-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OkJQ+/twxGvHaQXf5zu4FB6qJTCbjkI+v455QrBoDfe5BUImtPRoBTl2tbb7zyOD FF1FCIBLoxlSFkcjLP/klw== 0000099250-98-000004.txt : 19981116 0000099250-98-000004.hdr.sgml : 19981116 ACCESSION NUMBER: 0000099250-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSCONTINENTAL GAS PIPE LINE CORP CENTRAL INDEX KEY: 0000099250 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 741079400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07584 FILM NUMBER: 98747635 BUSINESS ADDRESS: STREET 1: 2800 POST OAK BLVD STREET 2: P O BOX 1396 CITY: HOUSTON STATE: TX ZIP: 77251 BUSINESS PHONE: 7134392000 MAIL ADDRESS: STREET 1: 2800 POST OAK BLVD STREET 2: P O BOX 1396 CITY: HOUSTON STATE: TX ZIP: 77251 10-Q 1 TRANSCO 3RD QTR 1998 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ......... TO .......... COMMISSION FILE NUMBER 1-7584 TRANSCONTINENTAL GAS PIPE LINE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 74-1079400 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2800 POST OAK BOULEVARD P. O. BOX 1396 HOUSTON, TEXAS 77251 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000 NONE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AS OF SEPTEMBER 30, 1998 WAS 100. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED: TRANSCONTINENTAL GAS PIPE LINE CORPORATION AND SUBSIDIARIES (TRANSCO) The accompanying interim condensed consolidated financial statements of Transco do not include all notes in annual financial statements and therefore should be read in conjunction with the consolidated financial statements and notes thereto in Transco's 1997 Annual Report on Form 10-K and 1998 First and Second Quarter Reports on Form 10-Q. The accompanying consolidated financial statements have not been audited by independent auditors but include all adjustments both normal recurring and others which, in the opinion of Transco's management, are necessary to present fairly its financial position at September 30, 1998, and results of operations for the three and nine month periods ended September 30, 1998 and 1997, and cash flows for the nine months ended September 30, 1998 and 1997. Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although Transco believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be achieved. Such statements are made in reliance on the "safe harbor" protections provided under the Private Securities Reform Act of 1995. Additional information about issues that could lead to material changes in performance is contained in Transco's 1997 Annual Report on Form 10-K, the 1998 First and Second Quarter Reports on Form 10-Q and the Year 2000 disclosure contained in this document. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
September 30, December 31, 1998 1997 ----------------- ----------------- ASSETS Current Assets: Cash $ 801 $ 1,321 Receivables: Affiliates 1,736 868 Others 19,789 27,493 Advances to affiliates 458,690 281,454 Transportation and exchange gas receivables: Affiliates 24,599 23,567 Others 64,204 66,825 Inventories 82,637 84,240 Deferred income tax asset 97,436 90,672 Other 18,888 17,570 ----------------- ----------------- Total current assets 768,780 594,010 ----------------- ----------------- Investments 7,382 7,072 ----------------- ----------------- Property, Plant and Equipment: Natural gas transmission plant 4,205,453 3,977,620 Less-Accumulated depreciation and amortization 584,458 477,667 ----------------- ----------------- Total property, plant and equipment, net 3,620,995 3,499,953 ----------------- ----------------- Other Assets 172,809 166,628 ----------------- ----------------- $ 4,569,966 $ 4,267,663 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Thousands of Dollars) (Unaudited)
September 30, December 31, 1998 1997 ---------------- ---------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Payables: Affiliates $ 33,229 $ 44,749 Others 69,460 90,486 Transportation and exchange gas payables: Affiliates 379 374 Others 11,210 18,033 Accrued liabilities 153,777 130,594 Reserve for rate refunds 306,483 204,554 ---------------- ---------------- Total current liabilities 574,538 488,790 ---------------- ---------------- Long-Term Debt 975,871 837,832 ---------------- ---------------- Other Long-Term Liabilities: Deferred income taxes 847,502 843,108 Other 145,142 171,586 ---------------- ---------------- Total other long-term liabilities 992,644 1,014,694 ---------------- ---------------- Commitments and contingencies (Note 3) Common Stockholder's Equity: Common stock $1.00 par value: 100 shares authorized, issued and outstanding - - Premium on capital stock and other paid-in capital 1,652,430 1,652,430 Retained earnings 374,483 273,917 ---------------- ---------------- Total common stockholder's equity 2,026,913 1,926,347 ---------------- ---------------- $ 4,569,966 $4,267,663 ================ ================ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars) (Unaudited)
Three Months Ended September 30 ---------------------------------------- 1998 1997 ----------------- ----------------- Operating Revenues Natural gas sales $ 125,576 $ 163,819 Natural gas transportation 160,753 149,486 Natural gas storage 35,993 35,003 Other 1,813 1,146 ----------------- ----------------- Total operating revenues 324,135 349,454 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 125,576 163,819 Cost of natural gas transportation 11,938 4,445 Operation and maintenance 44,311 45,017 Administrative and general 30,852 30,984 Depreciation and amortization 39,744 39,945 Taxes - other than income taxes 9,305 9,634 Other 1,815 322 ----------------- ----------------- Total operating costs and expenses 263,541 294,166 ----------------- ----------------- Operating Income 60,594 55,288 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 23,769 17,935 Interest income - affiliates (7,241) (2,431) Allowance for equity and borrowed funds used during construction (AFUDC) (3,316) (2,437) Miscellaneous other (income) deductions, net (234) 284 ----------------- ----------------- Total other deductions 12,978 13,351 ----------------- ----------------- Income before Income Taxes 47,616 41,937 Provision for Income Taxes 18,000 14,923 ----------------- ----------------- Net Income $ 29,616 $ 27,014 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars) (Unaudited)
