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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ......... TO ..........
COMMISSION FILE NUMBER 1-7584
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1079400
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 POST OAK BOULEVARD
P. O. BOX 1396
HOUSTON, TEXAS 77251
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000
NONE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE, OUTSTANDING AS
OF JUNE 30, 1998 WAS 100.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
<PAGE>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMPANY OR GROUP OF COMPANIES FOR WHICH REPORT IS FILED:
TRANSCONTINENTAL GAS PIPE LINE CORPORATION AND SUBSIDIARIES (TRANSCO)
The accompanying interim condensed consolidated financial statements of
Transco do not include all notes in annual financial statements and therefore
should be read in conjunction with the consolidated financial statements and
notes thereto in Transco's 1997 Annual Report on Form 10-K and 1998 First
Quarter Report on Form 10-Q. The accompanying consolidated financial statements
have not been audited by independent auditors but include all adjustments both
normal recurring and others which, in the opinion of Transco's management, are
necessary to present fairly its financial position at June 30, 1998, and results
of operations for the three and six month periods ended June 30, 1998 and 1997,
and cash flows for the six months ended June 30, 1998 and 1997.
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Transco believes such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that every objective will be achieved. Such statements are made in
reliance on the "safe harbor" protections provided under the Private Securities
Reform Act of 1995. Additional information about issues that could lead to
material changes in performance is contained in Transco's 1997 Annual Report on
Form 10-K and 1998 First Quarter Report on Form 10-Q.
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 988 $ 1,321
Receivables:
Affiliates 1,127 868
Others 27,318 27,493
Advances to affiliates 465,242 281,454
Transportation and exchange gas receivables:
Affiliates 25,959 23,567
Others 66,932 66,825
Inventories 90,065 84,240
Deferred income tax asset 89,782 90,672
Other 17,008 17,570
----------------- -----------------
Total current assets 784,421 594,010
----------------- -----------------
Investments 6,442 7,072
----------------- -----------------
Property, Plant and Equipment:
Natural gas transmission plant 4,126,326 3,977,620
Less-Accumulated depreciation and amortization 555,575 477,667
----------------- -----------------
Total property, plant and equipment, net 3,570,751 3,499,953
----------------- -----------------
Other Assets 171,809 166,628
----------------- -----------------
$ 4,533,423 $ 4,267,663
================= =================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Continued)
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Payables:
Affiliates $ 37,404 $ 44,749
Others 76,945 90,486
Transportation and exchange gas payables:
Affiliates 380 374
Others 15,579 18,033
Accrued liabilities 162,896 130,594
Reserve for rate refunds 275,157 204,554
---------------- ----------------
Total current liabilities 568,361 488,790
---------------- ----------------
Long-Term Debt 975,972 837,832
---------------- ----------------
Other Long-Term Liabilities:
Deferred income taxes 844,461 843,108
Other 147,332 171,586
---------------- ----------------
Total other long-term liabilities 991,793 1,014,694
---------------- ----------------
Commitments and contingencies (Note 3)
Common Stockholder's Equity:
Common stock $1.00 par value:
100 shares authorized, issued and outstanding - -
Premium on capital stock and other paid-in capital 1,652,430 1,652,430
Retained earnings 344,867 273,917
---------------- ----------------
Total common stockholder's equity 1,997,297 1,926,347
---------------- ----------------
$ 4,533,423 $ 4,267,663
================ ================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Operating Revenues
Natural gas sales $ 143,237 $ 151,952
Natural gas transportation 156,011 152,890
Natural gas storage 33,990 34,561
Other 1,008 695
----------------- -----------------
Total operating revenues 334,246 340,098
----------------- -----------------
Operating Costs and Expenses:
Cost of natural gas sales 143,238 151,952
Cost of natural gas transportation 10,758 8,168
Operation and maintenance 38,346 48,258
Administrative and general 31,396 30,084
Depreciation and amortization 31,155 39,275
Taxes - other than income taxes 8,713 9,396
Other 375 212
----------------- -----------------
Total operating costs and expenses 263,981 287,345
