UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 31, 2023
OR
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¨☐ | 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 COMPANY,Transcontinental Gas Pipe Line Company, LLC
(Exact name of registrant as specified in its charter)
| | 74-1079400 | | | | | | | | | | | | |
Delaware | | 74-1079400 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
2800 POST OAK BOULEVARD HOUSTON, TEXAS Post Oak Boulevard | | 77056 |
Houston, Texas | | 77056 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (713) 215-2000
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) 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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer¨ | ¨ | | Accelerated filer¨ | ¨ | | Non-accelerated filerþ | þ | | Smaller reporting company¨ | ☐ | | Emerging growth company¨
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| | | | (Do not check if a smaller reporting company) | | | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No þ
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H (1)H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
TRANSCONTINTENTAL GAS PIPE LINE COMPANY,Transcontinental Gas Pipe Line Company, LLC
Index
Forward Looking StatementsFORWARD-LOOKING STATEMENTS
The reports, filings, and other public announcements of Transcontinental Gas Pipe Line Company, LLC may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, and other matters.
All statements, other than statements of historical facts, included in this report that address activities, events, or developments that we expect, believe, or anticipate will exist or may occur in the future are forward-looking statements. Forward-looking statements can be identified by various forms of words or phrases such as “anticipates,” “believes,” “seeks,” “could,” “may,” “should,” “continues,” “estimates,” “expects,” “assumes,” “forecasts,” “intends,” “might,” “goals,” “objectives,” “targets,” “planned,” “potential,” “projects,” “scheduled,” “will,” “assumes,” “guidance,” “outlook,” “in service date”“in-service date,” or other similar expressions. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management and include, among others, statements regarding:
•Our and our affiliates’ future credit ratings;
•Amounts and nature of future capital expenditures;
•Expansion and growth of our business and operations;
•Expected in-service dates for capital projects;
•Financial condition and liquidity;
•Business strategy;
•Cash flow from operations or results of operations;
•Rate case filings;
•Natural gas prices, supply, and demand; and
•Demand for our services.
Forward-looking statements are based on numerous assumptions, uncertainties, and risks that could cause future events or results to be materially different from those stated or implied in this report. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:
•The impact of operational and developmental hazards and unforeseen interruptions;
•Development and rate of adoption of alternative energy sources;
•The strength and financial resources of our competitors and the effects of competition;
•Availability of supplies, including lower than anticipated volumes from third parties, and market demand;
•Volatility of pricing including the effect of lower than anticipated energy commodity pricesprices;
•Changes in maintenance and margins;construction costs, as well as our ability to obtain sufficient construction- related inputs, including skilled labor;
•The impact of existing and future laws and regulations, the regulatory environment, environmental matters, and litigation, as well as our ability to obtain necessary permits and approvals, and achieve favorable rate proceeding outcomes;
•Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social, and governance practices;
•The physical and financial risks associated with climate change;
•Our exposure to the credit risk of our customers and counterparties;
•Our ability to successfully expand our facilities and operations;
•Whether we are able to successfully identify, evaluate, and timely execute our capital projects and investment opportunities;
•Risks related to financing, including restrictions stemming from debt agreements, future changes in credit ratings as determined by nationally recognized credit rating agencies, and the availability and cost of capital;
•Inflation, interest rates, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on our customers and suppliers);
The strength and financial resources of our competitors and the effects of competition;
Whether we are able to successfully identify, evaluate and timely execute our capital projects and other investment opportunities in accordance with our capital expenditure budget;
Whether Williams will be able to effectively manage the transition in its board of directors and management as well as successfully execute its business restructuring;Our ability to successfully expand our facilities and operations;
Development and rate of adoption of alternative energy sources;
The impact of operational and development hazards, unforeseen interruptions, and the availability of adequate insurance coverage for such interruptions;
The impact of existing and future laws, regulations, the regulatory environment, environmental liabilities, and litigation as well as our ability to obtain necessary permits and approvals, and achieve favorable rate proceeding outcomes;
•Our costs for defined benefit pension plans and other postretirement benefit plans sponsored by our affiliates;
Changes in maintenance and construction costs;
•The risks resulting from outbreaks or other public health crises, including COVID-19;
•Changes in the current geopolitical situation;situation, including the Russian invasion of Ukraine;
Our exposure to the credit risks of our customers
•Changes in U.S. governmental administration and counterparties;policies;
Risks related to financing, including restrictions stemming from our debt agreements, future changes in our credit ratings and the availability and cost of capital;
•Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities;
•Acts of terrorism, including cybersecurity threats,incidents, and related disruptions; and
•Additional risks described in our filings with the Securities and Exchange Commission (SEC).
Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or to announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.
In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also
cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.
Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 22, 2017.27, 2023.
PART I —– FINANCIAL INFORMATION
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ITEM 1. | Financial Statements. |
Item 1. Financial Statements
TRANSCONTINENTAL GAS PIPE LINE COMPANY,Transcontinental Gas Pipe Line Company, LLC
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(ThousandsStatement of Dollars)Net Income
(Unaudited)
| | | | | | | | | | | | | Three Months Ended March 31, | |