Nine Months Ended September 30 ---------------------------------------- 1998 1997 ----------------- ----------------- Operating Revenues Natural gas sales $ 401,533 $ 475,280 Natural gas transportation 481,633 459,893 Natural gas storage 108,115 106,155 Other 6,471 2,738 ----------------- ----------------- Total operating revenues 997,752 1,044,066 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 401,533 475,280 Cost of natural gas transportation 32,891 23,425 Operation and maintenance 127,051 136,915 Administrative and general 92,241 92,807 Depreciation and amortization 111,526 118,014 Taxes - other than income taxes 27,091 28,294 Other 2,605 1,126 ----------------- ----------------- Total operating costs and expenses 794,938 875,861 ----------------- ----------------- Operating Income 202,814 168,205 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 69,158 51,250 Interest income - affiliates (20,884) (4,729) Allowance for equity and borrowed funds used during construction (AFUDC) (7,989) (5,780) Miscellaneous other deductions, net 471 1,519 ----------------- ----------------- Total other deductions 40,756 42,260 ----------------- ----------------- Income before Income Taxes 162,058 125,945 Provision for Income Taxes 61,492 47,505 ----------------- ----------------- Net Income $ 100,566 $ 78,440 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) (Unaudited)
Nine Months Ended September 30 --------------------------------- 1998 1997 ------------- ------------- Cash flows from operating activities: Net income $ 100,566 $ 78,440 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 116,413 122,817 Deferred income taxes (2,370) (8,468) Allowance for equity funds used during construction (AFUDC) (5,845) (3,997) Changes in operating assets and liabilities: Receivables 18,836 20,357 Receivables sold (12,000) (4,000) Transportation and exchange gas receivables 1,589 2,942 Inventories 1,603 (26,825) Payables (22,994) (13,564) Transportation and exchange gas payables (6,818) (8,229) Accrued liabilities 23,183 30,401 Reserve for rate refunds 101,929 (5,166) Other, net (32,377) 20,684 ------------- ------------- Net cash provided by operating activities 281,715 205,392 ------------- ------------- Cash flows from financing activities: Additions to long-term debt 298,343 150,000 Retirement of long-term debt (160,000) (99,000) Debt issue costs (2,060) (248) Dividends on common stock - (2,982) ------------- ------------- Net cash provided by financing activities 136,283 47,770 ------------- ------------- Cash flows from investing activities: Property, plant and equipment: Additions, net of equity AFUDC (233,807) (160,197) Changes in accounts payable and accrued liabilities (9,552) (8,675) Advances to affiliates, net (177,236) (88,325) Other, net 2,077 4,486 ------------- ------------- Net cash used in investing activities (418,518) (252,711) ------------- ------------- Net increase (decrease) in cash (520) 451 Cash at beginning of period 1,321 1,774 ------------- ------------- Cash at end of period $ 801 $ 2,225 ============= ============= Supplemental disclosures of cash flow information: Cash paid (refunded) during the year for : Interest (exclusive of amount capitalized) $ 47,797 $ 56,179 Income taxes paid 61,584 35,496 Income tax refunds received (77) (11,759) The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE STRUCTURE AND CONTROL Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned subsidiary of Williams Gas Pipeline Company (WGP) (formerly Williams Interstate Natural Gas Systems, Inc). WGP is a wholly-owned subsidiary of The Williams Companies, Inc. (Williams). Prior to May 1, 1997, Transco was a wholly-owned subsidiary of Williams. 2. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Transco and its majority-owned subsidiaries. Companies in which Transco and its subsidiaries own 20 percent to 50 percent of the voting common stock are accounted for under the equity method. The condensed consolidated financial statements have been prepared from the books and records of Transco without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Transco's 1997 Annual Report on Form 10-K and 1998 First and Second Quarter Reports on Form 10-Q. Through an agency agreement, Williams Energy Services Company (WESCO), an affiliate of Transco, manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations. Certain reclassifications have been made in the 1997 financial statements to conform to the 1998 presentation. 