UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 BLVD., P. O. BOX 1396, HOUSTON, TEXAS 77251
- --------------------------------------------------- ---------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (713) 215-2000
--------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
THE NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $1.00 PER SHARE,
OUTSTANDING AT JANUARY 31, 1999 WAS 100.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
(I)(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE
REDUCED DISCLOSURE FORMAT.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Transcontinental Gas Pipe Line Corporation (Transco) is an interstate
natural gas transmission company which owns a natural gas pipeline system
extending from Texas, Louisiana, Mississippi and the Gulf of Mexico through the
states of Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland,
Pennsylvania and New Jersey to the New York City metropolitan area. Transco's
principal business is the transportation of natural gas.
The number of full time employees of Transco at December 31, 1998 was
1,416.
Transco is an indirect wholly-owned subsidiary of The Williams Companies,
Inc. (Williams).
At December 31, 1998, Transco' system had a mainline delivery capacity of
approximately 3.8 Bcf <F1> of gas per day from production areas to its primary
markets. Using its Leidy Line and market-area storage capacity, Transco can
deliver an additional 2.9 Bcf of gas per day for a system-wide delivery capacity
total of approximately 6.7 Bcf of gas per day. The system is composed of
approximately 10,500 miles of mainline and branch transmission pipelines, 45
compressor stations, six storage locations and four processing plants.
Compression facilities at sea level rated capacity total approximately 1.3
million horsepower.
Transco has natural gas storage capacity in five underground storage
fields located on or near its pipeline system and/or market areas and operates
three of these storage fields and an additional liquefied natural gas (LNG)
storage facility. The total top gas storage capacity available to Transco and
its customers in such storage fields and LNG facility is approximately 216 Bcf
of gas. Storage capacity permits Transco's customers to inject gas into storage
during the summer and off-peak periods for delivery during peak winter demand
periods.
<F1> As used in this report, the term "Mcf" means thousand cubic feet, the term
"MMcf" means million cubic feet, the term "Bcf" means billion cubic feet, the
term "Tcf" means trillion cubic feet, the term "Mcf/d" means thousand cubic feet
per day, the term "MMcf/d" means million cubic feet per day, the term "Bcf/d"
means billion cubic feet per day, the term "MMBtu" means million British Thermal
Units, the term "TBtu" means trillion British Thermal Units, the term "Dt" means
dekatherm and the term "MDt/d" means thousand dekatherm per day.
<PAGE>
Transco's gas pipeline facilities are generally owned in fee. However, a
substantial portion of such facilities are constructed and maintained pursuant
to rights-of-way, easements, permits, licenses or consents on and across real
property owned by others. Compressor stations, with appurtenant facilities, are
located in whole or in part either on lands owned or on sites held under leases
or permits issued or approved by public authorities. The storage facilities are
either owned or contracted for under long-term leases or easements.
In 1992, the Federal Energy Regulatory Commission (FERC) issued Order 636
which made fundamental changes in the way natural gas pipelines conduct their
businesses. The FERC's stated purpose of Order 636 was to improve the
competitive structure of the natural gas pipeline industry by, among other
things, unbundling a pipeline's merchant role from its transportation services;
ensuring "equality" of transportation services including equal access to all
sources of gas; providing "no-notice" firm transportation services that are
equal in quality to bundled sales service; establishing a capacity release
program and changing rate design methodology from modified fixed-variable (MFV)
to straight fixed-variable (SFV), unless the pipeline and its customers agree
to, and the FERC approves, a different form of rate design methodology.
Effective November 1, 1993, Transco implemented its Order 636 restructuring
plan.
Through an agency agreement with Transco, Williams Energy Services Company
(WESCO), an affiliate of Transco, manages Transco's jurisdictional merchant gas
sales.
In May 1995, the operation of certain production area facilities were
transferred to Williams Field Services Group, Inc. (WFS), an affiliated company.
In February 1996, Transco filed an application with the FERC for an order
authorizing the abandonment of certain facilities located onshore and offshore
in Texas, Louisiana and Mississippi by conveyance to Williams Gas Processing
Gulf Coast Company (Gas Processing), an affiliate of Transco. The net book value
recorded by Transco at December 31, 1998 of the facilities was approximately
$504 million. Estimated operating income recorded by Transco for the year ended
December 31, 1998 associated with the facilities was $15 million; however, such
operating income may not be representative of the effects of the spin-down on
Transco's future operating income due to various factors, including future
regulatory actions. Concurrently, Gas Processing filed a petition for
declaratory order requesting a determination that its gathering services and
rates be exempt from FERC regulation under the Natural Gas Act. On September 25,
1996, the FERC issued an order dismissing Transco's application and Gas
Processing's petition for declaratory order. On October 25, 1996, Transco and
Gas Processing filed a joint request for rehearing of the FERC's September 25
order and in August 1997, filed a request that rehearing be expedited. 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, 1998, of the Tilden/McMullen facilities was approximately $69
million, the entirety of which is included in the $504 million net book value
for the facilities described in the February 1996 application.
MARKETS AND TRANSPORTATION
Transco's natural gas pipeline system serves customers in Texas and eleven
southeast and Atlantic seaboard states including major metropolitan areas in
Georgia, North Carolina, New York, New Jersey and Pennsylvania.
Transco's major gas transportation customers are public utilities and
municipalities that provide service to residential, commercial, industrial and
electric generation end users. Shippers on Transco's pipeline system include
public utilities, municipalities, intrastate pipelines, direct industrial users,
electrical generators, marketers and producers. Transco's two largest customers
in 1998 were Public Service Electric and Gas Company and Consolidated Edison
Company of New York, Inc., which accounted for approximately 9.0 percent and 8.6
percent, respectively, of Transco's total operating revenues. Transco's firm
transportation agreements are generally long-term agreements with various
expiration dates and account for the major portion of Transco's business.
Additionally, Transco offers interruptible transportation services under shorter
term agreements.
<PAGE>
Transco's total system deliveries for the years 1998, 1997 and 1996 are
shown below.
<TABLE>
<CAPTION>
Transco System Deliveries (TBtu) 1998 1997 1996
- ---------------------------------------- ------------- ------------ ------------
<S> <C> <C> <C>
Market-area deliveries
Long-haul transportation ......................... 857.8 940.2 948.9
Market-area transportation ....................... 522.1 438.9 428.1
------------- ------------ ------------
Total market-area deliveries ..................... 1,379.9 1,379.1 1,377.0
Production-area transportation ......................... 214.0 242.0 260.7
------------- ------------ ------------
Total system deliveries ................................ 1,593.9 1,621.1 1,637.7
============= ============ ============
Average Daily Transportation Volumes (TBtu) ............ 4.4 4.4 4.5
Average Daily Firm Reserved Capacity (TBtu) ............ 5.8 5.5 5.2
</TABLE>
Transco's facilities are divided into seven rate zones. Four are located
in the production area and three are located in the market area. Long-haul
transportation is gas that is received in one of the production-area zones and
delivered in a market-area zone. Market-area transportation is gas that is both
received and delivered within market-area zones. Production-area transportation
is gas that is both received and delivered within production-area zones.
As a result of the fundamental business changes resulting from FERC Order
636, especially the shifting of the responsibility for gas supply from the
pipeline companies to local distribution companies (LDCs), maintaining committed
proved gas reserves is no longer material to Transco's transportation business.
PIPELINE PROJECTS
PROJECTS IN SERVICE In 1998, Transco completed construction of, and placed
into service, two major projects, the Mobile Bay Lateral Expansion Project and
the Cherokee Expansion Project. Phase I of the Mobile Bay Lateral Expansion
Project, which was placed into service on August 1, 1998, provides new firm
transportation capacity of 350 MMcf/d on a new offshore pipeline extending from
the outer continental shelf to Transco's Station 82 and 128 MMcf/d of capacity
on the existing onshore lateral from Station 82 to Station 85 at Transco's
mainline in Choctaw County, Alabama. Phase II of the project, which was placed
into service on November 9, 1998, increased capacity onshore by an additional
136 MMcf/d bringing the total Mobile Bay Lateral capacity delivered at Station
85 to 784 MMcf/d. On November 1, 1998, Transco placed into service the Cherokee
Expansion Project, an incremental expansion of Transco's system in its southern
market area providing approximately 84 MMcf/d of new firm transportation
capacity to serve markets in Georgia.
PINE NEEDLE LNG COMPANY, LLC In February 1997, Pine Needle LNG Company,
LLC, which is owned by wholly owned subsidiaries of Transco and several of its
major customers, commenced construction of its liquefied natural gas (LNG)
storage project in Guilford County, North Carolina. The project will have 4 Bcf
of storage capacity and 400 MMcf/d of withdrawal capacity, and is expected to be
placed into service on May 1, 1999. The project is estimated to cost
approximately $107 million. Wholly owned subsidiaries of Transco will operate
the facility and have a 35% ownership interest. Transco expects to make equity
investments of approximately $19 million in this project.
CARDINAL PIPELINE PROJECT In November 1997, the North Carolina Utilities
Commission issued an order approving the Cardinal Pipeline Project. Wholly owned
subsidiaries of Transco and three of its North Carolina customers will own
Cardinal, which will involve the acquisition of the existing 37-mile Cardinal
pipeline in North Carolina and construction of an approximately 67-mile
extension of the pipeline to new interconnections near Clayton County, North
Carolina. This project will provide 140 MMcf/d of additional firm transportation
capacity to North Carolina markets and is expected to be placed into service by
November 1, 1999. The project is estimated to cost approximately $98 million.
Wholly owned subsidiaries of Transco will operate the pipeline and have a 45%
ownership interest in the project. Transco expects to make equity investments of
approximately $22 million in this project.
CUMBERLAND PIPELINE PROJECT In December 1997, wholly owned subsidiaries of
Transco and AGL Resources Inc. (AGL) formed Cumberland Gas Pipeline Company.
Cumberland plans to expand existing pipeline facilities of Transco and AGL
northward into Tennessee, establishing a 143-mile pipeline that is expected to
provide firm transportation capacity to markets in Georgia and Tennessee by the
2000-2001 winter heating season. Wholly owned subsidiaries of Transco will
operate the pipeline facilities and have a 50% ownership interest. Transco
estimates that the total cost of this project will be up to $99 million, and
expects to make equity investments of up to $24.8 million. Cumberland plans to
file for FERC approval of the project during the first quarter of 1999.
MARKETLINK EXPANSION PROJECT On May 13, 1998, Transco filed an application
with the FERC for approval to construct and operate mainline and Leidy Line
facilities to create an additional 700 MDt/d to serve increased demand in the
mid-Atlantic and south Atlantic regions of the United States by a targeted
in-service date of November 1, 2000. The estimated cost of the proposed
facilities is $529 million.
INDEPENDENCE PIPELINE PROJECT In March 1997, as amended in December 1997,
Independence Pipeline Company (Independence) filed an application with FERC for
approval to construct and operate a new pipeline consisting of approximately 400
miles of 36-inch pipe from ANR Pipeline Company's (ANR) existing compressor
station at Defiance, Ohio to Transco's facilities at Leidy, Pennsylvania.
Independence is expected to provide approximately 916 MMcf/d of firm
transportation capacity. In April 1998, 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
is owned equally by wholly owned subsidiaries of Transco, ANR, and National Fuel
Gas Company. The estimated cost of the project is $678 million, and Transco's
equity contributions are estimated to be approximately $68 million based on its
expected one-third ownership interest in the project.
In July 1998, the FERC determined that the Independence and MarketLink
projects are environmentally related and will be combined into one environmental
impact statement.
CROSS BAY PIPELINE PROJECT Subsidiaries of Transco, Duke Energy and
KeySpan Energy have formed Cross BaySM 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 the capacity of Transco's existing Long Beach Lateral by approximately
121 MMcf/d. The project is targeted to be in service in the 2000-2001 time
frame. The project is estimated to cost approximately $50 million. Wholly owned
subsidiaries of Transco will operate Cross Bay and have a 37.5% ownership
interest. Transco expects to make equity investments of approximately $5 million
in this project.
BUCCANEER PIPELINE PROJECT Buccaneer Gas Pipeline Company, L.L.C.
(Buccaneer), a wholly owned subsidiary of Transco, announced on March 4, 1999
that it would accept, until March 29, 1999, requests for firm transportation
service to be made available on a proposed new natural gas pipeline system
extending from the Mobile Bay area in Alabama to markets in Florida.
Specifically, Buccaneer anticipates that its pipeline system will extend from a
point near Transco's Station 82 in Coden, Alabama, across the Gulf of Mexico to
the west coast of Florida just north of Tampa. The pipeline would continue
onshore in an easterly direction to serve power generation plants and other
markets across the central part of the state, and will terminate in Volusia
County, Florida. Laterals will be constructed in accordance with market demand.
The target in-service date for the project is June 2002. Buccaneer plans to file
for FERC approval of the project in August 1999. The capital cost of the project
will depend upon the level of market commitment received.
SOUTHCOAST EXPANSION PROJECT The proposed SouthCoast Expansion Project is
expected to create additional firm transportation capacity on Transco's system
from the terminus of Transco's existing Mobile Bay Lateral in Choctaw County,
Alabama, to delivery points in Transco's Rate Zone 4 (Alabama and Georgia).
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. The
project is estimated to cost approximately $96 million.
<PAGE>
REGULATORY MATTERS
Transco's transportation rates are established through the FERC ratemaking
process. Key determinants in the ratemaking process are (i) volume throughput
assumptions, (ii) costs of providing service, including depreciation rates and
(iii) allowed rate of return, including the equity component of a pipeline's
capital structure. Rate design and the allocation of costs between the demand
and commodity rates also impact profitability. As a result of the ratemaking
process, a portion of Transco's revenues may have been collected subject to
refund.
Effective September 1, 1992, Transco changed from the MFV method of rate
design to the SFV method of rate design. Under MFV rate design, all fixed costs,
with the exception of return on equity and income taxes, are included in a
demand charge to customers and return on equity and income taxes are recovered
as part of a volumetric charge to customers. Accordingly, under MFV rate design,
overall throughput has a significant impact on operating income. Under the SFV
method of rate design, all fixed costs, including return on equity and income
taxes, are included in a demand charge to customers and all variable costs are
recovered through a commodity charge to customers. While the use of SFV rate
design limits Transco's opportunity to earn incremental revenues through
increased throughput, it also minimizes Transco's risk associated with
fluctuations in throughput.
For a discussion of additional regulatory matters, see "Item 8.
Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - 3. Contingent Liabilities and Commitments - Rate and Regulatory
Matters."
SALES SERVICE
As discussed above, WESCO manages Transco's jurisdictional merchant gas
sales, which are made to customers pursuant to a blanket sales certificate
issued by the FERC. Most of these sales are 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.
Transco's gas sales volumes managed by WESCO for the years 1998, 1997 and
1996 are shown below.