| | Three months ended September 30, | | Nine months ended September 30, | | | 2023 | | 2022 | |
| | 2017 | | 2016 | | 2017 | | 2016 | | | (Thousands) | |
Operating Revenues: | | | | | | | | | Operating Revenues: | | | |
Natural gas sales | | $ | 26,763 |
| | $ | 31,244 |
| | $ | 74,867 |
| | $ | 67,474 |
| |
Natural gas transportation | | 389,080 |
| | 346,004 |
| | 1,116,891 |
| | 1,042,547 |
| Natural gas transportation | | $ | 623,740 | | | $ | 621,537 | | |
Natural gas storage | | 33,954 |
| | 34,258 |
| | 102,778 |
| | 88,315 |
| Natural gas storage | | 47,676 | | | 44,158 | | |
Natural gas sales | | Natural gas sales | | 21,772 | | | 15,645 | | |
Other | | 2,255 |
| | 1,343 |
| | 3,734 |
| | 3,396 |
| Other | | 12,707 | | | 5,128 | | |
Total operating revenues | | 452,052 |
| | 412,849 |
| | 1,298,270 |
| | 1,201,732 |
| Total operating revenues | | 705,895 | | | 686,468 | | |
| | | | | | | | | | | | | | |
Operating Costs and Expenses: | | | | | | | | | Operating Costs and Expenses: | | | |
Cost of natural gas sales | | 26,763 |
| | 31,244 |
| | 74,867 |
| | 67,474 |
| Cost of natural gas sales | | 21,772 | | | 15,645 | | |
Cost of natural gas transportation | | 5,828 |
| | 4,689 |
| | 15,282 |
| | 15,501 |
| |
| Operation and maintenance | | 113,101 |
| | 83,916 |
| | 267,914 |
| | 225,975 |
| Operation and maintenance | | 130,199 | | | 111,296 | | |
Administrative and general | | 43,110 |
| | 40,604 |
| | 132,020 |
| | 125,997 |
| |
General and administrative | | General and administrative | | 54,774 | | | 51,549 | | |
Depreciation and amortization | | 82,826 |
| | 76,755 |
| | 239,368 |
| | 231,110 |
| Depreciation and amortization | | 125,367 | | | 132,562 | | |
Taxes — other than income taxes | | 15,333 |
| | 14,584 |
| | 49,131 |
| | 45,154 |
| Taxes — other than income taxes | | 26,658 | | | 27,114 | | |
Other expense, net | | 13,475 |
| | 12,894 |
| | 43,112 |
| | 41,541 |
| |
| Regulatory credit resulting from tax rate changes | | Regulatory credit resulting from tax rate changes | | (7,688) | | | (7,688) | | |
Other (income) expense, net | | Other (income) expense, net | | 1,075 | | | (10,888) | | |
Total operating costs and expenses | | 300,436 |
| | 264,686 |
| | 821,694 |
| | 752,752 |
| Total operating costs and expenses | | 352,157 | | | 319,590 | | |
| | | | | | | | | | | | | | |
Operating Income | | 151,616 |
| | 148,163 |
| | 476,576 |
| | 448,980 |
| Operating Income | | 353,738 | | | 366,878 | | |
| | | | | | | | | | | | | | |
Other (Income) and Other Expenses: | | | | | | | | | Other (Income) and Other Expenses: | | | |
Interest expense | | 41,304 |
| | 37,318 |
| | 115,797 |
| | 113,957 |
| Interest expense | | 81,096 | | | 82,437 | | |
| Interest income | | Interest income | | (20,536) | | | (1,103) | | |
| Allowance for equity and borrowed funds used during construction (AFUDC) | | (22,334 | ) | | (19,922 | ) | | (70,783 | ) | | (45,656 | ) | Allowance for equity and borrowed funds used during construction (AFUDC) | | (15,583) | | | (4,857) | | |
Equity in earnings of unconsolidated affiliates | | (912 | ) | | (1,455 | ) | | (3,322 | ) | | (4,447 | ) | |
Miscellaneous other (income) expenses, net | | (774 | ) | | 309 |
| | (5,972 | ) | | 655 |
| |
| Miscellaneous other (income) expense, net | | Miscellaneous other (income) expense, net | | (30) | | | 2,000 | | |
Total other (income) and other expenses | | 17,284 |
| | 16,250 |
| | 35,720 |
| | 64,509 |
| Total other (income) and other expenses | | 44,947 | | | 78,477 | | |
| | | | | | | | | | | | | | |
Net Income | | 134,332 |
| | 131,913 |
| | 440,856 |
| | 384,471 |
| Net Income | | $ | 308,791 | | | $ | 288,401 | | |
| | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | |
Equity interest in unrealized gain (loss) on interest rate hedges (includes $38 and $41 for the three months ended and $75 and $140 for the nine months ended September 30, 2017 and September 30, 2016, respectively, of accumulated other comprehensive income reclassification for equity interest in realized losses on interest rate hedges) | | 72 |
| | 156 |
| | 108 |
| | (128 | ) | |
| | | | | | | | | |
Comprehensive Income | | $ | 134,404 |
| | $ | 132,069 |
| | $ | 440,964 |
| | $ | 384,343 |
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See accompanying notes.
TRANSCONTINENTAL GAS PIPE LINE COMPANY,Transcontinental Gas Pipe Line Company, LLC
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)Balance Sheet
(Unaudited)
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Thousands) |
ASSETS | | | |
Current Assets: | | | |
Cash | $ | — | | | $ | — | |
Receivables: | | | |
Advances to affiliate | 1,763,253 | | | 1,813,480 | |
Trade | 242,451 | | | 264,959 | |
Affiliates | 5,707 | | | 8,205 | |
Other | 3,328 | | | 2,795 | |
Transportation and exchange gas receivables | 5,072 | | | 9,256 | |
Inventories: | | | |
Materials and supplies, at average cost | 45,201 | | | 43,738 | |
Gas available for customer nomination, at average cost | 47,288 | | | 48,289 | |
Gas in storage, at original cost | 781 | | | 1,079 | |
Regulatory assets | 113,387 | | | 123,903 | |
Other | 37,516 | | | 32,838 | |
Total current assets | 2,263,984 | | | 2,348,542 | |
| | | |
Property, plant and equipment | 18,364,333 | | | 18,239,745 | |
Less-Accumulated depreciation and amortization | 5,655,576 | | | 5,552,377 | |
Total property, plant and equipment, net | 12,708,757 | | | 12,687,368 | |
| | | |
Other Assets: | | | |
Regulatory assets | 283,231 | | | 298,793 | |
Right-of-use assets | 57,958 | | | 59,235 | |
Other | 273,395 | | | 265,651 | |
Total other assets | 614,584 | | | 623,679 | |
| | | |
Total assets | $ | 15,587,325 | | | $ | 15,659,589 | |
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| | September 30, 2017 | | December 31, 2016 |
ASSETS | | | | |
| | | | |
Current Assets: | | | | |
Cash | | $ | — |
| | $ | — |
|
Receivables: | | | | |
Affiliates | | 326 |
| | 489 |
|
Advances to affiliate | | 299,059 |
| | 811,693 |
|
Trade and other | | 146,471 |
| | 144,315 |
|
Transportation and exchange gas receivables | | 944 |
| | 1,827 |
|
Inventories | | 47,685 |
| | 55,209 |
|
Regulatory assets | | 90,367 |
| | 87,059 |
|
Other | | 14,179 |
| | 13,305 |
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Total current assets | | 599,031 |
| | 1,113,897 |
|
| | | | |
Investments, at cost plus equity in undistributed earnings | | 39,571 |
| | 42,403 |
|
| | | | |
Property, Plant and Equipment: | | | | |
Natural gas transmission plant | | 13,136,224 |
| | 11,996,454 |
|
Less-Accumulated depreciation and amortization | | 3,833,689 |
| | 3,687,473 |
|
Total property, plant and equipment, net | | 9,302,535 |
| | 8,308,981 |
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| | | | |
Other Assets: | | | | |
Regulatory assets | | 269,000 |
| | 264,001 |
|
Other | | 132,052 |
| | 102,198 |
|
Total other assets | | 401,052 |
| | 366,199 |
|
| | | | |
Total assets | | $ | 10,342,189 |
| | $ | 9,831,480 |
|
(continued)
See accompanying notes.
