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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO ..........
COMMISSION FILE NUMBER 1-7584
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1079400
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 POST OAK BOULEVARD
P. O. BOX 1396
HOUSTON, TEXAS 77251
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AS
OF SEPTEMBER 30, 1997 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.
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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 1996 Annual Report on Form 10-K and 1997 First and
Second Quarter Reports on Form 10-Q. The accompanying unaudited financial
statements have not been audited by independent auditors but include all
adjustments both normal recurring and others which, in the opinion of Transco's
management, are necessary to present fairly its financial position at September
30, 1997, and results of operations for the three months and nine months ended
September 30, 1997 and 1996, and cash flows for the nine months ended September
30, 1997 and 1996.
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TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 2,225 $ 1,774
Receivables:
Affiliates 11,043 4,837
Others 28,449 51,011
Advances to affiliates 236,821 148,496
Transportation and exchange gas receivables:
Affiliates 23,851 22,111
Others 68,218 72,900
Inventories 96,286 69,461
Deferred income tax asset 88,889 76,192
Other 21,933 19,807
------------- ------------
Total current assets 577,715 466,589
------------- ------------
Investments 2,300 5,865
------------- ------------
Property, Plant and Equipment:
Natural gas transmission plant 3,900,502 3,738,550
Less-Accumulated depreciation and amortization 439,241 318,234
------------- ------------
Total property, plant and equipment, net 3,461,261 3,420,316
------------- ------------
Other Assets 156,955 166,757
------------- ------------
$ 4,198,231 $ 4,059,527
============= ============
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ - $ 99,000
Payables:
Affiliates 46,852 70,283
Others 85,219 84,026
Transportation and exchange gas payables:
Affiliates 370 190
Other 18,641 27,050
Accrued liabilities 134,723 104,289
Reserve for rate refunds 167,657 172,823
------------- ------------
Total current liabilities 453,462 557,661
------------- ------------
Long-Term Debt 830,521 681,076
------------- ------------
Other Long-Term Liabilities:
Deferred income taxes 838,157 833,928
Other 181,419 167,648
------------- ------------
Total other long-term liabilities 1,019,576 1,001,576
------------- ------------
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 242,242 166,784
------------- ------------
Total common stockholder's equity 1,894,672 1,819,214
------------- ------------
$ 4,198,231 $ 4,059,527
============= ============
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Operating Revenues:
Natural gas sales $ 163,819 $ 140,164
Natural gas transportation 148,641 155,209
Natural gas storage 35,003 35,097
Other 1,991 2,000
---------------- ----------------
Total operating revenues 349,454 332,470
---------------- ----------------
Operating Costs and Expenses:
Cost of natural gas sales 163,819 140,163
Cost of natural gas transportation 4,445 19,574
Operation and maintenance 45,017 53,513
Administrative and general 30,984 27,311
Depreciation and amortization 39,945 39,800
Taxes - other than income taxes 9,634 9,240
Other 322 249
---------------- ----------------
Total operating costs and expenses 294,166 289,850
---------------- ----------------
Operating Income 55,288 42,620
---------------- ----------------
Other (Income) and Other Deductions:
Interest expense 17,935 17,759
Interest income - affiliates (2,431) (1,842)
- other (23) (180)
Allowance for equity and borrowed funds used during
construction (AFUDC) (2,437) (2,210)
Miscellaneous other deductions, net 307 384
---------------- ----------------
Total other deductions 13,351 13,911
---------------- ----------------
Income before Income Taxes 41,937 28,709
Provision for Income Taxes 14,923 11,163
---------------- ----------------
Net Income $ 27,014 $ 17,546
================ ================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Operating Revenues:
Natural gas sales $ 475,280 $ 595,225
Natural gas transportation 456,519 494,994
Natural gas storage 106,155 108,017
Other 6,112 5,037
---------------- ----------------
Total operating revenues 1,044,066 1,203,273
---------------- ----------------
Operating Costs and Expenses:
Cost of natural gas sales 475,280 595,223
Cost of natural gas transportation 23,425 63,626
Operation and maintenance 136,915 149,535
Administrative and general 92,807 91,895
Depreciation and amortization 118,014 129,965
Taxes - other than income taxes 28,294 27,565
Other 1,126 763
---------------- ----------------