<TABLE>
<CAPTION>
Gas Sales Volumes (TBtu) 1998 1997 1996
- ------------------------------ -------------- ------------- -------------
<S> <C> <C> <C>
Long-term sales ........................ 176.0 192.9 227.9
Short-term sales ....................... 25.0 21.8 37.9
-------------- ------------- -------------
Total gas sales ................. 201.0 214.7 265.8
============== ============= =============
</TABLE>
TRANSACTIONS WITH AFFILIATES
Transco engages in transactions with Williams and other Williams
subsidiaries, characteristic of group operations. See "Item 8. Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements -
2. Summary of Significant Accounting Policies and 9. Transactions With Major
Customers and Affiliates."
REGULATION
INTERSTATE GAS PIPELINE OPERATIONS Transco's transmission and storage
activities are subject to regulation by the FERC under the Natural Gas Act of
1938 (Natural Gas Act) and under the Natural Gas Policy Act of 1978 (NGPA), and,
as such, Transco's rates and charges for the transportation of natural gas in
interstate commerce, the extension, enlargement or abandonment of jurisdictional
facilities, and accounting, among other things, are subject to regulation.
Transco holds certificates of public convenience and necessity issued by the
FERC authorizing ownership and operation of all pipelines, facilities and
properties considered jurisdictional for which certificates are required under
the Natural Gas Act. Transco is also subject to the Natural Gas Pipeline Safety
Act of 1968, as amended by Title I of the Pipeline Safety Act of 1979, which
regulates safety requirements in the design, construction, operation and
maintenance of interstate gas transmission facilities.
INTRASTATE GAS PIPELINE OPERATIONS The Cardinal Pipeline System Project
(see Part I, Item 1, Pipeline Projects) is a North Carolina natural gas pipeline
project which is subject to the jurisdiction of the North Carolina Utilities
Commission.
ENVIRONMENTAL Transco is subject to the National Environmental Policy Act
and federal, state and local laws and regulations relating to environmental
quality control. Management believes that Transco's pipeline competitors are
also subject to similar laws and regulations relating to environmental quality
control. Management further believes that, with respect to any capital
expenditures and operation and maintenance expenses required to meet applicable
environmental standards and regulations, the FERC would grant the requisite rate
relief so that, for the most part, such expenditures would be recoverable in
rates. For these reasons, management believes that compliance with applicable
environmental requirements is not likely to have a material effect upon its
competitive position or earnings. See "Item 8. Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - 3. Contingent
Liabilities and Commitments - Environmental Matters."
COMPETITION
Although Transco continues to be regulated by the FERC pursuant to the
Natural Gas Act and the NGPA, competition for pipeline services continues to
intensify, due primarily to changes in regulation. Although FERC Order 636,
implemented in 1993, probably has contributed most to increased competition in
pipeline services, other changes in federal and state regulation also promise to
increase competition.
FERC Order 636 required that the natural gas, transportation, and other
services formerly provided in bundled form by pipelines be unbundled, resulting
in non-discriminatory open access transportation services, and encouraged the
establishment of market hubs. These and other factors have led to a commodity
market in gas and to increasingly competitive markets in natural gas services,
including competitive secondary markets in pipeline capacity. Pipeline capacity
is being used more efficiently, and peaking and storage services are
increasingly effective substitutes for annual pipeline capacity.
FERC Order 636 also changed rate design for pipelines. This change has
reduced short term risk of cost recovery by pipelines with fully subscribed
capacity. However, with slow growth in gas demand and more efficient use of
pipeline capacity and increased availability of substitutes for it, the risk of
contract non-renewal or capacity turnback has increased. Transco continues to
charge rates that are approved by the FERC on a cost of service basis.
Transco is aware that several state jurisdictions have been involved in
implementing changes similar to the changes that have occurred at the federal
level under Order 636. Of the states that Transco operates in, such activity,
frequently referred to as ALDC unbundling,@ has been most pronounced in the
states of New York, New Jersey, Georgia, and Pennsylvania. New York and New
Jersey began establishing LDC unbundling regulations in 1995 and continue to
develop regulations regarding LDC unbundling. Georgia enacted an LDC unbundling
program in 1997. Pennsylvania is currently considering LDC unbundling and may
enact legislation in 1999. In addition, Maryland and Delaware currently have
pilot unbundling programs for industrial, commercial, and residential end-users.
Management expects these regulations to encourage greater competition in the
natural gas marketplace.
The pace and extent of LDC unbundling and electric power industry
restructuring, and their impacts, remain uncertain at this time. Competition in
retail gas markets should lead to more efficient use of pipeline capacity and
greater preference for shorter term contracts. The potential impact of electric
power industry restructuring is particularly uncertain because gas competes with
electricity in residential, commercial, and industrial end uses, and with other
fuels, especially coal, in electricity generation. Although the net impact of
electric restructuring on gas demand is uncertain, especially in the short run,
the long run impact is expected to be increased gas use for power generation
relative to direct use in residential, commercial, and industrial applications.
FORWARD-LOOKING INFORMATION
Certain matters discussed in this report, excluding historical
information, include forward-looking statements that are subject to risks and
uncertainties. Although Transco believes such forward-looking statements are
based on reasonable assumptions, no assurance can be given that every objective
will be reached. Such statements are made in reliance on the safe harbor
protections provided under the Private Securities Litigation Reform Act of 1995.
As required by such Act, Transco hereby identifies the following important
factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted by Transco in forward-looking
statements: (i) risks and uncertainties related to changes in general economic
conditions in the United States, changes in laws and regulations to which
Transco is subject, including tax, environmental and employment laws and
regulations, the cost and effects of legal and administrative claims and
proceedings against Transco or its subsidiaries or which may be brought against
Transco or its subsidiaries, the effect of changes in accounting policies, and
conditions of the capital markets Transco utilized to access capital to finance
operations; (ii) risks and uncertainties related to the impact of future federal
and state regulation of business activities, including allowed rates of return,
the pace of deregulation in retail natural gas markets, and the resolution of
other regulatory matters discussed herein; (iii) risks and uncertainties related
to the ability to develop expanded markets as well as maintaining existing
markets; (iv) risks and uncertainties related to the year 2000 readiness of
Transco, its customers, and its vendors; and (v) risks and uncertainties related
to the ability to control costs. In addition, future utilization of pipeline
capacity can depend on energy prices, competition from other pipelines and
alternate fuels, the general level of natural gas demand, decisions by customers
not to renew expiring natural gas transportation contracts and weather
conditions, among other things. Further, gas prices which directly impact
transportation and operating profits may fluctuate in unpredictable ways.
ITEM 2. PROPERTIES.
See "Item 1. Business."
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
GATHERING FACILITIES SPIN-DOWN ORDER (DOCKET NOS. CP96-206-000 AND
CP96-207- 000) In February 1996, Transco filed an application with the FERC for
an order authorizing the abandonment of certain facilities located onshore and
offshore in Texas, Louisiana and Mississippi by conveyance to Williams Gas
Processing - Gulf Coast Company (Gas Processing), an affiliate of Transco. The
net book value recorded by Transco at December 31, 1998 of the facilities was
approximately $504 million. Estimated operating income recorded by Transco for
the year ended December 31, 1998 associated with the facilities was $15 million;
however, such operating income may not be representative of the effects of the
spin-down on Transco's future operating income due to various factors, including
future regulatory actions. Concurrently, Gas Processing filed a petition for
declaratory order requesting a determination that its gathering services and
rates be exempt from FERC regulation under the Natural Gas Act. On September 25,
1996, the FERC issued an order dismissing Transco's application and Gas
Processing's petition for declaratory order. On October 25, 1996, Transco and
Gas Processing filed a joint request for rehearing of the FERC's September 25
order, and in August 1997 filed a request that rehearing be expedited. 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, 1998 of the Tilden/McMullen facilities was approximately $69
million, the entirety of which is included in the $504 million net book value
for the facilities described in the February 1996 application.
ROYALTY CLAIMS AND LITIGATION In connection with Transco's renegotiations
with producers to resolve take-or-pay and other contract claims and to amend gas
purchase contracts, Transco entered into certain settlements which may require
the indemnification by Transco of certain claims for additional royalties which
the producers may be required to pay as a result of such settlements. Transco
has been made aware of demands on producers for additional royalties and such
producers may receive other demands which could result in claims against Transco
pursuant to the indemnification provisions in their respective settlements.
Indemnification for royalties will depend on, among other things, the specific
lease provisions between the producer and the lessor and the terms of the
settlement between the producer and Transco.
On March 15, 1994, a lawsuit was filed in the 189th Judicial District
Court of Harris County, Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line
Corporation). In this lawsuit, the plaintiff has claimed approximately $23
million, including interest and attorneys' fees for reimbursements of settlement
amounts paid to royalty owners. On October 16, 1997, a jury verdict in this case
found that Transco was required to pay Texaco damages of $14.5 million plus
$3.75 million in attorney's fees. The trial judge initially deferred entering
judgment and directed the parties to participate in mediation of this matter.
Following mediation in 1998, which did not result in a resolution of this
matter, the trial judge entered judgment consistent with the jury verdict and
also awarded prejudgment interest of $5.0 million. Transco is appealing the
verdict and continues to believe that it has meritorious defenses to Texaco's
claims.
In addition, Transco was notified by Freeport-McMoRan, Inc. (FMP) in
February 1995, that pursuant to a settlement with the Mineral Management Service
(MMS) of the MMS' claim for royalties due under gas contracts between Transco
and FMP which had been modified pursuant to settlement agreements made in 1986
and 1989, FMP was asserting a claim for indemnification of approximately $6
million, including interest, under the excess royalty provisions of those
settlement agreements. On or about March 30, 1995, FMP filed a petition for
specific performance seeking recovery against Transco for the sums claimed under
the settlement agreements. In May 1998, FMP filed a motion for summary judgment
which Transco opposed. In September 1998, the court granted FMP's motion finding
that at least a portion of FMP's payment to the MMS was subject to
indemnification. Transco has appealed the court's ruling.
In August 1996, a lawsuit was filed against Transco and certain Transco
affiliates by a royalty owner in a gas producing field in Brooks County, Texas
alleging a claim for incorrect computation of royalties. Transco is alleged to
have purchased gas from the field. Transco has filed an answer denying liability
for the claim.
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly owned subsidiaries including Transco. Mr. Grynberg has
also filed claims against approximately 300 other energy companies and alleges
that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought is an unspecified
amount of royalties allegedly not paid to the federal government, treble
damages, a civil penalty, attorneys' fees, and costs.
ENVIRONMENTAL MATTERS
Transco is subject to extensive federal, state and local environmental
laws and regulations which affect Transco's operations related to the
construction and operation of its pipeline facilities. Appropriate governmental
authorities may enforce these laws and regulations with a variety of civil and
criminal enforcement measures, including monetary penalties, assessment and
remediation requirements and injunctions as to future compliance. Transco's use
and disposal of hazardous materials are subject to the requirements of the
federal Toxic Substances Control Act (TSCA), the federal Resource Conservation
and Recovery Act (RCRA) and comparable state statutes. The Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), also known as
"Superfund," imposes liability, without regard to fault or the legality of the
original act, for release of a "hazardous substance" into the environment.
Because these laws and regulations change from time to time, practices that have
been acceptable to the industry and to the regulators have to be changed and
assessment and monitoring have to be undertaken to determine whether those
practices have damaged the environment and whether remediation is required.
Since 1989, Transco has had studies underway to test certain of its facilities
for the presence of toxic and hazardous substances to determine to what extent,
if any, remediation may be necessary. On the basis of the findings to date,
Transco estimates that environmental assessment and remediation costs that will
be incurred over the next five years under TSCA, RCRA, CERCLA and comparable
state statutes will total approximately $25 million to $30 million, measured on
an undiscounted basis. This estimate depends upon a number of assumptions
concerning the scope of remediation that will be required at certain locations
and the cost of remedial measures to be undertaken. Transco is continuing to
conduct environmental assessments and is implementing a variety of remedial
measures that may result in increases or decreases in the total estimated costs.
At December 31, 1998, Transco had a reserve of approximately $25 million for
these estimated costs that has been recorded in current liabilities and other
long-term liabilities in the accompanying Consolidated Balance Sheet.
Transco considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the ordinary course of
business. To date, Transco has been permitted recovery of environmental costs
incurred, and it is Transco's intent to continue seeking recovery of such costs,
as incurred, through rate filings. Therefore, these estimated costs of
environmental assessment and remediation have been recorded as regulatory assets
in the accompanying Consolidated Balance Sheet.
Transco has used lubricating oils containing polychlorinated biphenyls
(PCBs) and, although the use of such oils was discontinued in the 1970s, has
discovered residual PCB contamination in equipment and soils at certain gas
compressor station sites. Transco has worked closely with the U. S.
Environmental Protection Agency (EPA) and state regulatory authorities regarding
PCB issues, and has a program to assess and remediate such conditions where they
exist, the costs of which are included in the $25 million to $30 million range
discussed above. Civil penalties have been assessed by the EPA against other
major pipeline companies for the alleged improper use and disposal of PCBs.
Transco has received and responded to information requests from the EPA.
Although penalties have not presently been asserted, no assurances can be given
that the EPA will not seek such penalties in the future.
Transco has been identified as a potentially responsible party (PRP) at
various Superfund and state waste disposal sites. Based on present volumetric
estimates and other factors, Transco's estimated aggregate exposure for
remediation of these sites is less than $500,000. The estimated remediation
costs for all such sites have been included in Transco's environmental reserve
discussed above. Liability under CERCLA (and applicable state law) can be joint
and several with other PRPs. Although volumetric allocation is a factor in
assessing liability, it is not necessarily determinative; thus, the ultimate
liability could be substantially greater than the amounts described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Since Transco meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K, this information is omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Transco is an indirect wholly-owned subsidiary of Williams; therefore,
Transco's common stock is not publicly traded.
ITEM 6. SELECTED FINANCIAL DATA.
Since Transco meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K, this information is omitted.
<PAGE>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS. (THIS
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH ITEM 8, FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.)
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 a bank
credit agreement and short-term money market facilities and, if required,
advances from Williams.
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. Transco is also a party to
a short-term money market facility, under which it can borrow up to an aggregate
of $40 million. At December 31, 1998, there were no outstanding borrowings under
the Credit Agreement or the short-term money market facility. Net advances due
Transco and its subsidiaries by Williams totaled $416 million.
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. Proceeds from
the 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 1998
included $78 million for market-area projects, primarily for the Cherokee
Expansion Project, $128 million for supply-area projects, primarily for the
Mobile Bay Lateral Expansion Project, and $98 million for maintenance of
existing facilities and other projects. Transco has budgeted approximately $394
million for 1999 capital expenditures related to expansion projects in the
market and supply areas and the maintenance of existing facilities.
