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