3. CONTINGENT LIABILITIES AND COMMITMENTS There have been no new developments from those described in Transco's 1997 Annual Report on Form 10-K or 1998 First and Second Quarter Reports on Form 10-Q other than as described below. RATE AND REGULATORY MATTERS GENERAL RATE CASE (DOCKET NO. RP97-71) On November 1, 1996, Transco submitted to the Federal Energy Regulatory Commission (FERC) a general rate case filing principally designed to recover costs associated with increased capital expenditures. These increased capital expenditures primarily relate to system reliability, integrity and Clean Air Act compliance. When stated on a comparable basis, the rates Transco placed into effect on May 1, 1997, represent an annual cost of service increase of approximately $47 million over the cost of service underlying the rates contained in the settlement of Transco's last general rate filing (Docket No. RP95-197). The rates, which are subject to refund, are designed using the straight fixed-variable rate design method. The filing also included (1) a pro-forma proposal to roll-in the costs of Transco's Leidy Line and Southern expansion incremental projects and (2) a pro-forma proposal to make interruptible transportation (IT) backhaul rates equal to the IT forward haul rates. The pro-forma proposals would be made effective prospectively only after final FERC approval. On November 29, 1996, the FERC issued an order accepting Transco's filing, suspending its effectiveness until May 2, 1997 and establishing a hearing to examine the reasonableness of Transco's proposed rates. In addition, the order consolidated Transco's pro-forma roll-in proposal with the Phase II hearing in Docket No. RP95-197, and directed that the record in that proceeding be supplemented to the extent necessary. On February 3, 1997, the FERC issued an order on rehearing of its November 29, 1996 order which, among other things, revised the effective date for the proposed rates to May 1, 1997. On January 20, 1998, Transco filed a Stipulation and Agreement for approval by the FERC, documenting a settlement with all of the active parties in this proceeding. The settlement resolves all cost of service, throughput and other issues in this proceeding, except rate of return, capital structure and certain minor cost allocation and rate design issues. On June 12, 1998, the FERC issued an order approving the settlement. On October 30, 1998, Transco issued refunds in connection with the settlement in the amount of $ 89.5 million, including interest, for which Transco had previously provided a reserve. The issues not resolved by the settlement are being litigated by the parties before a FERC Administrative Law Judge (ALJ). GENERAL RATE CASE (DOCKET NO. RP95-197) On July 29, 1998, the FERC issued an order on rehearing of its August 1, 1997 order in the Phase I proceeding determining the capital structure and rate of return for Transco. As to capital structure, the FERC vacated its policy formulated in the August 1, 1997 order which favored use of the pipeline's own capital structure if the pipeline's equity ratio falls within the range of the equity ratios of the proxy companies used to determine the pipeline's return on equity. In the July 29, 1998 order, the FERC returned to its traditional policy, under which the pipeline's own capital structure will be used if the pipeline issues its own non-guaranteed debt and has its own bond rating, and if the pipeline's equity ratio is reasonable when compared to the equity ratios approved by the FERC in other proceedings and when compared to those of the proxy companies. Applying its new policy, the FERC affirmed the use of Transco's own capital structure, consisting of 57.58% equity, in developing Transco's rate of return in this proceeding. As discussed in greater detail below, the FERC also modified its methodology for determining return on equity. Applying its revised methodology to Transco in this proceeding, the FERC provided a rate of return on equity for Transco of 12.49%. A joint request for rehearing of the July 29, 1998 order was filed and is pending before the FERC. Transco believes the reserve previously provided is adequate for any refunds that may be required and has not made any adjustments to its reserves pending FERC action in this proceeding. RATE OF RETURN CALCULATION As noted above, on August 1, 1997, the FERC issued an order addressing, among other things, the authorized rate of return for Transco's 1995 rate case (Docket No. RP95-197). In that order, the FERC continued its practice of utilizing a methodology for calculating rates of return that incorporates a long-term growth rate component. The long-term growth rate component used by the FERC is a projection of U.S. gross domestic product growth rates. Generally, calculating rates of return utilizing a methodology which includes a long-term growth rate component results in rates of return that are lower than they would be if the long-term growth rate component were not included in the methodology. On January 30, 1998, the FERC convened a public conference to explore, among other things, possible modifications to the FERC's rate of return methodology. As discussed above, in its July 29, 1998 order on rehearing of its August 1, 1997 order, the FERC modified its rate of return methodology with regard to the weight to be given to the long-term growth component. Under its previous methodology, the FERC averaged the short and long-term growth projections, thereby giving them equal weight. In its July 29, 1998 order, the FERC changed its policy and will accord the short-term projection a two-thirds weighting and the long-term projection a one-third weighting. The FERC has determined that the short-term projection is more reliable and should be given more weight, but that the long-term projection should be given some weight in order to normalize any distortions that may be reflected in the short-term data. The revised weighting to be reflected in the FERC's methodology should lead to somewhat higher rates of return on equity than were obtained under the previous methodology. In addition, the FERC will now permit parties to argue that a pipeline's return on equity be established at any point within the range of returns