<TABLE>
<CAPTION>
Budget Actual
-------------- --------------------------------------------------
Capital Expenditures 1999 1998 1997 1996
- -------------------------- -------------- -------------- -------------- --------------
(In millions)
<S> <C> <C> <C> <C>
Market-Area Projects ............ $ 117.1 $ 78.2 $ 91.8 $ 44.5
Supply-Area Projects ............ 109.9 127.6 47.7 0.3
Maintenance of Existing Facilities
and Other Projects ............ 166.6 97.9 103.3 233.1
-------------- -------------- -------------- --------------
Total Capital Expenditures $ 393.6 $ 303.7 $ 242.8 $ 277.9
============== ============== ============== ==============
</TABLE>
OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES
ORDER 636 TRANSITION COSTS Transco implemented Order 636 services
effective November 1, 1993. Transco does not expect to incur Gas Supply
Realignment (GSR) costs associated with its firm sales service. Transco's
non-GSR transition costs are anticipated to be insignificant. Order 636 provides
that pipelines should be allowed the opportunity to recover all prudently
incurred transition costs. Transco does not believe that Order 636 transition
costs to be incurred by Transco will have a material adverse effect on its
financial position or results of operations.
RATE AND REGULATORY REFUNDS As discussed in Note 3 of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco has filed
general rate cases (Docket Nos. RP95-197 and RP97-71) under which all issues
have not been resolved. Transco has provided reserves which it believes are
adequate for any refunds that may be required under Docket Nos. RP95-197 and
RP97-71.
REGULATORY AND LEGAL PROCEEDINGS As discussed in Note 3 of the Notes to
Consolidated Financial Statements included in Item 8 herein, Transco is involved
in several pending regulatory and legal proceedings. Because of the complexities
of the issues involved in these proceedings, Transco cannot predict the actual
timing of resolution or the ultimate amounts which might have to be refunded or
paid in connection with the resolution of these pending regulatory and legal
proceedings.
ENVIRONMENTAL MATTERS As discussed in Note 3 of the Notes to Consolidated
Financial Statements included in Item 8 herein, Transco is subject to extensive
federal, state and local environmental laws and regulations which affect
Transco's operations related to the construction and operation of its pipeline
facilities.
Transco considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, as they are prudent costs incurred in the ordinary course of
business. To date, Transco has been permitted recovery of environmental costs
incurred, and it is Transco's intent to continue seeking recovery of such costs,
as incurred, through rate filings.
LONG-TERM GAS PURCHASE CONTRACTS Transco has long-term gas purchase
contracts containing either fixed prices or variable prices that are at a
significant premium to the estimated market price. However, due to contract
expirations and estimated deliverability declines, Transco's estimated purchase
commitments under such gas purchase contracts are not material to Transco's
total gas purchases.
YEAR 2000 COMPLIANCE Williams and its wholly-owned subsidiaries, which
includes Transco, initiated an enterprise-wide project in 1997 to address the
year 2000 compliance issue for both traditional and non-traditional information
technology areas, including embedded technology which is prevalent throughout
the company. The project focuses on all technology hardware and software,
external interfaces with customers and suppliers, operations process control,
automation and instrumentation systems, and facility items. The phases of the
project are awareness, inventory and assessment, renovation and replacement,
testing and validation. The awareness and inventory/assessment phases of this
project as 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 through 3 were
designated as critical and are the major focus of this project.
Renovation/replacement and testing/validation of critical systems are expected
to be completed by June 30, 1999, except for replacement of certain critical
systems scheduled for completion by September 1, 1999. Certain non-critical
systems may not be compliant by January 1, 2000.
Testing and validation activities have begun and will continue throughout
the process with substantial completion expected by June 30, 1999. Year 2000
test labs are in place and operational. As was expected, few problems have been
detected during testing for items believed to be compliant. The following table
indicates the approximate project status, at December 31, 1998, for traditional
and non-traditional information technology areas. The tested category indicates
the percentage that has been fully tested or otherwise validated as compliant.
The untested category includes items that are believed to be compliant but which
have not yet been validated. The not compliant category includes items which
have been identified as not year 2000 compliant.
Tested Untested Not Compliant
------ -------- -------------
Traditional Information Technology 26% 31% 43%
Non-Traditional Information Technology 50% 23% 27%
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, and service providers. Additional
communications are being mailed during 1999. Transco is evaluating responses as
they are received or otherwise investigating the status of these companies' year
2000 compliance efforts. As of December 31, 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. Transco has a core
group of 121 people assigned to this project. This group includes one individual
responsible for coordinating, organizing, managing, communicating, and
monitoring the project and another 120 part-time representatives responsible for
completing the project. Depending on which phase the project is in and what area
is being focused on at any given point in time, there can be an additional 36 to
40 employees who are also contributing a portion of their time to the completion
of this project. Transco has contracted with an external contractor for a cost
of up to $6.0 million for the remediation of Transco's customer service system.
Several previously planned system implementations currently in process are
scheduled for completion on or before September 1, 1999, which are expected to
lessen possible year 2000 impacts. In situations where planned system
implementations will not be in service timely, alternative steps are being taken
to make existing systems compliant.
Although all critical systems over which Transco has control are planned
to be compliant and tested before the year 2000, Transco has identified two
areas that would equate to a most-reasonably likely worst case scenario. First
is the possibility of service interruptions due to non-compliance by third
parties. For example, power failures along the communications network or
transportation systems would cause service interruptions. This risk should be
minimized by the enterprise-wide effort to communicate with and evaluate
third-party compliance plans. Another area of risk for non-compliance is the
delay of system replacements scheduled for completion during 1999. The status of
these systems is being closely monitored to reduce the chance of delays in
completion dates. It is not possible to quantify the possible financial impact
if this most reasonably likely worst case scenario were to come to fruition.
Initial contingency planning began during 1998; however, significant focus
on that phase of the project will not take place until 1999. Guidelines for that
process were issued in January 1999 in the form of a formal Business Continuity
Plan. Contingency plans are being developed for critical business processes,
critical business partners, suppliers and system replacements that experience
significant delays. These plans are expected to be defined by August 31, 1999
and implemented where appropriate.
Costs incurred for new software and hardware purchases are being
capitalized and other costs are being expensed as incurred. Transco currently
estimates the total cost of the project, including the cost of accelerating any
system replacements, to be approximately $8.0 million. Prior to 1998 and during
the first quarter of 1998, Transco conducted the project awareness and
inventory/assessment phases of the project and incurred minimal costs. During
the second quarter of 1998, $0.1 million was spent on the renovation/replacement
and testing/validation phases and on the completion of the inventory/assessment
phase. During the third and fourth quarters of 1998, the focus was on the
renovation/replacement and testing/validation phases and $2.1 million of costs
were incurred. During the first quarter of 1999, renovation/replacement and
testing/validation will continue, contingency planning will begin and $2.9
million is expected to be spent. During the second quarter of 1999, the primary
focus is expected to shift to testing/validation and contingency planning and
$2.4 million is expected to be spent. The third and fourth quarters of 1999 will
focus mainly on contingency planning and final testing with $0.5 million
expected to be spent. Virtually all of the $2.2 million incurred through
December 31, 1998 has been expensed with a minimal amount capitalized. Of the
$5.8 million of future costs necessary to complete the project within the
schedule described, virtually all costs will be expensed, with minimal
capitalization of costs. This estimate does not include Transco's potential
share of year 2000 costs that may be incurred by partnerships and joint ventures
in which the company participates but is not the operator. The costs of
previously planned system replacements are not considered to be year 2000 costs
and are, therefore, excluded from the amounts discussed above.
The preceding discussion contains forward-looking statements including,
without limitation, statements relating to the company's plans, strategies,
objectives, expectations, intentions, and adequate resources, that are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Readers are cautioned that such forward-looking statements
contained in the year 2000 update are based on certain assumptions which may
vary from actual results. Specifically, the dates on which the company believes
the year 2000 project will be completed and computer systems will be implemented
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, or that there will not be
a delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include, but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third-parties, the company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
CONCLUSION
Although no assurances can be given, Transco currently believes that the
aggregate of cash flows from operating activities, supplemented, when necessary,
by repayments of funds advanced to Williams, advances or capital contributions
from Williams and borrowings under the Credit Agreement or short-term money
market facilities will provide Transco with sufficient liquidity to meet its
capital requirements. Transco also expects to access public and private markets
on reasonable terms to finance its capital requirements.
<PAGE>
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
NET INCOME AND OPERATING INCOME Transco's net income for 1998 was $135.7
million compared with net income of $111.4 million for 1997. The 1997 results
include an after-tax extraordinary gain on reacquired debt of $2.9 million.
Excluding this gain, Transco's net income for 1997 would have been $108.5
million. Operating income for 1998 was $273.7 million compared to operating
income of $232.0 million for 1997.
Excluding the extraordinary gain on reacquired debt for 1997, the higher
net income of $27.2 million and higher operating income of $41.7 million for
1998 were primarily due to benefits of expansion projects placed into service in
1998 and the fourth quarter of 1997, new services that began in the last half of
1997, the positive impact of an adjustment related to settlement rates contained
in the January 1998 Stipulation and Agreement in Transco's general rate case
Docket No. RP97-71 approved by the FERC in June 1998 and lower operating
expenses, partially offset by the effects of lower interruptible transportation
and liquefiables volumes and a $5.4 million credit to the cost of natural gas
transportation recorded in 1997 as a result of a settlement related to a prior
rate proceeding.
TRANSPORTATION REVENUES Transco's operating revenues related to its
transportation services increased $21 million to $649 million for 1998, when
compared to 1997. The higher transportation revenues were primarily due to
benefits of the expansion projects placed into service in 1998 and the fourth
quarter of 1997 ($26 million), new services that began in the last half of 1997
($4 million) and an adjustment related to the RP97-71 settlement rates ($4
million), partly offset by the effects of lower interruptible transportation and
liquefiables volumes ($11 million).
Transco's market-area deliveries for 1998 were comparable to 1997.
Transco's production-area deliveries for 1998 decreased 28.0 TBtu, or 12%, when
compared to 1997, primarily 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.
SALES REVENUES Transco makes jurisdictional merchant gas sales to
customers pursuant to a blanket sales certificate issued by the FERC, with most
of those sales being made through a Firm Sales (FS) program which gives
customers the option to purchase daily quantities of gas from Transco at
market-responsive prices in exchange for a demand charge payment.
Through an agency agreement with Transco, Williams Energy Services Company
(WESCO), an affiliate of Transco, manages Transco's jurisdictional merchant gas
sales. The long-term purchase agreements managed by WESCO remain in Transco's
name, as do the corresponding sales of such purchased gas. Therefore, Transco
continues to record natural gas sales revenues and the related accounts
receivable and cost of natural gas sales and the related accounts payable for
the jurisdictional merchant sales that are managed by WESCO. Through the agency
agreement, WESCO receives all margins associated with jurisdictional merchant
gas sales business and, as Transco's agent, assumes all market and credit risk
associated with Transco's jurisdictional merchant gas sales. Consequently,
Transco's merchant gas sales service has no impact on its operating income or
results of operations. Transco's operating revenues related to its sales
services, including cash out sales in settlement of gas imbalances, decreased
$146 million to $525 million for 1998, when compared to 1997. The decrease was
primarily due to a lower average gas sales price of $2.10 per Dt for 1998 versus
$2.51 per Dt in 1997 and lower sales volumes.
STORAGE REVENUES Transco's operating revenues related to storage services
increased $2 million to $143 million for 1998, when compared to 1997. This
revenue increase included $5.8 million to recover higher underground storage
rates charged by others that is included in operation and maintenance expense,
partly offset by a $1.5 million adjustment related to the RP97-71 settlement
rates and a $2.1 million decrease due primarily to lower storage withdrawals and
lower demand charges.
OTHER REVENUES Other operating revenues increased $4.5 million to $8.5
million for 1998 when compared to 1997, due to new services that began in the
last half of 1997 and increased liquids transportation.
OPERATING COSTS AND EXPENSES Excluding the cost of sales and
transportation of $568 million and $706 million for 1998 and 1997, respectively,
Transco's operating expenses were $22 million lower in 1998 than in 1997. The
decrease was primarily due to lower expenses for operation and maintenance,
administrative and general, depreciation and amortization and taxes other than
income taxes. The lower operation and maintenance expense of $12.4 million was
primarily attributable to a $9.2 million decrease in charges from others for the
operation of certain Transco facilities, including a $4.1 million adjustment
related to the RP97-71 settlement rates; a $1.6 million adjustment in pipe
recoating costs, also related to the RP97-71 settlement rates; and lower costs
of contractual services ($3.6 million), materials ($3.9 million) and
professional services ($1.5 million); partly offset by a $6.0 million increase
in underground storage expense. As described above, the increase in underground
storage expense was largely offset by an increase in underground storage
revenues. The lower administrative and general expense of $3.5 million was
primarily due to lower costs of group insurance ($2.6 million) and the employee
retirement plan ($1.1 million). The lower depreciation and amortization expense
of $6.5 million resulted from a $9.9 million decrease due to lower depreciation
rates on offshore transmission facilities, including a $3.8 million adjustment
related to the RP97-71 settlement rates, and a $3.2 million decrease on computer
software, partly offset by a $6.6 million increase due to plant and property
additions. The lower taxes other than income taxes of $2.4 million was primarily
due to lower payroll, sales and use taxes.
1997 COMPARED TO 1996
NET INCOME AND OPERATING INCOME Transco's net income for 1997 was $111.4
million, compared with net income of $95.5 million for 1996. The 1997 results
include an after-tax extraordinary gain on reacquired debt of $2.9 million.
Excluding this gain, Transco's net income for 1997 would have been $108.5
million. Operating income for 1997 was $232.0 million compared to operating
income of $208.6 million for 1996.
Excluding the extraordinary gain on reacquired debt, the higher net income
of $13 million and higher operating income of $23.4 million for 1997 were
primarily due to lower operation and maintenance expenses, benefits of the final
phase of the Southeast Expansion Projects placed in service in late 1996, new
rates in the general rate case in Docket No. RP97-71 effective May 1, 1997 to
recover costs associated with increased capital expenditures, expansion projects
placed into service in the fourth quarter of 1997, and a $5.4 million credit to
cost of natural gas transportation as a result of a settlement related to a FERC
Order 94-A rate proceeding. The positive operating income variance was partially
offset at the net income level by higher net interest expense of $4.5 million
primarily due to interest expense associated with funding of capital projects,
partially offset by a greater allowance for funds used during construction of $1
million.
