |
Other Long-Term Liabilities: | | | |
Asset retirement obligations | 470,884 | | | 459,969 | |
Regulatory liabilities | 937,771 | | | 932,101 | |
Contract liabilities | 191,826 | | | 194,464 | |
Lease liability | 66,985 | | | 68,582 | |
Other | 4,210 | | | 4,281 | |
Total other long-term liabilities | 1,671,676 | | | 1,659,397 | |
| | | |
Contingent Liabilities and Commitments (Note 3) | | | |
| | | |
Member’s Equity: | | | |
Member’s capital | 5,088,499 | | | 4,960,499 | |
Retained earnings | 2,990,610 | | | 2,759,757 | |
Total member’s equity | 8,079,109 | | | 7,720,256 | |
| | | |
Total liabilities and member’s equity | $ | 15,461,824 | | | $ | 15,218,311 | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Condensed Statement of Changes in Member’s Equity
(Unaudited)
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | |
| (Thousands) | | |
Member’s Capital: | | | | | |
Balance at beginning of period | $ | 4,960,499 | | | $ | 4,543,499 | | | |
Cash contributions from parent | 128,000 | | | 60,000 | | | |
| | | | | |
| | | | | |
Balance at end of period | 5,088,499 | | | 4,603,499 | | | |
Retained Earnings: | | | | | |
Balance at beginning of period | 2,759,757 | | | 2,037,320 | | | |
Net income | 288,401 | | | 270,426 | | | |
Cash distributions to parent | (57,548) | | | — | | | |
| | | | | |
Balance at end of period | 2,990,610 | | | 2,307,746 | | | |
Total Member’s Equity | $ | 8,079,109 | | | $ | 6,911,245 | | | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Condensed Statement of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Thousands) |
OPERATING ACTIVITIES: | | | |
Net income | $ | 288,401 | | | $ | 270,426 | |
Adjustments to reconcile net cash provided (used) by operating activities: | | | |
Depreciation and amortization | 132,562 | | | 117,797 | |
Allowance for equity funds used during construction (equity AFUDC) | (3,834) | | | (3,052) | |
Regulatory credit resulting from tax rate changes | (7,688) | | | (7,688) | |
Changes in operating assets and liabilities: | | | |
Receivables — affiliates | 1,403 | | | (277) | |
— trade and other | 20,229 | | | 10,046 | |
Transportation and exchange gas receivable | 4,062 | | | (3,051) | |
Inventories | (3,710) | | | (4,313) | |
Payables — affiliates | (11,246) | | | 12,511 | |
— trade | (44,264) | | | (26,077) | |
Accrued liabilities | (38,489) | | | (22,381) | |
| | | |
Asset retirement obligations | 3,380 | | | 4,653 | |
Contract liabilities | (2,638) | | | (2,638) | |
Other, net | (21,507) | | | 2,748 | |
Net cash provided by operating activities | 316,661 | | | 348,704 | |
| | | |
FINANCING ACTIVITIES: | | | |
| | | |
Proceeds from other financing obligations | 2,843 | | | 817 | |
| | | |
Payments on other financing obligations | (6,136) | | | (5,430) | |
Payments for debt issuance costs | (16) | | | (32) | |
Cash distributions to parent | (57,548) | | | — | |
Cash contributions from parent | 128,000 | | | 60,000 | |
| | | |
| | | |
Net cash provided by financing activities | 67,143 | | | 55,355 | |
| | | |
INVESTING ACTIVITIES: | | | |
Capital expenditures (1) | (97,124) | | | (89,200) | |
Contributions and advances for construction costs, net | (4,655) | | | 12,454 | |
Disposal of property, plant and equipment, net | (5,940) | | | (1,635) | |
Advances to affiliate, net | (272,291) | | | (326,104) | |
Purchase of ARO Trust investments | (4,875) | | | (14,573) | |
Proceeds from sale of ARO Trust investments | 1,081 | | | 14,999 | |
Net cash used by investing activities | (383,804) | | | (404,059) | |
| | | |
Increase (decrease) in cash | — | | | — | |
Cash at beginning of period | — | | | — | |
Cash at end of period | $ | — | | | $ | — | |
_______________________ | | | |
(1) Increase to property, plant and equipment, exclusive of equity AFUDC | $ | (65,262) | | | $ | (84,631) | |
Changes in related accounts payable and accrued liabilities | (31,862) | | | (4,569) | |
Capital expenditures | $ | (97,124) | | | $ | (89,200) | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Notes to Condensed Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
In this report, Transcontinental Gas Pipe Line Company, LLC (Transco) is at times referred to in the first person as “we,” “us” or “our.”