----------------- -----------------
Operating Income 70,265 52,753
----------------- -----------------
Other (Income) and Other Deductions:
Interest expense 22,784 16,125
Interest income - affiliates (7,045) (1,168)
Allowance for equity and borrowed funds used during construction (AFUDC) (2,654) (1,543)
Miscellaneous other deductions, net 119 667
----------------- -----------------
Total other deductions 13,204 14,081
----------------- -----------------
Income before Income Taxes 57,061 38,672
Provision for Income Taxes 21,701 14,917
----------------- -----------------
Net Income $ 35,360 $ 23,755
================= =================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
Operating Revenues
Natural gas sales $ 275,957 $ 311,461
Natural gas transportation 320,880 310,407
Natural gas storage 72,122 71,152
Other 4,658 1,592
----------------- -----------------
Total operating revenues 673,617 694,612
----------------- -----------------
Operating Costs and Expenses:
Cost of natural gas sales 275,958 311,461
Cost of natural gas transportation 20,952 18,980
Operation and maintenance 82,740 91,898
Administrative and general 61,389 61,823
Depreciation and amortization 71,782 78,069
Taxes - other than income taxes 17,786 18,660
Other 790 804
----------------- -----------------
Total operating costs and expenses 531,397 581,695
----------------- -----------------
Operating Income 142,220 112,917
----------------- -----------------
Other (Income) and Other Deductions:
Interest expense 45,389 33,315
Interest income - affiliates (13,643) (2,298)
Allowance for equity and borrowed funds used during construction (AFUDC) (4,673) (3,343)
Miscellaneous other deductions, net 705 1,235
----------------- -----------------
Total other deductions 27,778 28,909
----------------- -----------------
Income before Income Taxes 114,442 84,008
Provision for Income Taxes 43,492 32,582
----------------- -----------------
Net Income $ 70,950 $ 51,426
================= =================
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 70,950 $ 51,426
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 74,572 81,744
Deferred income taxes 2,243 (881)
Allowance for equity funds used during construction (AFUDC) (3,410) (2,310)
Changes in operating assets and liabilities:
Receivables 11,916 31,093
Receivables sold (12,000) -
Transportation and exchange gas receivables (2,499) 6,396
Inventories (5,825) (30,247)
Payables (11,290) (45,518)
Transportation and exchange gas payables (2,448) (1,864)
Accrued liabilities 32,302 18,885
Reserve for rate refunds 70,603 (41,640)
Other, net (27,207) 18,922
------------- -------------
Net cash provided by operating activities 197,907 86,006
------------- -------------
Cash flows from financing activities:
Additions to long-term debt 298,343 -
Retirement of long-term debt (160,000) (99,000)
Debt issue costs (2,060) (146)
Dividends on common stock - (2,319)
------------- -------------
Net cash provided by (used in) financing activities 136,283 (101,465)
------------- -------------
Cash flows from investing activities:
Property, plant and equipment:
Additions, net of equity AFUDC (144,597) (84,269)
Changes in accounts payable and accrued liabilities (9,596) (8,389)
Advances to affiliates, net (183,788) 112,509
Other, net 3,458 (4,945)
------------- -------------
Net cash provided by (used in) investing activities (334,523) 14,906
------------- -------------
Net decrease in cash (333) (553)
Cash at beginning of period 1,321 1,774
============= =============
Cash at end of period $ 988 $ 1,221
============= =============
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the year for:
Interest (exclusive of amount capitalized) $ 24,659 $ 37,341
Income taxes paid 25,367 19,986
Income tax refunds received (77) (11,759)
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE STRUCTURE AND CONTROL
Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned
subsidiary of Williams Gas Pipeline Company (WGP) (formerly Williams Interstate
Natural Gas Systems, Inc). WGP is a wholly-owned subsidiary of The Williams
Companies, Inc. (Williams). Prior to May 1, 1997, Transco was a wholly-owned
subsidiary of Williams.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Transco and its majority-owned subsidiaries. Companies in which Transco and its
subsidiaries own 20 percent to 50 percent of the voting common stock are
accounted for under the equity method.
The condensed consolidated financial statements have been prepared from
the books and records of Transco without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in
Transco's 1997 Annual Report on Form 10-K and 1998 First 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.