TRANSCONTINENTAL GAS PIPE LINE COMPANY,Transcontinental Gas Pipe Line Company, LLC
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)Balance Sheet
(Unaudited)
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| (Thousands) |
LIABILITIES AND MEMBER’S EQUITY | | | |
Current Liabilities: | | | |
Payables: | | | |
Trade | $ | 144,680 | | | $ | 184,906 | |
Affiliates | 48,927 | | | 54,303 | |
Cash overdrafts | 8,472 | | | 13,589 | |
Transportation and exchange gas payables | 5,505 | | | 5,140 | |
Accrued liabilities: | | | |
Interest | 50,283 | | | 76,255 | |
Asset retirement obligations | 33,482 | | | 27,484 | |
Regulatory liabilities | 56,269 | | | 57,047 | |
Property and other taxes | 26,624 | | | 30,526 | |
Customer deposits | 31,193 | | | 28,498 | |
Customer advances | 18,799 | | | 11,535 | |
Other | 26,641 | | | 20,462 | |
Long-term debt due within one year | 29,183 | | | 28,532 | |
Total current liabilities | 480,058 | | | 538,277 | |
| | | |
Long-Term Debt | 5,248,807 | | | 5,251,799 | |
| | | |
Other Long-Term Liabilities: | | | |
Regulatory liabilities | 963,947 | | | 963,969 | |
Asset retirement obligations | 529,922 | | | 535,479 | |
Contract liabilities | 181,260 | | | 183,898 | |
Lease liability | 61,276 | | | 63,074 | |
Other | 12,870 | | | 12,699 | |
Total other long-term liabilities | 1,749,275 | | | 1,759,119 | |
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Contingent Liabilities and Commitments (Note 3) | | | |
| | | |
Member’s Equity: | | | |
Member’s capital | 5,088,499 | | | 5,088,499 | |
Retained earnings | 3,020,686 | | | 3,021,895 | |
Total member’s equity | 8,109,185 | | | 8,110,394 | |
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Total liabilities and member’s equity | $ | 15,587,325 | | | $ | 15,659,589 | |
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| | September 30, 2017 | | December 31, 2016 |
LIABILITIES AND OWNER’S EQUITY | | | | |
| | | | |
Current Liabilities: | | | | |
Payables: | | | | |
Affiliates | | $ | 23,483 |
| | $ | 29,455 |
|
Trade and other | | 305,949 |
| | 251,872 |
|
Transportation and exchange gas payables | | 3,555 |
| | 1,571 |
|
Accrued liabilities | | 160,087 |
| | 197,697 |
|
Long-term debt due within one year | | 251,320 |
| | — |
|
Total current liabilities | | 744,394 |
| | 480,595 |
|
| | | | |
Long-Term Debt | | 2,197,717 |
| | 2,210,754 |
|
| | | | |
Other Long-Term Liabilities: | |
| |
|
Asset retirement obligations | | 271,211 |
| | 248,518 |
|
Regulatory liabilities | | 501,201 |
| | 449,391 |
|
Advances for construction costs | | 261,487 |
| | 283,028 |
|
Transportation prepayments | | 11,115 |
| | 11,837 |
|
Deferred revenue | | 228,258 |
| | — |
|
Other | | 4,573 |
| | 6,088 |
|
Total other long-term liabilities | | 1,277,845 |
| | 998,862 |
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Contingent Liabilities and Commitments (Note 2) | |
| |
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Owner’s Equity: | |
| |
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Member’s capital | | 3,788,499 |
| | 3,678,499 |
|
Retained earnings | | 2,333,616 |
| | 2,462,760 |
|
Accumulated other comprehensive income | | 118 |
| | 10 |
|
Total owner’s equity | | 6,122,233 |
| | 6,141,269 |
|
| | | | |
Total liabilities and owner’s equity | | $ | 10,342,189 |
| | $ | 9,831,480 |
|
See accompanying notes.
TRANSCONTINENTAL GAS PIPE LINE COMPANY,
Transcontinental Gas Pipe Line Company, LLC
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(ThousandsStatement of Dollars)Changes in Member’s Equity
(Unaudited)
|
| | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
Cash flows from operating activities: | | | | |
Net income | | $ | 440,856 |
| | $ | 384,471 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
Depreciation and amortization | | 239,368 |
| | 231,110 |
|
Allowance for equity funds used during construction (equity AFUDC) | | (53,867 | ) | | (37,285 | ) |
Changes in operating assets and liabilities: | | | | |
Receivables — affiliates | | 163 |
| | 341 |
|
— trade and other | | (2,156 | ) | | 17,045 |
|
Transportation and exchange gas receivable | | 883 |
| | (216 | ) |
Inventories | | 7,524 |
| | 13,617 |
|
Payables — affiliates | | (5,972 | ) | | (23,340 | ) |
— trade | | (28,536 | ) | | 6,041 |
|
Accrued liabilities | | (41,137 | ) | | 61,484 |
|
Asset retirement obligations - non-current | | 45,629 |
| | 3,761 |
|
Asset retirement obligations - removal costs | | (1,708 | ) | | (2,688 | ) |
Deferred revenue | | (2,142 | ) | | — |
|
Other, net | | (4,691 | ) | | 23,451 |
|
Net cash provided by operating activities | | 594,214 |
| | 677,792 |
|
| | | | |
Cash flows from financing activities: | | | | |
Proceeds from long-term debt | | — |
| | 998,250 |
|
Retirement of long-term debt | | — |
| | (200,000 | ) |
Payments on other financing obligation | | (241 | ) | | — |
|
Payments for debt issuance costs | | (13 | ) | | (8,235 | ) |
Cash distributions to parent | | (330,000 | ) | | (350,000 | ) |
Cash contributions from parent | | 110,000 |
| | 372,000 |
|
Net cash provided by (used in) financing activities | | (220,254 | ) | | 812,015 |
|
| | | | |
Cash flows from investing activities: | | | | |
Property, plant and equipment additions, net of equity AFUDC* | | (1,089,917 | ) | | (906,105 | ) |
Contributions and advances for construction costs | | 252,249 |
| | 157,545 |
|
Disposal of property, plant and equipment, net | | (33,281 | ) | | (4,439 | ) |
Advances to affiliate, net | | 512,634 |
| | (718,279 | ) |
Return of capital from unconsolidated affiliates | | 2,729 |
| | 2,106 |
|
Purchase of ARO Trust investments | | (46,709 | ) | | (61,086 | ) |
Proceeds from sale of ARO Trust investments | | 27,520 |
| | 38,330 |
|
Proceeds from insurance | | 3,200 |
| | 2,121 |
|
Other, net | | (2,385 | ) | | — |
|
Net cash used in investing activities | | (373,960 | ) | | (1,489,807 | ) |
| | | | |
Increase (decrease) in cash | | — |
| | — |
|
Cash at beginning of period | | — |
| | — |
|
Cash at end of period | | $ | — |
| | $ | — |
|
| | | | |
* Increase to property, plant and equipment, net of equity AFUDC | | $ | (1,154,317 | ) | | $ | (907,023 | ) |
Changes in related accounts payable and accrued liabilities | | 64,400 |
| | 918 |
|
Property, plant and equipment additions, net of equity AFUDC | | $ | (1,089,917 | ) | | $ | (906,105 | ) |
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| Three Months Ended March 31, |
| 2023 | | 2022 | | |
| (Thousands) | | |
Member’s Capital: | | | | | |
Balance at beginning of period | $ | 5,088,499 | | | $ | 4,960,499 | | | |
Cash contributions from parent | — | | | 128,000 | | | |
Balance at end of period | 5,088,499 | | | 5,088,499 | | | |
Retained Earnings: | | | | | |
Balance at beginning of period | 3,021,895 | | | 2,759,757 | | | |
Net income | 308,791 | | | 288,401 | | | |
Cash distributions to parent | (310,000) | | | (57,548) | | | |
Balance at end of period | 3,020,686 | | | 2,990,610 | | | |
Total Member’s Equity | $ | 8,109,185 | | | $ | 8,079,109 | | | |
See accompanying notes.