Total operating costs and expenses 875,861 1,058,572
---------------- ----------------
Operating Income 168,205 144,701
---------------- ----------------
Other(Income) and Other Deductions:
Interest expense 51,250 47,415
Interest income - affiliates (4,729) (4,042)
- other (31) (436)
Allowance for equity and borrowed funds used during
construction (AFUDC) (5,780) (4,768)
Miscellaneous other deductions, net 1,550 2,322
---------------- ----------------
Total other deductions 42,260 40,491
---------------- ----------------
Income before Income Taxes 125,945 104,210
Provision for Income Taxes 47,505 40,492
---------------- ----------------
Net Income $ 78,440 $ 63,718
================ ================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 78,440 $ 63,718
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 122,817 133,836
Deferred income taxes (8,468) (52,582)
Allowance for equity funds used during construction (AFUDC) (3,997) (3,259)
Changes in operating assets and liabilities:
Receivables 20,357 39,063
Receivables sold (4,000) (21,000)
Transportation and exchange gas receivables 2,942 34,711
Inventories (26,825) (10,681)
Payables (13,564) (119,550)
Transportation and exchange gas payables (8,229) (47,041)
Accrued liabilities 30,401 (41,178)
Reserve for rate refunds (5,166) 75,317
Other, net 20,684 21,016
------------- --------------
Net cash provided by operating activities 205,392 72,370
------------- --------------
Cash flows from financing activities:
Additions to long-term debt 150,000 298,800
Retirement of long-term debt (99,000) (225,000)
Debt issue costs (248) (249)
Dividends on common stock (2,982) (3,164)
------------- --------------
Net cash provided by financing activities 47,770 70,387
------------- --------------
Cash flows from investing activities:
Property, plant and equipment:
Additions, net of equity AFUDC (160,197) (162,973)
Changes in accounts payable and accrued liabilities (8,675) (3,235)
Advances to affiliates, net (88,325) 23,881
Other, net 4,486 (1,014)
------------- --------------
Net cash used in investing activities (252,711) (143,341)
------------- --------------
Net increase (decrease) in cash 451 (584)
Cash at beginning of period 1,774 2,557
------------- --------------
Cash at end of period $ 2,225 $ 1,973
============= ==============
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest (exclusive of amount capitalized) $ 56,179 $ 44,219
Income taxes paid 35,496 161,091
Income tax refunds received (11,759) (1,043)
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
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TRANSCONTINENTAL GAS PIPE LINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE STRUCTURE AND CONTROL
Effective May 1, 1997, Transcontinental Gas Pipe Line Corporation (Transco)
became a wholly-owned subsidiary of Williams Interstate Natural Gas Systems,
Inc., which is a wholly-owned subsidiary of The Williams Companies, Inc.
(Williams). Prior to May 1, 1997, Transco was a wholly-owned subsidiary of
Williams.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Transco and its majority-owned subsidiaries. Companies in which Transco and its
subsidiaries own 20 percent to 50 percent of the voting common stock are
accounted for under the equity method.
The condensed consolidated financial statements have been prepared from the
books and records of Transco without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in
Transco's 1996 Annual Report on Form 10-K and included in Transco's 1997 First
and Second Quarter Reports on Form 10-Q.
Through an agency agreement, Williams Energy Services Company (WESCO), an
affiliate of Transco, manages all jurisdictional merchant gas sales of Transco,
receives all margins associated with such business and, as Transco's agent,
assumes all market and credit risk associated with Transco's jurisdictional
merchant gas sales. Consequently, Transco's merchant gas sales service has no
impact on its operating income or results of operations.
Certain reclassifications have been made in the 1996 financial statements
to conform to the 1997 presentation.
3. CONTINGENT LIABILITIES AND COMMITMENTS
There have been no new developments from those described in Transco's 1996
Annual Report on Form 10-K or 1997 First and Second Quarter Reports on Form 10-Q
other than as described below.
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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.
By order issued October 16, 1997, the Administrative Law Judge granted a
motion by all active parties, including Transco, to extend the procedural
schedule in this case by one month to allow the parties the opportunity to
continue discussions relating to the possible settlement of all or portions of
the case. The hearing in this case, which was originally scheduled to begin on
November 4, 1997, is now scheduled for December 2, 1997.