Certain reclassifications have been made in the 1997 financial
statements to conform to the 1998 presentation.
3. CONTINGENT LIABILITIES AND COMMITMENTS
There have been no new developments from those described in Transco's 1997
Annual Report on Form 10-K or 1998 First Quarter Report on Form 10-Q other than
as described below.
<PAGE>
RATE AND REGULATORY MATTERS
GENERAL RATE CASE (DOCKET NO. RP97-71) On November 1, 1996, Transco
submitted to the Federal Energy Regulatory Commission (FERC) a general rate case
filing principally designed to recover costs associated with increased capital
expenditures. These increased capital expenditures primarily relate to system
reliability, integrity and Clean Air Act compliance.
When stated on a comparable basis, the rates Transco placed into effect on
May 1, 1997, represent an annual cost of service increase of approximately $47
million over the cost of service underlying the rates contained in the
settlement of Transco's last general rate filing (Docket No. RP95-197). The
rates, which are subject to refund, are designed using the straight
fixed-variable rate design method.
The filing also included (1) a pro-forma proposal to roll-in the costs of
Transco's Leidy Line and Southern expansion incremental projects and (2) a
pro-forma proposal to make interruptible transportation (IT) backhaul rates
equal to the IT forward haul rates. The pro-forma proposals would be made
effective prospectively only after final FERC approval.
On November 29, 1996, the FERC issued an order accepting Transco's filing,
suspending its effectiveness until May 2, 1997 and establishing a hearing to
examine the reasonableness of Transco's proposed rates. In addition, the order
consolidated Transco's pro-forma roll-in proposal with the Phase II hearing in
Docket No. RP95-197, and directed that the record in that proceeding be
supplemented to the extent necessary. On February 3, 1997, the FERC issued an
order on rehearing of its November 29, 1996 order which, among other things,
revised the effective date for the proposed rates to May 1, 1997.
On January 20, 1998, Transco filed a Stipulation and Agreement for
approval by the FERC, documenting a settlement with all of the active parties in
this proceeding. The settlement resolves all cost of service, throughput and
other issues in this proceeding, except rate of return, capital structure and
certain minor cost allocation and rate design issues. On June 12, 1998, the FERC
issued an order approving the settlement. Transco is required to make refunds on
or before October 30, 1998. The issues not resolved by the settlement are being
litigated by the parties before a FERC Administrative Law Judge (ALJ).
GENERAL RATE CASE (DOCKET NO. RP95-197) On July 29, 1998, the FERC
issued an order on rehearing of its August 1, 1997 order in the Phase I
proceeding determining the capital structure and rate of return for Transco. As
to capital structure, the FERC vacated its policy formulated in the August 1,
1997 order which favored use of the pipeline's own capital structure if the
pipeline's equity ratio falls within the range of the equity ratios of the proxy
companies used to determine the pipeline's return on equity. In the July 29,
1998 order, the FERC returned to its traditional policy, under which the
pipeline's own capital structure will be used if the pipeline issues its own
non-guaranteed debt and has its own bond rating, and if the pipeline's equity
ratio is reasonable when compared to the equity ratios approved by the FERC in
other proceedings and when compared to those of the proxy companies. Applying
its new policy, the FERC affirmed the use of Transco's own capital structure,
consisting of 57.58% equity, in developing Transco's rate of return in this
proceeding. As discussed in greater detail below, the FERC also modified its
methodology for determining return on equity. Applying its revised methodology
to Transco in this proceeding, the FERC provided a rate of return on equity for
Transco of 12.49%. Transco had previously provided a reserve which it believes
is adequate for any refunds that may be required.
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.
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, 1997 of the facilities,
including the purchase price allocation to Transco, was approximately $529
million. Estimated operating income recorded by Transco for the year ended
December 31, 1997 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. Pending
the outcome of the rehearing request and in an effort to expedite abandonment of
at least a portion of the facilities included in the February 1996 application,
in February 1998 Transco filed a separate application with the FERC seeking
authorization to abandon by conveyance to Gas Processing, Transco's onshore
Tilden/McMullen gathering system which is located in Texas. The net book value
at December 31, 1997 of the Tilden/McMullen facilities was approximately $25
million, the entirety of which is included in the $529 million net book value
for the facilities described in the February 1996 application.