developed under the two-stage methodology (rather than only at the high, mid or low point in the range) based on the pipeline's relative level of risk. In that regard, when assessing a pipeline's relative risk, the FERC determined that it will not lower a pipeline's return on equity if its lower risk is the result of the pipeline's own efficiency, but will focus on risks faced by the pipeline that are attributable to circumstances outside the control of the pipeline's management. PRODUCTION AREA RATE DESIGN (DOCKET NOS. RP92-137, RP93-136 AND RP98-381) Transco has expressed to the FERC concerns that inconsistent treatment under Order 636 of Transco and its competitor pipelines with regard to rate design and cost allocation issues in the production area may result in rates which could make Transco less competitive, both in terms of production-area and long-haul transportation. A hearing before an ALJ (Docket Nos. RP92-137 and RP93-136), dealing with, among other things, Transco's production-area rate design, concluded in June 1994. On July 19, 1995, the ALJ issued an initial decision finding that Transco's proposed production area rate design, and its existing use of a system wide cost of service and allocation of firm capacity in the production area are unjust and unreasonable. The ALJ therefore recommended that Transco divide its costs between its production area and market area, and permit its customers to renominate their firm entitlements. On July 3, 1996, the FERC issued an order on review of the ALJ's initial decision concerning, among other things, Transco's production area rate design. The FERC rejected the ALJ's recommendations that Transco divide its costs between its production area and market area, and permit its customers to renominate their firm entitlements. The FERC also concluded that Transco may offer firm service on its supply laterals through an open season and eliminate its IT feeder service in favor of an interruptible service option that does not afford shippers feeding firm transportation on Transco's production area mainline a priority over other interruptible transportation. On December 18, 1996, the FERC denied rehearing of its July 3, 1996 Order. Several parties, including Transco, have filed petitions for review in the D.C. Circuit Court of the FERC's orders addressing production area rate design issues. On November 4, 1998, the D.C. Circuit Court issued an order granting the FERC's motion to hold these appeals in abeyance pending the outcome of the proceedings in Transco's Docket No. RP98-381 (see below). On August 31, 1998, Transco made a limited NGA Section 4 filing with the FERC to implement firm transportation service on Transco's production area supply laterals in accordance with the option authorized by the FERC's July 3 and December 18, 1996 orders. The filing (Docket No. RP98-381) was protested, and on September 30, 1998, the FERC accepted the filing and suspended its effectiveness until March 1, 1999, subject to further proceedings. REGULATION OF SHORT TERM NATURAL GAS TRANSPORTATION SERVICE (DOCKET NO. RM98-10-000) AND REGULATION OF NATURAL GAS TRANSPORTATION SERVICES (DOCKET NO. RM98-12-000) On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR) and a Notice of Inquiry (NOI), proposing revisions to, and seeking comments on, its regulatory policies for interstate natural gas transportation service. In the NOPR (Docket No. RM98-10-000), the FERC proposes revisions to its regulations to reflect changes in the market for short-term transportation services on pipelines. The FERC proposes to eliminate cost-based regulation of short-term transportation services and implement regulatory policies that are intended to maximize competition in the short-term transportation market, mitigate the ability of firms to exercise residual monopoly power and provide opportunities for greater flexibility in the provision of pipeline services. Included among the proposed changes are initiatives to revise pipeline scheduling procedures, receipt and delivery point policies, and penalty policies, to require pipelines to auction short-term capacity, to revise the FERC's reporting requirements, to permit pipelines to negotiate rates and terms of service, and to revise certain rate and certificate policies. In the NOI (Docket No. RM98-12-000), the FERC seeks comments on its pricing policies in the existing long-term market and pricing policies for new capacity. The proposed changes are expected to have prospective effects only. Comments on the NOPR and NOI are now due on January 22, 1999. Transco will review the NOPR and NOI and provide comments within the required time period. SUMMARY While no assurances may be given, Transco does not believe that the ultimate resolution of the foregoing matters and those described in Transco's 1997 Annual Report on Form 10-K and 1998 First and Second Quarter Reports on Form 10-Q, taken as a whole and after consideration of amounts accrued, recovery from customers, insurance coverage or other indemnification arrangements, will have a materially adverse effect upon Transco's future financial position, results of operations and cash flow requirements. 