-----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, QNmBwljcO5dqDQFI3hTZv3XBYptKSosavvCRgwRt4NL7A0P3WfPcyMuOaiLUhKIL 8wDEslC7vIXjCxLuXQG2Hw== 0000099250-99-000004.txt : 19990517 0000099250-99-000004.hdr.sgml : 19990517 ACCESSION NUMBER: 0000099250-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 99621929 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 1ST QTR 1999 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ......... TO .......... COMMISSION FILE NUMBER 1-7584 TRANSCONTINENTAL GAS PIPE LINE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 74-1079400 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2800 POST OAK BOULEVARD P. O. BOX 1396 HOUSTON, TEXAS 77251 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000 NONE (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AS OF MARCH 31, 1999 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 1998 Annual Report on Form 10-K. The accompanying condensed consolidated financial statements have not been audited by independent auditors but include all adjustments both normal recurring and others which, in the opinion of Transco's management, are necessary to present fairly its financial position at March 31, 1999, and results of operations and cash flows for the three months ended March 31, 1999 and 1998. 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 1998 Annual Report on Form 10-K and the Year 2000 disclosure contained in this document. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
March 31, December 31, 1999 1998 ----------------- ----------------- ASSETS Current Assets: Cash $ 1,039 $ 1,470 Receivables: Affiliates 2,153 10,892 Others 27,004 21,689 Advances to affiliates 352,412 416,164 Transportation and exchange gas receivables: Affiliates 576 1,370 Others 35,191 56,475 Inventories 73,893 79,787 Deferred income taxes 102,650 99,598 Other 23,018 16,714 ----------------- ----------------- Total current assets 617,936 704,159 ----------------- ----------------- Investments, at cost plus equity in undistributed earnings 30,112 8,915 ----------------- ----------------- Property, Plant and Equipment : Natural gas transmission plant 4,221,137 4,259,502 Less-Accumulated depreciation and amortization 595,503 616,120 ----------------- ----------------- Total property, plant and equipment, net 3,625,634 3,643,382 ----------------- ----------------- Other Assets 178,741 168,495 ----------------- ----------------- $ 4,452,423 $ 4,524,951 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Continued) (Thousands of Dollars) (Unaudited)
March 31, December 31, 1999 1998 ---------------- ---------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Payables: Affiliates $ 37,108 $ 25,050 Others 81,759 72,285 Transportation and exchange gas payables: Affiliates 379 379 Others 7,643 8,354 Accrued liabilities 116,746 156,631 Reserve for rate refunds 161,675 238,403 ---------------- ---------------- Total current liabilities 405,310 501,102 ---------------- ---------------- Long-Term Debt, less current maturities 975,662 975,768 ---------------- ---------------- Other Long-Term Liabilities: Deferred income taxes 848,298 846,306 Other 125,970 139,734 ---------------- ---------------- Total other long-term liabilities 974,268 986,040 ---------------- ---------------- 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 444,753 409,611 ---------------- ---------------- Total common stockholder's equity 2,097,183 2,062,041 ---------------- ---------------- $ 4,452,423 $ 4,524,951 ================ ================ The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Thousands of Dollars) (Unaudited)
Three Months Ended March 31 ---------------------------------------- 1999 1998 ----------------- ----------------- Operating Revenues: Natural gas sales $ 148,071 $ 132,720 Natural gas transportation 168,061 164,869 Natural gas storage 35,002 38,132 Other 3,088 3,646 ----------------- ----------------- Total operating revenues 354,222 339,367 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 148,071 132,720 Cost of natural gas transportation 10,984 10,194 Operation and maintenance 41,533 44,394 Administrative and general 34,631 29,993 Depreciation and amortization 40,213 40,627 Taxes - other than income taxes 7,848 9,073 Other 1,016 415 ----------------- ----------------- Total operating costs and expenses 284,296 267,416 ----------------- ----------------- Operating Income 69,926 71,951 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 18,052 22,605 Interest income - affiliates (5,732) (6,598) Allowance for equity and borrowed funds used during construction (AFUDC) (855) (2,019) Miscellaneous other deductions, net 840 582 ----------------- ----------------- Total other deductions 12,305 14,570 ----------------- ----------------- Income before Income Taxes 57,621 57,381 Provision for Income Taxes 22,479 21,791 ----------------- ----------------- Net Income $ 35,142 $ 35,590 ================= ================= The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Thousands of Dollars) (Unaudited)
