-----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, N1IFpUOUDaeMPQ5BgfGB6+Xso8atvri9R0AY3UR6+6bGOITWEqd1XD0PJKp8Pnfe z7wwbleaJaVKQixTdKVIAw== 0000099250-99-000005.txt : 19990817 0000099250-99-000005.hdr.sgml : 19990817 ACCESSION NUMBER: 0000099250-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99690731 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 2ND QTR 1999 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 JUNE 30, 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 JUNE 30, 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 and 1999 First Quarter Report on Form 10-Q. The accompanying condensed consolidated financial statements have not been audited by independent auditors but include all adjustments both normal recurring and others which, in the opinion of Transco's management, are necessary to present fairly its financial position at June 30, 1999, and results of operations for the three and six months ended June 30, 1999 and 1998, and cash flows for the six months ended June 30, 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, 1999 First Quarter Report on Form 10-Q and Year 2000 disclosure contained in this document. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited)
June 30, December 31, 1999 1998 ----------------- ----------------- ASSETS Current Assets: Cash $ 1,353 $ 1,470 Receivables: Affiliates 869 10,892 Others 36,444 21,689 Advances to affiliates 411,888 416,164 Transportation and exchange gas receivables: Affiliates 878 1,370 Others 36,507 56,475 Inventories 90,619 79,787 Deferred income taxes 110,417 99,598 Other 20,294 16,714 ----------------- ----------------- Total current assets 709,269 704,159 ----------------- ----------------- Investments, at cost plus equity in undistributed earnings 30,829 8,915 ----------------- ----------------- Property, Plant and Equipment: Natural gas transmission plant 4,252,801 4,259,502 Less-Accumulated depreciation and amortization 630,393 616,120 ----------------- ----------------- Total property, plant and equipment, net 3,622,408 3,643,382 ----------------- ----------------- Other Assets 180,198 168,495 ----------------- ----------------- $ 4,542,704 $ 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)
June 30, December 31, 1999 1998 ---------------- ---------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Payables: Affiliates $ 74,405 $ 25,050 Others 77,639 72,285 Transportation and exchange gas payables: Affiliates 377 379 Others 9,928 8,354 Accrued liabilities 138,721 156,631 Reserve for rate refunds 141,051 238,403 ---------------- ---------------- Total current liabilities 442,121 501,102 ---------------- ---------------- Long-Term Debt, less current maturities 975,554 975,768 ---------------- ---------------- Other Long-Term Liabilities: Deferred income taxes 857,458 846,306 Other 120,977 139,734 ---------------- ---------------- Total other long-term liabilities 978,435 986,040 ---------------- ---------------- 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 494,164 409,611 ---------------- ---------------- Total common stockholder's equity 2,146,594 2,062,041 ---------------- ---------------- $ 4,542,704 $ 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 June 30 ---------------------------------------- 1999 1998 ----------------- ----------------- Operating Revenues: Natural gas sales $ 168,277 $ 143,237 Natural gas transportation 185,656 156,011 Natural gas storage 33,891 33,990 Other 2,491 1,202 ----------------- ----------------- Total operating revenues 390,315 334,440 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 168,277 143,238 Cost of natural gas transportation 10,657 10,758 Operation and maintenance 40,776 38,346 Administrative and general 32,933 31,396 Depreciation and amortization 40,174 31,155 Taxes - other than income taxes 9,161 8,713 Other 756 375 ----------------- ----------------- Total operating costs and expenses 302,734 263,981 ----------------- ----------------- Operating Income 87,581 70,459 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 13,875 22,784 Interest income - affiliates (5,662) (7,045) Allowance for equity and borrowed funds used during construction (AFUDC) (1,139) (2,654) Miscellaneous other deductions, net 879 313 ----------------- ----------------- Total other deductions 7,953 13,398 ----------------- ----------------- Income before Income Taxes 79,628 57,061 Provision for Income Taxes 30,217 21,701 ----------------- ----------------- Net Income $ 49,411 $ 35,360 ================= ================= 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)
Six months ended June 30 ---------------------------------------- 1999 1998 ----------------- ----------------- Operating Revenues: Natural gas sales $ 316,348 $ 275,957 Natural gas transportation 353,717 320,880 Natural gas storage 68,893 72,122 Other 5,579 4,849 ----------------- ----------------- Total operating revenues 744,537 673,808 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 316,348 275,958 Cost of natural gas transportation 21,641 20,952 Operation and maintenance 82,309 82,740 Administrative and general 67,564 61,389 Depreciation and amortization 80,387 71,782 Taxes - other than income taxes 17,009 17,786 Other 1,772 790 ----------------- ----------------- Total operating costs and expenses 587,030 531,397 ----------------- ----------------- Operating Income 157,507 142,411 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 31,927 45,389 Interest income - affiliates (11,394) (13,643) Allowance for equity and borrowed funds used during construction (AFUDC) (1,994) (4,673) Miscellaneous other deductions, net 1,719 896 ----------------- ----------------- Total other deductions 20,258 27,969 ----------------- ----------------- Income before Income Taxes 137,249 114,442 Provision for Income Taxes 52,696 43,492 ----------------- ----------------- Net Income $ 84,553 $ 70,950 ================= ================= 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)
