Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
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 1-7414
Northwest Pipeline LLC
(Exact name of registrant as specified in its charter)
Delaware | 26-1157701 | ||||||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
One Williams Center | |||||||||||||||||
Tulsa, Oklahoma | 74172-0172 | ||||||||||||||||
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (918) 573-2000
295 Chipeta Way, Salt Lake City, Utah 84108
(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 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.
Large accelerated filer | ¨ | Accelerated filer | ¨ | Non-accelerated filer | þ | Smaller reporting company | ☐ | Emerging growth 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 INSTRUCTION (H)(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
Northwest Pipeline LLC
Index
Page | |||||
FORWARD-LOOKING STATEMENTS
The reports, filings, and other public announcements of Northwest Pipeline 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 such as “anticipates,” “believes,” “seeks,” “could,” “may,” “should,” “continues,” “estimates,” “expects,” “forecasts,” “intends,” “might,” “goals,” “objectives,” “targets,” “planned,” “potential,” “projects,” “scheduled,” “will,” “assumes,” “guidance,” “outlook,” “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;
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•Financial condition and liquidity;
•Business strategy;
•Cash flow from operations or results of operations;
•Rate case filings;
•Natural gas prices, supply, and demand;
•Demand for our services; and
•The impact of the coronavirus (COVID-19) pandemic.
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 prices;
•Changes in maintenance and 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;
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•Inflation, interest rates, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on customers and suppliers);
•Our costs for defined benefit pension plans and other postretirement benefit plans sponsored by our affiliates;
•The risks resulting from outbreaks or other public health crises, including COVID-19;
•Changes in the current geopolitical situation, including the Russian invasion of Ukraine;
•Changes in U.S. governmental administration and policies;
•Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities;
•Acts of terrorism, cybersecurity 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 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, 2021, as supplemented by the disclosure in Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q.
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Northwest Pipeline LLC
Statement of Net Income
(Unaudited)
Three Months Ended March 31, | |||||||||||
2022 | 2021 | ||||||||||
(Thousands) | |||||||||||
Operating Revenues: | |||||||||||
Natural gas transportation | $ | 109,707 | $ | 109,277 | |||||||
Natural gas storage | 3,184 | 3,044 | |||||||||
Other | 928 | 573 | |||||||||
Total operating revenues | 113,819 | 112,894 | |||||||||
Operating Expenses: | |||||||||||
General and administrative | 11,759 | 11,670 | |||||||||
Operation and maintenance | 17,745 | 16,646 | |||||||||
Depreciation and amortization | 28,642 | 28,068 | |||||||||
Regulatory debits | 454 | 348 | |||||||||
Taxes — other than income taxes | 4,081 | 4,216 | |||||||||
Regulatory charges resulting from tax rate changes | 5,814 | 5,814 | |||||||||
Other income, net | (39) | (31) | |||||||||
Total operating expenses | 68,456 | 66,731 | |||||||||
Operating Income | 45,363 | 46,163 | |||||||||
Other (Income) and Other Expenses: | |||||||||||
Interest expense | 7,628 | 7,361 | |||||||||
Allowance for equity and borrowed funds used during construction (AFUDC) | (700) | (265) | |||||||||
Miscellaneous other income, net | (799) | (161) | |||||||||
Total other (income) and other expenses | 6,129 | 6,935 | |||||||||
Net Income | $ | 39,234 | $ | 39,228 |
See accompanying notes.
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Northwest Pipeline LLC
Balance Sheet
(Unaudited)
March 31, 2022 | December 31, 2021 | ||||||||||
(Thousands) | |||||||||||
ASSETS | |||||||||||
Current Assets: | |||||||||||
Cash | $ | — | $ | — | |||||||
Receivables: | |||||||||||
Trade | 38,054 | 39,100 | |||||||||
Affiliated companies | 151 | 372 | |||||||||
Advances to affiliate | 302,787 | 281,442 | |||||||||
Other | 3,280 | 737 | |||||||||
Materials and supplies | 9,770 | 8,909 | |||||||||
Exchange gas due from others | 8,762 | 16,958 | |||||||||
Prepayments and other | 4,102 | 4,308 | |||||||||
Total current assets | 366,906 | 351,826 | |||||||||
Property, plant and equipment | 3,762,196 | 3,753,354 | |||||||||
Less-Accumulated depreciation and amortization | 1,890,314 | 1,863,921 | |||||||||
Total property, plant and equipment, net | 1,871,882 | 1,889,433 | |||||||||
Other Assets: | |||||||||||
Deferred charges and other long-term assets | 12,096 | 11,826 | |||||||||
Regulatory assets | 17,575 | 18,312 | |||||||||
Right-of-use assets | 10,449 | 10,238 | |||||||||
Total other assets | 40,120 | 40,376 | |||||||||
Total assets | $ | 2,278,908 | $ | 2,281,635 |
(continued)
See accompanying notes.