GENERAL RATE CASE (DOCKET NO. RP95-197)
On June 19, 1996, Transco filed a Stipulation and Agreement and settlement
rates. The agreement resolves cost of service (subject to the outcome of capital
structure and rate of return in the Phase I proceeding), throughput level and
mix, and certain cost allocation and rate design issues. The agreement also
reserves certain other issues for hearing in Phase II, including the issue of
rolled-in pricing for incremental Leidy Line services. With the exception of one
party that filed comments opposing the settlement and one party that took no
position on the merits of the settlement, all active parties and the FERC's
staff either supported the settlement or did not oppose it. On November 1, 1996,
the FERC issued an order approving the June 19 agreement, and on February 3,
1997 approved an order denying rehearing of its November 1, 1996 order. As a
result, Transco made refunds on May 30, 1997 of approximately $79.0 million,
including interest, under Docket No. RP95-197 for which Transco had previously
provided a reserve.
On August 1, 1997, the FERC issued an order modifying the initial decision
issued on December 18, 1996 by the Administrative Law Judge (ALJ) in the Phase I
proceeding determining the capital structure and rate of return for Transco. As
to capital structure, the FERC reversed the ALJ's use of the Williams capital
structure, and applied a new modified capital structure policy to find that
Transco's own capital structure, consisting of 57.58 percent equity, should be
used for developing the rate of return in this proceeding. As to rate of return
on equity, the FERC affirmed the overall methodology used by the ALJ in his
initial decision, but reversed the ALJ's decision in order to revise the manner
in which the long-range growth component of that methodology is determined
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to be consistent with the FERC's recent decisions on that issue. The order
requires that Transco make a compliance filing consistent with the revised
methodology, and states that refunds will be determined once the FERC rules on
that compliance filing. Transco has sought rehearing of the FERC's order
asserting, among other things, that the FERC's methodology for calculating rates
of return is flawed. Other parties in the case have also sought rehearing of the
FERC's order claiming, among other things, that FERC should not have reversed
the ALJ with respect to the issue of the appropriate capital structure for
ratemaking purposes. Transco has provided a reserve which it believes is
adequate for any required refunds.
RATE OF RETURN CALCULATION
As discussed above, the FERC recently issued an order addressing, among
other things, the authorized rate of return for Transco's 1995 rate case (Docket
No. 95-197). In the 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 now 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. As
indicated above, Transco has sought rehearing of the FERC order in an effort to
have the FERC change its rate of return methodology with respect to both pending
and future rate cases. Additionally, at a recent public FERC meeting, it was
announced that the FERC intended to convene early next year a public conference
to consider rate of return issues, including the appropriateness of the FERC's
current methodology for calculating rates of return.
GENERAL RATE CASE (DOCKET NO. RP92-137)
On September 17, 1992, the FERC issued a decision addressing the single
issue of the appropriate rate of return in Docket No. RP92-137. The FERC, using
a hypothetical capital structure based on the average capital structure of a
group of seven publicly-traded companies with pipeline subsidiaries, determined
Transco's appropriate rate of return on equity to be 14.45%. The issue of the
appropriate rate of return for Transco was appealed to the D.C. Circuit Court.
On December 23, 1994, the D.C. Circuit Court issued an opinion remanding to the
FERC for further consideration the FERC's September 17, 1992 order. The D.C.
Circuit Court determined that the FERC had failed to explain adequately its
decisions to use a hypothetical capital structure for Transco, to select a rate
of return on equity at the top range of reasonableness, and to use as a proxy
group to develop Transco's hypothetical capital structure a group of
publicly-traded parent companies with pipeline subsidiaries rather than a group
of regulated pipelines. On April 10, 1996, the FERC issued its order on remand
and adopted Transco's capital structure as the appropriate capital structure for
ratemaking purposes, reversing its previous orders adopting a hypothetical
capital structure. The FERC made no adjustment to Transco's rate of return on
equity, adopting a 14.45% rate of return on equity. The FERC directed Transco to
make refunds in accordance with the April 10, 1996 order. On July 23, 1996,
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the FERC denied rehearing of the April 10, 1996 order. On September 17, 1996,
Transco made refunds required under the FERC order, for which Transco had
previously provided a reserve. On September 20, 1996, certain parties filed a
petition for review of the FERC's April 10, 1996 and July 23, 1996 orders in the
D.C. Circuit Court. On November 5, 1997 the D.C. Circuit Court denied the
petition.
