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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 June 30, 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 filed with the SEC on February 28, 2022, as supplemented by disclosures in Part II, Item 1A. Risk Factors in subsequent Quarterly Reports on Form 10-Q.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Transcontinental Gas Pipe Line Company, LLC
Statement of Net Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| (Thousands) | | | | |
Operating Revenues: | | | | | | | | | | | |
Natural gas sales | $ | 43,371 | | | $ | 16,003 | | | $ | 59,016 | | | $ | 30,227 | | | | | |
Natural gas transportation | 614,043 | | | 571,245 | | | 1,235,580 | | | 1,153,802 | | | | | |
Natural gas storage | 49,159 | | | 41,357 | | | 93,317 | | | 83,859 | | | | | |
Other | 3,151 | | | 2,634 | | | 8,279 | | | 7,128 | | | | | |
Total operating revenues | 709,724 | | | 631,239 | | | 1,396,192 | | | 1,275,016 | | | | | |
| | | | | | | | | | | |
Operating Costs and Expenses: | | | | | | | | | | | |
Cost of natural gas sales | 43,371 | | | 16,003 | | | 59,016 | | | 30,227 | | | | | |
| | | | | | | | | | | |
Operation and maintenance | 129,019 | | | 95,831 | | | 240,315 | | | 191,915 | | | | | |
Administrative and general | 57,090 | | | 46,424 | | | 108,639 | | | 97,177 | | | | | |
Depreciation and amortization | 130,670 | | | 117,759 | | | 263,232 | | | 235,556 | | | | | |
Taxes — other than income taxes | 25,727 | | | 24,418 | | | 52,841 | | | 48,946 | | | | | |
| | | | | | | | | | | |
Regulatory credit resulting from tax rate changes | (7,688) | | | (7,688) | | | (15,376) | | | (15,376) | | | | | |
Other (income) expense, net | (7,360) | | | 3,254 | | | (18,248) | | | 4,677 | | | | | |
Total operating costs and expenses | 370,829 | | | 296,001 | | | 690,419 | | | 593,122 | | | | | |
| | | | | | | | | | | |
Operating Income | 338,895 | | | 335,238 | | | 705,773 | | | 681,894 | | | | | |
| | | | | | | | | | | |
Other (Income) and Other Expenses: | | | | | | | | | | | |
Interest expense | 82,184 | | | 80,260 | | | 164,621 | | | 160,435 | | | | | |
| | | | | | | | | | | |
Interest income | (4,542) | | | (1,184) | | | (5,644) | | | (2,071) | | | | | |
| | | | | | | | | | | |
Allowance for equity and borrowed funds used during construction (AFUDC) | (5,793) | | | (5,724) | | | (10,650) | | | (9,721) | | | | | |
| | | | | | | | | | | |
Miscellaneous other (income) expense, net | 1,459 | | | 1,085 | | | 3,458 | | | 2,024 | | | | | |
Total other (income) and other expenses | 73,308 | | | 74,437 | | | 151,785 | | | 150,667 | | | | | |
| | | | | | | | | | | |
Net Income | $ | 265,587 | | | $ | 260,801 | | | $ | 553,988 | | | $ | 531,227 | | | | | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Balance Sheet
(Unaudited)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (Thousands) |
ASSETS | | | |
Current Assets: | | | |
Cash | $ | — | | | $ | — | |
Receivables: | | | |
Advances to affiliate | 2,010,313 | | | 1,669,368 | |
Trade | 224,060 | | | 234,680 | |
Affiliates | 8,731 | | | 6,978 | |
Other (less allowance of $6,229 and $6,222 in 2022 and 2021, respectively) | 7,335 | | | 12,977 | |
Transportation and exchange gas receivables | 13,511 | | | 7,685 | |
Inventories: | | | |
Materials and supplies, at average cost | 42,996 | | | 41,189 | |
Gas available for customer nomination, at average cost | 27,341 | | | 12,553 | |
Gas in storage, at original cost | 744 | | | 695 | |
Regulatory assets | 125,672 | | | 114,351 | |
Other | 8,546 | | | 17,058 | |
Total current assets | 2,469,249 | | | 2,117,534 | |
| | | |
Property, plant and equipment | 17,859,476 | | | 17,713,050 | |