Six months ended June 30 --------------------------------- 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 84,553 $ 70,950 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 82,835 74,572 Deferred income taxes 334 2,243 Allowance for equity funds used during construction (AFUDC) (1,389) (3,410) Changes in operating assets and liabilities: Receivables (4,586) 11,916 Receivables sold 1,000 (12,000) Transportation and exchange gas receivables 20,460 (2,499) Inventories (10,832) (5,825) Payables 61,460 (11,290) Transportation and exchange gas payables 1,572 (2,448) Accrued liabilities (17,631) 32,302 Reserve for rate refunds (97,352) 70,603 Other, net (36,394) (27,207) ------------- ------------- Net cash provided by operating activities 84,030 197,907 ------------- ------------- Cash flows from financing activities: Additions to long-term debt - 298,343 Retirement of long-term debt - (160,000) Debt issue costs - (2,060) ------------- ------------- Net cash provided by financing activities - 136,283 ------------- ------------- Cash flows from investing activities: Property, plant and equipment: Additions, net of equity AFUDC (62,762) (144,597) Changes in accounts payable (6,750) (9,596) Advances to affiliates, net 4,275 (183,788) Other, net (18,910) 3,458 ------------- ------------- Net cash used in investing activities (84,147) (334,523) ------------- ------------- Net decrease in cash (117) (333) Cash at beginning of period 1,470 1,321 ------------- ------------- Cash at end of period $ 1,353 $ 988 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (exclusive of amount capitalized) $ 53,478 $ 24,659 Income taxes paid 42,459 25,367 Income tax refunds received - (77) 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 and 1999 First Quarter Report on Form 10-Q. Through an agency agreement, Williams Energy Services Company (WESCO), an affiliate of Transco, manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. 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 or 1999 First Quarter Report on Form 10-Q other than as described below. RATE AND REGULATORY MATTERS GENERAL RATE CASE (DOCKET NO. RP97-71) 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 resolved 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 (D.C. Circuit Court). 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. During the first half of 1999, Transco engaged in an analysis of the court appeal and, particularly, its likely results. Based on developments in regulatory proceedings in the second quarter of 1999 involving Transco and others, and advice recently received from counsel, Transco adjusted its remaining reserve for rate refunds ($28.1 million of principal and $5.9 million of interest) in the second quarter of 1999 to take into account the FERC's revised rate of return methodology as applied in the July 29, 1998, and December 1, 1998 orders. On March 24, 1998, the ALJ issued an initial decision on the Phase II issues not resolved by the June 19, 1996 and October 9, 1996 settlement agreements in this docket, as well as, in Transco's roll-in proposal filed in Docket No. RP97-71. 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. Several parties have filed requests for rehearing of the FERC's April 16, 1999 order. 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) 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 in Docket Nos. RP92-137 and RP93-136. 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 sought rehearing of the February 24, 1999 order and on July 29, 1999, the FERC issued an order denying all requests for rehearing in this proceeding. As a result, Transco's production area supply lateral service remains unchanged. GATHERING FACILITIES SPIN-DOWN ORDER (DOCKET NOS. CP96-206-000 AND CP96-207-000) In February 1996, Transco filed an application with the FERC for an order authorizing the abandonment of certain facilities located onshore and offshore in Texas, Louisiana and Mississippi by conveyance to Williams Gas Processing - Gulf Coast Company (Gas Processing), an affiliate of Transco. The net book value recorded by Transco at December 31, 1998 of the facilities was approximately $504 million. Estimated operating income recorded by Transco for the year ended December 31, 1998 associated with the facilities was $15 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. Concurrently, Gas Processing filed a petition for declaratory order requesting a determination that its gathering services and rates be exempt from FERC regulation under the Natural Gas Act. On September 25, 1996, the FERC issued an order dismissing Transco's application and Gas Processing's petition for declaratory order. On October 25, 1996, Transco and Gas Processing filed a joint request for rehearing of the FERC's September 25 order, and in August 1997 filed a request that rehearing be expedited. On June 1, 1998, the FERC issued a Notice of Inquiry (NOI) into alternative methods for regulating natural gas pipeline facilities and