TRANSPORTATION REVENUES Transco's operating revenues related to
transportation services decreased $17 million to $627 million for 1997, when
compared to 1996. The lower transportation revenues were primarily due to the
effects of having passed through to ratepayers a lower level of reimbursable
costs that are recovered in Transco's rates, partly offset by the benefits of
the final phase of the Southeast Expansion Projects placed in service in late
1996, expansion projects placed into service in the fourth quarter of 1997, new
rates in the general rate case in Docket No. RP97-71 effective May 1, 1997 to
recover costs associated with increased capital expenditures, and the effects of
a downward adjustment in 1996 to reflect the cost of service settlement in the
general rate case in Docket No. RP95-197. The adjustment resulted in lower
revenues and lower depreciation and had no impact on operating income.
Transco's market-area deliveries for 1997 were comparable to 1996.
Transco's production-area deliveries for 1997 decreased 23.2 TBtu, or 11%, when
compared to 1996. The decreased deliveries were primarily due to milder weather
conditions in the first quarter of 1997 as compared to the same period in 1996.
SALES REVENUES Transco's operating revenues related to its sales services,
including cash out sales in settlement of gas imbalances, decreased $136 million
to $671 million for 1997, when compared to 1996. The decrease was primarily due
to a significantly lower volume of gas sales in Transco's jurisdictional
merchant sales services. However, this decrease in revenues had no effect on
Transco's operating or net income variances when compared to the prior year
since the decrease in revenues was offset by a corresponding decrease in the
cost of sales.
OPERATING COSTS AND EXPENSES Excluding the cost of sales and
transportation of $706 million and $884 million for 1997 and 1996, respectively,
Transco's operating expenses were $4 million higher in 1997 than in 1996. The
increase was primarily due to higher depreciation, largely offset by lower
operation and maintenance expense. The higher depreciation expense of $16
million was primarily due to the effects of a downward adjustment to
depreciation expense in 1996 to reflect the cost of service settlement in the
general rate case in Docket No. RP95-197 and higher depreciation expense in 1997
associated with recent capital expenditures included in the general rate case in
Docket No. RP97-71. However, the effects on operating income of the depreciation
adjustment in 1996 and the higher depreciation expense associated with capital
expenditures were substantially offset by a corresponding variance in revenues.
The lower operation and maintenance expense of $13 million was primarily
attributable to a $7 million decrease in miscellaneous contractual services, a
$3 million decrease in lube oil and odorants expense, a $3 million decrease in
professional services, and a $2 million decrease in other supplies and
expenditures, partly offset by a $1 million increase in charges from others for
the operation of certain Transco facilities.
RATE AND REGULATORY MATTERS
See Note 3 of the Notes to Consolidated Financial Statements, included in
Item 8 herein, for a discussion of Transco's rate and regulatory matters.
EFFECT OF INFLATION
Transco generally has experienced increased costs due to the effect of
inflation on the cost of labor, materials and supplies, and property, plant and
equipment. A portion of the increased labor and materials and supplies cost can
directly affect income through increased maintenance and operating costs. The
cumulative impact of inflation over a number of years has resulted in increased
costs for current replacement of productive facilities. The majority of
Transco's property, plant and equipment and inventory is subject to ratemaking
treatment, and under current FERC practices, recovery is limited to historical
costs. While amounts in excess of historical cost are not recoverable under
current FERC practices, Transco believes it will be allowed to recover and earn
a return based on increased actual cost incurred when existing facilities are
replaced. Cost based regulation along with competition and other market factors
limit Transco's ability to price services or products based upon inflation's
effect on costs.
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Transco's interest rate risk exposure results from its debt portfolio
which is influenced by short-term rates, primarily LIBOR-based borrowings from
commercial banks and the issuance of commercial paper, and long-term U.S.
Treasury rates. To mitigate the impact of fluctuations in its interest rates,
Transco maintains a significant portion of its debt portfolio in fixed rate
debt.
The following tables provide information as of December 31, 1998, about
Transco's long-term debt that is subject to interest rate risk. The tables
present principal cash flows and weighted-average interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
December 31, 1998 Expected Maturity Date
- ----------------- --------------------------------------------------------------
1999 2000 2001 2002
------------ ------------ ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Long-term debt, including current portion:
Fixed rate........................ $ - $ - $ 200 $ 125
Interest rate................... 7.23% 7.23% 7.25% 7.21%
Variable rate..................... $ - $ - $ - $ 150
Interest rate (5.65% for 1998)
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 Expected Maturity Date
- ----------------- --------------------------------------------------------------
2003 Thereafter Total Fair Value
------------ ------------ ------------ ------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Long-term debt, including current portion:
Fixed rate........................ $ - $ 500 $ 825 $ 841
Interest rate................... 6.77% 7.17%
Variable rate..................... $ - $ - $ 150 $ 150
Interest rate (5.65% for 1998)
</TABLE>
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
-----------------
Report of Independent Auditors ................................ 26
Consolidated Balance Sheet .................................... 27-28
Consolidated Statement of Income .............................. 29
Consolidated Statement of Common Stockholder's Equity.......... 30
Consolidated Statement of Cash Flows .......................... 31-32
Notes to Consolidated Financial Statements..................... 33-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Transcontinental Gas Pipe Line Corporation
The Board of Directors
We have audited the accompanying consolidated balance sheet of
Transcontinental Gas Pipe Line Corporation as of December 31, 1998 and 1997, and
the related consolidated statements of income, common stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transcontinental Gas Pipe Line Corporation at December 31, 1998 and 1997, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Tulsa, Oklahoma
February 26, 1999
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash ................................................................. $ 1,470 $ 1,321
Receivables:
Trade (Notes 4 and 8) .............................................. 13,889 23,315
Affiliates ......................................................... 10,892 868
Advances to affiliates ............................................. 416,164 281,454
State income taxes ................................................. 2,725 2,560
Other .............................................................. 5,075 1,618
Transportation and exchange gas receivables:
Affiliates.......................................................... 1,370 23,567
Others.............................................................. 56,475 66,825
Inventories:
Gas in storage, at LIFO ............................................ 35,720 38,160
Materials and supplies, at lower of average cost or market ......... 30,172 29,455
Gas available for customer nomination .............................. 13,895 16,625
Deferred income taxes (Note 7) ........................................ 99,598 90,672
Other ................................................................. 16,714 17,570
----------------- -----------------
Total current assets ............................................... 704,159 594,010
----------------- -----------------
Investments, at cost plus equity in undistributed earnings ................ 8,915 7,072
----------------- -----------------
Property, Plant and Equipment:
Natural gas transmission plant ........................................ 4,259,502 3,977,620
Less - Accumulated depreciation and amortization ...................... 616,120 477,667
----------------- -----------------
Total property, plant and equipment, net ........................... 3,643,382 3,499,953
----------------- -----------------
Other Assets .............................................................. 168,495 166,628
----------------- -----------------
$ 4,524,951 $ 4,267,663
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED BALANCE SHEET
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C> <C>
Current Liabilities:
Payables:
Trade .............................................................. $ 51,147 $ 60,941
Affiliates ......................................................... 25,050 44,749
Other .............................................................. 21,138 29,545
Transportation and exchange gas payable:
Affiliates ......................................................... 379 374
Others ............................................................. 8,354 18,033
Accrued liabilities:
Federal income taxes payable to affiliate .......................... 26,076 27,686
Other taxes ........................................................ 16,467 20,667
Interest ........................................................... 20,885 13,087
Employee benefits .................................................. 51,616 46,644
Other .............................................................. 41,587 22,510
Reserve for rate refunds .............................................. 238,403 204,554
----------------- -----------------
Total current liabilities .......................................... 501,102 488,790
----------------- -----------------
Long-Term Debt, less current maturities (Note 4) .......................... 975,768 837,832
----------------- -----------------
Other Long-Term Liabilities:
Deferred income taxes (Note 7)......................................... 846,306 843,108
Other ................................................................. 139,734 171,586
----------------- -----------------
Total other long-term liabilities .................................. 986,040 1,014,694
----------------- -----------------
Commitments and contingencies (Note 3) ....................................
Cumulative Redeemable Preferred Stock, without par value: (Note 5)
Authorized 10,000,000 shares: none issued or outstanding .............. - -
----------------- -----------------
Cumulative Redeemable Second Preferred Stock, without par value: (Note 5)
Authorized 2,000,000 shares: none issued or outstanding ............... - -
----------------- -----------------
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 ..................................................... 409,611 273,917
----------------- -----------------
Total common stockholder's equity .................................. 2,062,041 1,926,347
----------------- -----------------
$ 4,524,951 $ 4,267,663
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED STATEMENT OF INCOME
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Operating Revenues:
Natural gas sales.................................. $ 524,822 $ 670,879 $ 806,691
Natural gas transportation......................... 648,508 627,301 644,075
Natural gas storage................................ 143,275 141,108 140,745
Other ............................................. 8,531 4,011 3,318
---------------- ---------------- -----------------
Total operating revenues........................ 1,325,136 1,443,299 1,594,829
---------------- ---------------- -----------------
Operating Costs and Expenses
Cost of natural gas sales.......................... 524,822 670,879 806,690
Cost of natural gas transportation................. 42,765 34,718 77,369
Operation and maintenance.......................... 172,769 185,175 197,953
Administrative and general......................... 120,632 124,145 124,094
Depreciation and amortization (Note 2)............. 151,387 157,883 142,301
Taxes - other than income taxes.................... 34,392 36,745 36,471
Other ............................................. 4,632 1,787 1,307
---------------- ---------------- -----------------
Total operating costs and expenses.............. 1,051,399 1,211,332 1,386,185
---------------- ---------------- -----------------
Operating Income....................................... 273,737 231,967 208,644
---------------- ---------------- -----------------
Other (Income) and Other Deductions:
Interest expense- affiliates..................... 45 2 -
- other.......................... 91,610 71,637 64,305
Interest income - affiliates..................... (27,290) (9,213) (5,895)
- other.......................... (92) (50) (569)
Allowance for equity and borrowed funds used
during construction (AFUDC) (9,792) (7,771) (6,800)
Miscellaneous other deductions, net 4,281 2,240 3,447
---------------- ---------------- -----------------
Total other (income) and other deductions 58,762 56,845 54,488
---------------- ---------------- -----------------
Income before Income Taxes and
Extraordinary Item............................... 214,975 175,122 154,156
Provision for Income Taxes (Note 7)................ 79,281 66,594 58,613
---------------- ---------------- -----------------
Income before Extraordinary Item................... 135,694 108,528 95,543
Extraordinary Item - Net Gain on Reacquired
Debt (Note 4).................................... - 2,860 -
---------------- ---------------- -----------------
Net Income......................................... $ 135,694 $ 111,388 $ 95,543
================ ================ =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDER'S EQUITY
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Common Stock:
Balance at beginning and end of period............. $ - $ - $ -
---------------- ---------------- -----------------
Premium on Capital Stock and Other Paid-in Capital:
Balance at beginning and end of period............. 1,652,430 1,652,430 1,652,430
---------------- ---------------- -----------------
Retained Earnings:
Balance at beginning of period..................... 273,917 166,784 84,401
Add (deduct):
Net income...................................... 135,694 111,388 95,543
Cash dividends on common stock.................. - (4,255) (4,814)
Non-cash dividends on common stock.............. - - (8,346)
---------------- ---------------- -----------------
Balance at end of period........................... 409,611 273,917 166,784
---------------- ---------------- -----------------
Total Common Stockholder's Equity.................. $ 2,062,041 $ 1,926,347 $ 1,819,214
================ ================ =================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 135,694 $ 111,388 $ 95,543
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary item - net gain on reacquired debt.... - (2,860) -
Depreciation and amortization (Note 2).............. 157,942 164,224 149,359
Deferred income taxes (Note 7)...................... (5,729) (7,029) (44,219)
Allowance for equity funds used during construction
(Equity AFUDC).................................... (7,169) (5,377) (4,670)
Changes in operating assets and liabilities:
Receivables...................................... 7,634 27,487 (3,519)
Receivables sold................................. (13,000) - -
Transportation and exchange gas receivable....... 32,547 4,619 46,608
Inventories...................................... 4,453 (14,779) (12,357)
Payables......................................... (35,270) (18,481) (67,253)
Transportation and exchange gas payable.......... (9,674) (8,833) (50,060)
Accrued liabilities.............................. 26,363 28,047 (40,122)
Reserve for rate refunds......................... 33,849 31,731 117,188
Other, net....................................... (30,594) 5,657 14,874
---------------- ---------------- -----------------
Net cash provided by operating activities..... 297,046 315,794 201,372
---------------- ---------------- -----------------
Cash flows from financing activities: (Notes 4 and 5)
Additions to long-term debt............................ 298,343 310,000 549,660
Retirement of long-term debt........................... (160,000) (249,000) (425,000)
Debt issue costs....................................... (2,060) (253) (3,378)
Dividends on common stock.............................. - (4,255) (4,814)
---------------- ---------------- -----------------
Net cash provided by financing activities..... 136,283 56,492 116,468
---------------- ---------------- -----------------
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
THOUSANDS OF DOLLARS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from investing activities:
Property, plant and equipment:
Additions, net of equity AFUDC...................... (301,078) (242,202) (286,084)
Changes in accounts payable......................... (2,629) (594) 8,217
Sale of assets......................................... - - 2,561
Advances to affiliates, net............................ (134,710) (132,958) (43,997)
Other, net............................................. 5,237 3,015 680
---------------- ---------------- -----------------
Net cash used in investing activities......... (433,180) (372,739) (318,623)
---------------- ---------------- -----------------
Net increase (decrease) in cash........................ 149 (453) (783)
Cash at beginning of period............................ 1,321 1,774 2,557
---------------- ---------------- -----------------
Cash at end of period.................................. $ 1,470 $ 1,321 $ 1,774
================ ================ =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (exclusive of amount capitalized)....... $ 62,287 $ 69,657 $ 51,483
Income taxes paid................................ 86,862 57,958 175,001
Income tax refunds received...................... (77) (11,821) (1,057)
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Structure and Control....................................... 33
2. Summary of Significant Accounting Policies............................ 33
3. Contingent Liabilities and Commitments................................ 37
4. Debt, Financing Arrangements and Leases............................... 47
5. Preferred Stock....................................................... 49
6. Employee Benefit Plans................................................ 49
7. Income Taxes.......................................................... 52
8. Financial Instruments................................................. 53
9. Transactions with Major Customers and Affiliates...................... 54
10. Quarterly Information (Unaudited)..................................... 55
<PAGE>
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.
Transco's Board of Directors declared a non-cash common stock dividend
equal to the net book value of the assets transferred to Williams of $8.3
million in 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS Transco is an interstate natural gas transmission
company which owns a natural gas pipeline system extending from Texas,
Louisiana, Mississippi and the Gulf of Mexico through the states of Alabama,
Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania and
New Jersey to the New York City metropolitan area. The system serves customers
in Texas and the eleven southeast and Atlantic seaboard states mentioned above,
including major metropolitan areas in Georgia, North Carolina, New York, New
Jersey and Pennsylvania.