Less-Accumulated depreciation and amortization | 5,385,537 | | | 5,227,128 | |
Total property, plant and equipment, net | 12,473,939 | | | 12,485,922 | |
| | | |
Other Assets: | | | |
Regulatory assets | 307,679 | | | 253,081 | |
Right-of-use assets | 62,819 | | | 68,817 | |
Other | 260,743 | | | 292,957 | |
Total other assets | 631,241 | | | 614,855 | |
| | | |
Total assets | $ | 15,574,429 | | | $ | 15,218,311 | |
(continued)
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Balance Sheet
(Unaudited)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| (Thousands) |
LIABILITIES AND MEMBER’S EQUITY | | | |
Current Liabilities: | | | |
Payables: | | | |
Trade | $ | 171,339 | | | $ | 163,001 | |
Affiliates | 52,352 | | | 69,128 | |
Cash overdrafts | 11,591 | | | 21,404 | |
Transportation and exchange gas payables | 8,575 | | | 10,125 | |
Accrued liabilities: | | | |
Interest | 76,561 | | | 76,656 | |
Asset retirement obligations | 57,327 | | | 58,418 | |
Regulatory liabilities | 56,989 | | | 57,369 | |
Property and other taxes | 27,617 | | | 26,470 | |
Customer deposits | 20,771 | | | 21,004 | |
Customer advances | 10,108 | | | 14,582 | |
Other | 20,136 | | | 25,883 | |
Long-term debt due within one year | 26,784 | | | 25,594 | |
Total current liabilities | 540,150 | | | 569,634 | |
| | | |
Long-Term Debt | 5,261,979 | | | 5,269,024 | |
| | | |
Other Long-Term Liabilities: | | | |
Regulatory liabilities | 942,624 | | | 932,101 | |
Asset retirement obligations | 476,193 | | | 459,969 | |
Contract liabilities | 189,185 | | | 194,464 | |
Lease liability | 65,289 | | | 68,582 | |
Other | 4,313 | | | 4,281 | |
Total other long-term liabilities | 1,677,604 | | | 1,659,397 | |
| | | |
Contingent Liabilities and Commitments (Note 3) | | | |
| | | |
Member’s Equity: | | | |
Member’s capital | 5,088,499 | | | 4,960,499 | |
Retained earnings | 3,006,197 | | | 2,759,757 | |
Total member’s equity | 8,094,696 | | | 7,720,256 | |
| | | |
Total liabilities and member’s equity | $ | 15,574,429 | | | $ | 15,218,311 | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Statement of Changes in Member’s Equity
(Unaudited)
| | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2022 | | 2021 | | |
| (Thousands) | | |
Member’s Capital: | | | | | |
Balance at beginning of period | $ | 5,088,499 | | | $ | 4,603,499 | | | |
Cash contributions from parent | — | | | 73,000 | | | |
| | | | | |
| | | | | |
Balance at end of period | 5,088,499 | | | 4,676,499 | | | |
Retained Earnings: | | | | | |
Balance at beginning of period | 2,990,610 | | | 2,307,746 | | | |
Net income | 265,587 | | | 260,801 | | | |
Cash distributions to parent | (250,000) | | | (231,370) | | | |
| | | | | |
Balance at end of period | 3,006,197 | | | 2,337,177 | | | |
Total Member’s Equity | $ | 8,094,696 | | | $ | 7,013,676 | | | |
| | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 | | |
| (Thousands) | | |
Member’s Capital: | | | | | |
Balance at beginning of period | $ | 4,960,499 | | | $ | 4,543,499 | | | |
Cash contributions from parent | 128,000 | | | 133,000 | | | |
Balance at end of period | 5,088,499 | | | 4,676,499 | | | |
Retained Earnings: | | | | | |
Balance at beginning of period | 2,759,757 | | | 2,037,320 | | | |
Net income | 553,988 | | | 531,227 | | | |
Cash distributions to parent | (307,548) | | | (231,370) | | | |
Balance at end of period | 3,006,197 | | | 2,337,177 | | | |
Total Member’s Equity | $ | 8,094,696 | | | $ | 7,013,676 | | | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Statement of Cash Flows
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
| (Thousands) |
OPERATING ACTIVITIES: | | | |
Net income | $ | 553,988 | | | $ | 531,227 | |