ORDER NO. 94-A COSTS (DOCKET NO. RP92-149)
On January 29, 1997, the FERC issued an order approving the October 1993
settlement between Transco and Columbia Gas Transmission Corporation (Columbia)
and directing Columbia to refund to Transco all amounts refunded to Columbia in
excess of the amount required by the October 1993 settlement. On January 30,
1997 Columbia filed with the FERC a request for rehearing and a request that the
FERC essentially stay Columbia's refund obligation. On February 28, 1997, the
FERC issued an order denying rehearing of its January 29 order. In the third
quarter of 1997, Transco entered into an agreement with Columbia, which required
Columbia to pay $5.4 million to Transco in settlement of this matter. Transco
received the payment in September 1997.
LEGAL PROCEEDINGS
ROYALTY CLAIMS AND LITIGATION In connection with Transco's renegotiations
with producers to resolve take-or-pay and other contract claims and to amend gas
purchase contracts, Transco has entered into certain settlements which may
require the indemnification by Transco of certain claims for additional
royalties which the producers may be required to pay as a result of such
settlements. Transco has been made aware of demands on producers for additional
royalties and such producers may receive other demands which could result in
claims against Transco pursuant to the indemnification provisions in their
respective settlements. Indemnification for royalties will depend on, among
other things, the specific lease provisions between the producer and the lessor
and the terms of the settlement between the producer and Transco.
On March 15, 1994, a lawsuit was filed in the 189th Judicial District Court
of Harris County, Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line
Corporation). In this lawsuit, the plaintiff has claimed approximately $23
million, including interest and attorneys' fees for reimbursements of settlement
amounts paid to royalty owners. On October 16, 1997, a jury verdict in this case
found that Transco was required to pay Texaco $14.5 million plus $3.75 million
in attorney's fees. The trial judge deferred entering judgment (which would
include a determination of any amounts owed Texaco for interest on the principal
amount of the judgment) and directed the parties to participate in mediation of
this matter. Transco denied liability in the litigation and continues to believe
that it has meritorious defenses to the claims which it intends to pursue
vigorously.
As previously reported on Transco's 1996 Form 10-K, Transco is involved in
litigation with one other producer, Freeport-McMoRan, Inc., with respect to
royalty indemnification issues. There have been no new developments in that
litigation.
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OTHER LITIGATION In July 1996, Canadian Occidental of California (CXY)
filed a lawsuit against Transco and certain Transco affiliates demanding an
accounting relating to alleged take-or-pay deficiencies under seven gas purchase
contracts for the years 1982 and 1983. CXY has since amended its original
petition to demand an accounting under the seven contracts through the year
1992. Transco has answered the lawsuit asserting that the alleged deficiencies
were settled in an agreement with CXY in 1986 or, alternatively, that the claims
are barred by the statute of limitation.
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
1996 Annual Report on Form 10-K and 1997 First and Second Quarter Reports on
Form 10-Q, taken as a whole and after consideration of amounts accrued, recovery
from customers, insurance coverage or other indemnification arrangements, will
have a materially adverse effect upon Transco's future financial position,
results of operations and cash flow requirements.
4. DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT
Williams and certain of its subsidiaries, including Transco, are parties to
a $1 billion credit agreement (Credit Agreement), under which Transco can borrow
up to $400 million. Interest rates vary with current market conditions based on
the base rate of Citibank N.A., three-month certificates of deposit of major
United States money market banks, federal funds rate or the London Interbank
Offered Rate. As of September 30, 1997, Transco had no outstanding borrowings
under this agreement.
On January 15, 1997, Transco redeemed $99 million of its 8-1/8% Notes.
On July 31, 1997, Transco entered into a $150 million, five-year bank
agreement, with variable interest rates based on the London Interbank Offered
Rate.
In September 1997, Williams and certain of its subsidiaries, including
Transco, initiated a restructuring of its debt portfolio. On October 8, 1997,
Transco borrowed $160 million under the Credit Agreement to fund the redemption
of its entire $150 million issue of 9-1/8% Debentures originally due February 1,
2017, at a total redemption price of $156.4 million, plus accrued interest. As a
result of the revaluation of Transco's debt at the time of its acquisition by
Williams in 1995, Transco will record an extraordinary gain of $2.9 million, net
of tax, from the early redemption of the 9-1/8% Debentures. The $6.4 million
premium will be amortized over the remaining original life of the debentures
based on FERC accounting requirements.
SHORT-TERM DEBT
Transco is a party to three short-term money market facilities under which
it can borrow up to an aggregate of $135 million. Interest rates vary with
current market
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conditions based on the applicable bank's rate at the time of the borrowings. As
of September 30, 1997, Transco had no outstanding borrowings under these
facilities.