BASIS OF PRESENTATION The acquisition of Transco Energy Company (TEC) and
its subsidiaries, including Transco, by Williams in 1995 was accounted for using
the purchase method of accounting. Accordingly, an allocation of the purchase
price was assigned to the assets and liabilities of Transco based on their
estimated fair values. The purchase price allocation to Transco primarily
consisted of a $1.5 billion allocation to property, plant and equipment, which
is being amortized on a straight-line basis, and adjustments to deferred taxes
based upon the book basis of the net assets recorded as a result of the
acquisition. Current Federal Energy Regulatory Commission (FERC) policy does not
permit Transco to recover through rates amounts in excess of original cost.
As a participant in Williams' cash management program, Transco has made
advances to Williams. These advances are represented by demand notes. Transco
currently expects to receive payment of these advances within the next twelve
months and has recorded such advances as current in the accompanying
Consolidated Balance Sheet. The interest rate on intercompany demand notes is
the London Interbank Offered Rate on the first day of the month plus a fixed
rate of 0.275%.
Through an agency agreement with Transco, Williams Energy Services Company
(WESCO), an affiliate of Transco, manages Transco's jurisdictional merchant gas
sales. The long-term purchase agreements managed by WESCO remain in Transco's
name, as do the corresponding sales of such purchased gas. Therefore, Transco
continues to record natural gas sales revenues and the related accounts
receivable and cost of natural gas sales and the related accounts payable for
the jurisdictional merchant sales that are managed by WESCO. Through the agency
agreement, WESCO receives all margins associated with jurisdictional merchant
gas sales business and, as Transco's agent, assumes all market and credit risk
associated with Transco's jurisdictional merchant gas sales. Consequently,
Transco's merchant gas sales service has no impact on its operating income or
results of operations.
PRINCIPLES OF CONSOLIDATION The 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.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at
cost, adjusted in 1995 to reflect the allocation of the purchase price as
discussed above. Gains or losses from the ordinary sale or retirement of
property, plant and equipment are credited or charged to accumulated
depreciation; other gains or losses are recorded in net income.
Depreciation rates used for major regulated gas plant facilities at
December 31, 1998, 1997, and 1996 were:
Category of Property 1998 1997 1996
- ------------------------- ----------- ----------- -----------
Gathering facilities 2.60%-3.80% 2.60%-3.80% 2.60-3.80%
Storage facilities 2.50% 2.50% 2.50%
Onshore transmission facilities 2.35% 2.35% 2.35%
Offshore transmission facilities 1.50% 2.25% 2.25%
Depreciation of general plant is provided on a group basis at
straight-line rates.
Under the terms of a settlement in Transco's general rate case in Docket
No. RP97-71, which was effective May 1, 1997, Transco agreed to reduce the
depreciation rate for offshore transmission facilities. The reduction in the
depreciation rate had no effect on operating or net income due to an offsetting
reduction in operating revenues, but did result in lower cash flows from
operations. The reduction in the rate was recorded in 1998, retroactive to May
1, 1997.
ACCOUNTING FOR INCOME TAXES Williams and its wholly-owned subsidiaries,
which includes Transco, file a consolidated federal income tax return. It is
Williams' policy to charge or credit each subsidiary with an amount equivalent
to its federal income tax expense or benefit computed as if each subsidiary had
filed a separate return.
Transco uses the liability method of accounting for deferred income taxes
which requires, among other things, provisions for all temporary differences
between the financial basis and the tax basis in Transco's assets and
liabilities and adjustments to the existing deferred tax balances for changes in
tax rates, whereby such balances will more closely approximate the actual taxes
to be paid.
REVENUE RECOGNITION Transco recognizes revenues for the sale of its
commodities in the period of delivery and recognizes revenue for the
transportation of gas in the period the service is provided based upon
contractual terms. Transco is subject to FERC regulations and, accordingly,
certain revenues are collected subject to possible refunds pending final FERC
orders. Transco records rate refund accruals based on management's estimate of
the expected outcome of these proceedings.
ALLOWANCE FOR DOUBTFUL RECEIVABLES Due to its customer base, Transco has
not historically experienced recurring credit losses in connection with its
receivables. As a result, receivables determined to be uncollectible are
reserved or written off in the period of such determination. At December 31,
1998 and 1997, Transco had no allowance for doubtful accounts.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION The allowance for funds used
during construction (AFUDC) represents the cost of funds applicable to regulated
natural gas transmission plant under construction as permitted by FERC
regulatory practices. The allowance for borrowed funds used during construction
was $2.6 million, $2.4 million and $2.1 million for 1998, 1997 and 1996,
respectively. The allowance for equity funds was $7.2 million, $5.4 million and
$4.7 million for 1998, 1997 and 1996, respectively.
GAS IN STORAGE Transco utilizes the last-in, first-out (LIFO) method of
accounting for inventory gas in storage.
GAS IMBALANCES In the course of providing transportation services to
customers, Transco may receive different quantities of gas from shippers than
the quantities delivered
<PAGE>
on behalf of those shippers. Additionally, Transco transports gas on various
pipeline systems which may deliver different quantities of gas on behalf of
Transco than the quantities of gas received from Transco. These transactions
result in gas transportation and exchange imbalance receivables and payables
which are recovered or repaid in cash or through the receipt or delivery of gas
in the future and are recorded in the accompanying Consolidated Balance Sheet.
Settlement of imbalances requires agreement between the pipelines and shippers
as to allocations of volumes to specific transportation contracts and timing of
delivery of gas based on operational conditions. Transco's tariff includes a
method whereby most transportation imbalances generated after August 1, 1991 are
settled on a monthly basis. Imbalances predating August 1, 1991 are being
recovered or repaid in cash or through the receipt or delivery of gas upon
agreement of the parties as to the allocation of the gas volumes, and as
permitted by pipeline operating conditions. These imbalances have been
classified as current assets or current liabilities at December 31, 1998 and
1997.
EMPLOYEE STOCK-BASED AWARDS Employee stock-based awards are accounted for
under Accounting Principles Board Opinion (APBO) No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Williams' fixed plan common
stock options do not result in compensation expense, because the exercise price
of the stock options equals the market price of the underlying stock on the date
of grant.
NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board recently
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 Nos. 131 and 132, effective for fiscal
years beginning after December 15, 1997, are disclosure-oriented standards.
Therefore, neither standard affected 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.
RECLASSIFICATIONS Certain reclassifications have been made in the 1997 and
1996 financial statements to conform to the 1998 presentation.
<PAGE>
3. CONTINGENT LIABILITIES AND COMMITMENTS
RATE AND REGULATORY MATTERS
GENERAL RATE CASE (DOCKET NO. RP97-71) On November 1, 1996, Transco
submitted to the 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 March 1, 1995, Transco filed
with the FERC a general rate case that proposed changes in the rates for
Transco's transportation, sales and storage service rate schedules effective
April 1, 1995. The changes in rates, if accepted as proposed, would have
generated additional annual jurisdictional revenues of approximately $132
million over the pre-filed rates in effect, based, among other things, on an
increase in Transco's cost of capital resulting from an increase in the equity
component of the capital structure used (the filing was based on Transco's own
capital structure) and in the cost of equity from the pre-filed rate of return
on equity of 14.45% to the proposed rate of return on equity of 15.25%. Transco
also proposed certain changes to the terms and conditions of its tariff,
including the elimination of the IT crediting mechanism.
On March 31, 1995, the FERC issued an order on Transco's filing which
accepted and suspended the tariff sheets relating to Transco's rates, to be
effective September 1, 1995, subject to refund, and established hearing
procedures. The March 31 order also accepted, effective April 1, 1995, the
tariff sheets changing Transco's terms and conditions of service, subject to the
outcome of a technical conference. As to the elimination of the IT crediting
mechanism, the FERC permitted Transco to eliminate the IT crediting mechanism
subject to the outcome of a hearing to determine the reasonableness of Transco's
test period throughput projections for interruptible services. On August 31,
1995, Transco filed to place the rates filed on March 1, 1995 into effect on
September 1, 1995, as adjusted to reflect certain changes subsequent to the
March 1 filing. The FERC accepted Transco's filing, subject to the outcome of
the hearing and technical conference established by the FERC's March 31 order.
At a prehearing conference, the presiding ALJ adopted a procedural
schedule establishing a phased hearing for the rate issues raised by Transco's
filing. Phase I of the hearing was limited to the issues of the rate of return
and capital structure. Phase II of the hearing was to address the remaining rate
issues.
The hearing before the ALJ in Phase I concluded in December 1995. On
December 18, 1996, the ALJ issued his initial decision in Phase I, which, as to
capital structure, found that Williams controlled Transco's financing and
imputed Williams' capital structure to Transco, resulting in a capital structure
consisting of 47.72% long term debt, 4.07% preferred equity, and 48.21% common
equity, and found that Transco should use Williams' cost of long term debt
(8.89%) and its cost of preferred equity (8.80%) as of June 30, 1995. As to rate
of return, the ALJ recommended a rate of return on equity of 11.50%.
On August 1, 1997, the FERC issued an order modifying the initial decision
issued on December 18, 1996 by the ALJ in the Phase I proceeding determining the
capital structure and rate of return for Transco. As to capital structure, the
FERC reversed the ALJ's use of the Williams capital structure, and applied a new
modified capital structure policy to find that Transco's own capital structure,
consisting of 57.58% equity, should be used for developing the rate of return in
this proceeding. As to rate of return on equity, the FERC affirmed the overall
methodology used by the ALJ in his initial decision, but reversed the ALJ's
decision in order to revise the manner in which the long-range growth component
of that methodology is determined to be consistent with the FERC's recent
decisions on that issue. The order required that Transco make a compliance
filing consistent with the revised methodology, stating that refunds will be
determined once the FERC rules on that compliance filing. Transco sought
rehearing of the FERC's order asserting, among other things, that the FERC's
methodology for calculating rates of return is flawed. Other parties in the case
also sought rehearing of the FERC's order claiming, among other things, that
FERC should not have reversed the ALJ with respect to the issue of the
appropriate capital structure for ratemaking purposes.
On July 29, 1998, the FERC issued an order on rehearing of its August 1,
1997 order. 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 with the FERC and, on December 1, 1998, the FERC denied
rehearing. On January 29, 1999, most of the same parties that were involved in
the joint request for rehearing filed a notice of appeal with the United States
Court of Appeals for the District of Columbia. Transco plans to make refunds on
March 1, 1999 of approximately $96.0 million, including interest, under Docket
No. RP95-197 for which Transco had previously provided a reserve. Transco
believes the remaining reserve is adequate for any additional refunds that may
be required and has not made any adjustments to its reserves pending further
analysis of the court appeal.
On June 19, 1996, Transco filed with the FERC a Stipulation and Agreement
which resolved cost of service (subject to the outcome of capital structure and
rate of return in the Phase I proceeding), throughput level and mix, and certain
cost allocation and rate design issues. The agreement also reserved certain
other issues for hearing in Phase II, including the issue of rolled-in pricing
for incremental Leidy Line services. With the exception of one party that filed
comments opposing the settlement and one party that took no position on the
merits of the settlement, all active parties and the FERC's staff either
supported the settlement or did not oppose it. Transco began billing the
settlement rates to non-contesting parties effective August 1, 1996.
On October 9, 1996, Transco filed with the FERC a Stipulation and
Agreement which, subject to the outcome of the litigation of the reserved issues
in Phase I and Phase II in this proceeding, settled the issues of cost of
service and throughput with the one party that opposed the resolution of those
issues in the June 19, 1996 settlement.
On November 1, 1996, the FERC issued an order approving the June 19
agreement, and on December 23, 1996, FERC approved the October 9, 1996
agreement. On February 3, 1997, the FERC denied rehearing of its November 1,
1996 order. As a result, Transco made refunds on May 30, 1997 of approximately
$79.0 million, including interest, under Docket No. RP95-197 for which Transco
had previously provided a reserve.
The hearing concerning the Phase II issues not resolved by the June 19,
1996 and October 9, 1996 agreements concluded in November 1996. A supplemental
hearing to consider Transco's roll-in proposal filed in Docket No. RP97-71, as
discussed above, was completed in June 1997. On March 24, 1998, the ALJ in the
Phase II hearings issued an initial decision. As to the main issue addressed in
the decision, rolled-in pricing, the ALJ determined that the proponents of
roll-in, including Transco, must satisfy the burden under Section 5 of the
Natural Gas Act and demonstrate that Transco's existing incremental rate
treatment is unjust and unreasonable and that the proposed rolled-in rate
treatment is just and reasonable. The ALJ ruled that neither Transco nor any of
the other roll-in proponents had satisfied that burden and, therefore, that
Transco's existing incremental rate treatment must remain in effect. The ALJ's
initial decision is subject to review by the FERC.
On October 4, 1995, the FERC issued an order on the tariff issues
addressed at a technical conference held pursuant to the FERC's March 31 order.
The FERC required that Transco make certain tariff changes consistent with the
October 4 order (most of which were agreed to by Transco at the technical
conference). Among other things, the October 4 order directed that Transco
modify its tariff concerning shipper access to secondary receipt points. On May
29, 1996, the FERC accepted Transco's filing effective June 1, 1996 to implement
secondary receipt point access, but also required Transco to show cause why firm
backhauls should not be required on Transco's system. Following a technical
conference on the issue in Docket No. RP96-211, the FERC required Transco to
offer a firm backhaul service which Transco implemented, subject to further FERC
action, on January 1, 1997.
RATE OF RETURN CALCULATION As noted above, on August 1, 1997, the FERC
issued an order addressing, among other things, the authorized rate of return
for Transco's 1995 rate case (Docket No. RP95-197). In that order, the FERC
continued its practice of utilizing a methodology for calculating rates of
return that incorporates a long-term growth rate component. The long-term growth
rate component used by the FERC is a projection of U.S. gross domestic product
growth rates. Generally, calculating rates of return utilizing a methodology
which includes a long-term growth rate component results in rates of return that
are lower than they would be if the long-term growth rate component were not
included in the methodology. On January 30, 1998, the FERC convened a public
conference to explore, among other things, possible modifications to the FERC's
rate of return methodology. As discussed above, in its July 29, 1998 order on
rehearing of its August 1, 1997 order, the FERC modified its rate of return
methodology with regard to the weight to be given to the long-term growth
component. Under its previous methodology, the FERC averaged the short and
long-term growth projections, thereby giving them equal weight. In its July 29,
1998 order, the FERC changed its policy and will accord the short-term
projection a two-thirds weighting and the long-term projection a one-third
weighting. The FERC has determined that the short-term projection is more
reliable and should be given more weight, but that the long-term projection
should be given some weight in order to normalize any distortions that may be
reflected in the short-term data. The revised weighting to be reflected in the
FERC's methodology should lead to somewhat higher rates of return on equity than
were obtained under the previous methodology. In addition, the FERC will now
permit parties to argue that a pipeline's return on equity be established at any
point within the range of returns developed under the two-stage methodology
(rather than only at the high, mid or low point in the range) based on the
pipeline's relative level of risk. In that regard, when assessing a pipeline's
relative risk, the FERC determined that it will not lower a pipeline's return on
equity if its lower risk is the result of the pipeline's own efficiency, but
will focus on risks faced by the pipeline that are attributable to circumstances
outside the control of the pipeline's management.