Adjustments to reconcile net cash provided (used) by operating activities: | | | |
Depreciation and amortization | 263,232 | | | 235,556 | |
Allowance for equity funds used during construction (equity AFUDC) | (8,555) | | | (7,481) | |
Regulatory credit resulting from tax rate changes | (15,376) | | | (15,376) | |
Changes in current assets and liabilities: | | | |
Affiliate receivables | (1,753) | | | (641) | |
Trade and other accounts receivable | 16,255 | | | 11,855 | |
Transportation and exchange gas receivables | (5,826) | | | (4,129) | |
Inventories | (16,644) | | | (12,698) | |
Regulatory assets | (11,321) | | | (11,912) | |
Other current assets | 8,512 | | | (1,077) | |
Affiliate payables | (16,776) | | | 14,782 | |
Trade accounts payable | (9,122) | | | 8,135 | |
Transportation and exchange gas payables | (1,550) | | | 1,988 | |
Accrued liabilities | (6,400) | | | 27 | |
| | | |
| | | |
| | | |
Other, including changes in long-term assets and liabilities | (11,571) | | | 34,440 | |
Net cash provided (used) by operating activities | 737,093 | | | 784,696 | |
| | | |
FINANCING ACTIVITIES: | | | |
| | | |
Proceeds from other financing obligations | 5,148 | | | 1,790 | |
| | | |
Payments on other financing obligations | (12,412) | | | (10,984) | |
Payments for debt issuance costs | (16) | | | (32) | |
Cash distributions to parent | (307,548) | | | (231,370) | |
Cash contributions from parent | 128,000 | | | 133,000 | |
| | | |
| | | |
Net cash provided (used) by financing activities | (186,828) | | | (107,596) | |
| | | |
INVESTING ACTIVITIES: | | | |
Property, plant and equipment: | | | |
Capital expenditures (1) | (185,045) | | | (231,903) | |
Contributions and advances for construction costs, net | (2,279) | | | 26,388 | |
Disposal of property, plant and equipment, net | (14,028) | | | (8,966) | |
Advances to affiliate, net | (340,945) | | | (460,120) | |
Purchase of ARO Trust investments | (10,127) | | | (17,925) | |
Proceeds from sale of ARO Trust investments | 2,159 | | | 15,426 | |
Net cash provided (used) by investing activities | (550,265) | | | (677,100) | |
| | | |
Increase (decrease) in cash | — | | | — | |
Cash at beginning of period | — | | | — | |
Cash at end of period | $ | — | | | $ | — | |
_______________________ | | | |
(1) Increases to property, plant and equipment, exclusive of equity AFUDC | $ | (187,384) | | | $ | (235,046) | |
Changes in related accounts payable and accrued liabilities | 2,339 | | | 3,143 | |
Capital expenditures | $ | (185,045) | | | $ | (231,903) | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Notes to 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
Our accompanying interim financial statements do not include all the notes in our annual financial statements and, therefore, should be read in conjunction with our financial statements and notes thereto for the year ended December 31, 2021, in our Annual Report on Form 10-K. The accompanying unaudited financial statements include all normal recurring adjustments and others that, in the opinion of management, are necessary to present fairly our interim financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ from those estimates.
Certain reclassifications have been made to information from previous years to conform to the current presentation, including a reclassification within Operating Costs and Expenses on the Statement of Net Income to include Cost of natural gas transportation within Operation and maintenance of approximately $13.9 million and $31.5 million for the three and six months ended June 30, 2021, respectively.
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 Statement of Net Income.