SALE OF RECEIVABLES
Transco is a party to an agreement that expires in February 1998 pursuant
to which Transco can sell to an investor up to $100 million of undivided
interests in certain of its trade receivables. At September 30, 1997 and
December 31, 1996, interests in $96 million and $100 million, respectively, of
these receivables were held by the investor.
5. ADOPTION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," effective for transactions
occurring after December 31, 1996. The adoption of this standard had no
significant impact on Transco's consolidated results of operations, financial
position or cash flows.
The Financial Accounting Standards Board has issued two new accounting
standards, SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. The pronouncements will not
materially change Transco's financial reporting or disclosures.
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 discussion contained
in Items 7 and 8 of Transco's 1996 Annual Report on Form 10-K and in Transco's
1997 First and Second Quarter Reports on Form 10-Q and with the condensed
consolidated financial statements and notes contained in this report.
RESULTS OF OPERATIONS
NET INCOME AND OPERATING INCOME
Transco's net income for the nine months ended September 30, 1997 was $78.4
million compared to net income of $63.7 million for the nine months ended
September 30, 1996. Operating income for the nine months ended September 30,
1997 was $168.2 million compared to $144.7 million for the nine months ended
September 30, 1996. The higher operating income of $23.5 million was primarily
attributable to lower operation and maintenance expenses, benefits of the final
phase of the Southeast Expansion Projects placed in service in late 1996 and
other capital projects included in Docket No. RP97-71 placed into effect on May
1, 1997 and a $5.4 million credit to cost of natural gas transportation as a
result of a settlement related to a prior rate proceeding (see Note 3). The
positive operating income variance was partially offset at the net income level
by
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higher interest expense of $3.8 million due primarily to funding of capital
projects, partially offset by a greater allowance for funds used during
construction of $1.0 million.
OPERATING EXPENSES
Excluding the cost of sales and transportation of $499 million for the nine
months ended September 30, 1997 and $659 million for the comparable period in
1996, Transco's operating expenses for the nine months ended September 30, 1997,
were approximately $22.6 million lower than the comparable period in 1996. The
decrease was due to lower depreciation and amortization of $12.0 million and
lower operation and maintenance expenses of $12.6 million. The lower
depreciation and amortization was due to a reduction in depreciation rates that
were established in Transco's June 1996 Stipulation and Agreement in Docket No.
RP95-197 and that continued to be reflected in rates in Docket No. RP97-71.
However, the effects of the lower depreciation rates on depreciation and
amortization were offset by a corresponding decrease in revenues. The lower
operation and maintenance expense was primarily due to a $7.7 million decrease
in miscellaneous contractual services, a $2.5 million decrease in professional
services, a $2.5 million decrease in lube oil and odorants expense and a $2.3
million decrease in other supplies and expenditures, partly offset by a $2.1
million increase in charges from others for the operation of certain Transco
facilities.
TRANSPORTATION SERVICES
Transco's operating revenues related to its transportation services for the
nine months ended September 30, 1997 were $457 million, compared to $495 million
for the nine months ended September 30, 1996. The lower transportation revenues
were primarily due to the effects of having passed through to ratepayers a lower
level of reimbursable costs and lower depreciation costs that are recovered in
Transco's rates, partly offset by the benefits of the final phase of the
Southeast Expansion Projects placed in service in late 1996 and other capital
projects included in Docket No. RP97-71 placed into effect on May 1, 1997.
As shown in the table below, Transco's total market-area deliveries and
production-area deliveries for the nine months ended September 30, 1997
decreased 5.2 TBtu (1%) and 8.7 TBtu (5%), respectively, when compared to the
same period in 1996. The decreased deliveries were mainly due to milder weather
conditions in the first quarter of 1997 as compared to the same period in 1996.
As a result of a straight fixed-variable (SFV) rate design, increases or
decreases in firm transportation volumes have no significant impact on operating
income. Increases or decreases in interruptible transportation volumes can have
an impact on operating income.