4. DEBT AND FINANCING ARRANGEMENTS LONG-TERM DEBT Williams and certain of its subsidiaries, including Transco, are parties to a $1 billion credit agreement (Credit Agreement), under which Transco can borrow up to $400 million if the funds available under the Credit Agreement have not been borrowed by Williams or other subsidiaries. Interest rates vary with current market conditions based on the base rate of Citibank N.A., three-month certificates of deposit of major United States money market banks, federal funds rate or the London Interbank Offered Rate. As of September 30, 1998, Transco had no outstanding borrowings under this agreement. On January 16, 1998, Transco issued $200 million of notes that mature on January 15, 2005, and $100 million of notes that mature on January 15, 2008, which pay interest at 6-1/8% and 6-1/4%, respectively, per annum on January 15 and July 15 of each year, beginning July 15, 1998. The notes are not subject to redemption and have no sinking fund provisions. Proceeds from the notes were used for general corporate purposes, including the repayment of $160 million borrowed under the Credit Agreement. SHORT-TERM DEBT Transco is a party to a short-term money market facility under which it can borrow up to $40 million. Interest rates vary with current market conditions based on the applicable bank rate at the time of the borrowings. As of September 30, 1998, Transco had no outstanding borrowings under these facilities. SALE OF RECEIVABLES Transco is a party to an agreement that expires on January 29, 1999 pursuant to which Transco can sell to an investor up to $100 million of undivided interests in certain of its trade receivables. At September 30, 1998 and December 31, 1997, interests in $88 million and $100 million, respectively, of these receivables were held by the investor. 5. ADOPTION OF ACCOUNTING STANDARDS The Financial Accounting Standards Board issued three new accounting standards, Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 131 and No. 132, effective for fiscal years beginning after December 15, 1997, are disclosure-oriented standards. Therefore, neither standard will affect Transco's reported consolidated results of operations, financial position or cash flows. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. This standard is not expected to have any significant effect on Transco's reported consolidated results of operations, financial position or cash flows. The American Institute of Certified Public accountants (AICPA) issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," effective for fiscal years beginning after December 15, 1998. The SOP is not expected to have any significant effect on Transco's reported consolidated results of operations, financial position or cash flows. ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements, notes and management's narrative analysis contained in Items 7 and 8 of Transco's 1997 Annual Report on Form 10-K and in Transco's 1998 First and Second Quarter Reports on Form 10-Q and with the condensed consolidated financial statements and notes contained in this report. RESULTS OF OPERATIONS NET INCOME AND OPERATING INCOME Transco's net income for the nine months ended September 30, 1998 was $100.6 million compared to net income of $78.4 million for the nine months ended September 30, 1997. Operating income for the nine months ended September 30, 1998 was $202.8 million compared to $168.2 million for the nine months ended September 30, 1997. The higher operating income of $34.6 million was primarily the result of higher natural gas transportation and other revenues, lower operation and maintenance expenses and lower depreciation and amortization, as discussed in more detail below, partially offset by a $5.4 million credit to cost of natural gas transportation that was recorded in 1997 as a result of a settlement related to a prior rate proceeding. The increase in net income was attributable to the increased operating income. Net interest expense was approximately the same as net interest expense for the nine months ended September 30, 1997. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. OPERATING EXPENSES Excluding the cost of sales and transportation of $434 million for the nine months ended September 30, 1998 and $499 million for the comparable period in 1997, Transco's operating expenses for the nine months ended September 30, 1998, were approximately $17 million lower than the comparable period in 1997. This decrease was primarily attributable to lower operation and maintenance expenses and lower depreciation and amortization. The lower operation and maintenance expenses are primarily attributable to a $7.7 million decrease in charges from others for the operation of certain Transco facilities, including a $4.1 million adjustment related to settlement rates contained in the general rate case in Docket No. RP97-71 approved by the FERC in June 1998; a $1.6 million adjustment in pipe recoating costs, also related to the RP97-71 settlement rates; and lower costs of labor ($1.9 million), contractual services ($2.6 million) and materials ($3.7 million); partly offset by a $4.9 million increase in underground storage expense and a $1.7 million increase in lube oil and odorants expense. As described below, the increase in underground storage expense was largely offset by an increase in underground storage revenues. The lower depreciation and amortization resulted from a $3.2 million adjustment to accruals on certain general plant assets and a $3.8 million adjustment related to the RP97-71 settlement rates, partly offset by a $0.5 million increase due to recent capital expenditures, included in the general rate case in Docket No. RP97-71 and the expansion projects placed into service in the last quarter of 1997 and during 1998. TRANSPORTATION REVENUES Transco's operating revenues related to its transportation services for the nine months ended September 30, 1998 were $482 million, compared to $460 million for the nine months ended September 30, 1997. The higher transportation revenues were primarily due to benefits of the expansion projects placed into service in November 1997, new rates to recover costs associated