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 is 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.
REGULATION OF SHORT TERM NATURAL GAS TRANSPORTATION SERVICE (DOCKET NO.
RM98-10-000) AND REGULATION OF NATURAL GAS TRANSPORTATION SERVICES (DOCKET NO.
RM98-12-000) On July 29, 1998, the FERC issued a Notice of Proposed Rulemaking
(NOPR) and a Notice of Inquiry (NOI), proposing revisions to, and seeking
comments on, its regulatory policies for interstate natural gas transportation
service. In the NOPR (Docket No. RM98-10-000), the FERC proposes revisions to
its regulations to reflect changes in the market for short-term transportation
services on pipelines. The FERC proposes to eliminate cost-based regulation of
short-term transportation services and implement regulatory policies that are
intended to maximize competition in the short-term transportation market,
mitigate the ability of firms to exercise residual monopoly power and provide
opportunities for greater flexibility in the provision of pipeline services.
Included among the proposed changes are initiatives to revise pipeline
scheduling procedures, receipt and delivery point policies, and penalty
policies, to require pipelines to auction short-term capacity, to revise the
FERC's reporting requirements, to permit pipelines to negotiate rates and terms
of service, and to revise certain rate and certificate policies. In the NOI
(Docket No. RM98-12-000), the FERC seeks comments on its pricing policies in the
existing long-term market and pricing policies for new capacity. The proposed
changes are expected to have prospective effects only. Comments on the NOPR and
NOI are due within 90 days. Transco will review the NOPR and NOI and provide
comments within the required time period.
LEGAL PROCEEDINGS
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 subsequently amended its original
petition to demand an accounting under the seven contracts through the year
1992. Transco 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 limitations. On July 24, 1998, the parties to this
lawsuit entered into a settlement agreement resolving this matter. Pursuant to
the terms of the settlement agreement, Transco made a cash payment to CXY, which
had no significant effect on Transco's results of operations.
SUMMARY
While no assurances may be given, Transco does not believe that the
ultimate resolution of the foregoing matters and those described in Transco's
1997 Annual Report on Form 10-K and 1998 First 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. 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 June 30, 1998, Transco had no outstanding
borrowings under this agreement.
On January 16, 1998, Transco issued $200 million of notes that mature on
January 15, 2005, and $100 million of notes that mature on January 15, 2008,
which pay interest at 6-1/8% and 6-1/4%, respectively, per annum on January 15
and July 15 of each year, beginning July 15, 1998. The notes are not subject to
redemption and have no sinking fund provisions. Proceeds from the notes were
used for general corporate purposes, including the repayment of $160 million
borrowed under the Credit Agreement.
SHORT-TERM DEBT
Transco is a party to two short-term money market facilities under which
it can borrow up to an aggregate of $90 million. Interest rates vary with
current market conditions based on the applicable bank's rate at the time of the
borrowings. As of June 30, 1998, Transco had no outstanding borrowings under
these facilities.
SALE OF RECEIVABLES
Transco is a party to an agreement that expires on January 29, 1999
pursuant to which Transco can sell to an investor up to $100 million of
undivided interests in certain of its trade receivables. At June 30, 1998 and
December 31, 1997, interests in $88 million and $100 million, respectively, of
these receivables were held by the investor.
<PAGE>
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements, notes and management's narrative analysis
contained in Items 7 and 8 of Transco's 1997 Annual Report on Form 10-K and in
Transco's 1998 First 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, 1998 was $71.0
million compared to net income of $51.4 million for the six months ended June
30, 1997. Operating income for the six months ended June 30, 1998 was $142.2
million compared to $112.9 million for the six months ended June 30, 1997. The
higher operating income of $29.3 million was primarily the result of higher
natural gas transportation and other revenues, lower operation and maintenance
expenses and lower depreciation and amortization, as discussed in more detail
below. The increase in net income was attributable to the increased operating
income. Net interest expense was approximately the same as the net interest
expense for the six months ended June 30, 1997.