PRODUCTION AREA RATE DESIGN (DOCKET NOS. RP92-137, RP93-136 AND RP98-381)
Transco has expressed to the FERC concerns that inconsistent treatment under
Order 636 of Transco and its competitor pipelines with regard to rate design and
cost allocation issues in the production area may result in rates which could
make Transco less competitive, both in terms of production-area and long-haul
transportation. A hearing before an ALJ (Docket Nos. RP92-137 and RP93-136),
dealing with, among other things, Transco's production-area rate design,
concluded in June 1994. On July 19, 1995, the ALJ issued an initial decision
finding that Transco's proposed production area rate design, and its existing
use of a system wide cost of service and allocation of firm capacity in the
production area are unjust and unreasonable. The ALJ therefore recommended that
Transco divide its costs between its production area and market area, and permit
its customers to renominate their firm entitlements.
On July 3, 1996, the FERC issued an order on review of the ALJ's initial
decision concerning, among other things, Transco's production area rate design.
The FERC rejected the ALJ's recommendations that Transco divide its costs
between its production area and market area, and permit its customers to
renominate their firm entitlements. The FERC also concluded that Transco may
offer firm service on its supply laterals through an open season and eliminate
its IT feeder service in favor of an interruptible service option that does not
afford shippers feeding firm transportation on Transco's production area
mainline a priority over other interruptible transportation. On December 18,
1996, the FERC denied rehearing of its July 3, 1996 Order. Several parties,
including Transco, have filed petitions for review in the D.C. Circuit Court of
the FERC's orders addressing production area rate design issues. On November 4,
1998, the D.C. Circuit Court issued an order granting the FERC's motion to hold
these appeals in abeyance pending the outcome of the proceedings in Transco's
Docket No. RP98-381 (see below).
On August 31, 1998, Transco made a limited NGA Section 4 filing with the
FERC to implement firm transportation service on Transco's production area
supply laterals in accordance with the option authorized by the FERC's July 3
and December 18, 1996 orders. The filing (Docket No. RP98-381) was protested,
and on September 30, 1998, the FERC accepted the filing and suspended its
effectiveness until March 1, 1999, subject to further proceedings. On February
24, 1999, the FERC issued an order rejecting the filing, finding that Transco's
proposal, as filed, conflicts with certain FERC policies. The FERC indicated
that Transco could pursue implementation of firm service on Transco's production
area supply laterals to the extent the service is structured in a way that
conforms with those policies.
GATHERING FACILITIES SPIN-DOWN ORDER (DOCKET NOS. CP96-206-000 AND
CP96-207-000) In February 1996, Transco filed an application with the FERC for
an order authorizing the abandonment of certain facilities located onshore and
offshore in Texas, Louisiana and Mississippi by conveyance to Williams Gas
Processing - Gulf Coast Company (Gas Processing), an affiliate of Transco. The
net book value recorded by Transco at December 31, 1998 of the facilities was
approximately $504 million. Estimated operating income recorded by Transco for
the year ended December 31, 1998 associated with the facilities was $15 million;
however, such operating income may not be representative of the effects of the
spin-down on Transco's future operating income due to various factors, including
future regulatory actions. Concurrently, Gas Processing filed a petition for
declaratory order requesting a determination that its gathering services and
rates be exempt from FERC regulation under the Natural Gas Act. On September 25,
1996, the FERC issued an order dismissing Transco's application and Gas
Processing's petition for declaratory order. On October 25, 1996, Transco and
Gas Processing filed a joint request for rehearing of the FERC's September 25
order, and in August 1997 filed a request that rehearing be expedited. 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, 1998 of the Tilden/McMullen facilities was approximately $69
million, the entirety of which is included in the $504 million et 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 on April 22, 1999. Transco will review the NOPR and NOI and provide
comments within the required time period.
LEGAL PROCEEDINGS
ROYALTY CLAIMS AND LITIGATION In connection with Transco's renegotiations
with producers to resolve take-or-pay and other contract claims and to amend gas
purchase contracts, Transco entered into certain settlements which may require
the indemnification by Transco of certain claims for additional royalties which
the producers may be required to pay as a result of such settlements. Transco
has been made aware of demands on producers for additional royalties and such
producers may receive other demands which could result in claims against Transco
pursuant to the indemnification provisions in their respective settlements.
Indemnification for royalties will depend on, among other things, the specific
lease provisions between the producer and the lessor and the terms of the
settlement between the producer and Transco.
On March 15, 1994, a lawsuit was filed in the 189th Judicial District
Court of Harris County, Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line
Corporation). In this lawsuit, the plaintiff has claimed approximately $23
million, including interest and attorneys' fees for reimbursements of settlement
amounts paid to royalty owners. On October 16, 1997, a jury verdict in this case
found that Transco was required to pay Texaco damages of $14.5 million plus
$3.75 million in attorney's fees. The trial judge initially deferred entering
judgment and directed the parties to participate in mediation of this matter.
Following mediation in 1998, which did not result in a resolution of this
matter, the trial judge entered judgment consistent with the jury verdict and
also awarded prejudgment interest of $5.0 million. Transco is appealing the
verdict and continues to believe that it has meritorious defenses to Texaco's
claims.
In addition, Transco was notified by Freeport-McMoRan, Inc. (FMP) in
February 1995, that pursuant to a settlement with the Mineral Management Service
(MMS) of the MMS' claim for royalties due under gas contracts between Transco
and FMP which had been modified pursuant to settlement agreements made in 1986
and 1989, FMP was asserting a claim for indemnification of approximately $6
million, including interest, under the excess royalty provisions of those
settlement agreements. On or about March 30, 1995, FMP filed a petition for
specific performance seeking recovery against Transco for the sums claimed under
the settlement agreements. In May 1998, FMP filed a motion for summary judgement
which Transco opposed. In September 1998, the court granted FMP's motion finding
that at least a portion of FMP's payment to the MMS was subject to
indemnification. Transco has appealed the court's ruling.
In August 1996, a lawsuit was filed against Transco and certain Transco
affiliates by a royalty owner in a gas producing field in Brooks County, Texas
alleging a claim for incorrect computation of royalties. Transco is alleged to
have purchased gas from the field. Transco has filed an answer denying liability
for the claim.
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly owned subsidiaries including Transco. Mr. Grynberg has
also filed claims against approximately 300 other energy companies and alleges
that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought is an unspecified
amount of royalties allegedly not paid to the federal government, treble
damages, a civil penalty, attorneys' fees, and costs.
ENVIRONMENTAL MATTERS
Transco is subject to extensive federal, state and local environmental
laws and regulations which affect Transco's operations related to the
construction and operation of its pipeline facilities. Appropriate governmental
authorities may enforce these laws and regulations with a variety of civil and
criminal enforcement measures, including monetary penalties, assessment and
remediation requirements and injunctions as to future compliance. Transco's use
and disposal of hazardous materials are subject to the requirements of the
federal Toxic Substances Control Act (TSCA), the federal Resource Conservation
and Recovery Act (RCRA) and comparable state statutes. The Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA), also known as
"Superfund," imposes liability, without regard to fault or the legality of the
original act, for release of a "hazardous substance" into the environment.
Because these laws and regulations change from time to time, practices that have
been acceptable to the industry and to the regulators have to be changed and
assessment and monitoring have to be undertaken to determine whether those
practices have damaged the environment and whether remediation is required.
Since 1989, Transco has had studies underway to test certain of its facilities
for the presence of toxic and hazardous substances to determine to what extent,
if any, remediation may be necessary. On the basis of the findings to date,
Transco estimates that environmental assessment and remediation costs that will
be incurred over the next five years under TSCA, RCRA, CERCLA and comparable
state statutes will total approximately $25 million to $30 million, measured on
an undiscounted basis. This estimate depends upon a number of assumptions
concerning the scope of remediation that will be required at certain locations
and the cost of remedial measures to be undertaken. Transco is continuing to
conduct environmental assessments and is implementing a variety of remedial
measures that may result in increases or decreases in the total estimated costs.
At December 31, 1998, Transco had a reserve of approximately $25 million for
these estimated costs that has been recorded in current liabilities and other
long-term liabilities in the accompanying Consolidated Balance Sheet.
Transco considers environmental assessment and remediation costs and costs
associated with compliance with environmental standards to be recoverable
through rates, since they are prudent costs incurred in the ordinary course of
business. To date, Transco has been permitted recovery of environmental costs
incurred, and it is Transco's intent to continue seeking recovery of such costs,
as incurred, through rate filings. Therefore, these estimated costs of
environmental assessment and remediation have been recorded as regulatory assets
in the accompanying Consolidated Balance Sheet.
Transco has used lubricating oils containing polychlorinated biphenyls
(PCBs) and, although the use of such oils was discontinued in the 1970s, has
discovered residual PCB contamination in equipment and soils at certain gas
compressor station sites. Transco has worked closely with the U. S.
Environmental Protection Agency (EPA) and state regulatory authorities regarding
PCB issues, and has a program to assess and remediate such conditions where they
exist, the costs of which are included in the $25 million to $30 million range
discussed above. Civil penalties have been assessed by the EPA against other
major pipeline companies for the alleged improper use and disposal of PCBs.
Transco has received and responded to information requests from the EPA.
Although penalties have not presently been asserted, no assurances can be given
that the EPA will not seek such penalties in the future.
Transco has been identified as a potentially responsible party (PRP) at
various Superfund and state waste disposal sites. Based on present volumetric
estimates and other factors, Transco's estimated aggregate exposure for
remediation of these sites is less than $500,000. The estimated remediation
costs for all such sites have been included in Transco's environmental reserve
discussed above. Liability under CERCLA (and applicable state law) can be joint
and several with other PRPs. Although volumetric allocation is a factor in
assessing liability, it is not necessarily determinative; thus, the ultimate
liability could be substantially greater than the amounts described above.
Transco is also subject to the federal Clean Air Act and to the federal
Clean Air Act Amendments of 1990 (1990 Amendments), which added significantly to
the existing requirements established by the federal Clean Air Act. The 1990
Amendments required that the EPA issue new regulations, mainly related to mobile
sources, air toxics, ozone non-attainment areas and acid rain. During the last
few years Transco has been acquiring all necessary permits and installing new
emission control devices required for new or modified facilities in areas
designated as attainment by EPA and is continuing that process. Transco operates
facilities in some areas of the country currently designated as non-attainment
and it anticipates that by the end of the year 2000 the EPA may designate
additional new non-attainment areas which might impact Transco's operations.
Pursuant to non-attainment area requirements of the 1990 Amendments, and two
recently promulgated EPA rules designed to mitigate the migration of
ground-level ozone (NOx) in 22 eastern states, Transco is planning installation
of new air pollution controls on existing sources at certain facilities in order
to achieve attainment of air quality standards, including NOx emission
reductions, in regions where they are not currently achieved, and anticipates
that additional facilities may be subject to increased controls within five
years. For many of these facilities, Transco is completing installation of more
cost effective, innovative compressor engine control designs developed by the
Company, and it is therefore not possible to precisely determine the control
costs pending completion of performance testing and final state approval. The
control additions described above, required to comply with current federal Clean
Air Act requirements, the 1990 Amendments, and the individual State
Implementation Plans (SIP) for NOx reductions, are estimated to cost in the
range of $140 million to $180 million by May 2003 and will be recorded as
additions to property, plant and equipment as the facilities are added. If the
EPA designates additional new non-attainment areas in 2000 which impact
Transco's operations, the cost of additions to property, plant and equipment is
expected to increase, but Transco is unable at this time to estimate with any
certainty the cost of additions that may be required although it is believed
that some of those costs are included in the ranges discussed above.
Additionally, the EPA is expected to promulgate new rules regarding Hazardous
Air Pollutants (HAPs) by November 2000 which will impose controls in addition to
the controls described above. Transco at this time cannot predict with any
certainty the exact cost associated with the installation of those controls. The
mandated compliance deadline for the HAP controls has been set for November
2003. Transco considers costs associated with compliance with the federal Clean
Air Act and the 1990 Amendments to be prudent costs incurred in the ordinary
course of business and, therefore, recoverable through its rates.
SUMMARY
While no assurances may be given, Transco does not believe that the
ultimate resolution of the foregoing matters, 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.
OTHER COMMITMENTS
COMMITMENTS FOR CONSTRUCTION Transco has commitments for construction and
acquisition of property, plant and equipment of approximately $135 million at
December 31, 1998 of which the majority relates to construction materials for
pipeline expansion projects.
EQUITY COMMITMENTS Transco and certain of its subsidiaries have equity
funding commitments related to investments in two joint ventures, Pine Needle
LNG Company, LLC and Cardinal Extension Company, LLC, of approximately $19
million and $22 million, respectively, at December 31, 1998.
<PAGE>
4. DEBT, FINANCING ARRANGEMENTS AND LEASES
LONG-TERM DEBT At December 31, 1998 and 1997, long-term debt issues were
outstanding as follows (in thousands):
1998 1997
------------------ ------------------
Debentures:
7.08% due 2026............. $ 200,000 $ 200,000
7.25% due 2026............. 200,000 200,000
------------------ ------------------
Total debentures........ 400,000 400,000
------------------ ------------------
Notes:
8-7/8% due 2002............ 125,000 125,000
Variable rate due 2002..... 150,000 150,000
6-1/8% due 2005............ 200,000 -
6-1/4% due 2008............ 100,000 -
Credit Agreement........... - 160,000
------------------ ------------------
Total notes............. 575,000 435,000
----------------- ------------------
Total long-term debt issues...... 975,000 835,000
Unamortized debt premium... 768 2,832
Current maturities......... - -
------------------ ------------------
Total long-term debt,
less current maturities.... $ 975,768 $ 837,832
================== ==================
Sinking fund or prepayment requirements applicable to long-term debt
outstanding at December 31, 1998 are as follows (in thousands):
2001:
7.08% Debentures........... $ 200,000
==============
2002:
8-7/8% Note................ $ 125,000
Variable rate note......... 150,000
==============
Total................... $ 275,000
==============
There are no sinking fund requirements applicable to long-term debt
outstanding for the years 1999, 2000 and 2003.
No property is pledged as collateral under any of the long-term debt
issues.