with increased capital expenditures contained in the general rate case in Docket No. RP97-71 placed into effect in May 1997 and the Mobile Bay Expansion placed into service in 1998, and a $2 million adjustment related to RP97-71 settlement rates approved by the FERC in June 1998. As shown in the table below, Transco's total market-area deliveries for the nine months ended September 30, 1998 increased 20.7 trillion British Thermal Units (TBtu) (2.1%) when compared to the same period in 1997. The increased deliveries were mainly due to 39.6 TBtu delivered under the Sunbelt Expansion Project in the first nine months of 1998, offset by lower long-haul transportation deliveries due to milder weather conditions. Transco's production area deliveries for the nine months ended September 30, 1998 decreased 31.0 TBtu (16%) when compared to the same period in 1997 as a result of milder weather conditions. As a result of a straight fixed-variable (SFV) rate design, increases or decreases in firm transportation volumes in comparable facilities have no significant impact on operating income; however, because interruptible transportation rates have components of fixed and variable cost recovery, increases or decreases in interruptible transportation volumes do have an impact on operating income. Nine Months Ended September 30, ------------------------- Transco System Deliveries (TBtu) 1998 1997 - -------------------------------- ---------- ---------- Market-area deliveries: Long-haul transportation 651.3 698.0 Market-area transportation 369.0 301.6 ---------- ---------- Total market-area deliveries 1,020.3 999.6 Production-area transportation 166.0 197.0 ---------- ---------- Total system deliveries 1,186.3 1,196.6 ========== ========== Average Daily Transportation Volumes (TBtu) 4.3 4.4 Average Daily Firm Reserved Capacity (TBtu) 6.4 5.5 Transco's facilities are divided into seven rate zones. Four are located in the production area and three are located in the market area. Long-haul transportation is gas that is received in one of the production-area zones and delivered in a market-area zone. Market-area transportation is gas that is both received and delivered within market-area zones. Production-area transportation is gas that is both received and delivered within production-area zones. See Note 3 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent developments in Transco's rate and regulatory matters. SALES REVENUES Transco makes jurisdictional merchant gas sales to customers pursuant to a blanket sales certificate issued by the FERC, with most of those sales being made through a Firm Sales (FS) program which gives customers the option to purchase daily quantities of gas from Transco at market-responsive prices in exchange for a demand charge payment. Through an agency agreement, WESCO manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations. Transco's operating revenues for the nine months ended September 30, 1998 related to its sales services, including cash out sales in settlement of gas imbalances, decreased $73.7 million to $402 million, when compared to the same period in 1997. The decrease was primarily due to a lower average gas sales price of $2.12 per dekatherm (Dt) in the first nine months of 1998 versus $2.37 per Dt in 1997 and lower sales volumes. However, this decrease in revenues had no effect on Transco's operating income or net income variances when compared to the prior year because the decrease in revenues was offset by a corresponding decrease in the cost of sales. Nine Months Ended September 30, ------------------------- Gas Sales Volumes (TBtu) 1998 1997 - ------------------------ -------- -------- Long-term sales 135.7 149.1 Short-term sales 18.3 11.0 -------- -------- Total gas sales 154.0 160.1 ======== ======== STORAGE REVENUES Transco's operating revenues related to storage services increased $2.0 million to $108.1 million for the nine months ended September 30, 1998 when compared to the same period in 1997. This revenue increase included $4.5 million to recover higher underground storage rates charged by others that is included in operation and maintenance expenses, partly offset by a $1.5 million adjustment related to settlement rates contained in the general rate case in Docket No. RP97-71 approved by the FERC in June 1998 and $1.0 million due primarily to lower storage withdrawals and lower demand charges. OTHER REVENUES Other operating revenues increased $3.7 million to $6.5 million for the nine months ended September 30, 1998 when compared to the same period in 1997, due to new services that began in July 1997 and increased liquids transportation. CAPITAL RESOURCES AND LIQUIDITY METHOD OF FINANCING Transco funds its capital requirements with cash flows from operating activities, including the sale of trade receivables, by accessing capital markets, by repayments of funds advanced to Williams, by borrowings under the Credit Agreement and short-term money market facilities and, if required, advances from Williams. At September 30, 1998, there were no outstanding borrowings under the Credit Agreement or short-term money market facilities. Advances due Transco by Williams totaled $459 million. On January 16, 1998, Transco issued $200 million of notes that mature in 2005 and $100 million of notes that mature in 2008. Proceeds from these notes were used for general corporate purposes, including the repayment of $160 million borrowed under the Credit Agreement. CAPITAL EXPENDITURES As shown in the table below, Transco's capital expenditures for the nine months ended September 30, 1998 were $243.4 million, compared to $168.9 million for the nine months ended September 30, 1997.