Because of its rate structure and historical maintenance schedule, Transco
typically experiences lower operating income in the second and third quarters as
compared to the first and fourth quarters.
OPERATING EXPENSES
Excluding the cost of sales and transportation of $297 million for the six
months ended June 30, 1998 and $330 million for the comparable period in 1997,
Transco's operating expenses for the six months ended June 30, 1998, were
approximately $17 million lower than the comparable period in 1997. This
decrease was primarily attributable to lower operation and maintenance expenses
and lower depreciation and amortization. The lower operation and maintenance
expenses are primarily attributable to a $6.3 million decrease in charges from
others for the operation of certain Transco facilities, including a $4.1 million
adjustment related to settlement rates contained in the general rate case in
Docket No. RP97-71 approved by the FERC in June 1998; a $1.6 million adjustment
in pipe recoating costs, also related to the RP97-71 settlement rates; and lower
costs of labor ($1.1 million), contractual services ($1.4 million), materials
($1.3 million) and transportation ($1.2 million); partly offset by a $3.2
million increase in underground storage expense and a $1.2 million increase in
lube oil and odorants expense. As described below, the increase in underground
storage expense was largely offset by an increase in underground storage
revenues. The lower depreciation and amortization resulted from a $3.2 million
adjustment to accruals on certain general plant assets and a $3.8 million
adjustment related to the RP97-71 settlement rates, partly offset by a $0.7
million increase due to recent capital expenditures included in the general rate
case in Docket No. RP97-71 and the expansion projects placed into service in the
last quarter of 1997.
<PAGE>
TRANSPORTATION REVENUES
Transco's operating revenues related to its transportation services for
the six months ended June 30, 1998 were $321 million, compared to $310 million
for the six months ended June 30, 1997. The higher transportation revenues were
primarily due to new rates to recover costs associated with increased capital
expenditures contained in the general rate case in Docket No. RP97-71 placed
into effect in May 1997, benefits of the expansion projects placed into service
in November 1997 and a $2 million adjustment related to RP97-71 settlement rates
approved by the FERC in June 1998.
As shown in the table below, Transco's total market-area deliveries for
the six months ended June 30, 1998 increased 9.5 trillion British Thermal Units
(TBtu) (1.4%) when compared to the same period in 1997. The increased deliveries
were mainly due to 27.5 TBtu delivered under the Sunbelt Expansion Project in
the first six months of 1998, offset by lower long-haul transportation
deliveries due to milder weather conditions. Transco's production area
deliveries for the six months ended June 30, 1998 decreased 22.6 TBtu (17%) when
compared to the same period in 1997 as a result of milder weather conditions.
As a result of a straight fixed-variable (SFV) rate design, increases or
decreases in firm transportation volumes in comparable facilities have no
significant impact on operating income; however, because interruptible
transportation rates have components of fixed and variable cost recovery,
increases or decreases in interruptible transportation volumes do have an impact
on operating income.
Six Months
Ended June 30,
------------------------
Transco System Deliveries (TBtu) 1998 1997
- --------------------------------
--------- --------
Market-area deliveries:
Long-haul transportation 450.3 472.2
Market-area transportation 252.3 220.9
--------- --------
Total market-area deliveries 702.6 693.1
Production-area transportation 108.2 130.8
========= ========
Total system deliveries 810.8 823.9
========= ========
Average Daily Transportation Volumes (TBtu) 4.5 4.6
Average Daily Firm Reserved Capacity (TBtu) 6.2 5.4
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.
<PAGE>
SALES REVENUES
Transco makes jurisdictional merchant gas sales to customers pursuant to a
blanket sales certificate issued by the FERC, with most of those sales being
made through a Firm Sales (FS) program which gives customers the option to
purchase daily quantities of gas from Transco at market-responsive prices in
exchange for a demand charge payment.
Through an agency agreement, WESCO manages all jurisdictional merchant gas
sales of Transco, receives all margins associated with such business and, as
Transco's agent, assumes all market and credit risk associated with Transco's
jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales
service has no impact on its operating income or results of operations.