TRANSCONTINENTAL GAS PIPE LINE COMPANY,
Transcontinental Gas Pipe Line Company, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSStatement of Cash Flows
(Unaudited)
1. BASIS OF PRESENTATION | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
| (Thousands) |
OPERATING ACTIVITIES: | | | |
Net income | $ | 308,791 | | | $ | 288,401 | |
Adjustments to reconcile net cash provided (used) by operating activities: | | | |
Depreciation and amortization | 125,367 | | | 132,562 | |
Allowance for equity funds used during construction (equity AFUDC) | (12,689) | | | (3,834) | |
Regulatory credit resulting from tax rate changes | (7,688) | | | (7,688) | |
Changes in current assets and liabilities: | | | |
Affiliate receivables | 2,498 | | | 1,403 | |
Trade and other accounts receivable | 21,975 | | | 20,229 | |
Transportation and exchange gas receivables | 4,184 | | | 4,062 | |
Inventories | (164) | | | (3,710) | |
Regulatory assets | 10,516 | | | (18,050) | |
Other current assets | (4,678) | | | 2,878 | |
Affiliate payables | (5,376) | | | (11,246) | |
Trade accounts payable | (44,826) | | | (44,264) | |
Transportation and exchange gas payables | 365 | | | (4,013) | |
Accrued liabilities | (15,781) | | | (34,064) | |
| | | |
| | | |
| | | |
Other, including changes in long-term assets and liabilities | 576 | | | (6,005) | |
Net cash provided (used) by operating activities | 383,070 | | | 316,661 | |
| | | |
FINANCING ACTIVITIES: | | | |
| | | |
Proceeds from other financing obligations | 3,757 | | | 2,843 | |
| | | |
Payments on other financing obligations | (6,842) | | | (6,136) | |
Payments for debt issuance costs | — | | | (16) | |
Cash distributions to parent | (310,000) | | | (57,548) | |
Cash contributions from parent | — | | | 128,000 | |
| | | |
| | | |
Net cash provided (used) by financing activities | (313,085) | | | 67,143 | |
| | | |
INVESTING ACTIVITIES: | | | |
Property, plant and equipment: | | | |
Capital expenditures (1) | (119,188) | | | (97,124) | |
Contributions and advances for construction costs, net | 9,482 | | | (4,655) | |
Disposal of property, plant and equipment, net | (7,984) | | | (5,940) | |
Advances to affiliate, net | 50,227 | | | (272,291) | |
Purchase of ARO Trust investments | (5,199) | | | (4,875) | |
Proceeds from sale of ARO Trust investments | 2,677 | | | 1,081 | |
Net cash provided (used) by investing activities | (69,985) | | | (383,804) | |
| | | |
Increase (decrease) in cash | — | | | — | |
Cash at beginning of period | — | | | — | |
Cash at end of period | $ | — | | | $ | — | |
_______________________ | | | |
(1) Increases to property, plant and equipment, exclusive of equity AFUDC | $ | (116,873) | | | $ | (65,262) | |
Changes in related accounts payable and accrued liabilities | (2,315) | | | (31,862) | |
Capital expenditures | $ | (119,188) | | | $ | (97,124) | |
See accompanying notes.
Transcontinental Gas Pipe Line Company, LLC
Notes to Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
In this report, Transco (which includes Transcontinental Gas Pipe Line Company, LLC and, unless the context otherwise requires, all of our majority-owned subsidiaries)(Transco) is at times referred to in the first person as “we,” “us” or “our.”
Transco is indirectly owned by Williams Partners L.P. (WPZ), a publicly traded Delaware limited partnership, which is consolidated by The Williams Companies, Inc. (Williams). In January 2017, Williams permanently waived, a publicly traded Delaware corporation. We own and operate an interstate natural gas pipeline system that is regulated by the WPZ general partner's incentive distribution rights, converted its 2 percent general partner interest in WPZ to a non-economic interest and purchased additional WPZ common units. At September 30, 2017, Williams owns a 74 percent limited partner interest in WPZ.Federal Energy Regulatory Commission (FERC).
General
The condensed consolidated unaudited
Our accompanying interim financial statements do not include all the notes in our accountsannual financial statements and, therefore, should be read in conjunction with our financial statements and notes thereto for the accounts of the subsidiaries we control. Companies in which we and our subsidiaries own 20 percent to 50 percent of the voting common stock or otherwise exercise significant influence over operating and financial policies of the company are accounted for under the equity method. The equity method investments as of September 30, 2017 and year ended December 31, 2016 consist of Cardinal Pipeline Company, LLC (Cardinal) with an ownership interest of approximately 45 percent and Pine Needle LNG Company, LLC (Pine Needle) with an ownership interest of 35 percent. We received distributions associated with2022, in our equity method investments totaling $6.3 million and $6.5 million in the nine months ended September 30, 2017 and September 30, 2016, respectively. Included in the distributions are $2.7 million and $2.1 million return of capital in 2017 and 2016, respectively.
Annual Report on Form 10-K. The condensed consolidated unaudited financial statements have been prepared from our books and records. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. The condensed consolidatedaccompanying unaudited financial statements include all normal recurring adjustments and others which,that, in the opinion of our management, are necessary to present fairly our interim financial statements. These condensed consolidated unaudited financial statements should be read in conjunctionCertain reclassifications have been made to information from previous periods to conform to the current presentation on the statement of cash flows within operating activities, with the consolidated financial statements and the notes thereto included in our 2016 Annual Report on Form 10-K.no net impact to cash provided by operating activities.
The preparation of financial statements in conformity with GAAPaccounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated unauditedour financial statements and accompanying notes. Actual results could differ from those estimates.
Accounting Standards Issued But Not Yet Adopted
In August 2016,
Note 2 – Revenue Recognition
Revenue by Category
Our revenue disaggregation by major service line includes Natural gas sales, Natural gas transportation, Natural gas storage, and Other, which are separately presented on the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-15 “StatementStatement of Cash Flows (Topic 230): ClassificationNet Income.
Contract Liabilities
The following table presents a reconciliation of Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 provides specific guidanceour contract liabilities:
| | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2023 | | 2022 | | | | |
| | | | | (Thousands) |
Balance at beginning of period | | | | | $ | 194,464 | | | $ | 205,030 | | | | | |
Recognized in revenue | | | | | (2,638) | | | (2,638) | | | | | |
Balance at end of period | | | | | $ | 191,826 | | | $ | 202,392 | | | | | |
Remaining Performance Obligations
Our remaining performance obligations primarily include reservation charges on eight cash flow classification issues, including debt prepayment or debt extinguishment costs and distributions received from equity method investees, to reduce diversity in practice. ASU 2016-15 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. ASU 2016-15 requires a retrospective transition. We do not expect ASU 2016-15 to have a material impactcontracted capacity on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 changes the impairment model for most financial assetsfirm transportation and storage contracts with customers. Amounts from certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will resultcontracts included in the earlier recognition of allowances for losses. The guidance also requires increased disclosures. ASU 2016-13
is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. ASU 2016-13 requires varying transition methods for the different categories of amendments. We do not expect ASU 2016-13 to have a significant impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. ASU 2016-02 requires a modified retrospective transition for capital or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. Wetable below, which are in the process of reviewing contracts to identify leases, as well as evaluating the applicability of ASU 2016-02 to contracts involving easement/rights-of-way.
In May 2014, the FASB issued ASU 2014-09 establishing Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers” (ASC 606). ASC 606 establishes a comprehensive new revenue recognition model designed to depict the transfer of goods or services to a customer in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for those goods or services and requires significantly enhanced revenue disclosures. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (ASU 2015-14). Per ASU 2015-14, the standard is effective for interim and annual reporting periods beginning after December 15, 2017. ASC 606 allows either full retrospective or modified retrospective transition and early adoption is permitted for annual periods beginning after December 15, 2016.
We continue to evaluate the impact ASC 606 may have on our financial statements. For each revenue contract type, we are conducting a formal contract review process to evaluate the impact, if any, that ASC 606 may have. We continue to evaluate contracts with a significant financing component, which may exist in situations where the timing of the consideration we receive varies significantly from the timing of when we provide the service, as well as a certain contract with prepayments for services. We are unable to determine the potential impact upon the amount and the timing of our revenue recognition. We continue to develop and evaluate disclosures required under the new standard, with a particular focus on the scope of contracts subject to disclosure of remaining performance obligations. Additionally, we have identified possible financial systemperiodic review and internal control changes necessary for adoption. We currently anticipate utilizing a modified retrospective transition uponapproval by the adoption of ASC 606 as of January 1, 2018.