Three Months Ended March 31 --------------------------------- 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 35,142 $ 35,590 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 41,332 42,147 Deferred income taxes (1,060) 18,729 Allowance for equity funds used during construction (AFUDC) (602) (1,460) Changes in operating assets and liabilities: Receivables 2,570 8,445 Receivables sold 2,000 (7,000) Transportation and exchange gas receivables 22,078 (184) Inventories 5,894 16,647 Payables 27,393 (25,974) Transportation and exchange gas payables (711) (2,026) Accrued liabilities (39,453) (31,944) Reserve for rate refunds (76,728) 32,675 Other, net (32,095) (22,971) ------------- ------------- Net cash provided by (used in) operating activities (14,240) 62,674 ------------- ------------- Cash flows from financing activities: Additions to long-term debt - 298,343 Retirement of long-term debt - (160,000) Debt issue costs - (2,060) Dividends on common stock - - ------------- ------------- Net cash provided by financing activities - 136,283 ------------- ------------- Cash flows from investing activities: Property, plant and equipment: Additions, net of equity AFUDC (25,093) (42,928) Changes in accounts payable (5,861) (6,825) Advances to affiliates, net 63,752 (151,031) Other, net (18,989) 1,935 ------------- ------------- Net cash provided by (used in) investing activities 13,809 (198,849) ------------- ------------- Net increase (decrease) in cash (431) 108 Cash at beginning of period 1,470 1,321 ------------- ------------- Cash at end of period $ 1,039 $ 1,429 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for : Interest (exclusive of amount capitalized) $ 42,385 $ 15,999 Income taxes paid 17,551 18,859 The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. CORPORATE STRUCTURE AND CONTROL Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned subsidiary of Williams Gas Pipeline Company (WGP). WGP is a wholly-owned subsidiary of The Williams Companies, Inc. (Williams). 2. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Transco and its majority-owned subsidiaries. Companies in which Transco and its subsidiaries own 20 percent to 50 percent of the voting common stock are accounted for under the equity method. Equity in earnings and losses of unconsolidated affiliates is included in other operating revenues. 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 1998 Annual Report on Form 10-K. Through an agency agreement, Williams Energy Services Company (WESCO), an affiliate of Transco, manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. Certain reclassifications have been made in the 1998 financial statements to conform to the 1999 presentation. 3. CONTINGENT LIABILITIES AND COMMITMENTS There have been no new developments from those described in Transco's 1998 Annual Report on Form 10-K other than as described below. RATE AND REGULATORY MATTERS GENERAL RATE CASE (DOCKET NO. RP97-71) On November 1, 1996, Transco submitted to the 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 were litigated by the parties before a FERC Administrative Law Judge (ALJ). On March 30, 1999, the ALJ issued her initial decision which is consistent with the rate of return and capital structure policies FERC announced in RP95-197 (see discussion below). Applying these policies, the ALJ recommended utilization of Transco's own capital structure, consisting of 60.2% equity, and a return on equity of 12.40%. The ALJ's decision is subject to FERC review. Transco believes the remaining reserve is adequate for any additional refunds that may be required and has not made any adjustments to its reserve pending FERC review. 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 approved a rate of return on equity for Transco of 12.49%. A joint request for rehearing of the July 29, 1998 order was filed with the FERC and, on December 1, 1998, the FERC denied rehearing. On January 29, 1999, most of the same parties that were involved in the joint request for rehearing filed a notice of appeal with the United States Court of Appeals for the District of Columbia. Transco made refunds on March 1, 1999 of approximately $96.0 million, including interest, under Docket No. RP95-197 for which Transco had previously provided a reserve. Transco believes the remaining reserve is adequate for any additional refunds that may be required and has not made any adjustments to its reserve pending further analysis of the court appeal. The hearing concerning the Phase II issues not resolved by the June 19, 1996 and October 9, 1996 agreements concluded in November 1996. A supplemental hearing to consider Transco's roll-in proposal filed in Docket No. RP97-71, as discussed above, was completed in June 1997. On March 24, 1998, the ALJ in the Phase II hearings issued an initial decision. As to the main issue addressed in the decision, rolled-in pricing, the ALJ determined that the proponents of roll-in, including Transco, must satisfy the burden under