Nine Months Ended September 30, ---------------------- Capital Expenditures 1998 1997 - -------------------- -------- --------- (In Millions) Market-area projects $ $ 64.1 79.9 Supply-area projects 113.2 19.4 Maintenance of existing facilities and other projects 50.3 85.4 -------- --------- Total capital expenditures $ 243.4 $ 168.9 ======== =========
Transco's capital expenditure budget for 1998 and future capital projects are discussed in its 1997 Annual Report on Form 10-K and First and Second Quarter Reports on Form 10-Q. The following describes significant developments related to those projects and any new projects proposed by Transco. CROSS BAY PIPELINE PROJECT Subsidiaries of Transco, Duke Energy and KeySpan Energy have formed Cross Bay[SM] Pipeline Company, L.L.C. (Cross Bay). The Cross Bay Pipeline Project is designed to increase natural gas deliveries into the New York City metropolitan area by installing compression and looping to expand Transco's existing Long Beach Lateral by approximately 121 million cubic feet per day (MMcf) of gas per day. Cross Bay is holding an open season from October 15 to November 13, 1998, to solicit customers interested in subscribing to firm transportation capacity under the project. Cross Bay plans to file for FERC approval of the project during the fourth quarter of 1998. The project is targeted to be in service by the 1999-2000 winter heating season. Wholly owned subsidiaries of Transco will operate Cross Bay and have a 37.5% ownership interest. FLORIDA PIPELINE PROJECT On October 16, 1998, Transco announced that it is contacting various local, state and federal agencies to obtain information that would enable the company to determine the route for a new natural gas pipeline to provide firm and interruptible transportation service to Florida. The target markets for the pipeline would be new natural gas-fired power generation facilities. At this stage of the planning process it is premature to estimate the size of the pipeline project and the associated capital cost. 1998 CHEROKEE EXPANSION PROJECT Transco has completed construction of the 1998 Cherokee Expansion Project and commenced firm transportation through the expansion on November 1, 1998. The project is an incremental expansion of Transco's pipeline system in its southern market area which will provide approximately 84 MMcf per day of new firm transportation capacity to serve markets in Georgia. MOBILE BAY LATERAL EXPANSION PROJECT On August 1, 1998, Transco placed into service Phase I of the Mobile Bay Lateral Expansion Project which provides new firm transportation capacity of 350 MMcf per day from the outer continental shelf to Transco=s Station 82. Phase II of the project was placed into service on November 9, 1998, increasing the capacity on the existing onshore lateral to Station 85 from 520 MMcf per day to 784 MMcf per day. OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES Transco's capital requirements and contingencies are discussed in its 1997 Annual Report on Form 10-K and 1998 First and Second Quarter Reports on Form 10-Q. Other than as described in Note 3 of the Notes to Condensed Consolidated Financial Statements, there have been no new developments from those described in Transco's 1997 Annual Report on Form 10-K and 1998 First and Second Quarter Reports on Form 10-Q with regard to other capital requirements and contingencies. RATE AND REGULATORY REFUNDS Transco has provided reserves which it believes are adequate for any rate refunds that may be required. On October 30, 1998, Transco issued refunds in the amount of $89.5 million, including interest, in connection with the settlement of its general rate case Docket No. RP97-71, which settlement was approved by the FERC by order dated June 12, 1998. The issues not resolved by the settlement are being litigated by the parties before a FERC ALJ. In July 1998, the FERC issued an order modifying its rate of return methodology (see Note 3). YEAR 2000 COMPLIANCE Williams and its wholly-owned subsidiaries, which includes Transco, initiated an enterprise-wide project in 1997 to address the year 2000 compliance issue for both traditional information technology areas and non-traditional areas, including embedded technology which is prevalent throughout the company. The project focuses on all technology hardware and software, external interfaces with customers and suppliers, operations process control, automation and instrumentation systems, and facility items. The phases of the project are awareness, inventory and assessment, renovation and replacement, testing and validation. The awareness and inventory/assessment phases of this project as it relates to both traditional and non-traditional information technology areas have been completed. During the inventory and assessment phase, all systems with possible year 2000 implications were inventoried and classified into five categories: 1) highest, business critical, 2) high, compliance necessary within a short period of time following January 1, 2000, 3) medium, compliance necessary within 30 days from January 1, 2000, 4) low, compliance desirable but not required, and 5) unnecessary. Categories 1 - 3 were designated as critical and are the major focus of this project. Renovation/replacement and testing/validation of critical systems are expected to be completed by June 30, 1999, except for replacement of certain critical systems scheduled for completion by September 1, 1999. Certain non-critical systems may not be compliant by January 1, 2000. Testing and validation activities have begun and will continue throughout the process with substantial completion expected by June 30, 1999. Year 2000 test labs are in place and operational. As was expected, few problems have been detected during testing for items believed to be compliant. The following table indicates the approximate project status, at September 30, 1998, for traditional information technology and non-traditional areas. The tested category indicates the percentage that has been fully tested or otherwise validated as compliant. The untested category includes items that are believed to be compliant but which have not yet been validated. The not compliant category includes items which have been identified as not year 2000 compliant.