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Northwest Pipeline LLC
Balance Sheet
(Unaudited)
March 31, 2022 | December 31, 2021 | ||||||||||
(Thousands) | |||||||||||
LIABILITIES AND MEMBER’S EQUITY | |||||||||||
Current Liabilities: | |||||||||||
Payables: | |||||||||||
Trade | $ | 10,267 | $ | 23,108 | |||||||
Affiliated companies | 8,436 | 13,140 | |||||||||
Accrued liabilities: | |||||||||||
Taxes — other than income taxes | 14,288 | 11,196 | |||||||||
Interest | 12,019 | 5,505 | |||||||||
Exchange gas due to others | 5,925 | 12,559 | |||||||||
Customer advances | 7,254 | 2,281 | |||||||||
Other | 2,422 | 2,546 | |||||||||
Total current liabilities | 60,611 | 70,335 | |||||||||
Long-Term Debt | 579,289 | 579,030 | |||||||||
Other Long-Term Liabilities: | |||||||||||
Asset retirement obligations | 124,281 | 122,650 | |||||||||
Regulatory liabilities | 396,363 | 388,433 | |||||||||
Lease liability | 8,448 | 8,202 | |||||||||
Other | 3,279 | 3,582 | |||||||||
Total other long-term liabilities | 532,371 | 522,867 | |||||||||
Contingent Liabilities and Commitments (Note 3) | 0 | 0 | |||||||||
Member’s Equity: | |||||||||||
Member’s capital | 1,073,892 | 1,073,892 | |||||||||
Retained earnings | 32,745 | 35,511 | |||||||||
Total member’s equity | 1,106,637 | 1,109,403 | |||||||||
Total liabilities and member’s equity | $ | 2,278,908 | $ | 2,281,635 |
See accompanying notes.
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Northwest Pipeline LLC
Statement of Changes in Member’s Equity
(Unaudited)
Three Months Ended March 31, | |||||||||||||||||
2022 | 2021 | ||||||||||||||||
(Thousands) | |||||||||||||||||
Member’s Capital: | |||||||||||||||||
Balance at beginning and end of period | $ | 1,073,892 | $ | 1,073,892 | |||||||||||||
Retained Earnings: | |||||||||||||||||
Balance at beginning of period | 35,511 | 66,503 | |||||||||||||||
Net income | 39,234 | 39,228 | |||||||||||||||
Cash distributions to parent | (42,000) | (55,000) | |||||||||||||||
Balance at end of period | 32,745 | 50,731 | |||||||||||||||
Total Member’s Equity | $ | 1,106,637 | $ | 1,124,623 |
See accompanying notes.
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Northwest Pipeline LLC
Statement of Cash Flows
(Unaudited)
Three Months Ended March 31, | |||||||||||
2022 | 2021 | ||||||||||
(Thousands) | |||||||||||
OPERATING ACTIVITIES: | |||||||||||
Net income | $ | 39,234 | $ | 39,228 | |||||||
Adjustments to reconcile net cash provided (used) by operating activities: | |||||||||||
Depreciation and amortization | 28,642 | 28,068 | |||||||||
Regulatory debits | 454 | 348 | |||||||||
Regulatory charges resulting from tax rate changes | 5,814 | 5,814 | |||||||||
Amortization of deferred charges and credits | (1,126) | (772) | |||||||||
Allowance for equity funds used during construction (equity AFUDC) | (516) | (215) | |||||||||
Changes in current assets and liabilities: | |||||||||||
Trade and other accounts receivable | (1,497) | 1,822 | |||||||||
Affiliated receivables | 221 | (9) | |||||||||
Materials and supplies | (861) | (42) | |||||||||
Other current assets | 864 | 1,872 | |||||||||
Trade accounts payable | (3,073) | (8,375) | |||||||||
Affiliated payables | (4,704) | 3,867 | |||||||||
Other accrued liabilities | 9,630 | 6,175 | |||||||||
Changes in long-term assets and liabilities: | |||||||||||
Regulatory liabilities | 1,136 | 957 | |||||||||
Other, net | 1,102 | 85 | |||||||||
Net cash provided by operating activities | 75,320 | 78,823 | |||||||||
FINANCING ACTIVITIES: | |||||||||||
Cash distributions to parent | (42,000) | (55,000) | |||||||||
Net cash used by financing activities | (42,000) | (55,000) | |||||||||
INVESTING ACTIVITIES: | |||||||||||
Property, plant and equipment: | |||||||||||
Capital expenditures (1) | (13,441) | (7,426) | |||||||||
Contributions and advances for construction costs | 1,626 | 1,699 | |||||||||
Disposal of property, plant and equipment, net | (160) | (246) | |||||||||
Advances to affiliate, net | (21,345) | (17,850) | |||||||||
Net cash used by investing activities | (33,320) | (23,823) | |||||||||
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 | $ | (7,026) | $ | (5,741) | |||||||
Changes in related accounts payable and accrued liabilities | (6,415) | (1,685) | |||||||||
Capital expenditures | $ | (13,441) | $ | (7,426) |
See accompanying notes.