Section 5 of the Natural Gas Act and demonstrate that Transco's existing incremental rate treatment is unjust and unreasonable and that the proposed rolled-in rate treatment is just and reasonable. The ALJ ruled that neither Transco nor any of the other roll-in proponents had satisfied that burden and, therefore, that Transco's existing incremental rate treatment must remain in effect. On April 16, 1999, the FERC issued an order reversing the ALJ, concluding that Transco's proposal did not have to meet the Section 5 burden discussed above and that under the appropriate standard, Section 4, Transco had demonstrated that its proposal was just and reasonable. As a result, the FERC remanded to the ALJ issues regarding the implementation of Transco's roll-in proposal. 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. On February 24, 1999, the FERC issued an order rejecting the filing, finding that Transco's proposal, as filed, conflicts with certain FERC policies. The FERC indicated that Transco could pursue implementation of firm service on Transco's production area supply laterals to the extent the service is structured in a way that conforms with those policies. Transco has sought rehearing of the February 24, 1999 order. TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (DOCKET NOS. CP98-236 AND 242) In February 1998, Transco filed an application with the FERC seeking authorization to abandon Transco's onshore Tilden/McMullen Gathering System located in Texas by conveyance to Williams Gas Processing - Gulf Coast Company (Gas Processing), an affiliate of Transco. Gas Processing filed a contemporaneous request that the FERC declare that the facilities sought to be abandoned would be considered nonjurisdictional gathering facilities upon transfer to Gas Processing. In May 1999, the FERC issued an order in which it determined that certain of the facilities would be gathering facilities upon transfer to Gas Processing, i.e., 1) those facilities upstream of and including the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream of the Tilden Plant, and 3) the small, short laterals which branch out from the McMullen Lateral downstream of the Tilden Plant at several points along its length. However, the FERC determined that the McMullen Lateral itself, as well as two compressor stations, are jurisdictional facilities, but authorized their abandonment subject to Gas Processing obtaining a certificate to operate those facilities. The net book value at March 31, 1999 of the Tilden/McMullen facilities, including the purchase price allocation to Transco, was approximately $68 million. Operating income for the year ended December 31, 1998 associated with those facilities is estimated to be less than $3 million; however, such operating income may not be representative of the effects of the spin-down on Transco's future operating income due to various factors, including future regulatory actions. Transco's abandonment authority is effective for one year from the date of issuance of the order. Transco must notify the FERC of the effective date of the abandonment within 10 days of the transfer. Transco and Gas Processing plan to file for rehearing of the order with regard to the facilities classified by the FERC as jurisdictional facilities. REGULATION OF SHORT TERM NATURAL GAS TRANSPORTATION SERVICE (DOCKET NO. RM98-10-000) AND REGULATION OF INTERSTATE 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. On April 22, 1999, Williams filed comments on the NOPR and NOI. In general, Williams comments were supportive of the FERC's initiatives, particularly to the extent that such initiatives would result in a more competitive, market-based environment. LEGAL PROCEEDINGS OTHER LITIGATION In 1998, the United States Department of Justice informed Williams that Jack Grynberg, an individual, had filed claims in the United States District Court for the District of Colorado under the False Claims Act against Williams and certain of its wholly owned subsidiaries, including Transco. Mr. Grynberg has also filed claims against approximately 300 other energy companies and alleges that the defendants violated the False Claims Act in connection with the measurement and purchase of hydrocarbons. The relief sought is an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys' fees, and costs. On April 9, 1999, the United States Department of Justice announced that it was declining to intervene in any of the Grynberg qui tam cases; including the action filed against the Williams entities in the United States District Court for the District of Colorado. 