Transco's operating revenues for the six months ended June 30, 1998 related
to its sales services, including cash out sales in settlement of gas imbalances,
decreased $35.5 million to $276 million, when compared to the same period in
1997. The decrease was primarily due to a lower average gas sales price of $2.20
per dekatherm (Dt) in the first six months of 1998 versus $2.41 per Dt in 1997.
However, this decrease in revenues had no effect on Transco's operating income
or net income variances when compared to the prior year because the decrease in
revenues was offset by a corresponding decrease in the cost of sales.
Six Months
Ended June 30,
-------------------------
Gas Sales Volumes (TBtu) 1998 1997
- ------------------------
-------- --------
Long-term sales 89.3 97.4
Short-term sales 14.7 5.0
======== ========
Total gas sales 104.0 102.4
======== ========
STORAGE REVENUES
Transco's operating revenues related to storage services increased $1.0
million to $72.1 million for the six months ended June 30, 1998 when compared to
the same period in 1997. This revenue increase included $2.9 million to recover
higher underground storage rates charged by others that is included in operation
and maintenance expenses, partly offset by a $1.5 million adjustment related to
settlement rates contained in the general rate case in Docket No. RP97-71
approved by the FERC in June 1998.
<PAGE>
OTHER REVENUES
Other operating revenues increased $3.1 million to $4.7 million for the six
months ended June 30, 1998 when compared to the same period in 1997, due to new
services that began in July 1997 and increased liquids transportation.
CAPITAL RESOURCES AND LIQUIDITY
METHOD OF FINANCING
Transco funds its capital requirements with cash flows from operating
activities, including the sale of trade receivables, by accessing capital
markets, by repayments of funds advanced to Williams, by borrowings under the
Credit Agreement and short-term money market facilities and, if required,
advances from Williams. At June 30, 1998, there were no outstanding borrowings
under the Credit Agreement or short-term money market facilities. Advances due
Transco by Williams totaled $465 million.
On January 16, 1998, Transco issued $200 million of notes that mature in
2005 and $100 million of notes that mature in 2008. Proceeds from these notes
were used for general corporate purposes, including the repayment of $160
million borrowed under the Credit Agreement.
CAPITAL EXPENDITURES
As shown in the table below, Transco's capital expenditures for the six
months ended June 30, 1998 were $154.2 million, compared to $92.7 million for
the six months ended June 30, 1997.
Six Months
Ended June 30,
----------------------
Capital Expenditures 1998 1997
- --------------------
-------- ---------
(In Millions)
Market-area projects $ 53.2 $ 31.9
Supply-area projects 78.6 7.3
Maintenance of existing facilities and other projects 22.4 53.5
======== =========
Total capital expenditures $ 154.2 $ 92.7
======== =========
Transco's capital expenditure budget for 1998 and future capital projects
are discussed in its 1997 Annual Report on Form 10-K and First Quarter Report on
Form 10-Q. The following describes significant developments related to those
projects and any new projects proposed by Transco.
<PAGE>
INDEPENDENCE PIPELINE PROJECT In April 1998, Independence Pipeline Company
(Independence) notified the FERC that it is revising its expected in-service
date from November 1999 to November 2000, reflecting the status of its
certificate application and the anticipated time required to construct the
pipeline project once it is authorized. Independence also recently executed and
filed with the FERC a precedent agreement with a new shipper for firm
transportation service of up to 99,000 Dts of natural gas per day. This brings
the level of capacity subscribed on the Independence Pipeline to just over 68
percent. In July 1998, the FERC determined that the Independence and MarketLink
projects are environmentally related and will be combined into one environmental
impact statement.
MARKETLINK EXPANSION PROJECT On May 13, 1998, Transco filed an application
with the FERC for approval of its MarketLink Expansion Project with a targeted
in-service date of November 1, 2000. Nine shippers have executed precedent
agreements for terms of up to 15 years for approximately 95 percent of the firm
capacity created by the project. As noted above, in July 1998, the FERC
determined that the Independence and MarketLink projects are environmentally
related and will be combined into one environmental impact statement.