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Northwest Pipeline LLC
Notes to Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
In this report, Northwest Pipeline LLC (Northwest) is at times referred to in the first person as “we,” “us,” or “our.”
Northwest is indirectly owned by The Williams Companies, Inc. (Williams), a publicly traded Delaware corporation. We own and operate an interstate natural gas pipeline system that is regulated by the Federal Energy Regulatory Commission (FERC).
General
The accompanying 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 accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. The unaudited financial statements include all normal recurring adjustments and others which, in the opinion of our management, are necessary to present fairly our interim financial statements. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto in our 2021 Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the interim financial statements and accompanying notes. Actual results could differ from those estimates.
A reclassification within Operating Revenues on the Statement of Net Income from the service line of Natural gas storage to Other of approximately $0.6 million for the three months ended March 31, 2021 has been made to conform to the 2022 presentation.
Note 2 – Revenue Recognition
Revenue by Category
Our revenue disaggregation by major service line includes Natural gas transportation, Natural gas storage, and Other, which are separately presented on the Statement of Net Income.
Contract Assets
The following table presents a reconciliation of our contract assets:
Three Months Ended | ||||||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
(Thousands) | ||||||||||||||||||||||||||
Balance at beginning of period | $ | 7,943 | $ | 3,395 | ||||||||||||||||||||||
Revenue recognized in excess of amounts invoiced | 1,121 | 1,121 | ||||||||||||||||||||||||
Balance at end of period | $ | 9,064 | $ | 4,516 |
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Notes (Continued) |
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
Three Months Ended | ||||||||||||||||||||||||||
March 31, | ||||||||||||||||||||||||||
2022 | 2021 | |||||||||||||||||||||||||
(Thousands) | ||||||||||||||||||||||||||
Balance at beginning of period | $ | 3,672 | $ | 4,610 | ||||||||||||||||||||||
Recognized in revenue | (254) | (232) | ||||||||||||||||||||||||
Balance at end of period | $ | 3,418 | $ | 4,378 |
Remaining Performance Obligations
Our remaining performance obligations primarily include reservation charges on contracted capacity on our firm transportation and storage contracts with customers. Amounts from certain contracts included in the table below, which are subject to periodic review and approval by the FERC, reflect the rates for such services in our current FERC tariffs for the life of the related contracts; however, these rates may change based on future rate cases or settlements approved by the FERC and the amount and timing of these changes is not currently known. This table excludes the variable consideration component for commodity charges. Certain of our contracts contain evergreen and other renewal provisions for periods beyond the initial term of the contract. The remaining performance obligations as of March 31, 2022 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 authorization 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 31, 2022.
Contract Liabilities | Remaining Performance Obligations | ||||||||||
(Thousands) | |||||||||||
2022 (nine months) | $ | 775 | $ | 311,051 | |||||||
2023 (one year) | 1,120 | 392,655 | |||||||||
2024 (one year) | 1,218 | 341,271 | |||||||||
2025 (one year) | 305 | 331,553 | |||||||||
2026 (one year) | — | 322,990 | |||||||||
Thereafter 00 | — | 2,518,264 | |||||||||
Total | $ | 3,418 | $ | 4,217,784 |
Accounts Receivable
Receivables from contracts with customers are included within Receivables - Trade and Receivables - Affiliated companies and receivables that are not related to contracts with customers are included within the balance of Receivables - Advances to affiliate and Receivables - Other on our Balance Sheet.