2. CONTINGENT LIABILITIES AND COMMITMENTS
Rate Matters
General rate case (Docket No. RP06-569) On August 31, 2006, we submitted to the Federal Energy Regulatory Commission (FERC) a general rate filing principally designed to recover increased costs. The rates became effective March 1, 2007, subject to refund and the outcome of a hearing. All issues in this proceeding except one have been resolved by settlement.
The one issue reserved for litigation or further settlement relates to our proposal to change the design ofFERC, reflect the rates for service undersuch services in our WSS-OA storage rate schedule, which was implemented subject tocurrent FERC tariffs, net of estimated reserve for refund, on March 1, 2007. Following a hearing, the FERC issued an opinion approving our proposed incremental rate design, and subsequently denied requests for rehearing of that approval. On February 21, 2014, the U. S. Court of Appeals for the D.C. Circuit (D.C. Circuit) issued an opinion that vacated and remandedlife of the FERC's order because the FERC did not adequately support its conclusions. On March 17, 2016, the FERC issued an order addressing the issues raisedrelated contracts; however, these rates may change based on future tariffs approved by the D.C. Circuit's opinion. InFERC. This table excludes the March 17 order,variable consideration component for commodity charges. Certain of our contracts contain evergreen and other renewal provisions for periods beyond the FERC reversed its prior opinion and found that Transco's incremental rate design is unjust and unreasonable. The FERC directed Transco to design its WSS-OA rates on a rolled-in basis, to file revised WSS-OA rates reflecting the findings in the order, and to refund the amounts collected in excess of those rates since March 1, 2007. On April 18, 2016, we submitted the compliance filing reflecting rolled-in rates for WSS-OA service consistent with the March 17 order, and began charging those rates beginning April 19, 2016. We also filed a request for rehearinginitial term of the contract. The remaining performance obligations as of March 17 order. On October 4, 2017,31, 2023 do not consider potential future performance obligations for which the renewal has not been exercised and exclude contracts with customers for which the underlying facilities have not received FERC issued an order denying all requests for rehearingauthorization to be placed into service.
The following table presents the amount of the contract liabilities balance expected to be recognized as revenue when performance obligations are satisfied and the transaction price allocated to the remaining performance obligations under certain contracts as of March 17 order, accepting our April 18, 2016 compliance filing, and directing us to make refunds. As of September 30, 2017, we have accrued a liability for refunds of $19.3 million in Payables31, 2023.
| | | | | | | | | | | |
| Contract Liabilities | | Remaining Performance Obligations |
| (Thousands) |
2023 (nine months) | $ | 7,927 | | | $ | 1,889,090 | |
2024 (one year) | 10,568 | | | 2,357,382 | |
2025 (one year) | 10,566 | | | 2,237,770 | |
2026 (one year) | 10,566 | | | 1,813,751 | |
2027 (one year) | 10,566 | | | 1,641,805 | |
Thereafter | 141,633 | | | 10,633,120 | |
Total | $ | 191,826 | | | $ | 20,572,918 | |
Accounts Receivable
Receivables from contracts with customers are included within Receivables - Trade and Receivables - Affiliates, and other inreceivables that are not related to contracts with customers are included within the accompanying
Condensed Consolidatedbalance of Receivables - Advances to affiliate and Receivables - Other on our Balance Sheet. Assuming no further request for rehearing of the order is filed, we expect to issue refunds in the fourth quarter of 2017.
Station 62 Incident
On October 8, 2015, an explosionNote 3 – Contingent Liabilities and fire occurred at our Compressor Station No. 62 in Gibson, Louisiana. At the time of the incident, planned facility maintenance was being performed at the station and the facility was not operational. The incident was related to maintenance work being performed on the slug catcher at the station. Four contractor employees were killed in the incident and others were injured.Commitments
In responding to the incident, we cooperated with local, state and federal authorities, including the Louisiana State Police, Terrebonne Parish, the Louisiana Department of Environmental Quality, the U.S. Environmental Protection Agency (Region 6), the Occupational Safety and Health Administration, and the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA). On July 29, 2016, PHMSA issued a Notice of Probable Violation (NOPV), which includes a $1.6 million proposed civil penalty to us in connection with the incident. This penalty was accrued in the second quarter of 2016 and would not be covered by our insurance policies. We filed a response to the NOPV on August 25, 2016, and on July 14, 2017, PHMSA held a hearing on the NOPV.
The incident did not cause any rupture of the gas pipeline or any damage to the building containing the compressor engines. In anticipation of the planned maintenance, our Southeast Louisiana Lateral was taken out of service on October 4, 2015, which affected approximately 200 MMcf/d of natural gas production. The lateral was restored to service in early 2016 after repairs were made to the facilities damaged in the incident.
We are a defendant in lawsuits seeking damages for wrongful death, personal injury and property damages. We believe it is reasonably possible that losses will be incurred on some lawsuits. However, in management's judgment, the ultimate resolution of these matters will not have a material effect on our financial condition, results of operations or cash flows. While we also have claims for indemnification, we believe that it is probable that any ultimate losses incurred will be covered by our general liability insurance policy.
Environmental Matters
We have had studies underway for many years to test some of our facilities for the presence of toxic and hazardous substances such as polychlorinated biphenyls (PCBs) and mercury to determine to what extent, if any, remediation may be necessary. We have also similarly evaluated past on-site disposal of hydrocarbons at a number of our facilities. We have worked closely with and responded to data requests from the U.S. Environmental Protection Agency (EPA) and state agencies regarding such potential contamination of certain of our sites. On the basis of the findings to date, we estimate that environmental assessment and remediation costs under various federal and state statutes will total approximately $6 million to $8 million (including both expense and capital expenditures), measured on an undiscounted basis, and will substantially be spent over the next four to six years. This estimate depends on a number of assumptions concerning the scope of remediation that will be required at certain locations and the cost of the remedial measures. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs. We also have program for monitoring certain environmental activities at our Eminence storage facility. At September 30, 2017,March 31, 2023, we had a balanceliability of approximately $3.9$11.9 million for the expense portion of these estimatedexpected ongoing remediation and monitoring costs, $2.1$1.5 million recorded in Accrued liabilities- Other and $1.8$10.4 million recorded in Other Long-Term Liabilities - Other in on the accompanying Condensed Consolidated Balance Sheet. At December 31, 2016,2022, we had a balanceliability of approximately $4.2$11.8 million for the expense portion of these estimatedexpected ongoing remediation and monitoring costs, $2.1$1.4 million recorded in Accrued liabilities- Other and $2.1$10.4 million recorded in Other Long-Term Liabilities - Other in on the accompanying Condensed Consolidated Balance Sheet.
We have been identified as a potentially responsible party (PRP) at various Superfund and state waste disposal sites. Based on present volumetric estimates and other factors, our estimated aggregate exposure for remediation of these sites is less than $0.5 million. The estimated remediation costs for all of these sites are included in the $6 million to $8 million rangeenvironmental liabilities discussed above. Liability under the Comprehensive Environmental Response, Compensation and Liability Act 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.