14
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------
Transco System Deliveries (TBtu) 1997 1996
- -------------------------------- ---- ----
<S> <C> <C>
Market-area deliveries:
Long-haul transportation 698.0 699.9
Market-area transportation 301.6 304.9
------- -------
Total market-area deliveries 999.6 1,004.8
Production-area transportation 154.3 163.0
------- -------
Total system deliveries 1,153.9 1,167.8
======= =======
Average Daily Transportation Volumes (TBtu) 4.2 4.3
Average Daily Firm Reserved Capacity (TBtu) 5.5 5.1
</TABLE>
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 SERVICES
Transco makes jurisdictional merchant gas sales to customers pursuant to a
blanket sales certificate issued by the FERC, with most of those sales being
made through a Firm Sales (FS) program which gives customers the option to
purchase daily quantities of gas from Transco at market-responsive prices in
exchange for a demand charge payment.
Through an agency agreement, WESCO manages all jurisdictional merchant gas
sales of Transco, receives all margins associated with such business and, as
Transco's agent, assumes all market and credit risk associated with Transco's
jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales
service has no impact on its operating income or results of operations.
Transco's operating revenues for the nine months ended September 30, 1997
related to its sales services decreased $120 million to $475 million, when
compared to the same period in 1996. The decrease was primarily due to a
significantly lower volume of gas sales in Transco's jurisdictional merchant
sales services as shown in the table below. However, this decrease in revenues
had no effect on Transco's operating income or net income variances when
compared to the prior year since the decrease in revenues was offset by a
corresponding decrease in the cost of sales.
15
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
Gas Sales Volumes (TBtu) 1997 1996
- ------------------------ ---- ----
<S> <C> <C>
Long-term sales 149.1 167.5
Short-term sales 11.0 33.6
----- -----
Total gas sales 160.1 201.1
===== =====
</TABLE>
STORAGE SERVICES
Transco's operating revenues related to storage services of $106.2 million
for the nine months ended September 30, 1997 were comparable to storage revenues
of $108.0 million in the same period in 1996.
CAPITAL RESOURCES AND LIQUIDITY
METHOD OF FINANCING
Transco funds its capital requirements with cash flows from operating
activities, including the sale of trade receivables, by accessing capital
markets, by repayments of funds advanced to Williams, by borrowings under the
Credit Agreement and short-term money market facilities and, if required,
advances from Williams. At September 30, 1997, there were no outstanding
borrowings under the Credit Agreement, short-term money market facilities or the
short term credit facility. Advances due Transco by Williams totaled $237
million.
On July 31, 1997, Transco entered into a $150 million, five-year bank
agreement, with variable interest rates based on the London Interbank Offered
Rate. Proceeds were used for general corporate purposes.
In September 1997, Williams and certain of its subsidiaries, including
Transco, initiated a restructuring of its debt portfolio. On October 8, 1997,
Transco borrowed $160 million under the Credit Agreement to fund the redemption
of $150 million of its 9-1/8% Debentures at a total redemption price of $156.4
million, plus accrued interest.
In the fourth quarter of 1997, Transco also plans to access capital markets
to fund its expansion projects and other general corporate requirements. Transco
believes any additional financing can be obtained on reasonable terms.
CAPITAL EXPENDITURES
As shown in the table below, Transco's capital expenditures for the nine
months ended September 30, 1997 were $168.9 million, compared to $166.2 million
for the nine months ended September 30, 1996.
16
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-----------------------
Capital Expenditures 1997 1996
- -------------------- ---- ----
(In Millions)
<S> <C> <C>
Market-Area Projects $ 64.1 $ 26.2
Supply-Area Projects 19.4 -
Maintenance of Existing Facilities and Other Projects 85.4 140.0
------ ------
Total Capital Expenditures $168.9 $166.2
====== ======
</TABLE>
Transco's capital expenditure budget for 1997 and future capital projects
are discussed in its 1996 Annual Report on Form 10-K and 1997 First and Second
Quarter Reports on Form 10-Q. The following describes significant developments
related to those projects and any new projects proposed by Transco.
INDEPENDENCE PIPELINE PROJECT In March 1997, Independence Pipeline Company
(Independence) filed for FERC approval to construct and operate a pipeline
consisting of approximately 370 miles of 36-inch diameter pipe with an
anticipated annual gas transportation capacity of 838.5 million cubic feet per
day (MMcf/d). The pipeline will extend from ANR Pipeline Company's (ANR)
existing compressor station at Defiance, Ohio to Transco's facilities at Leidy,
Pennsylvania. During September 1997, Independence filed with the FERC executed
precedent agreements for 530 MMcf/d of annual firm transportation service for a
term of ten (10) years. On September 23, 1997, the existing partners in
Independence (subsidiaries of Transco and ANR) executed a Partnership Interest
Purchase and Sale Agreement pursuant to which a wholly-owned subsidiary of
National Fuel Gas Company would own 25% of Independence upon the receipt of
necessary regulatory approvals and the satisfaction of other closing conditions,
with an option to become an equal partner. Negotiations are ongoing with
additional potential partners. The Independence project is expected to be in
service for the 1999- 2000 winter heating season.