Transco is indirectly owned by The Williams Companies, Inc. (Williams), a publicly traded Delaware corporation. We own and operate an interstate natural gas pipeline system that is regulated by the Federal Energy Regulatory Commission (FERC).
General
The accompanying condensed 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 accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. The condensed 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 condensed unaudited financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2021 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 condensed unaudited financial statements and accompanying notes. Actual results could differ from those estimates.
A reclassification within Operating Costs and Expenses on the Condensed Statement of Net Income to include Cost of natural gas transportation within Operation and maintenance of approximately $17.6 million for the three months ended March 31, 2021 has been made to conform to the 2022 presentation.
Note 2 – Revenue Recognition
Revenue by Category
Our revenue disaggregation by major service line includes Natural gas sales, Natural gas transportation, Natural gas storage, and Other, which are separately presented on the Condensed Statement of Net Income.
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | | | |
| | | | | (Thousands) |
Balance at beginning of period | | | | | $ | 205,030 | | | $ | 215,596 | | | | | |
Recognized in revenue | | | | | (2,638) | | | (2,638) | | | | | |
Balance at end of period | | | | | $ | 202,392 | | | $ | 212,958 | | | | | |
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 FERC, reflect the rates for such services in our current FERC tariffs, net of estimated reserve for refund, for the life of the related contracts; however, these rates may change based on future tariffs 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 and other renewal provisions for periods beyond the initial term of the contract. The remaining performance obligations as of March 31, 2022 do not consider potential future performance obligations for which the renewal has not been exercised and exclude 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 March 31, 2022.
| | | | | | | | | | | |
| Contract Liabilities | | Remaining Performance Obligations |
| (Thousands) |
2022 (nine months) | $ | 7,927 | | | $ | 1,862,423 | |
2023 (one year) | 10,566 | | | 2,310,342 | |
2024 (one year) | 10,568 | | | 2,179,510 | |
2025 (one year) | 10,566 | | | 1,739,032 | |
2026 (one year) | 10,566 | | | 1,578,189 | |
Thereafter | 152,199 | | | 12,137,882 | |
Total | $ | 202,392 | | | $ | 21,807,378 | |
Accounts Receivable
Receivables from contracts with customers are included within Receivables - Trade and Receivables - Affiliates, and receivables that are not related to contracts with customers are included within the balance of Receivables - Advances to affiliate and Receivables - Other on our Condensed Balance Sheet.
Note 3 – Contingent Liabilities and Commitments
Environmental Matters
We have had studies underway for many years to test some of our facilities for the presence of toxic and hazardous substances such as polychlorinated biphenyls (PCBs) and mercury to determine to what extent, if any, remediation may be necessary. We have also similarly evaluated past on-site disposal of hydrocarbons at a number of our facilities. We have worked closely with and responded to data requests from the U.S. Environmental Protection Agency (EPA) and state agencies regarding such potential contamination of certain of our sites. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs. At March 31, 2022, we had a balance of approximately $2.5 million for the expense portion of these estimated costs, $0.6 million recorded in Accrued liabilities and $1.9 million recorded in Other Long-Term Liabilities - Other on the Condensed Balance Sheet. At December 31, 2021, we had a balance of approximately $2.5 million for the expense portion of these estimated costs, $0.7 million recorded in Accrued liabilities and $1.8 million recorded in Other Long-Term Liabilities - Other on the Condensed Balance Sheet.
We have been identified as a potentially responsible party (PRP) at various Superfund and state waste disposal sites. Based on present volumetric estimates and other factors, our estimated aggregate exposure for remediation of these sites is less than $0.5 million. The estimated remediation costs for all of these sites are included in the environmental liabilities discussed above. Liability under the Comprehensive Environmental Response, Compensation and Liability Act and applicable state law can be joint and several with other PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability could be substantially greater than the amounts described above.