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 1998 Annual Report on Form 10-K, taken as a whole and after consideration of amounts accrued, recovery from customers, insurance coverage or other indemnification arrangements, will have a materially adverse effect upon Transco's future financial position, results of operations 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 March 31, 1999, Transco had no outstanding borrowings under this 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 March 31, 1999, Transco had no outstanding borrowings under these facilities. SALE OF RECEIVABLES Transco is a party to an agreement that expires on January 28, 2000 pursuant to which Transco can sell to an investor up to $100 million of undivided interest in certain of its trade receivables. At March 31, 1999 and December 31, 1998, interests in these receivables held by the investor were $89 million and $87 million, respectively. ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS. The following discussion should be read in conjunction with the consolidated financial statements, notes and management's narrative analysis contained in Items 7 and 8 of Transco's 1998 Annual Report on Form 10-K and with the condensed consolidated financial statements and notes contained in this report. RESULTS OF OPERATIONS NET INCOME AND OPERATING INCOME Transco's net income for the three months ended March 31, 1999 was $35.1 million compared to net income of $35.6 million for the three months ended March 31, 1998. Operating income for the three months ended March 31, 1999 was $69.9 million compared to $72.0 million for the three months ended March 31, 1998. The lower operating income of $2.1 million was primarily the result of lower gas storage revenues and higher administrative and general expense, partially offset by lower operation and maintenance expense and lower taxes other than income taxes. The decrease in net income was attributable to the decreased operating income, partially offset by lower interest expense. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. TRANSPORTATION REVENUES Transco's operating revenues related to its transportation services for the three months ended March 31, 1999 were $168 million, compared to $165 million for the three months ended March 31, 1998. The higher transportation revenues were primarily due to a higher level of reimbursable costs that are included in operating expenses and recovered in Transco's rates. As shown in the table below, Transco's total market-area deliveries for the three months ended March 31, 1999 increased 25.1 trillion British Thermal Units (TBtu) (6.5%) when compared to the same period in 1998. The increased deliveries were mainly due to higher deliveries under the Mobile Bay Lateral Expansion Project and the Cherokee Expansion Project in the first three months of 1999, along with slightly higher long-haul transportation deliveries. Transco's production area deliveries for the three months ended March 31, 1999 decreased 3.7 TBtu (7.6%) when compared to the same period in 1998 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. Three Months Ended March 31, ------------------------- Transco System Deliveries (TBtu) 1999 1998 - -------------------------------- ---------- ---------- Market-area deliveries: Long-haul transportation 235.6 233.0 Market-area transportation 176.4 153.9 ---------- ---------- Total market-area deliveries 412.0 386.9 Production-area transportation 44.7 48.4 ---------- ---------- Total system deliveries 456.7 435.3 ========== ========== Average Daily Transportation Volumes (TBtu) 5.1 4.8 Average Daily Firm Reserved Capacity (TBtu) 6.0 5.9 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 with Transco, WESCO, an affiliate of Transco, manages Transco's jurisdictional merchant gas sales. The long-term purchase agreements managed by WESCO remain in Transco's name, as do the corresponding sales of such purchased gas. Therefore, Transco continues to record natural gas sales revenues and the related accounts receivable and cost of natural gas sales and the related accounts payable for the jurisdictional merchant sales that are managed by WESCO. Through the agency agreement, WESCO receives all margins associated with jurisdictional merchant gas sales business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on Transco's operating income or results of operations. Transco's operating revenues for the three months ended March 31, 1999 related to its sales services, including Transco's cash out sales in settlement of gas imbalances, increased $15.4 million to $148 million, when compared to the same period in 1998. The increase was primarily due to higher cash out sales related to the settlement of imbalances and higher sales volumes, partially offset by a lower average gas sales price of $1.76 per dekatherm (Dt) in the first three months of 1999 versus $2.18 per Dt in 1998. Three Months Ended March 31, ------------------------- Gas Sales Volumes (TBtu) 1999 1998 - ------------------------ -------- -------- Long-term sales 51.5 40.5 Short-term sales 4.1 9.0 -------- -------- Total gas sales 55.6 49.5 ======== ======== STORAGE REVENUES Transco's operating revenues related to storage services decreased $3.1 million to $35.0 million for the three months ended March 31, 1999 when compared to the same period in 1998. This revenue decrease included a $2.0 million decrease due to lower underground storage