Tested Untested Not Compliant Traditional Information Technology 8% 31% 61% Non-Traditional Information Technology 33% 36% 31%
Transco has initiated a formal communications process with other companies with which Transco's systems interface or rely on to determine the extent to which those companies are addressing their year 2000 compliance. In connection with this process, Transco has sent approximately 150 letters and questionnaires to third parties including customers, vendors, service providers, etc. Additional communications are being mailed during the fourth quarter of 1998. Transco is evaluating responses as they are received or otherwise investigating the status of these companies' year 2000 compliance efforts. As of September 30, 1998 approximately 59% of the companies contacted have responded and virtually all of those have indicated that they are already compliant or will be compliant on a timely basis. Where necessary, Transco will be working with key business partners to reduce the risk of a break in service or supply and with non-compliant companies to mitigate any material adverse effect on Transco. Transco expects to utilize both internal resources and external contractors to complete the year 2000 compliance project. Existing resources will be redeployed, and several previously planned system implementations currently in process are scheduled for completion on or before September 1, 1999, which are expected to lessen possible year 2000 impacts. In situations where planned system implementations will not be in service timely, alternative steps are being taken to make existing systems compliant. Although all critical systems over which Transco has control are planned to be compliant and tested before the year 2000, there is a possibility of service interruptions due to non-compliance by third parties. In particular, power failures along the communications network or transportation system would cause service interruptions. This risk should be minimized by the enterprise-wide effort to communicate with and evaluate third-party compliance plans. Another area of risk for non-compliance is the delay of system replacements scheduled for completion during 1999. The status of these systems is being closely monitored to reduce the chance of delays in completion dates. Contingency plans are being developed for critical business processes, critical business partners, suppliers and system replacements that experience significant delays. These plans are expected to be defined by August 31, 1999 and implemented where appropriate. Costs incurred for new software and hardware purchases are being capitalized and other costs are being expensed as incurred. While estimates of the total cost of Transco's project continue to be refined, Transco estimates that future costs, including the cost to accelerate system replacements, necessary to complete the project within the schedule described will total approximately $7.5 million. Of this total, approximately $7.4 million will be expensed and the remainder capitalized. This estimate does not include Transco's potential share of year 2000 costs that may be incurred by partnerships and joint ventures in which the company participates but is not the operator. Approximately $0.3 million of costs have been expensed to date. The costs of the project and the completion dates are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party year 2000 compliance modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially from these estimates. The above contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions, and adequate resources, that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements contained in the year 2000 update are based on certain assumptions which may vary from actual results. Specifically, the dates on which the company believes the year 2000 project will be completed and computer systems will be implemented are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the year 2000 project. Other specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer code, timely responses to and corrections by third-parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the year 2000 problem, resulting in large part from the uncertainty of the year 2000 readiness of third-parties, the company cannot ensure its ability to timely and cost-effectively resolve problems associated with the year 2000 issue that may affect its operations and business, or expose it to third-party liability. CONCLUSION Although no assurances can be given, Transco currently believes that the aggregate of cash flows from operating activities, supplemented, when necessary, by repayments of funds advanced to Williams, advances or capital contributions from Williams and borrowings under the Credit Agreement or short-term money market facilities, will provide Transco with sufficient liquidity to meet its capital requirements. Transco also expects to access public and private markets on reasonable terms to finance its capital requirements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. See discussion in Note 3 of the Notes to Condensed Consolidated Financial Statements included herein. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. None (b) Reports on Form 8-K. None SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRANSCONTINENTAL GAS PIPE LINE CORPORATION (Registrant) Dated: November 13, 1998 By /s/ James C. Bourne ------------------------------ James C. Bourne Controller (Principal Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE TRANSCO 3RD QTR 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, CONTAINED IN TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1998 THIRD QUARTER REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 SEP-30-1998 801 0 14,090 0 82,637 768,780 4,205,453 584,458 4,569,966 574,538 975,871 0 0 0 2,026,913 4,569,966 401,533 997,752 401,533 700,092 0 0 69,158 162,058 61,492 100,566 0 0 0 100,566 0 0
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