1998 CHEROKEE EXPANSION PROJECT On September 30, 1997, the FERC made a
preliminary determination that the 1998 Cherokee Expansion Project is required
by the public convenience and necessity pending the outcome of the FERC's
environmental review of the proposal. The project is expected to provide
approximately 87 MMcf/d of additional firm transportation capacity in Alabama
and Georgia by the 1998-1999 winter heating season at a cost of approximately
$66 million.
PIEDMONT/MAIDEN LATERAL EXPANSION PROJECT On August 12, 1997, the FERC
issued a certificate authorizing Transco to expand its existing Maiden Lateral
to Piedmont Natural Gas Company, Inc. in Lincoln and Catawba Counties, North
Carolina. The project facilities include 17.77 miles of 16-inch pipeline loop
and an expansion of Transco's existing Lowesville Meter Station. The project is
expected to be placed into service for the 1997-1998 winter heating season.
17
<PAGE>
MOBILE BAY LATERAL EXPANSION PROJECT On October 29, 1997, the FERC made a
preliminary determination that the Mobile Bay Lateral Expansion Project is
required by the public convenience and necessity pending the outcome of the
FERC's environmental review of the proposal. The project is expected to provide
new capacity of 350 MMcf/d from the outer continental shelf to Transco's Station
82 and increase capacity on the existing onshore lateral from 520 MMcf/d to 784
MMcf/d. The project is targeted to be in service in two phases during 1998 at a
cost of approximately $120 million.
CARDINAL PIPELINE SYSTEM PROJECT On November 6, 1997, the North Carolina
Utilities Commission issued an order authorizing Cardinal Extension Company to
construct, own and operate approximately 67 miles of 24-inch diameter pipeline
from the terminus of the existing Cardinal pipeline to new interconnections near
Clayton County, North Carolina, and approving rates contained in the Stipulation
filed by Cardinal Extension. This project will provide an additional 140 MMcf/d
of new firm transportation capacity to North Carolina markets and has a target
in-service date of November 1, 1999.
POCONO EXPANSION PROJECT On November 1, 1997, this project, which expands
firm transportation service on Transco's Leidy Line by approximately 35 MMcf/d,
was placed into service.
SUNBELT EXPANSION PROJECT On November 1, 1997, this project was also placed
into service. Sunbelt provides approximately 146 MMcf/d of additional firm
transportation service to markets in Georgia, South Carolina and North Carolina.
OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES
Transco's capital requirements and contingencies are discussed in its 1996
Annual Report on Form 10-K. Other than as described in Note 3 of the Notes to
Condensed Consolidated Financial Statements and in Transco's 1997 First and
Second Quarter Reports on Form 10-Q, there have been no new developments from
those described in Transco's 1996 Annual Report on Form 10-K with regard to
other capital requirements and contingencies.
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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See discussion of legal proceedings 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
19
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRANSCONTINENTAL GAS PIPE LINE
CORPORATION (Registrant)
Dated: November 14, 1997 By /s/ James C. Bourne
----------------------------------
James C. Bourne
Controller
(Principal Accounting Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, CONTAINED IN
TRANSCONTNENTAL GAS PIPE LINE CORPORATION'S REPORT ON FORM 10-Q AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,225
<SECURITIES> 0
<RECEIVABLES> 26,850
<ALLOWANCES> 0
<INVENTORY> 96,286
<CURRENT-ASSETS> 577,715
<PP&E> 3,900,502
<DEPRECIATION> 439,241
<TOTAL-ASSETS> 4,198,231
<CURRENT-LIABILITIES> 453,462
<BONDS> 830,521
0
0
<COMMON> 0
<OTHER-SE> 1,894,672
<TOTAL-LIABILITY-AND-EQUITY> 4,198,231
<SALES> 475,280
<TOTAL-REVENUES> 1,044,066
<CGS> 475,280
<TOTAL-COSTS> 781,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,250
<INCOME-PRETAX> 125,945
<INCOME-TAX> 47,505
<INCOME-CONTINUING> 78,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,440
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