rates charged by others that is included in operation and maintenance expenses and a $1.1 million decrease primarily due to lower storage demand charges. OTHER REVENUES Other operating revenues decreased $0.6 million to $3.1 million for the three months ended March 31, 1999 when compared to the same period in 1998, due to lower Parking and Borrowing Service revenues, partially offset by increased liquids transportation. OPERATING COSTS AND EXPENSES Excluding the cost of sales and transportation of $159 million for the three months ended March 31, 1999 and $143 million for the comparable period in 1998, Transco's operating expenses for the three months ended March 31, 1999, were approximately $1 million higher than the comparable period in 1998. This increase was primarily attributable to higher administrative and general expense, partially offset by lower operation and maintenance expense and lower taxes other than income taxes. The higher administrative and general expense was primarily attributable to higher professional services expense ($1.8 million), building rent ($0.6 million) and labor ($0.7 million), along with a $1.1 million increase in Gas Research Institute charges that were offset by a corresponding revenue increase reflecting the pass through of such costs to customers. The lower operation and maintenance expense resulted from a $1.5 million decrease in charges from others for the operation of certain Transco facilities and a $1.7 million decrease in underground storage rates charged to Transco by others. The lower taxes other than income taxes of $1.2 million was due to an adjustment to a prior year estimate for franchise and sales and use taxes. 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 March 31, 1999, there were no outstanding borrowings under the Credit Agreement or short-term money market facilities. Net advances due Transco and its subsidiaries by Williams totaled $352 million. CAPITAL EXPENDITURES As shown in the table below, Transco's capital expenditures for the three months ended March 31, 1999 were $31.0 million, compared to $49.8 million for the three months ended March 31, 1998.
Three Months Ended March 31, ---------------------- Capital Expenditures 1999 1998 - -------------------- --------- --------- (In Millions) Market-area projects $ 5.2 $ 9.6 Supply-area projects 1.3 25.5 Maintenance of existing facilities and other projects 24.5 14.7 --------- --------- Total capital expenditures $ 31.0 $ 49.8 ========= =========
Transco's capital expenditures budget for 1999 and future capital projects are discussed in its 1998 Annual Report on Form 10-K. The following describes significant developments related to those projects and any new projects proposed by Transco. BUCCANEER PIPELINE PROJECT Buccaneer Gas Pipeline Company, L.L.C. (Buccaneer), a wholly owned subsidiary of Transco, announced in April 1999 that it has received, in the aggregate, long-term nonbinding nominations in excess of 1.3 billion cubic feet per day for pipeline capacity on a proposed new natural gas pipeline system extending from the Mobile Bay area in Alabama to markets in Florida. The target in-service date for the project is June 2002. Buccaneer plans to file for FERC approval of the project in the third quarter of 1999. The capital cost of the project will depend upon the level of firm market commitment received. SOUTHCOAST EXPANSION PROJECT In April 1999, Transco filed an application with the FERC for its approval of the SouthCoast Expansion Project, which is designed to create additional firm transportation capacity on Transco's system from the terminus of Transco's existing Mobile Bay Lateral in Choctaw County, Alabama, to delivery points in Transco's Rate Zone 4 (Alabama and Georgia). The project has a target in-service date of November 1, 2000. The project is estimated to cost approximately $108 million. CUMBERLAND PIPELINE PROJECT Cumberland Gas Pipeline Company, a partnership between wholly owned subsidiaries of Transco and AGL Resources Inc., has decided not to pursue its pipeline project at this time. In lieu of the project, Transco intends to expand the capacity of its North Georgia extension as part of the SouthCoast Expansion Project in order to meet the firm transportation service requirements of its shippers. SUNDANCE EXPANSION PROJECT In April 1999, Transco announced its Sundance Expansion Project, which would create additional firm transportation capacity from Transco's Station 65 in Louisiana to Station 165 in Virginia. The project has a target in-service date of April 2002. OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES Transco's capital requirements and contingencies are discussed in its 1998 Annual Report on Form 10-K. Other than as described in Note 3 of the Notes to Condensed Consolidated Financial Statements, there have been no new developments from those described in Transco's 1998 Annual Report on Form 10-K with regard to other capital requirements and contingencies. RATE AND REGULATORY REFUNDS Transco has