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 Total property, plant, and equipment, net on the Condensed 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.
We consider prudently incurred environmental assessment and remediation costs and the costs associated with compliance with environmental standards to be recoverable through rates. To date, we have been permitted recovery of environmental costs, and it is our intent to continue seeking recovery of such costs through future rate filings.
Other Matters
Various other proceedings are pending against us and are considered incidental to our operations.
Summary
We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss. 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.
Note 4 – Debt and Financing Arrangements
Commercial Paper
Williams participates in a $3.5 billion commercial paper program and Williams’ management considers amounts outstanding under this program to be a reduction of available capacity under the credit facility. At March 31, 2022, Williams had no outstanding commercial paper.
Credit Facility
We, along with Williams and Northwest Pipeline LLC, are party to a credit agreement with aggregate commitments available of $3.75 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. We and Northwest Pipeline LLC are each able to borrow up to $500 million under the credit facility to the extent not otherwise utilized by the other co-borrowers. At March 31, 2022, no letters of credit have been issued and no loans were outstanding under the credit facility.
Other Financing Obligations
Dalton Expansion Project
At March 31, 2022 and December 31, 2021, the amount included in Long-Term Debt on the Condensed Balance Sheet for this financing obligation is $251.2 million and $251.9 million, and the amount included in Long-term debt due within one year on the Condensed Balance Sheet for this financing obligation is $2.6 million and $2.5 million, respectively.
Atlantic Sunrise Project
During the first three months of 2022 and 2021, we received an additional $0.3 million and $0.8 million, respectively, of funding from a co-owner for its proportionate share of construction costs related to its undivided ownership interest in certain parts of the project. This additional funding is reflected in Long-Term Debt on the Condensed Balance Sheet. At March 31, 2022 and December 31, 2021, the amount included in Long-Term Debt on the Condensed Balance Sheet for this financing obligation is $801.5 million and $807.1 million, and the amount included in Long-term debt due within one year on the Condensed Balance Sheet for this financing obligation is $22.9 million and $22.4 million, respectively.
Leidy South Project
During the first three months of 2022, we received an additional $2.6 million of funding from a co-owner for its proportionate share of construction costs related to its undivided joint ownership interest in certain parts of the project. This additional funding is reflected in Long-Term Debt on the Condensed Balance Sheet. At March 31, 2022 and December 31, 2021, the amount included in Long-Term Debt on the Condensed Balance Sheet for this financing obligation is $73.9 million and $71.5 million, and the amount included in Long-term debt due within one year on the Condensed Balance Sheet for this financing obligation is $0.7 million and $0.7 million, respectively.
Note 5 – ARO Trust
We are entitled to collect in rates the amounts necessary to fund our asset retirement obligations (ARO). We deposit monthly, into an external trust account (ARO Trust), the revenues specifically designated for ARO. The ARO Trust carries a moderate risk portfolio. The Money Market Funds held in our ARO Trust are considered investments. We measure the financial instruments held in our ARO Trust at fair value. However, in accordance with ASC Topic 980, Regulated Operations, both realized and unrealized gains and losses of the ARO Trust are recorded as regulatory assets or liabilities.
Pursuant to the approved stipulation and agreement in Docket No. RP18-1126 the annual funding obligation effective March 31, 2020 is approximately $16.0 million, with deposits made monthly.
Investments within the ARO Trust were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Amortized Cost Basis | | Fair Value | | Amortized Cost Basis | | Fair Value |
Money Market Funds | $ | 9.7 | | | $ | 9.7 | | | $ | 5.9 | | | $ | 5.9 | |
U.S. Equity Funds | 52.6 | | | 114.4 | | | 52.7 | | | 121.4 | |
International Equity Funds | 31.7 | | | 40.5 | | | 31.7 | | | 43.2 | |
Municipal Bond Funds | 87.7 | | | 85.0 | | | 87.7 | | | 90.0 | |
Total | $ | 181.7 | | | $ | 249.6 | | | $ | 178.0 | | | $ | 260.5 | |
Note 6 – Fair Value Measurements
The following table presents, by level within the fair value hierarchy, certain of our significant financial assets and liabilities. 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. Therefore, these assets and liabilities are not presented in the following table.