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
| (Thousands) |
Balance at beginning of period | $ | 202,392 | | | $ | 212,958 | | | $ | 205,030 | | | $ | 215,596 | | | | | |
Recognized in revenue | (2,641) | | | (2,641) | | | (5,279) | | | (5,279) | | | | | |
Balance at end of period | $ | 199,751 | | | $ | 210,317 | | | $ | 199,751 | | | $ | 210,317 | | | | | |
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. 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 June 30, 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 June 30, 2022.
| | | | | | | | | | | |
| Contract Liabilities | | Remaining Performance Obligations |
| (Thousands) |
2022 (six months) | $ | 5,286 | | | $ | 1,268,588 | |
2023 (one year) | 10,566 | | | 2,369,372 | |
2024 (one year) | 10,568 | | | 2,201,498 | |
2025 (one year) | 10,566 | | | 1,872,146 | |
2026 (one year) | 10,566 | | | 1,585,109 | |
Thereafter | 152,199 | | | 12,139,572 | |
Total | $ | 199,751 | | | $ | 21,436,285 | |
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 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 June 30, 2022, we had a balance of approximately $2.7 million for the expense portion of these estimated costs, $0.9 million recorded in Accrued liabilities - Other and $1.8 million recorded in Other Long-Term Liabilities - Other on the 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 - Other and $1.8 million recorded in Other Long-Term Liabilities - Other on the 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 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
Credit Facility
We, along with Williams and Northwest Pipeline LLC (Northwest), 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 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 June 30, 2022, no letters of credit have been issued and no loans were outstanding under the credit facility.
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 June 30, 2022, $1.040 billion was outstanding under Williams’ commercial paper program.
Other Financing Obligations
Dalton Expansion Project
At June 30, 2022 and December 31, 2021, the amount included in Long-Term Debt on the Balance Sheet for this financing obligation was $250.6 million and $251.9 million, respectively, and the amount included in Long-term debt due within one year on the Balance Sheet for this financing obligation is $2.6 million and $2.5 million, respectively.
Atlantic Sunrise Project
During the first six months of 2022 and 2021, we received an additional $1.3 million and $1.8 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 Balance Sheet. At June 30, 2022 and December 31, 2021, the amount included in Long-Term Debt on the Balance Sheet for this financing obligation was $796.4 million and $807.1 million, respectively, and the amount included in Long-term debt due within one year on the Balance Sheet for this financing obligation was $23.4 million and $22.4 million, respectively.
Leidy South Project
During the first six months of 2022, we received an additional $3.9 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 Balance Sheet. At June 30, 2022 and December 31, 2021, the amount included in Long-Term Debt on the Balance Sheet for this financing obligation was $75.0 million and $71.5 million, respectively, and the amount included in Long-term debt due within one year on the Balance Sheet for this financing obligation was $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. The financial instruments held in our ARO Trust are measured at fair value and reported in Other Assets - Other on the Balance Sheet. However, in accordance with ASC Topic 980, Regulated Operations, both realized and unrealized gains and losses of the ARO Trust are ultimately 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):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Amortized Cost Basis | | Fair Value | | Amortized Cost Basis | | Fair Value |
Money Market Funds | $ | 13.9 | | | $ | 13.9 | | | $ | 5.9 | | | $ | 5.9 | |
U.S. Equity Funds | 52.6 | | | 94.7 | | | 52.7 | | | 121.4 | |
International Equity Funds | 31.7 | | | 34.9 | | | 31.7 | | | 43.2 | |
Municipal Bond Funds | 87.7 | | | 82.5 | | | 87.7 | | | 90.0 | |
Total | $ | 185.9 | | | $ | 226.0 | | | $ | 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | 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 June 30, 2022: | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | |
ARO Trust investments | $ | 226.0 | | | $ | 226.0 | | | $ | 226.0 | | | $ | — | | | $ | — | |
Additional disclosures: | | | | | | | | | |
Long-term debt, including current portion | (5,288.8) | | | (5,544.4) | | | — | | | (5,544.4) | | | — | |
| | | | | | | | | |
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 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 June 30, 2022 and December 31, 2021, our advances to Williams totaled approximately $2.0 billion and $1.7 billion, respectively. These advances are represented by demand notes and are classified as Receivables - Advances to affiliate on the 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 1.21 percent at June 30, 2022. The interest income from these advances was $3.3 million and $3.5 million for the three and six months ended June 30, 2022, respectively, and minimal for the three and six months ended June 30, 2021. Such interest income is included in Other (Income) and Other Expenses - Interest income on the Statement of Net Income.