services on the outer continental shelf. The purpose of the NOI was to generate public comment that will assist the FERC in exploring possible alternatives to the FERC's current test used to determine whether offshore pipeline facilities and services should be subject to the FERC's Natural Gas Act jurisdiction. On June 30, 1999, informed by the comments submitted in response to the NOI, the FERC issued a Notice of Proposed Rulemaking (NOPR), which proposes regulatory requirements under the Outer Continental Shelf Lands Act (OCSLA) to ensure that gas is transported on an open and nondiscriminatory basis through pipelines located on the OCS. The proposed regulations will apply both to NGA-jurisdictional and NGA-exempt offshore gas transportation service providers, and will require that those OCS gas transportation service providers, subject to certain exemptions, make available information regarding their affiliations and the conditions under which service is rendered. These proposed reporting requirements are intended by FERC to assure that open access and nondiscriminatory conditions of service, including nondiscriminatory rates, exist for shippers using OCS facilities. The FERC is seeking comments from interested persons on the regulations proposed in the NOPR. Also on June 30, 1999, the FERC modified, in a case involving Sea Robin Pipeline Company, the test that the FERC will use to determine the jurisdictional status of OCS pipeline systems. In the Sea Robin case, the FERC determined that in assessing the jurisdictional status of offshore facilities, the location of gas processing plants will not be afforded greater significance than other factors used in the test. In addition, the FERC determined that the location of a collection facility, where gas is delivered by several relatively small diameter lines for aggregation and preparation for further delivery onshore through a single larger diameter pipeline, will be given considerable weight for determining the demarcation point between gathering and jurisdictional transportation on the OCS. The FERC stated that it will use this modified test, and any additional refinements that the FERC may develop to further adapt the test to the physical characteristics of moving gas across the OCS, to determine the jurisdictional status of the OCS pipeline systems. TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (DOCKET NOS. CP98-236 AND 242) Pending the outcome of the October 1996 rehearing request on the gathering facilities spin-down order and in an effort to expedite abandonment of at least a portion of the facilities included in the February 1996 application discussed above, Transco filed an application with the FERC in February 1998 seeking authorization to abandon Transco's onshore Tilden/McMullen Gathering System located in Texas by conveyance to Gas Processing. 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 units, are jurisdictional facilities, but authorized their abandonment subject to Gas Processing obtaining a certificate to operate those facilities. The net book value at June 30, 1999 of the Tilden/McMullen facilities was approximately $68 million, the entirety of which is included in the $504 million net book value for the gathering facilities described in the February 1996 application discussed above. 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. On June 3, 1999, Transco and Gas Processing filed for rehearing of the order with regard to the facilities classified by the FERC as jurisdictional facilities. ENVIRONMENTAL MATTERS Transco received a letter stating that the U.S. Department of Justice (DOJ), at the request of the U.S. Environmental Protection Agency (EPA), intends to file a civil action against Transco arising from its waste management practices at Transco's compressor stations and metering stations located in eleven (11) states from Texas to New Jersey. DOJ stated in the letter that its complaint will seek civil penalties and injunctive relief under federal environmental laws. DOJ has offered to discuss settlement of the claim. While no specific amount was proposed, DOJ stated that any settlement must include an appropriate civil penalty for the alleged violations. Transco cannot reasonably estimate the amount of its potential liability, if any, at this time. However, Transco believes it has substantially addressed environmental concerns on its system through ongoing voluntary remediation and management programs. 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 and 1999 First Quarter Report 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. The Credit Agreement contains restrictions which limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Transco. As of June 30, 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 June 30, 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 June 30, 1999 and December 31, 1998, interests in these receivables held by the investor were $88 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 in Transco's 1999 First Quarter Report 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 six months ended June 30, 1999 was $84.6 million compared to net income of $71.0 million for the six months ended June 30, 1998. Operating income for the six months ended June 30, 1999 was $157.5 million compared to $142.4 million for the six months ended June 30, 1998. The higher operating income of $15.1 million was primarily the result of higher transportation revenues discussed below, partially offset by higher administrative and general expense and depreciation expense. The increase in net income was attributable to the increased operating income, as well as, lower net interest expense due primarily to the adjustment to reserves for rate refunds discussed below and rate refunds made in 1998 and early 1999, partially offset by lower allowance for funds used during construction due to lower capital expenditures. 