The 7.08% Debentures mature on July 15, 2026, but are subject to
redemption, at anytime after July 15, 2001, at Transco's option, in whole or
part, at a specified redemption price, plus accrued and unpaid interest to the
date of redemption. The holder of each 7.08% Debenture may elect between May 15,
2001 and June 15, 2001 to have such 7.08% Debenture repaid on July 15, 2001 at
100% of the principal amount. Because of this option available to the holder,
the 7.08% Debentures have been included in the sinking fund or prepayment
requirements for the year 2001 in the table above. The 7.08% Debentures have no
sinking fund provisions.
On July 31, 1997, Transco entered into a $150 million, five-year bank
agreement, with variable interest rates based on the London Interbank Offered
Rate.
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 December 31, 1998, Transco had
no outstanding borrowings under this agreement.
In September 1997, Williams and certain of its subsidiaries, including
Transco, initiated a restructuring of its debt portfolio. On October 8, 1997,
Transco borrowed $160 million under the Credit Agreement to fund the redemption
of its entire $150 million issue of 9-1/8% Debentures originally due February 1,
2017, at a total redemption price of $156.4 million, plus accrued interest. As a
result of the revaluation of Transco's debt at the time of its acquisition by
Williams in 1995, Transco recorded an extraordinary gain of $4.6 million ($2.9
million, net of tax) from the early redemption of the 9-1/8% Debentures. The
$6.4 million premium will be amortized over the remaining original life of the
debentures based on FERC accounting requirements.
In November 1997, Transco entered into interest-rate forward contracts to
lock in underlying treasury rates on anticipated long-term debt issuances. The
contracts were terminated in January 1998 and the settlement amount of $9.8
million was deferred in Other Assets in the accompanying Consolidated Balance
Sheet and is being amortized as an adjustment to interest expense over the terms
of the following described notes. 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 effective interest rates for the new issues, including the effects
of the forward contract settlements, are 6.225% and 6.323%, respectively. 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 an aggregate of $40 million. Interest rates vary
with current market conditions based on the applicable bank rate at the time of
the borrowings. During 1998 and 1997, Transco had no outstanding borrowings
under this facility.
RESTRICTIVE COVENANTS At December 31, 1998, none of Transco's debt
instruments restrict the amount of dividends distributable.
SALE OF RECEIVABLES Transco is a party to an agreement that expires on
January 28, 2000 pursuant to which Transco can sell to an investor up to $100
million of undivided interest in certain of its trade receivables. At December
31, 1998 and 1997, interests in these receivables held by the investor were $87
million and $100 million, respectively.
LEASE OBLIGATIONS Prior to December 23, 1998, Transco had a 20-year lease
agreement with Transco Tower Limited for its headquarters building (Transco
Tower) which expires in 2004 (Transco Tower lease). On December 23, 1998,
Transco assigned and transferred to Laughton, LLC, (Laughton), an affiliate of
Transco, all its right, title and interest in the Transco Tower lease and
entered into an agreement to sublease the premises from Laughton through March
29, 2003 (Transco Tower sublease). All other terms of the Transco Tower lease
are incorporated into the Transco Tower sublease, including sublease agreements
between Transco and other parties that also expire in 2004.
The future minimum lease payments under Transco's various operating
leases, including the Transco Tower sublease, net of future minimum sublease
receipts under Transco's existing sublease agreements through March 29, 2003,
are as follows (in thousands):
Operating Leases
-------------------------------------------
Transco Tower Other Leases Total
------------- ------------ ------------
1999...............................$ 23,458 $ 3,709 $ 27,167
2000............................... 22,413 3,192 25,605
2001............................... 23,963 3,088 27,051
2002............................... 23,918 3,088 27,006
2003............................... 5,978 2,606 8,584
Thereafter......................... - 7,388 7,388
------------ ------------ -----------
Total net minimum obligations...$ 99,730 $ 23,071 $ 122,801
============ ============ ===========
The allocation of the Williams purchase price to the assets and
liabilities of Transco based on their estimated fair values resulted in the
recording in 1995 of a liability of $53.0 million for the estimated unused space
and the amount that Transco's Transco Tower lease obligation was in excess of
fair value. The $53.0 million liability is being amortized over the term of the
lease.
Transco's lease expense was $17.4 million in 1998, $18.0 million in 1997
and $17.0 million in 1996.
5. PREFERRED STOCK
Transco has authorized 10,000,000 shares of cumulative first preferred
stock without par value, of which none were outstanding at December 31, 1998 or
1997. Transco has authorized 2,000,000 shares of cumulative second preferred
stock without par value. None of the second preferred stock had been issued at
December 31, 1998.
<PAGE>
6. EMPLOYEE BENEFIT PLANS
PENSION PLAN The following table presents the changes in benefit obligations and
plan assets for pension benefits for the years 1998 and 1997. The table also
presents a reconciliation of the funded status of these benefits to the amount
recognized in the Consolidated Balance Sheet as of December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................... $ 237,086 $ 197,787
Service cost.............................................. 7,055 6,212
Interest cost............................................. 16,499 15,808
Amendments................................................ (35,014) -
Actuarial loss............................................ 35,521 25,752
Benefits paid............................................. (16,758) (8,473)
---------------- ----------------
Benefit obligation at end of year......................... 244,389 237,086
---------------- ----------------
Change in plan assets:
Fair value of plan assets at beginning of year............ 209,396 179,462
Actual return on plan assets.............................. 24,713 27,769
Employer contributions.................................... 7,882 10,638
Benefits paid............................................. (16,758) (8,473)
---------------- ----------------
Fair value of plan assets at end of year.................. 225,233 209,396
---------------- ----------------
Funded status................................................. (19,156) (27,690)
Unrecognized net actuarial loss............................... 34,135 5,672
Unrecognized prior service credit............................. (36,576) (4,401)
---------------- ----------------
Accrued benefit cost.......................................... $ (21,597) $ (26,419)
================ ================
</TABLE>
The allocation of the purchase price to the assets and liabilities of
Transco and TEC based on their estimated fair values resulted in the recording
of an additional pension liability of $19.2 million, $17.3 million of which was
recorded by Transco, representing the amount that the projected benefit
obligation exceeded the plan assets. The amount of pension costs deferred at
both December 31, 1998 and 1997 was $6.9 million and is expected to be recovered
through future rates over the average remaining service period for active
employees.
The following table presents the net pension expense for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Components of net periodic pension expense
Service cost....................................... $ 7,055 $ 6,212 $ 5,847
Interest cost...................................... 16,499 15,808 14,240
Expected return on plan assets..................... (18,991) (16,487) (15,341)
Amortization of prior service credit............... (2,839) (373) (373)
Recognized net actuarial loss...................... 1,790 77 -
Regulatory asset deferral.......................... (454) (47) (472)
----------- ----------- ------------
Net periodic pension expense....................... $ 3,060 $ 5,190 $ 3,901
=========== =========== ============
</TABLE>
<PAGE>
The following table presents the weighted-average assumptions used to
determine the projected benefit obligation for the years 1998 and 1997:
1998 1997
---------- ----------
Weighted-average assumptions as of December 31
Discount rate.................................. 7.0% 7.25%
Expected return on plan assets................. 10% 10%
Rate of compensation increase.................. 5% 5%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Transco participates in a plan
with Williams and its subsidiaries that provides certain health care and life
insurance benefits for retired employees of Transco that were hired prior to
January 1, 1996. The accounting for the plan anticipates future cost-sharing
changes to the written plan that are consistent with Williams' expressed intent
to increase the retiree contribution rate annually, generally in line with
health care cost increases. Cash contributions to the medical trust totaled
$10.3 million in 1998, $6.8 million in 1997 and $12.2 million in 1996. Although
the actuarially determined cash contributions for each of the three years were
comparable, the timing of the actual contributions caused a variance between
years.
The allocation of the purchase price to the assets and liabilities of
Transco and TEC based on their estimated fair values resulted in the recording
of a postretirement benefits liability of $86.9 million representing the amount
that the accumulated postretirement benefit obligation exceeded the plan assets.
The amounts of postretirement benefits costs deferred as a regulatory asset at
December 31, 1998 and 1997 were $54.7 million and $60.7 million, respectively,
and are expected to be recovered through future rates over the remaining
amortization period of the unrecognized transition obligation.
DEFINED-CONTRIBUTION PLAN Transco employees participate in a Williams
defined-contribution plan. Compensation expense of $4.6 million, $3.6 million
and $4.5 million was recognized by Transco in 1998, 1997 and 1996, respectively.
EMPLOYEE STOCK-BASED AWARDS Williams has several plans providing for
common stock-based awards to its employees and employees of its subsidiaries.
The plans permit the granting of various types of awards including, but not
limited to, stock options, stock appreciation rights, restricted stock and
deferred stock. Awards may be granted for no consideration other than prior and
future services or based on certain financial performance targets being
achieved. The purchase price per share for stock options may not be less than
the market price of the underlying stock on the date of grant. Stock options
generally become exercisable after five years, subject to accelerated vesting if
certain future stock prices are achieved. Stock options expire ten years after
grant.
Williams' employee stock-based awards are accounted for under APBO No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Williams' fixed plan common stock options do not result in compensation expense,
because the exercise price of the stock options equals the market price of the
underlying stock on the date of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that
companies who continue to apply APBO No. 25 disclose pro forma net income
assuming that the fair-value method in SFAS No. 123 had been applied in
measuring compensation cost. Pro forma net income for Transco, beginning with
1996 employee stock-based awards was $133.7 million, $109.4 million and $95.3
million for 1998, 1997 and 1996, respectively. Reported net income was $135.7
million, $111.4 million and $95.5 million for 1998, 1997 and 1996, respectively.
Pro forma amounts for 1998 reflect the remaining total compensation expense from
the awards made in 1997, as these awards fully vested in 1998 as a result of the
accelerated vesting provisions. Pro forma amounts for 1997 reflect the remaining
total compensation expense from the awards made in 1996, as these awards fully
vested in 1997 as a result of the accelerated vesting provisions. Since
compensation expense from stock options is recognized over the future years'
vesting period, and additional awards generally are made each year, pro forma
amounts may not be representative of future years' amounts.
The following summary reflects stock options related to 1998, 1997 and 1996
(options in thousands):
1998 1997 1996
------ ------ ------
Options granted.......................... 284 546 861
Weighted-average grant date fair value...$8.19 $5.98 $3.92
Options outstanding - December 31........2,055 1,987 1,714
Options exercisable - December 31........1,772 1,465 948
The fair value of the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: expected life of the stock options of approximately five years;
volatility of the expected market price of Williams common stock of 25 percent
(23 percent in 1997 and 24 percent in 1996); risk-free interest rate of 5.3
percent (6.1 percent in 1997 and 6.2 percent in 1996); and a dividend yield of
2.0 percent (2.4 percent in 1997 and 3 percent in 1996).
7. INCOME TAXES
Following is a summary of the provision for income taxes for 1998, 1997
and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Federal:
Current................................. $ 75,422 $ 68,632 $ 88,927
Deferred................................ (5,056) (3,041) (37,613)
------------- -------------- -------------
70,366 65,591 51,314
------------- -------------- -------------
State and municipal:
Current................................. 9,588 4,991 13,905
Deferred................................ (673) (3,988) (6,606)
------------- -------------- -------------
8,915 1,003 7,299
------------- -------------- -------------
Provision for income taxes................... $ 79,281 $ 66,594 $ 58,613
============= ============== =============
</TABLE>
Following is a reconciliation of the provision for income taxes at the
federal statutory rate to the provision for income taxes (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Taxes computed by applying the federal statutory rate. $ 75,241 $ 61,293 $ 53,955
Reclassification of state liability................ - 3,761 -
State and municipal income taxes................... 5,795 652 4,744
Other, net......................................... (1,755) 888 (86)
-------------- ------------- --------------
Provision for income taxes......................... $ 79,281 $ 66,594 $ 58,613
============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
Significant components of deferred income tax assets and liabilities as of December 31, 1998 and
1997 are as follows (in thousands):
1998 1997
------------- -------------
Deferred tax liabilities
- -------------------------
<S> <C> <C>
Property, plant and equipment.................................... $ 883,715 $ 878,142
Postretirement benefits.......................................... 23,482 23,482
Other ........................................................... 16,678 14,976
------------- -------------
Total deferred tax liabilities................................... 923,875 916,600
------------- -------------
Deferred tax assets
- ---------------------
Rate refunds..................................................... 93,624 78,464
Accrued liabilities.............................................. 47,017 52,540
Deferred revenues................................................ 6,547 2,945
State deferred taxes............................................. 29,979 30,215
------------- -------------
Total deferred tax assets........................................ 177,167 164,164
------------- -------------
Net deferred tax liabilities..................................... $ 746,708 $ 752,436
============= =============
</TABLE>
<PAGE>
8. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount and estimated fair
values of Transco's financial instruments as of December 31, 1998 and 1997 are
as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Amount Fair Value
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term financial assets. $ 417,634 $ 282,775 $ 417,634 $ 282,775
Financial liabilities:
Long-term debt....................... 975,768 837,832 991,128 851,760
</TABLE>
For cash and short-term financial assets (advances to affiliates), the
carrying amount is a reasonable estimate of fair value due to the short maturity
of those instruments.
For Transco's publicly traded long-term debt, estimated fair value is
based on quoted market prices at year-end. For Transco's private debt, all at
variable interest rates, estimated fair value is equivalent to the carrying
amount.
CREDIT AND MARKET RISK As of December 31, 1998 and 1997, Transco had trade
receivables of $14 million and $23 million, respectively. These trade
receivables primarily are due from local distribution companies and other
pipeline companies predominantly located in the eastern United States. Transco's
credit risk exposure in the event of nonperformance by the other parties is
limited to the face value of the receivables. No collateral is required on these
receivables. Transco has not historically experienced significant credit losses
in connection with its trade receivables.
Transco sells, with limited recourse, certain trade receivables. The
aggregate limit under the receivables facilities was $100 million at December
31, 1998 and 1997. At December 31, 1998 and 1997, $87 million and $100 million,
respectively, of such receivables had been sold. Based on amounts outstanding at
December 31, 1998 and 1997 the maximum contractual credit loss under these
arrangements is approximately $13 million and $15 million, respectively, but the
likelihood of loss is considered to be remote.
9. TRANSACTIONS WITH MAJOR CUSTOMERS AND AFFILIATES
MAJOR CUSTOMERS The sales, transportation and storage revenues received
from Public Service Electric and Gas Company and Consolidated Edison Company of
New York, Inc., the major customers of Transco, were $119.2 million and $113.9
million in 1998, $139.3 million and $131.8 million in 1997 and $158.1 million
and $141.4 million in 1996, respectively.