In March 2008,The EPA and various state regulatory agencies routinely propose and promulgate new rules, and issue updated guidance to existing rules. These rulemakings include, but are not limited to, rules for reciprocating internal combustion engine and combustion turbine maximum achievable control technology, review and updates to the EPA promulgated a new, lower National Ambient Air Quality Standard (NAAQS)Standards, and rules for ground-level ozone. In May 2012, the EPA completed designationnew and existing source performance standards for volatile organic compounds and methane. We continuously monitor these regulatory changes and how they may impact our operations. Implementation of new eight-hour ozone non-attainment areas. Several ofor modified regulations may result in impacts to our facilities are located in 2008 ozone non-attainment areas. To date, no federal actions have been proposed to mandate additional emission controls at these facilities. Pursuant to recently finalized state regulatory actions associated with implementation of the 2008 ozone standard, we anticipate that some facilities may be subject to increased controls within five years. As a result,operations and increase the cost of additions to Total property, plant, and equipment, is expectednet on the Balance Sheet for both new and existing facilities in affected areas; however, due to increase. We are unable at this time to estimate with any certainty the cost of additions that may be required to meet the proposed regulations.
In December 2014, the EPA proposed to further reduce the ground-level ozone NAAQS from the March 2008 levelsregulatory uncertainty on final rule content and subsequently finalized a rule on October 1, 2015. We are monitoring the rule's implementation as the reduction will trigger additional federal and state regulatory actions that may impact our operations. As a result, the cost of additions to property, plant and equipment is expected to increase. We are unable at this time to estimate with any certainty the cost of additions that may be required to meet new regulations.
In February 2010, the EPA set a new one-hour nitrogen dioxide (NO2) NAAQS. In January 2012, the EPA determined pursuant to available information that no area in the country is violating the 2010 NO2 NAAQS and thus designated all areas of the country as “unclassifiable/attainment.” However, the EPA or states may require ambient air quality modeling on a case by case basis to demonstrate compliance with the NO2 standard. Becauseapplicability timeframes, we are unable to predict the outcome of the EPA’s or states’ assessment of NO2 compliance, we are unable toreasonably estimate the cost of additions that may be required to meetthese regulatory impacts at this regulation.time.
We consider prudently incurred environmental assessment and remediation costs and the costs associated with compliance with environmental standards to be recoverable through rates. To date,Historically, with limited exceptions, we have been permitted recovery of environmental costs, and it is our intent to continue seeking recovery of such costs through future rate filings. As a result, as estimated costs of environmental assessment and remediation are incurred, they are recorded as regulatory assets in the Condensed Consolidated Balance Sheet until collected through rates. At September 30, 2017, we had a balance of approximately $1.6 million of uncollected environmental related regulatory assets, $1.2 million recorded in Current Assets - Regulatory assets and $0.4 million recorded in Other Assets - Regulatory assets in the accompanying Condensed Consolidated Balance Sheet. At December 31, 2016, we had a balance of approximately $2.5 million of uncollected environmental related regulatory assets, $1.2 million recorded in Current Assets - Regulatory assets and $1.3 million recorded in Other Assets - Regulatory assets in the accompanying Condensed Consolidated Balance Sheet.
Other Matters
Various other proceedings are pending against us and are considered incidental to our operations.
Summary
We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss. We estimate that for all matters for which we are able to reasonably estimate a range of loss, including those noted above and others that are not individually significant, our aggregate reasonably possible losses beyond amounts accrued for all of our contingent liabilities are immaterial to our expected future annual results of operations, liquidity and financial position. These calculations have been made without consideration of any potential recovery from third parties. We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss.
3. DEBT AND FINANCING ARRANGEMENTS
Note 4 – Debt and Financing Arrangements
Credit Facility
We, along with WPZWilliams and Northwest Pipeline LLC (Northwest), are party to a credit agreement with aggregate commitments available of $3.5$3.75 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. Total letter of credit capacity available to WPZ under this credit facility is $1.125 billion. We
and Northwest are each able to borrow up to $500 million under thisthe credit facility to the extent not otherwise utilized by the other co-borrowers. At September 30, 2017,March 31, 2023, no letters of credit have been issued and no loans were outstanding under the credit facility.
WPZ
Commercial Paper
Williams participates in a $3.5 billion commercial paper program, and WPZWilliams’ management considers amounts outstanding under this program to be a reduction of available capacity under the credit facility. The program allows a maximumAt March 31, 2023, Williams had no outstanding amount at any time of $3 billion of unsecured commercial paper notes. At September 30, 2017, no commercial paper was outstanding under the commercial paper program.paper.
Other Financing ObligationObligations
During the construction of our
Dalton Expansion Project
At March 31, 2023 and December 31, 2022, the amount included in Long-Term Debt on the Balance Sheet for this financing obligation was $248.7 million and $249.4 million, respectively, and the amount included in Long-term debt due within one year on the Balance Sheet for this financing obligation was $2.8 million and $2.8 million, respectively.
Atlantic Sunrise Project
During the first three months of 2023 and 2022, we received an additional $3.7 million and $0.3 million, respectively, of funding from a partnerco-owner for its proportionate share of construction costs related to its undivided ownership interest in certain parts of the Dalton lateral. Amounts received were recordedproject. This additional funding is reflected in Advances for construction costsLong-Term Debt on our Condensed Consolidatedthe Balance Sheet. Upon placingAt March 31, 2023 and December 31, 2022, the projectamount included in service during the third quarter of 2017, we began leasing this partner's undivided interest in the lateral, including the associated pipeline capacity, and reclassified approximately $235.8 million of funding previously received from our partner from Advances for construction costs to Long-Term Debt on our Condensed Consolidatedthe Balance Sheet to reflect thefor this financing obligation payable to our partner over an expected term of 35 years. As this transaction did not meetwas $781.8 million and $784.6 million, respectively, and the criteria for sale leaseback accounting due to our continued involvement, it was accounted for as a financing arrangement over the course of the capacity agreement. The obligation maturesamount included in July 2052, requires monthly interest and principal payments, and bears an interest rate of approximately 10 percent.
Long-Term Debt Due Within One Year
The long-termLong-term debt due within one year at September 30, 2017 is associated withon the $250Balance Sheet for this financing obligation was $25.3 million and $24.6 million, respectively.
Leidy South Project
During the first three months of 2022, we received an additional $2.6 million of 6.05 percent notes maturingfunding from a co-owner for its proportionate share of construction costs related to its undivided joint ownership interest in certain parts of the project. This additional funding is reflected in Long-Term Debt on June 15, 2018the Balance Sheet. At March 31, 2023 and $1.5December 31, 2022, the amount included in Long-Term Debt on the Balance Sheet for this financing obligation was $76.0 million associated withand $76.2 million, respectively, and the previously described otheramount included in Long-term debt due within one year on the Balance Sheet for this financing obligation.obligation was $1.1 million and $1.1 million, respectively.
4.
Note 5 – ARO TRUSTTrust
Available-for-Sale Investments
We are entitled to collect in rates the amounts necessary to fund our asset retirement obligations (ARO). We deposit monthly, into an external trust account (ARO Trust), the revenues specifically designated for ARO.AROs. The ARO Trust carries a moderate risk portfolio. We measure theThe Money Market Funds held in our ARO Trust are considered investments. The financial instruments held in our ARO Trust are measured at fair value.value and reported in Other Assets - Other on the Balance Sheet. However, in accordance with the ASC Topic 980, Regulated Operations, both realized and unrealized gains and losses of the ARO Trust are ultimately recorded as regulatory assets or liabilities.