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 six months ended June 30, 1999 were $354 million, compared to $321 million for the six months ended June 30, 1998. The higher transportation revenues were primarily due to the positive adjustment to the reserve for rate refunds in Transco's general rate case Docket No. RP95-197 ($28.1 million), benefits of expansion projects placed into service in 1998 ($9.6 million) and new services begun in 1998 ($2.9 million). This was partly offset by the positive impact of a $4 million adjustment recorded in 1998 related to settlement rates contained in the January 1998 stipulation and agreement in Transco's general rate case Docket No. RP97-71 approved by the FERC in June 1998. During the first half of 1999, Transco engaged in an analysis of the court appeal related to Transco's general rate case Docket No. RP95-197 and, particularly, its likely results. Based on developments in regulatory proceedings in the second quarter of 1999 involving Transco and others, and advice recently received from counsel, Transco adjusted its remaining reserve for rate refunds ($28.1 million of principal and $5.9 million of interest) in the second quarter of 1999 to reflect the FERC's revised rate of return methodology as applied in the July 29, 1998, and December 1, 1998 orders. As shown in the table below, Transco's total market-area deliveries for the six months ended June 30, 1999 increased 28.7 trillion British Thermal Units (TBtu) (4.1%) 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 six months of 1999. Transco's production area deliveries for the six months ended June 30, 1999 decreased 3.7 TBtu (3.4%) 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. Six Months Ended June 30, ------------------------- Transco System Deliveries (TBtu) 1999 1998 - -------------------------------- ---------- ---------- Market-area deliveries: Long-haul transportation 437.1 450.3 Market-area transportation 294.2 252.3 ---------- ---------- Total market-area deliveries 731.3 702.6 Production-area transportation 104.5 108.2 ---------- ---------- Total system deliveries 835.8 810.8 ========== ========== Average Daily Transportation Volumes (TBtu) 4.6 4.5 Average Daily Firm Reserved Capacity (TBtu) 6.1 6.2 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 six months ended June 30, 1999 related to its sales services, including Transco's cash out sales in settlement of gas imbalances, increased $40.4 million to $316 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 $1.99 per dekatherm (Dt) in the first six months of 1999 versus $2.20 per Dt in 1998. Six Months Ended June 30, ------------------------- Gas Sales Volumes (TBtu) 1999 1998 - ------------------------ -------- -------- Long-term sales 104.2 89.3 Short-term sales 17.0 14.7 -------- -------- Total gas sales 121.2 104.0 ======== ======== STORAGE REVENUES Transco's operating revenues related to storage services decreased $3.2 million to $68.9 million for the six months ended June 30, 1999 when compared to the same period in 1998. This revenue decrease included a $3.9 million decrease due to lower underground storage rates charged by others that is included in operation and maintenance expenses and a $0.8 million decrease primarily due to lower storage demand charges, partly offset by the impact of an adjustment recorded in 1998 to the revenue refund reserve to reflect the actual rates contained in the RP97-71 Settlement Agreement. OPERATING COSTS AND EXPENSES Excluding the cost of sales and transportation of $338 million for the six months ended June 30, 1999 and $297 million for the comparable period in 1998, Transco's operating expenses for the six months ended June 30, 1999, were approximately $14.5 million higher than the comparable period in 1998. This increase was primarily attributable to higher administrative and general expense and higher depreciation expense. The higher administrative and general expense was primarily attributable to higher professional services ($1.2 million), building rent ($1.0 million) and labor ($1.7 million), along with a $0.5 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 higher depreciation expense was due to a $3.8 million adjustment related to the RP97-71 settlement rates recorded in 1998, a $3.2 million adjustment on computer software recorded in 1998 and a $1.6 million increase in 1999, primarily due to plant and property additions. Slightly lower operation and maintenance expense was primarily attributable to lower underground storage rates charged by others ($3.7 million), lower professional services ($1.1 million) and lower contractual services ($1.2 million), partly offset by the effects of a $5.7 million adjustment recorded in 1998 related to the RP97-71 settlement rates. 