Included in Operating Revenues on the Statement of Net Income are revenues received from affiliates of $22.6 million and $43.7 million for the three and six months ended June 30, 2022, respectively, and $2.1 million and $4.7 million for the three and six months ended June 30, 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 Statement of Net Income are costs of gas purchased from affiliates of $1.8 million and $7.2 million for the three and six months ended June 30, 2022, respectively, and $0.7 million and $4.1 million for the three and six months ended June 30, 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 $87.4 million and $167.0 million for the three and six months ended June 30, 2022, respectively, and $75.7 million and $154.5 million for the three and six months ended June 30, 2021, respectively, for these service expenses, which are primarily included in Operation and maintenance and Administrative and general expenses on the 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 $2.1 million and $3.7 million for the three and six months ended June 30, 2022, respectively, and $1.8 million and $3.5 million for the three and six months ended June 30, 2021, respectively.
During July 2022, we declared and paid a cash distribution of $280.0 million to our parent.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion should be read in conjunction with the 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 Financial Statements and Notes contained in this Form 10-Q.
Results of Operations
This analysis discusses financial results of our operations for the six-month periods ended June 30, 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 six months of 2022, we recognized Net Income of $554.0 million compared to $531.2 million recognized during the first six months of 2021. The significant components of this year-over-year increase of $22.8 million (4.3 percent) are discussed further below.
Natural gas sales revenues increased $28.8 million due to higher cash-out volumes and pricing.
Natural gas transportation revenues increased $81.8 million (7.1 percent), which was primarily attributable to:
•$51.4 million from our Leidy South project from additional capacity placed into service during the second half of 2021;
•$13.5 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;
•$9.2 million from a combination of higher short-term firm transportation and overall demand;
•$4.1 million higher commodity revenues; and
•$3.6 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).
Natural gas storage revenues increased $9.5 million (11.3 percent) primarily due to an increase in rates that became effective during the second quarter of 2022.
Operating Costs and Expenses, excluding the Cost of natural gas sales, which directly offsets Natural gas sales in Operating Revenues, increased $68.5 million (12.2 percent). This increase was primarily attributable to:
•$48.4 million increase in Operation and maintenance costs primarily resulting from (i) increased transportation costs of $20.0 million associated with Leidy South, (ii) higher electric power costs of $13.5 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), (iii) higher storage costs of $8.4 million (offset in Operating Revenues resulting in no net impact on our results of operations) and (iv) higher employee-related labor and benefit costs of $5.9 million;
| | | | | |
Management’s Discussion and Analysis (Continued) | |
•$11.5 million increase in Administrative and general expenses resulting mostly from an unfavorable change in allocated corporate expenses and employee-related labor and benefit costs;
•$27.7 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; and
•$3.9 million increase in Taxes — other than income taxes primarily due to an increase in estimated property taxes as a result of valuation increases;
•Partially offset by a $22.9 million favorable change in Other (income) expense, net driven by the deferral of $21.5 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 $3.6 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 $1.1 million driven by an increase of $4.2 million in interest expense primarily due to interest incurred on our financing obligation associated with the Leidy South project, partially offset by an increase of $3.5 million in affiliated interest income on our advances to Williams due to rising interest rates.
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.
Southside Reliability Enhancement
The Southside Reliability Enhancement Project is an incremental expansion of our existing natural gas transmission system to provide firm transportation capacity from receipt points in Virginia and North Carolina to delivery points in North Carolina. The expansion project will add a total of approximately 423 Mdth/d of capacity. We plan to place the project into service as early as the 2024/2025 winter heating season assuming timely receipt of all necessary regulatory approvals. We filed our certificate application for the project with the FERC on May 23, 2022.
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 second 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, as filed with the SEC on February 28, 2022, as supplemented by disclosures in Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q, as filed with the SEC on May 2, 2022, includes certain risk factors that could materially affect our business, financial condition, or future results. Those Risk Factors have not materially changed.
Item 6. Exhibits
The following instruments are included as exhibits to this report.
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Exhibit 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: | August 1, 2022 | By: | | /s/ Billeigh W. Mark |
| | | | Billeigh W. Mark |
| | | | Controller |
| | | | (Principal Accounting Officer) |