Effective March 1, 2013,
Pursuant to the approved stipulation and agreement in Docket No. RP18-1126 the annual funding obligation effective March 31, 2020 is approximately $36.4$16.0 million, with deposits made monthly.
Investments in available-for-sale securities within the ARO Trust at fair value were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Amortized Cost Basis | | Fair Value | | Amortized Cost Basis | | Fair Value |
Money Market Funds | $ | 18.9 | | | $ | 18.9 | | | $ | 16.4 | | | $ | 16.4 | |
U.S. Equity Funds | 52.6 | | | 102.6 | | | 52.7 | | | 96.1 | |
International Equity Funds | 31.7 | | | 37.4 | | | 31.6 | | | 35.2 | |
Municipal Bond Funds | 87.7 | | | 83.4 | | | 87.7 | | | 82.0 | |
Total | $ | 190.9 | | | $ | 242.3 | | | $ | 188.4 | | | $ | 229.7 | |
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Amortized Cost Basis | | Fair Value | | Amortized Cost Basis | | Fair Value |
Cash and Money Market Funds | $ | 8.5 |
| | $ | 8.5 |
| | $ | 5.0 |
| | $ | 5.0 |
|
U.S. Equity Funds | 35.9 |
| | 47.7 |
| | 29.4 |
| | 36.5 |
|
International Equity Funds | 20.7 |
| | 23.7 |
| | 19.2 |
| | 18.6 |
|
Municipal Bond Funds | 46.8 |
| | 47.1 |
| | 36.7 |
| | 36.3 |
|
Total | $ | 111.9 |
| | $ | 127.0 |
| | $ | 90.3 |
| | $ | 96.4 |
|
5. FAIR VALUE MEASUREMENTSNote 6 – Fair Value Measurements
The following table presents, by level within the fair value hierarchy, certain of our significant financial assets and liabilities. The carrying values of cash, short-term financial assets (advances to affiliate) that have variable interest rates (advances to affiliate), accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. Therefore, these assets and liabilities are not presented in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements Using |
| Carrying Amount | | Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (Millions) |
Assets (liabilities) at March 31, 2023: | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | |
ARO Trust investments | $ | 242.3 | | | $ | 242.3 | | | $ | 242.3 | | | $ | — | | | $ | — | |
Additional disclosures: | | | | | | | | | |
Long-term debt, including current portion | (5,278.0) | | | (5,423.3) | | | — | | | (5,423.3) | | | — | |
| | | | | | | | | |
Assets (liabilities) at December 31, 2022: | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | |
ARO Trust investments | $ | 229.7 | | | $ | 229.7 | | | $ | 229.7 | | | $ | — | | | $ | — | |
Additional disclosures: | | | | | | | | | |
Long-term debt, including current portion | (5,280.3) | | | (5,361.7) | | | — | | | (5,361.7) | | | — | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements Using |
| | Carrying Amount | | Fair Value | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| | (Millions) |
Assets (liabilities) at September 30, 2017: | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | |
ARO Trust investments | | $ | 127.0 |
| | $ | 127.0 |
| | $ | 127.0 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
Additional disclosures: | | | | | | | | | | |
Long-term debt, including current portion | | (2,449.0 | ) | | (3,051.1 | ) | | — |
| | (3,051.1 | ) | | — |
|
| | | | | | | | | | |
Assets (liabilities) at December 31, 2016: | | | | | | | | | | |
Measured on a recurring basis: | | | | | | | | | | |
ARO Trust investments | | $ | 96.4 |
| | $ | 96.4 |
| | $ | 96.4 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
Additional disclosures: | | | | | | | | | | |
Long-term debt | | (2,210.8 | ) | | (2,507.5 | ) | | — |
| | (2,507.5 | ) | | — |
|
Fair Value of Methods
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
ARO Trust investments —: We deposit a portion of our collected rates, pursuant to the terms of the Docket No. RP12-993RP18-1126 rate case settlement, into the ARO Trust, which is specifically designated to fund future asset retirement obligations.AROs. The ARO Trust invests in a portfolio of actively traded mutual funds that are measured at fair value on a recurring basis based on quoted prices in an active market are classified as available-for-sale and are reported in Other Assets-Other inAssets - Other on the Condensed Consolidated Balance Sheet. However, both realized and unrealized gains and losses are ultimately recorded as regulatory assets or liabilities. See Note 45 – ARO Trust for more information regarding the ARO Trust.information.
Long-term debt, — including current portion: The disclosed fair value of our long-term debt is determined primarily by a market approach using broker quoted indicative period-end bond prices. The quoted prices are based on observable transactions in less active markets for our debt or similar instruments. The fair value of the financing obligationobligations associated with our Dalton, lateral, which is included within long-term debt, wasAtlantic Sunrise and Leidy South projects were determined using an income approach (See(see Note 3 -4 – Debt and Financing Arrangements)Arrangements).
Reclassifications of fair value between Level 1, Level 2, and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter. No transfers between Level 1 and Level 2 occurred during the nine months ended September 30, 2017 or 2016.
6. TRANSACTIONS WITH AFFILIATESNote 7 – Transactions with Affiliates
We are a participant in WPZ’sWilliams’ cash management program, and we make advances to and receive advances from WPZ. At September 30, 2017Williams. Our advances to Williams totaled approximately $1.8 billion at both March 31, 2023 and December 31, 2016, our advances to WPZ totaled approximately $299.1 million and $811.7 million, respectively.2022. These advances are represented by demand notes and are classified as Receivables - Advances to affiliate inon the accompanying Condensed Consolidated Balance Sheet. Advances are stated at the historical
carrying amounts. Interest income is recognized when chargeable and collectability is reasonably assured. The interest rate on these intercompany demand notes is based upon the daily
overnight investment rate paid on WPZ’sWilliams’ excess cash at the end of each month. At September 30, 2017,month, which was approximately 4.7 percent at March 31, 2023. The interest income from these advances was $19.3 million for the three months ended March 31, 2023 and minimal for the three months ended March 31, 2022. Such interest rate was 0.91 percent.income is included in Other (Income) and Other Expenses - Interest income on the Statement of Net Income.
Included in Operating Revenues in on the accompanying Condensed Consolidated Statement of ComprehensiveNet Income are revenues received from affiliates of $2.5$12.2 million and $8.9 million for the three and nine months ended September 30, 2017, respectively, and $4.8 million and $8.9$21.1 million for the three and nine months ended September 30, 2016,March 31, 2023 and 2022, respectively. The rates charged to provide sales and services to affiliates are the same as those that are charged to similarly-situated nonaffiliated customers.
Included in Cost of natural gas sales in on the accompanying Condensed Consolidated Statement of ComprehensiveNet Income are costcosts of gas purchased from affiliates of $1.0$3.4 million and $2.9 million for the three and nine months ended September 30, 2017, respectively, and $1.8 million and $3.3$5.4 million for the three and nine months ended September 30, 2016,March 31, 2023 and 2022, respectively. All gas purchases are made at market or contract prices.