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| | | | | Fair Value Measurements Using |
| Carrying Amount | | Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (Millions) |
Assets (liabilities) at March 31, 2022: | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | |
ARO Trust investments | $ | 249.6 | | | $ | 249.6 | | | $ | 249.6 | | | $ | — | | | $ | — | |
Additional disclosures: | | | | | | | | | |
Long-term debt, including current portion | (5,292.0) | | | (6,206.2) | | | — | | | (6,206.2) | | | — | |
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Assets (liabilities) at December 31, 2021: | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | |
ARO Trust investments | $ | 260.5 | | | $ | 260.5 | | | $ | 260.5 | | | $ | — | | | $ | — | |
Additional disclosures: | | | | | | | | | |
Long-term debt, including current portion | (5,294.6) | | | (6,849.8) | | | — | | | (6,849.8) | | | — | |
Fair Value Methods
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:
ARO Trust investments: We deposit a portion of our collected rates, pursuant to the terms of the Docket No. RP18-1126 rate case settlement, into the ARO Trust, which is specifically designated to fund future AROs. The ARO Trust invests in a portfolio of actively traded mutual funds that are measured at fair value on a recurring basis based on quoted prices in an active market and are reported in Other Assets-Other on the Condensed Balance Sheet. However, both realized and unrealized gains and losses are ultimately recorded as regulatory assets or liabilities. See Note 5 – ARO Trust for more information.
Long-term debt, including current portion: The disclosed fair value of our long-term debt is determined primarily 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 fair value of the financing obligations associated with our Dalton, Atlantic Sunrise and Leidy South projects, which are included within long-term debt, were determined using an income approach (see Note 4 – Debt and Financing Arrangements).
Note 7 – Transactions with Affiliates
We are a participant in Williams’ cash management program, and we make advances to and receive advances from Williams. At March 31, 2022 and December 31, 2021, our advances to Williams totaled approximately $1,941.7 million and $1,669.4 million, respectively. These advances are represented by demand notes and are classified as Receivables - Advances to affiliate on the Condensed Balance Sheet. Advances are stated at the
historical carrying amounts. Interest expense and income are recognized when earned and the collectability is reasonably assured. 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 0.12 percent at March 31, 2022. The interest income from these advances was minimal for each of the three months ended March 31, 2022 and 2021. Such interest income is included in Other (Income) and Other Expenses – Miscellaneous other expense, net on the Condensed Statement of Net Income.
Included in Operating Revenues on the Condensed Statement of Net Income are revenues received from affiliates of $21.1 million and $2.6 million for the three months ended March 31, 2022 and 2021, respectively. The rates charged to provide sales and services to affiliates are the same as those that are charged to similarly-situated nonaffiliated customers.
Included in Cost of natural gas sales on the Condensed Statement of Net Income are costs of gas purchased from affiliates of $5.4 million and $3.4 million for the three months ended March 31, 2022 and 2021, respectively. All gas purchases are made at market or contract prices.
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. We have recorded approximately $79.6 million and $78.8 million for the three months ended March 31, 2022 and 2021, respectively, for these service expenses, which are primarily included in Operation and maintenance and Administrative and general expenses on the Condensed Statement of Net Income.
We provide services to certain of our affiliates. We recorded reductions in operating expenses for services provided to and reimbursed by our affiliates of $1.6 million and $1.7 million for the three months ended March 31, 2022 and 2021, respectively.
We declared and paid cash distributions to our parent totaling $57.5 million during the three months ended March 31, 2022. During April 2022, we declared and paid an additional cash distribution of $250.0 million to our parent. Our parent made contributions to us totaling $128.0 million and $60.0 million during the three months ended March 31, 2022 and 2021, respectively, to fund a portion of our expenditures for additions to property, plant, and equipment.
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 Financial Statements, Notes and Management’s Discussion and Analysis contained in Items 7 and 8 of our 2021 Annual Report on Form 10-K and with the Condensed Financial Statements and Notes contained in this Form 10-Q.