CUMBERLAND PIPELINE PROJECT Cumberland Gas Pipeline Company (Cumberland)
held an open season from March 30 to May 29, 1998, for parties interested in
subscribing to firm transportation capacity. Cumberland plans to file for FERC
approval of the project during the fourth quarter of 1998. The project is
expected to be in service by the 2000-2001 winter heating season.
SOUTH COAST EXPANSION PROJECT Transco announced that it is holding an open
season from July 22, 1998 to August 24, 1998, for parties interested in
subscribing to its South Coast Expansion Project, which will create additional
firm transportation capacity from the terminus of Transco's existing Mobile Bay
Lateral in Choctaw County, Alabama, to mainline delivery points in Transco's
Rate Zone 4 (Alabama and Georgia). Transco plans to file for FERC approval of
the project during the first quarter of 1999. The project has a target
in-service date of November 1, 2000.
MOBILE BAY LATERAL EXPANSION PROJECT In January 1998, the FERC approved the
Mobile Bay Lateral Expansion Project, an expansion and extension of Transco's
existing 123-mile Mobile Bay Lateral. The project is expected to provide new
firm transportation capacity of 350 MMcf per day from the outer continental
shelf to Transco's Station 82 and increase capacity on the existing onshore
lateral from 520 MMcf per day to 784 MMcf per day. The project will be placed
into service in two phases: Phase I was placed into service on August 1, 1998,
and Phase II is targeted to be placed into service on November 1, 1998.
OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES
Transco's capital requirements and contingencies are discussed in its 1997
Annual Report on Form 10-K and 1998 First 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 1997 Annual Report on Form 10-K and 1998 First Quarter Report on Form
10-Q with regard to other capital requirements and contingencies.
<PAGE>
RATE AND REGULATORY REFUNDS Transco has provided reserves which it
believes is adequate for any rate refunds that may be required. In connection
with the settlement in its general rate case under Docket No. RP97-71 approved
by the FERC by order dated June 12, 1998, Transco expects to make refunds, which
it currently estimates to be in a range of $70 million to $90 million, in the
fourth quarter of 1998.
YEAR 2000 COMPLIANCE Williams and its wholly-owned subsidiaries, which
includes Transco, has initiated an enterprise-wide project to address the year
2000 compliance issue for all technology hardware and software, external
interfaces with customers and suppliers, operations process control, automation
and instrumentation systems and facility items. The inventory and assessment
phases of this project are complete. Necessary conversion, testing and
replacement activities have begun and will continue through mid-1999. 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, and where necessary,
Transco will be working with those companies to mitigate any material adverse
effect to Transco.
Transco expects to utilize both internal and external resources to
complete this process. Costs incurred for new software and hardware purchases
will be capitalized and other costs will be expensed as incurred. While the
total cost of this project is still being evaluated, Transco currently estimates
that the cost, excluding previously planned system replacements, necessary to
complete the project within the schedule described will be approximately $4
million to $6 million. Transco will update this estimate as additional
information becomes available. The costs of the project and the completion dates
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party year 2000 modification plans and other factors. There can
be no guarantee that these estimates will be achieved and actual results could
differ materially from these estimates.
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.
<PAGE>
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
<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: August 13, 1998 By /s/ James C. Bourne
--------------------------
James C. Bourne
Controller
(Principal Accounting Officer)
<PAGE>
<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 SIX MONTHS ENDED JUNE 30, 1998, CONTAINED IN TRANSCONTINENTAL GAS PIPE
LINE CORPORATION'S 1998 SECOND QUARTER REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 988
<SECURITIES> 0
<RECEIVABLES> 22,282
<ALLOWANCES> 0
<INVENTORY> 90,065
<CURRENT-ASSETS> 784,421
<PP&E> 4,126,326
<DEPRECIATION> 555,575
<TOTAL-ASSETS> 4,533,423
<CURRENT-LIABILITIES> 568,361
<BONDS> 975,972
0
0
<COMMON> 0
<OTHER-SE> 1,997,297
<TOTAL-LIABILITY-AND-EQUITY> 4,533,423
<SALES> 275,957
<TOTAL-REVENUES> 673,617
<CGS> 275,958
<TOTAL-COSTS> 469,218
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<INCOME-PRETAX> 114,442
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