We have no employees. Services necessary to operate our business are provided to us by Williams and certain affiliates of Williams. We reimburse Williams and its affiliates for all direct and indirect expenses incurred or payments made (including salary, bonus, incentive compensation and benefits) in connection with these services. Employees of Williams also provide general, administrative and management services to us, and we are charged for certain administrative expenses incurred by Williams. These charges are either directly identifiable or allocated to our assets. Direct charges are for goods and services provided by Williams at our request. Allocated charges are based on a three-factor formula, which considers revenues; property, plant and equipment; and payroll. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing business incurred by Williams. We were billed $91.4have recorded $84.1 million and $261.1$79.6 million infor the three and nine months ended September 30, 2017, respectivelyMarch 31, 2023 and $78.4 million and $234.7 million in the three and nine months ended September 30, 2016,2022, respectively, for these services. Suchservice expenses, which are primarily included in Operation and maintenance and AdministrativeGeneral and general administrative expenses inon the accompanying Condensed Consolidated Statement of ComprehensiveNet Income. The amount billed to us for the nine months ended September 30, 2016, includes $6.3 million recognized in the first quarter for severance and other related costs associated with a reduction in workforce.
We provide services to certain of our affiliates. We recorded reductions in operating expenses for services provided to and reimbursed by our affiliates of $0.9$2.8 million and $2.7$1.6 million for the three and nine months ended September 30, 2017, respectively,March 31, 2023 and $1.0 million2022, respectively.
During April 2023, we declared and $3.4 million for the three and nine months ended September 30, 2016, respectively.
We made equity distributions totaling $330.0 million and $350.0 million during the nine months ended September 30, 2017 and 2016, respectively. During October 2017, we made an additionalpaid a cash distribution of $100.0 million. Our parent made contributions to us totaling $110.0$310 million and $372.0 million in the nine months ended September 30, 2017 and 2016, respectively, to fund a portion of our expenditures for additions to property, plant and equipment.
During July 2017, we recorded deferred revenue and recognized a non-cash distributionto our parent of $240 million associated with funds received by WPZ related to the March 2016 WPZ agreement with the member-sponsors of Sabal Trail regarding the Hillabee Expansion and Sabal Trail projects. Although the agreement was between WPZ and the member-sponsors, since the agreement was, in part, related to furthering the completion of Hillabee, this deferred revenue is assigned to our results of operations over the 25-year term of the capacity agreement with Sabal Trail.parent.
7. OTHER
For the nine months ended September 30, 2017 and 2016, we capitalized $0.2 million and $1.4 million, respectively, of project feasibility costs, which had been expensed in prior periods in Other expense, net, upon determining that the project was probable of development.
The Advances for construction costs on the accompanying Condensed Consolidated Balance Sheet are associated with advances received from third parties related to construction costs on the Atlantic Sunrise and Dalton projects. This balance increases as we receive additional advances. After construction of the respective projects are completed, the related liabilities will be reclassified to Long-Term Debt and reduced by payments we make to the third parties
under terms of the applicable lease agreements. In the third quarter 2017, the advances received from a third party related to construction costs on the Dalton lateral was reclassified to Long-Term Debt on our Condensed Consolidated Balance Sheet.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General
The following discussion should be read in conjunction with the Consolidatedour historical Financial Statements Notesand accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Items 7 and 8 of our 20162022 Annual Report on Form 10-K and with the Condensed Consolidated Financial Statements and Notesaccompanying notes contained in this Form 10-Q.
RESULTS OF OPERATIONS
Operating Income and Net IncomeResults of Operations
Operating Income
This analysis discusses financial results of our operations for the nine monthsthree-month periods ended September 30, 2017 was $476.6 million compared to $449.0 million for the nine months ended September 30, 2016. The increase in Operating Income of $27.6 million (6.1 percent) was primarilyMarch 31, 2023 and 2022. Variances due to higher Naturalthe changes in natural gas transportationprices and Natural gas storagetransportation volumes have little impact on revenues, inbecause under our rate design methodology, the first nine monthsmajority of 2017 compared to the same period in 2016, partly offset by an increase in Operating Costs and Expenses, as discussed below. Net Income for the nine months ended September 30, 2017 was $440.9 million compared to $384.5 million for the nine months ended September 30, 2016. The increase in Net Incomeoverall cost of $56.4 million (14.7 percent) was mostly attributable to the increase in Operating Income and a favorable change in net expenses in Other (Income) and Other Expenses, as discussed below.
Operating Revenues
Natural gas sales increased $7.4 million (11.0 percent) for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was primarily due to system management gas sales. System management gas sales are offsetservice is recovered through firm capacity reservation charges in our costtransportation rates.
We have cash out sales, which settle gas imbalances with shippers. In the course of naturalproviding transportation services to customers, we may receive different quantities of gas soldfrom shippers than the quantities delivered on behalf of those shippers. Additionally, we transport gas on various pipeline systems, which may deliver different quantities of gas on our behalf than the quantities of gas received from us. These transactions result in gas transportation and thereforeexchange imbalance receivables and payables. Our tariff includes a method whereby the majority of transportation imbalances are settled on a monthly basis through cash out sales or purchases. The cash out sales have no impact on our operating income or results of operations.income.
Natural gas transportation
Net Income for the ninefirst three months ended September 30, 2017of 2023 of$308.8 million increased $74.4by $20.4 million (7.1(7 percent) overwhen compared to the same period$288.4 million recognized during the first three months of 2022 due to the following significant variances:
Operating Revenues increased $19.4 million (3 percent) due primarily to:
•$7.6 million increase in 2016. The increase wasOther revenues primarily due to higher transportation reservation revenues related to new incremental projects of $88.4park and loan services;
•$6.1 million (primarily increase in Natural gas sales due to $38.3 million from our Gulf Trace project placed in service in February 2017, $28.0 million from our Dalton project placed in partial service in April 2017, and fully in service in August 2017, $11.2 million from our Hillabee project Phase I placed in partial service in June 2017 and fully in service in July 2017 and $8.3 million from our Rock Springs project placed in service in August 2016),higher cash-out volumes, partially offset by $6.7lower pricing;
•$3.5 million lower commodity revenues, $3.6 million due to one less billable dayincrease in 2017 compared to 2016, and $3.5 million lower firm transportation backhaul revenues.
Natural gas storage increased $14.5 million (16.4 percent) for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was primarily due to the absencean increase in rates. These rate increases are offset in Operation and maintenance resulting in no net impact on our results of an accrual for Washington Storage Service potential refunds recordedoperations; and
•$2.2 million increase in 2016.Natural gas transportation primarily due to higher short-term firm transportation.
Operating Costs and Expenses
Excluding,excluding the Cost of natural gas sales,, which is directly offsetoffsets Natural gas sales in revenues, of $74.9Operating Revenues, increased $26.4 million for the nine months ended September 30, 2017 and $67.5 million for the comparable period in 2016, our operating costs and expenses for the nine months ended September 30, 2017 increased approximately $61.5 million (9.0(9 percent) from the comparable period in 2016. This increase was primarily attributable to:
A $41.9•$18.9 million (18.5 percent) increase in Operation and maintenance costs primarily resulting from (i) $12.6 million increase in costs related to outside services for pipeline inspection, right-of-way management, painting and compressor station maintenance and (ii) higher third-party storage costs of $3.9 million (offset in Operating Revenues resulting in no net impact on our results of operations);
•$12.0 million unfavorable change in Other (income) expense, net driven by a decrease in the deferral of ARO-related depreciation of $10.0 million (offset in Depreciation and amortization resulting in no net impact on our results of operations) and a $1.9 million increase in project development costs primarily due to $32.9the capitalization of feasibility costs in 2022; and
•$3.2 million higher costs for pipeline integrity, general maintenance and other testing on our pipeline and $4.0 million higher employee labor and related benefit costs;
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Senior Vice President and our Vice President Controller and Chief Accounting Officer. Based upon that evaluation, our Senior Vice President and our Vice President Controller and Chief Accounting Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
PART II — OTHER INFORMATION.