Results of Operations
This analysis discusses financial results of our operations for the three-month periods ended March 31, 2022 and 2021. Variances due to the 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.
We have cash out sales, which settle gas imbalances with shippers. In the course of providing transportation services to customers, we may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. Additionally, we transport gas on various pipeline systems, which may deliver different quantities of gas on our behalf than the quantities of gas received from us. These transactions result in gas transportation and exchange imbalance receivables and payables. Our tariff includes a method whereby the majority of transportation imbalances are settled on a monthly basis through cash out sales or purchases. The cash out sales have no impact on our operating income.
During the first three months of 2022 we recognized Net Income of $288.4 million compared to $270.4 million during the first three months of 2021. The significant components of this year-over-year increase of $18.0 million (6.6 percent) are discussed further below.
Natural gas transportation revenues increased $39.0 million (6.7 percent), which was primarily attributable to:
•$25.6 million from our Leidy South project from additional capacity placed into service during the fourth quarter of 2021;
•$4.9 million higher electric power costs, which are recovered from our customers through transportation rates and are offset in Operating Costs and Expenses resulting in no net impact on our results of operations;
•$3.8 million from a combination of higher short-term firm transportation and overall demand;
•$2.2 million higher commodity revenues; and
•$2.2 million higher revenues related to a cash out surcharge (offset in Operating Costs and Expenses resulting in no net impact on our results of operations).
Operating Costs and Expenses, excluding the Cost of natural gas sales, which directly offsets Natural gas sales in Operating Revenues, increased $21.0 million (7.4 percent). This increase was primarily attributable to:
•$15.2 million increase in Operation and maintenance costs primarily resulting from (i) increased transportation costs of $11.4 million associated with Leidy South and (ii) higher electric power costs of $4.9 million (electric power costs are recovered from customers through transportation rates and are offset in Operating Revenues resulting in no net impact on our results of operations), partially offset by other immaterial variances;
•$14.8 million increase in Depreciation and amortization primarily as a result of an increase in ARO related depreciation, and to a lesser extent, additional assets placed into service;
•$2.6 million increase in Taxes — other than income taxes primarily due to an increase in estimated property taxes;
| | | | | |
Management’s Discussion and Analysis (Continued) | |
•Partially offset by a $12.3 million favorable change in Other (income) expense, net driven by the deferral of $12.1 million of ARO related depreciation (offset in Depreciation and amortization resulting in no net impact on our results of operations), partially offset by the unfavorable change of $2.2 million related to a cash out surcharge (offset in Operating Revenues resulting in no net impact on our results of operations).
Other (income) and other expenses had an unfavorable change of $2.2 million (2.9 percent) driven by an increase of $2.3 million in interest expense primarily due to interest incurred on our financing obligation associated with the Leidy South project.
Pipeline Expansion Projects
Regional Energy Access
The Regional Energy Access Expansion involves an expansion of our existing natural gas transmission system to provide incremental firm transportation capacity from receipt points in northeastern Pennsylvania to multiple delivery points in Pennsylvania, New Jersey, and Maryland. We filed our certificate application for the project with the FERC on March 26, 2021. We plan to place the project into service as early as the fourth quarter of 2024, assuming timely receipt of all necessary regulatory approvals. The project is expected to increase capacity by 829 Mdth/d.
Item 4. Controls and Procedures
Disclosure 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, 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
There have been no changes during the first quarter of 2022 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 I, 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, 2021 includes certain risk factors that could materially affect our business, financial condition, or future results. Those Risk Factors have not materially changed, except that they are supplemented or modified by the following risk factors.
Difficult conditions in the global financial markets and the economy in general could negatively affect our business and results of operations.