Note 3 – Contingent Liabilities and Commitments
Environmental Matters
We are subject to the National Environmental Policy Act and other federal and state legislation regulating the environmental aspects of our business. Except as discussed below, our management believes that we are in
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Notes (Continued) |
substantial compliance with existing environmental requirements. Environmental expenditures are expensed or capitalized depending on their future economic benefit and potential for rate recovery. We believe that, with respect to any expenditures required to meet applicable standards and regulations, the FERC would grant the requisite rate relief so that substantially all of such expenditures would be permitted to be recovered through rates.
Beginning in the mid-1980s, we evaluated many of our facilities for the presence of toxic and hazardous substances to determine to what extent, if any, remediation might be necessary. We identified polychlorinated biphenyl (PCB) contamination in air compressor systems, soils, and related properties at certain compressor station sites. Similarly, we identified hydrocarbon impacts at these facilities due to the former use of earthen pits, lubricating oil leaks or spills, and excess pipe coating released to the environment. In addition, heavy metals have been identified at these sites due to the former use of mercury containing meters and paint and welding rods containing lead, cadmium, and arsenic. The PCBs were remediated pursuant to a Consent Decree with the U.S. Environmental Protection Agency (EPA) in the late 1980s, and we conducted a voluntary clean-up of the hydrocarbon and mercury impacts in the early 1990s. In 2005, the Washington Department of Ecology required us to re-evaluate our previous clean-ups in Washington. During 2006 to 2015, 129 meter stations were evaluated, of which 82 required remediation. As of March 31, 2022, two meter stations are still being remediated. During 2006 to 2018, 14 compressor stations were evaluated, of which 11 required remediation. As of March 31, 2022, five compressor stations are still being remediated. At March 31, 2022, we had accrued liabilities totaling approximately $1.0 million, $0.1 million of which is recorded in Accrued liabilities - Other and $0.9 million of which is recorded in Other Long-Term Liabilities - Other on the Balance Sheet. At December 31, 2021, we had accrued liabilities totaling approximately $1.0 million, $0.1 million of which is recorded in Accrued liabilities - Other and $0.9 million of which is recorded in Other Long-Term Liabilities - Other on the Balance Sheet. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs.
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 National Ambient Air Quality Standards, and rules for new 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 or modified regulations may result in impacts to our operations and increase the cost additions to Total property, plant, and equipment, net on the Balance Sheet for both new and existing facilities in affected areas; however, due to regulatory uncertainty on final rule content and applicability timeframes, we are unable to reasonably estimate the cost of these regulatory impacts at this time.
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.
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Notes (Continued) |
Note 4 – Debt and Financing Arrangements
Commercial Paper
Williams participates in a $3.5 billion commercial paper program and Williams’ management considers amounts outstanding under this program to be a reduction of available capacity under the credit facility. At March 31, 2022, Williams had 0 outstanding commercial paper.
Credit Facility
We, along with Williams and Transcontinental Gas Pipe Line Company, LLC (Transco), are party to a credit agreement with aggregate commitments available of $3.75 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. We and Transco are each able to borrow up to $500 million under this credit facility to the extent not otherwise utilized by the other co-borrowers. At March 31, 2022, 0 letters of credit have been issued and 0 loans were outstanding under the credit facility.
Note 5 – Financial Instruments
Fair Value of Financial Instruments
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:
Short-term financial assets: The carrying values of short-term financial assets 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.
Long-term debt: The disclosed fair value of our long-term debt, which we consider as a level 2 measurement, is determined 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 carrying amount and estimated fair value of our long-term debt were $579.3 million and $605.7 million, respectively, at March 31, 2022, and $579.0 million and $646.2 million, respectively, at December 31, 2021.
Note 6 – Transactions with Affiliates
We are a participant in Williams’ cash management program, and we make advances to and receive advances from Williams. At March 31, 2022 and December 31, 2021, our advances to Williams totaled approximately $302.8 million and $281.4 million, respectively. These advances are represented by demand notes and are classified as Receivables - Advances to affiliate on the Balance Sheet. Advances are stated at the historical carrying amounts. Interest expense and income are recognized when earned and the collectability is reasonably assured. The interest rate on these intercompany demand notes is based upon the daily overnight investment rate paid on Williams’ excess cash at the end of each month, which was 0.12 percent at March 31, 2022. The interest income from these advances was minimal for each of the three months ended March 31, 2022 and 2021. Such interest income is included in Other (Income) and Other Expenses – Miscellaneous other income, net on the Statement of Net Income.