AFFILIATES Included in Transco's sales and transportation revenues for
1998, 1997, and 1996 are revenues applicable to sales and transportation for
affiliates of $81.9 million, $79.2 million and $124.3 million, respectively. The
rates charged to provide sales and transportation services to affiliates are the
same as those that are charged to similarly-situated nonaffiliated customers.
Through an agency agreement with Transco, WESCO manages Transco's
jurisdictional merchant gas sales. For the years ended December 31, 1998, 1997
and 1996, included in Transco's cost of sales is $31.0 million, $31.4 million
and $34.7 million, respectively, representing agency fees billed to Transco by
WESCO under the agency agreement.
Included in Transco's cost of sales for 1998, 1997 and 1996 is purchased
gas cost from affiliates of $317.0 million, $405.1 million and $466.8 million,
respectively. All gas purchases are made at market or contract prices.
Transco has long-term gas purchase contracts containing either fixed
prices or variable prices that are at a significant premium to the estimated
market price. However, due to contract expirations and estimated deliverability
declines, Transco's estimated purchase commitments under such gas purchase
contracts are not material to Transco's total gas purchases. Furthermore,
through the agency agreement with Transco, WESCO has assumed management of
Transco's merchant sales service and, as Transco's agent, is at risk for any
above-spot-market gas costs that it may incur.
Also included in Transco's cost of transportation is transportation
expense of $4.1 million in 1998, $4.3 million in 1997 and $17.5 million in 1996
applicable to the transportation of gas by Texas Gas Transmission Corporation
(Texas Gas), an affiliate of Transco. Texas Gas is regulated by the FERC and its
transportation rates charged to Transco are approved by the FERC.
Williams has a policy of charging subsidiary companies for management
services provided by the parent company and other affiliated companies. Included
in Transco's administrative and general expenses for 1998, 1997 and 1996 were
$15.0 million, $14.7 million and $14.5 million, respectively, for such corporate
expenses charged by Williams. Management considers the cost of these services to
be reasonable.
Transco has an operating agreement with Williams Field Services (WFS)
whereby WFS, as Transco's agent, assumed operational control of Transco's gas
gathering facilities. Included in Transco's operation and maintenance expenses
for 1998, 1997 and 1996, are $31.4 million, $37.3 million and $35.6 million,
respectively, charged by WFS to operate Transco's gas gathering facilities.
10. QUARTERLY INFORMATION (UNAUDITED)
The following summarizes selected quarterly financial data for 1998 and
1997 (in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
------------- ------------- ------------- -------------
1998
<S> <C> <C> <C> <C>
Operating revenues.................. $ 339,371 $ 334,246 $ 324,135 $ 327,384
Operating expenses.................. 267,416 263,981 263,541 256,461
------------- ------------- ------------- -------------
Operating income.................... 71,955 70,265 60,594 70,923
Interest expense.................... 22,605 22,784 23,769 22,497
Other (income) and deductions, net.. (8,031) (9,580) (10,791) (4,491)
------------- ------------- ------------- -------------
Income before income taxes.......... 57,381 57,061 47,616 52,917
Provision for income taxes.......... 21,791 21,701 18,000 17,789
------------- ------------- ------------- -------------
Net income.......................... $ 35,590 $ 35,360 $ 29,616 $ 35,128
============= ============= ============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
------------- ------------- ------------- -------------
1997
<S> <C> <C> <C> <C>
Operating revenues.................. $ 354,514 $ 340,098 $ 349,454 $ 399,233
Operating expenses.................. 294,350 287,345 294,166 335,471
------------- ------------- ------------- -------------
Operating income.................... 60,164 52,753 55,288 63,762
Interest expense.................... 17,190 16,125 17,935 20,389
Other (income) and deductions, net.. (2,362) (2,044) (4,584) (5,804)
------------- ------------- ------------- -------------
Income before income taxes and
extraordinary item................ 45,336 38,672 41,937 49,177
Provision for income taxes.......... 17,665 14,917 14,923 19,089
------------- ------------- ------------- -------------
Income before extraordinary item.... 27,671 23,755 27,014 30,088
Extraordinary item - net gain on
reacquired debt................... - - - 2,860
------------- ------------- ------------- -------------
Net income.......................... $ 27,671 $ 23,755 $ 27,014 $ 32,948
============= ============= ============= =============
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Since Transco meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K, this information is omitted.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
PAGE
REFERENCE TO
1998 10-K
------------
A. INDEX
1. FINANCIAL STATEMENTS:
Report of Independent Auditors - Ernst & Young LLP 26
Consolidated Balance Sheet as of December 31,
1998 and 1997 27-28
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997 and 1996 29
Consolidated Statement of Common Stockholder's
Equity for the Years Ended December 31, 1998, 1997 and 1996 30
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1998, 1997 and 1996 31-32
Notes to Consolidated Financial Statements 33-56
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES:
The following schedules are omitted because of the absence of the
conditions under which they are required:
I, II, III, IV, and V.
3. EXHIBITS:
The following instruments are included as exhibits to this report.
Those exhibits below incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. If no
parenthetical appears after an exhibit, copies of the instrument have
been included herewith.
<PAGE>
(2) PLAN OF ACQUISITION, REORGANIZATION ARRANGEMENT, LIQUIDATION OR
SUCCESSION
- Stock Option Agreement dated as of December 12, 1994 by and
between The Williams Companies, Inc. and Transco Energy Company.
(Exhibit 3 to Transco Energy Company Schedule 14D-9 Commission
File Number 005-19963)
(3) ARTICLES OF INCORPORATION AND BY-LAWS
- 1 Second Restated Certificate of Incorporation, as amended, of
Transco. (Exhibit 3.1 to Transco Form 8-K dated January 23,
1987 Commission File Number 1-7584)
a) Certificate of Amendment, dated July 30, 1992, of the Second
Restated Certificate of Incorporation (Exhibit (10)-17(a) to
Transco Energy Company Form 10-K for 1993 Commission File
Number 1-7513
b) Certificate of Amendment, dated December 22, 1986, of the
Second Restated Certificate of Incorporation (Exhibit (10)-
17(b) to Transco Energy Company Form 10-K for 1993
Commission File Number 1-7513)
c) Certificate of Amendment, dated August 5, 1987, of the
Second Restated Certificate of Incorporation (Exhibit (10)-
17(c) to Transco Energy Company Form 10-K for 1993
Commission File Number 1-7513)
- 2 By-Laws of Transco, as Amended and Restated May 2, 1995
(Exhibit (3)-2 to Transco Form 10-K for 1995 Commission File
Number 1-7584)
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES
- 1 Indenture dated September 15, 1992 between Transco and the
Bank of New York, as Trustee (Exhibit 4.2 to Transco Form 8-K
dated September 17, 1992 Commission File Number 1-7584)
- 2 Indenture dated July 15, 1996 between Transco and Citibank,
N.A., as Trustee (Exhibit 4.1 to Transco Form S-3 dated April
2, 1996 Transco Registration Statement No. 333-2155)
- 3 Indenture dated January 16, 1998 between Transco and
Citibank, N.A., as Trustee (Exhibit 4.1 to Transco Form S-3
dated September 8, 1997 Transco Registration Statement No.
333-27311)
- 4 Amendment dated January 26, 1999, to Second Amended and
Restated Credit Agreement dated as of July 23, 1997 by and
among Transco, The Williams Companies, Texas Gas Transmission
Corporation, Northwest Pipeline Corporation, WilTel
Communications, LLC, Williams Holdings of Delaware, Inc. and
Citibank N.A. as agent and the Banks named therein (Exhibit
4(c) to The Williams Companies Form 10-K for 1998 Commission
File Number 1-4174)
(10) MATERIAL CONTRACTS
- 1 Transco Energy Company Tran$tock Employee Stock Ownership Plan
(Transco Energy Company Registration Statement No. 33-11721)
- 2 Lease Agreement, dated October 5, 1981, between Transco and
Post Oak/Alabama, a Texas partnership. (Exhibit (10)-7 to
Transco Energy Company Form 10-K for 1989 Commission File
Number 1-7513)
(21) SUBSIDIARIES OF THE REGISTRANT
(23) CONSENT OF INDEPENDENT AUDITORS
(24) POWER OF ATTORNEY WITH CERTIFIED RESOLUTION
(27) FINANCIAL DATA SCHEDULE
4. REPORTS ON FORM 8-K:
None.
<PAGE>
SIGNATURES
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, on this 29th day of
March, 1999.
TRANSCONTINENTAL GAS PIPE
LINE CORPORATION
(Registrant)
By: /s/ JAMES C. BOURNE
--------------------------------------------------
James C. Bourne
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on this 29th day of March, 1999, by the following
persons on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ KEITH E. BAILEY * Chairman of the Board
----------------------
Keith E. Bailey
/s/ BRIAN E. O'NEILL * Director, President and Chief Executive Officer
-----------------------
Brian E. O'Neill (Principal Executive Officer)
/s/ CUBA WADLINGTON, Jr.* Director
---------------------------
Cuba Wadlington, Jr.
/s/ NICK A. BACILE * Vice President (Principal Financial Officer)
---------------------
Nick A. Bacile
/s/ JAMES C. BOURNE * Controller (Principal Accounting Officer)
----------------------
James C. Bourne
* By /s/ JAMES C. BOURNE
- ---------------------------
James C. Bourne
Attorney-in-fact
Exhibit (21)
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
SUBSIDIARIES
%Owned State of
Subsidiary Name By Parent Incorporation
Cardinal Operating Company 100.00 Delaware
Cross Bay Operating Company 100.00 Delaware
Cumberland Operating Company 100.00 Delaware
Independence Operating Company 100.00 Delaware
Marsh Resources, Inc. 100.00 Delaware
Pine Needle Operating Company 100.00 Delaware
TGPL Enterprises, Inc. 100.00 Delaware
Transco Cross Bay Company 100.00 Delaware
Cross Bay Pipeline Company, L.L.C 37.5 Delaware
TransCardinal Company 100.00 Delaware
TransCarolina LNG Company 100.00 Delaware
TransCumberland Pipeline Company 100.00 Delaware
Transco Independence Pipeline Company 100.00 Delaware
WGP Enterprises, Inc. 100.00 Delaware
Williams Gas Processing - Gulf Coast Company, L.P. 99.00 Delaware
Exhibit (23)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-27311) of Transcontinental Gas Pipe Line Corporation of our report
dated February 26, 1999, with respect to the consolidated financial statements
included in this Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
Tulsa, Oklahoma
March 29, 1999
Exhibit (24)
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned
individuals, in their capacity as a director or officer, or both, as hereinafter
set forth below their signature, of TRANSCONTINENTAL GAS PIPE LINE CORPORATION,
a Delaware corporation ("Transco"), does hereby constitute and appoint NICK A.
BACILE AND JAMES C. BOURNE their true and lawful attorneys and each of them
(with full power to act without the other) their true and lawful attorneys for
them and in their name and in their capacity as a director or officer, or both,
of Transco, as hereinafter set forth below their signature, to sign Transco's
Annual Report to the Securities and Exchange Commission on Form 10-K for the
fiscal year ended December 31, 1998, and any and all amendments thereto or all
instruments necessary or incidental in connection therewith; and
THAT the undersigned Transco does hereby constitute and
appoint NICK A. BACILE AND JAMES C. BOURNE its true and lawful attorneys and
each of them (with full power to act without the other) its true and lawful
attorney for it and in its name and on its behalf to sign said Form 10-K and any
and all amendments thereto and any and all instruments necessary or incidental
in connection therewith.
Each of said attorneys shall have full power of substitution
and resubstitution, and said attorneys or any of them or any substitute
appointed by any of them hereunder shall have full power and authority to do and
perform in the name and on behalf of each of the undersigned, in any and all
capacities, every act whatsoever requisite or necessary to be done in the
premises, as fully to all intents and purposes as each of the undersigned might
or could do in person, the undersigned hereby ratifying and approving the acts
of said attorneys or any of them or of any such substitute pursuant hereto.
IN WITNESS WHEREOF, the undersigned have executed this
instrument, all as of the 11th day of March, 1999.
/s/ Brian E. O'Neill /s/ Nick A. Bacile
- -------------------- ------------------
Brian E. O'Neill Nick A. Bacile
President, Chief Executive Vice President and
Officer, and Director Chief Financial Officer
(Principal Financial Officer) (Principal Executive Officer)
/s/ James C. Bourne
-------------------
James C. Bourne
Controller
(Principal Accounting Officer)
<PAGE>
/s/ Keith E. Bailey /s/ Cuba Wadlington, Jr.
- ------------------- -----------------------
Keith E. Bailey Cuba Wadlington, Jr.
Director Director
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
By /s/ Nick A. Bacile
------------------
Nick A. Bacile
Vice President and
Chief Financial Officer
ATTEST:
/s/ Shawna L. Gehres
- --------------------
Shawna L. Gehres
Secretary
<PAGE>
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
I, the undersigned, Shawna L. Gehres, Secretary of
TRANSCONTINENTAL GAS PIPE LINE CORPORATION, a Delaware company (hereinafter
called the "Company"), do hereby certify that pursuant to Section 141(f) of the
General Corporation Law of Delaware, the Board of Directors of this Corporation
unanimously consented, as of March 11, 1999, to the following:
RESOLVED that the Chairman of the Board, the
President or any Vice President of the Company be, and each of
them hereby is, authorized and empowered to execute a Power of
Attorney for use in connection with the execution and filing,
for and on behalf of the Company, under the Securities
Exchange Act of 1934, of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
I further certify that the foregoing resolution has not been
modified, revoked or rescinded and is in full force and effect.
IN WITNESS WHEROF, I have hereunto set my hand and affixed the
corporate seal of TRANSCONTINENTAL GAS PIPE LINE CORPORATION this 11th day of
March 1999.
/s/ Shawna L. Gehres
--------------------
Shawna L. Gehres
Secretary
[CORPORATE SEAL]
<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 TWELVE MONTHS ENDED DECEMBER 31, 1998, CONTAINED IN
TRANSCONTINENTAL GAS PIPE LINE CORPORATION'S 1998 REPORT ON FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,470
<SECURITIES> 0
<RECEIVABLES> 13,889
<ALLOWANCES> 0
<INVENTORY> 79,787
<CURRENT-ASSETS> 704,159
<PP&E> 4,259,502
<DEPRECIATION> 616,120
<TOTAL-ASSETS> 4,524,951
<CURRENT-LIABILITIES> 501,102
<BONDS> 975,768
0
0
<COMMON> 0
<OTHER-SE> 2,062,041
<TOTAL-LIABILITY-AND-EQUITY> 4,524,951
<SALES> 524,822
<TOTAL-REVENUES> 1,325,136
<CGS> 524,822
<TOTAL-COSTS> 926,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 91,655
<INCOME-PRETAX> 214,975
<INCOME-TAX> 79,281
<INCOME-CONTINUING> 135,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 135,694
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