Our business may be negatively impacted by adverse economic conditions or future disruptions in the global financial markets. Included among these potential negative impacts are industrial or economic contraction (including as a result of the COVID-19 pandemic) leading to reduced energy demand and lower prices for our products and services and increased difficulty in collecting amounts owed to us by our customers. The ongoing Russian invasion of Ukraine and the actions undertaken by western nations in response to Russia’s actions has had, and may continue to have, adverse impacts on global financial markets. We, along with Williams and Northwest Pipeline LLC, are party to a credit agreement with aggregate commitments available of $3.75 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. We and Northwest Pipeline LLC are each subject to a $500 million borrowing sublimit. As of March 31, 2022, we had a borrowing capacity of $500 million under such credit facility, but our ability to borrow under that facility could be impaired if one or more of our lenders fails to honor its contractual obligation to lend to us. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to implement our business plans or otherwise take advantage of business opportunities or respond to competitive pressures. In addition, financial markets have periodically been affected by concerns over U.S. fiscal and monetary policies. These concerns, as well as actions taken by the U.S. federal government in response to these concerns, could significantly and adversely impact the global and U.S. economies and financial markets, which could negatively impact us in the manner described above.
Our business could be negatively impacted by acts of terrorism and related disruptions.
Given the volatile nature of the commodities we transport and store, our assets and the assets of our customers and others in our industry may be targets of terrorist activities. Uncertainty surrounding the Russian invasion of Ukraine, or other sustained military campaigns, may affect our operations in unpredictable ways, including the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terrorism. A terrorist attack could create significant price volatility, disrupt our business, limit our access to capital markets, or cause significant harm to our operations, such as full or partial disruption to our ability to transport natural gas. Acts of terrorism, as well as events occurring in response to or in connection with acts of terrorism, could cause environmental repercussions that could result in a significant decrease in revenues or significant reconstruction or remediation costs, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
A breach of our information technology infrastructure, including a breach caused by a cybersecurity attack on us or third parties with whom we are interconnected, may interfere with the safe operation of our assets, result in the disclosure of personal or proprietary information, and harm our reputation.
We rely on our information technology infrastructure to process, transmit, and store electronic information, including information we use to safely operate our assets. In addition to the oversight of our business provided by our Management Committee, the Williams’ Board of Directors has oversight responsibility with regard to enterprise-wide assessment of the major risks inherent in its businesses, including cybersecurity risks. Accordingly, the Williams’ Board of Directors reviews management’s efforts to address and mitigate such risks, including the establishment and implementation of policies to address cybersecurity threats. We have invested, and expect to continue to invest, significant time, manpower, and capital in our information technology infrastructure. However, the age, operating systems, or condition of our current information technology infrastructure and software assets and our ability to maintain and upgrade such assets could affect our ability to resist cybersecurity threats. While we believe that we maintain appropriate information security policies, practices, and protocols, we regularly face
cybersecurity and other security threats to our information technology infrastructure, which could include threats to our operational industrial control systems and safety systems that operate our pipelines, plants, and assets. We face unlawful attempts to gain access to our information technology infrastructure, including coordinated attacks from hackers, whether state-sponsored groups, “hacktivists”, or private individuals. We face the threat of theft and misuse of sensitive data and information, including customer and employee information. We also face attempts to gain access to information related to our assets through attempts to obtain unauthorized access by targeting acts of deception against individuals with legitimate access to physical locations or information. We also are subject to cybersecurity risks arising from the fact that our business operations are interconnected with third parties, including third-party pipelines, other facilities, and our contractors and vendors. In addition, the breach of certain business systems could affect our ability to correctly record, process, and report financial information. Breaches in our information technology infrastructure or physical facilities, or other disruptions, including those arising from theft, vandalism, fraud, or unethical conduct, which may increase as a result of the Russian invasion of Ukraine, could result in damage to or destruction of our assets, unnecessary waste, safety incidents, damage to the environment, reputational damage, potential liability, the loss of contracts, the imposition of significant costs associated with remediation and litigation, heightened regulatory scrutiny, increased insurance costs, and have a material adverse effect on our operations, financial condition, results of operations, and cash flows.
Item 6. Exhibits
The following instruments are included as exhibits to this report.
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Exhibit Number | | Description |
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2 | | |
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3.1 | | |
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3.2 | | |
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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 Extension Definition Linkbase. |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase. |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase. |
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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 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC (Registrant) |
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Dated: | May 2, 2022 | By: | | /s/ Billeigh W. Mark |
| | | | Billeigh W. Mark |
| | | | Controller |
| | | | (Principal Accounting Officer) |