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 June 30, 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 $412 million. CAPITAL EXPENDITURES As shown in the table below, Transco's capital expenditures for the six months ended June 30, 1999 were $69.5 million, compared to $154.2 million for the six months ended June 30, 1998. Six Months Ended June 30, ---------------------- Capital Expenditures 1999 1998 - -------------------- -------- --------- (In Millions) Market-area projects $ 12.1 $ 53.2 Supply-area projects - 78.6 Maintenance of existing facilities and other projects 57.4 22.4 -------- --------- Total capital expenditures $ 69.5 $ 154.2 ======== ========= Transco's capital expenditures budget for 1999 and future capital projects are discussed in its 1998 Annual Report on Form 10-K and 1999 First Quarter Report on Form 10-Q. The following describes significant developments related to those projects and any new projects proposed by Transco. PINE NEEDLE LNG COMPANY, LLC In May 1999, Pine Needle LNG Company, LLC (Pine Needle), which is owned by wholly owned subsidiaries of Transco and several of its major customers, placed its liquefied natural gas (LNG) storage facility into service. The facility, which is located in Guilford County, North Carolina, has 4 billion cubic feet (Bcf) of storage capacity and 400 million cubic feet per day (MMcf/d) of withdrawal capacity. Wholly owned subsidiaries of Transco operate the facility and have a 35% ownership interest. 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 non-binding open season for the Sundance Expansion Project ended June 18. Non-binding nominations of approximately 1.3 million dekatherms per day (MMDt/d) were received. The project has a target in-service date of May 2002. OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES Transco's capital requirements and contingencies are discussed in its 1998 Annual Report on Form 10-K and 1999 First Quarter Report 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 1998 Annual Report on Form 10-K and 1999 First Quarter Report 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. 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 has been completed. While year 2000 date processes have been successfully validated, ongoing testing will continue to ensure data integrity and core functionality. Certain non-critical systems may not be compliant by January 1, 2000. Testing and validation activities have been completed and at June 30, 1999, 100% of the critical systems have been fully tested or validated as compliant. 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. 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 third 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 June 30, 1999 approximately 17% 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. 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 communications effort with and evaluation of third-party compliance plans and by the development of contingency 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. In situations where planned system implementations will not be in service timely or are delayed past an implementation date of September 1, 1999, alternative steps are being taken to make existing systems compliant. It is not possible to quantify the possible financial impact if this most reasonably likely worst case scenario were to come to fruition. Significant focus on the contingency plan phase of the project has been taking place in 1999. Guidelines for the contingency planning process were issued in January 1999. Contingency plans have been developed for critical business processes, critical business partners, suppliers and system replacements that experience significant delays. Transco's contingency plans include manning all operational stations twenty-four hours a day, putting extra security measures into place and stocking up on supplies. In addition, most of Transco's compressor stations are capable of independently generating electricity in the event of a loss of electricity, and operation of the pipeline can be done manually in case there is a loss of telecommunications capability. These plans are subject to on-going review as we continue to assess the readiness of vendors and suppliers, and make changes as 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 any accelerated system replacements, to be approximately $7.9 million. This $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 completion of the inventory/assessment phase. -The third and fourth quarters of 1998, focused 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 shifted to testing/validation and contingency planning and $1.3 million was spent. -The third and fourth quarters of 1999 will focus mainly on contingency planning and final testing with $2.1 million expected to be spent. -Approximately $0.3 million is estimated to be spent during the first two quarters of 2000 for monitoring and problem resolution. Virtually all of the $5.5 million incurred through June 30, 1999 has been expensed with a minimal amount capitalized. Of the $2.4 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: August 12, 1999 By /s/ James C. Bourne ------------------------------- James C. Bourne Controller (Principal Accounting Officer) EX-27 2 FINANCIAL DATA SCHEDULE TRANSCO 2ND QTR 1999
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999, CONTAINED IN TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1999 SECOND QUARTER REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JUN-30-1999 1,353 0 26,176 0 90,619 709,269 4,252,801 630,393 4,542,704 442,121 975,554 0 0 0 2,146,594 4,542,704 316,348 744,537 316,348 517,694 0 0 31,927 137,249 52,696 84,553 0 0 0 84,553 0 0
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