provided reserves which it believes are adequate for any rate refunds that may be required. On March 1, 1999 Transco issued refunds in the amount of $96.0 million, including interest, under Docket No. RP95-197 (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 and non-traditional information technology 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 they relate 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 through 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 March 31, 1999, for traditional and non-traditional information technology 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 59% 7% 34% Non-Traditional Information Technology 77% 18% 5% 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 3,146 letters and questionnaires to third parties including customers, vendors, and service providers. Additional communications are being mailed during the second quarter of 1999. Transco is evaluating responses as they are received or otherwise investigating the status of these companies' year 2000 compliance efforts. As of March 31, 1999 approximately 14% of the companies contacted have responded and virtually all of these 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. Transco has a core group of 121 people assigned to this project. This group includes one individual responsible for coordinating, organizing, managing, communicating, and monitoring the project and another 120 part-time representatives responsible for completing the project. Depending on which phase the project is in and what area is being focused on at any given point in time, there can be an additional 36 to 40 employees who are also contributing a portion of their time to the completion of this project. Transco has contracted with an external contractor for a cost of up to $6.0 million for the remediation of Transco's customer service system. 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, Transco has identified two areas that would equate to a most-reasonably likely worst case scenario. First is the possibility of service interruptions due to non-compliance by third parties. For example, power failures along the communications network or transportation systems 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. It is not possible to quantify the possible financial impact if this most reasonably likely worst case scenario were to come to fruition. Initial contingency planning began during 1998. Significant focus on that phase of the project is taking place in 1999. Guidelines for that process were issued in January 1999 in the form of a formal Business Continuity Plan. 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. Transco currently estimates the total cost of the project, including the cost of accelerating any system replacements, to be approximately $7.9 million. The $7.9 million has been or is expected to be spent as follows: Prior to 1998 and during the first quarter of 1998, Transco conducted the project awareness and inventory/assessment phases of the project and incurred minimal costs. During the second quarter of 1998, $0.1 million was spent on the renovation/replacement and testing/validation phases and on the completion of the inventory/assessment phase. During the third and fourth quarters of 1998, the focus was on the renovation/replacement and testing/validation phases and $2.1 million of costs were incurred. During the first quarter of 1999, renovation/replacement and testing/validation continued, contingency planning began and $2.0 million was expended. During the second quarter of 1999, the primary focus is expected to shift to testing/validation and contingency planning and $3.2 million is expected to be spent. The third and fourth quarters of 1999 will focus mainly on contingency planning and final testing with $0.5 million expected to be spent. Virtually all of the $4.2 million incurred through March 31, 1999 has been expensed with a minimal amount capitalized. Of the $3.7 million of future costs necessary to complete the project within the schedule described, virtually all costs will be expensed, with minimal capitalization of costs. 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. The costs of previously planned system replacements are not considered to be year 2000 costs and are, therefore, excluded from the amounts discussed above. The preceding discussion 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: May 14, 1999 By /s/ James C. Bourne ---------------------- James C. Bourne Controller (Principal Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL IMFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999, CONTAINED IN TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1999 FIRST QUARTER REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 MAR-31-1999 1,039 0 18,469 0 73,893 617,936 4,221,137 595,503 4,452,423 405,310 975,662 0 0 0 2,097,183 4,452,423 148,071 354,222 148,071 248,649 0 0 18,052 57,621 22,479 35,142 0 0 0 35,142 0 0
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