Included in Operating Revenues on the Statement of Net Income are revenues received from affiliates of $0.4 million for each of the three months ended March 31, 2022 and 2021. The rates charged to provide services to affiliates are the same as those that are charged to similarly-situated nonaffiliated customers.
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
12
Notes (Continued) |
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 have recorded approximately $20.3 million and $20.6 million for the three months ended March 31, 2022 and 2021, respectively, for these service expenses which are primarily included in General and administrative and Operation and maintenance expenses on the Statement of Net Income.
We declared and paid cash distributions to our parent totaling $42.0 million and $55.0 million during the three months ended March 31, 2022 and 2021, respectively. During April 2022, we declared and paid an additional cash distribution of $36.5 million to our parent.
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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 Management’s Discussion and Analysis, Financial Statements, and Notes contained in Items 7 and 8 of our 2021 Annual Report on Form 10-K and with the Financial Statements and Notes contained in this Form 10-Q.
Results of Operations
This analysis discusses financial results of our operations for the three-month periods ended March 31, 2022 and 2021. Variances due to changes in natural gas prices and transportation volumes have little impact on revenues, because under our rate design methodology, the majority of overall cost of service is recovered through firm capacity reservation charges in our transportation rates.
Net Income for the first three months of 2022 of $39.2 million was flat when compared to the $39.2 million recognized during the first three months of 2021 as favorable results were offset by increased expenses as discussed further below.
Operating Revenues increased $0.9 million, or approximately 1 percent, primarily driven by an increase in Natural gas transportation from higher short-term firm transportation and an increase in Other from higher park and loan services in 2022.
Operating Expenses increased $1.7 million, or 3 percent, primarily due to an increase in Operation and Maintenance expenses related to various immaterial items and higher Depreciation and amortization from additional assets placed into service.
Other (Income) and Other Expenses had an $0.8 million favorable change, or approximately 12 percent, primarily due to (i) favorable changes for funds used during construction as a result of higher capitalized construction costs and (ii) the favorable impact as a result of the tax gross-up on the increase in prepayments received for reimbursable projects in 2022, partially offset by an increase in interest expense associated with our rate reserve liability associated with deferred income taxes as result of a higher balance in 2022.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Senior Vice President and our Vice President and Chief Accounting Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act, as amended) (Disclosure Controls) or our internal control over financial reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant.
Evaluation of Disclosure Controls and Procedures
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 and Chief Accounting Officer. Based upon that evaluation, our Senior Vice President and our Vice President and Chief Accounting Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes during the first quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our Internal Control over Financial Reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Environmental
While it is not possible for us to predict the final outcome of any pending legal proceedings involving governmental authorities under federal, state, and local laws regulating the discharge of materials into the environment, we do not anticipate a material effect on our financial position if we were to receive an unfavorable outcome in any one or more of such proceedings. Our threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
Other
The additional information called for by this item is provided in Note 3 – Contingent Liabilities and Commitments, included in the Notes to Financial Statements included under Part I, Item 1. Financial Statements of this Form 10-Q, which information is incorporated by reference into this item.
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Item 1A. Risk Factors
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2021 includes certain risk factors that could materially affect our business, financial condition, or future results. Those Risk Factors have not materially changed, except that they are supplemented or modified by the following risk factors.
Difficult conditions in the global financial markets and the economy in general could negatively affect our business and results of operations.
Our business may be negatively impacted by adverse economic conditions or future disruptions in the global financial markets. Included among these potential negative impacts are industrial or economic contraction (including as a result of the COVID-19 pandemic) leading to reduced energy demand and lower prices for our products and services and increased difficulty in collecting amounts owed to us by our customers. The ongoing Russian invasion of Ukraine and the actions undertaken by western nations in response to Russia’s actions has had, and may continue to have, adverse impacts on global financial markets. We, along with Williams and Transcontinental Gas Pipe Line Company, LLC, are party to a credit agreement with aggregate commitments available of $3.75 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. We and Transcontinental Gas Pipe Line Company, LLC are each subject to a $500 million borrowing sublimit. As of March 31, 2022, we had a borrowing capacity of $500 million under such credit facility, but our ability to borrow under that facility could be impaired if one or more of our lenders fails to honor its contractual obligation to lend to us. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to implement our business plans or otherwise take advantage of business opportunities or respond to competitive pressures. In addition, financial markets have periodically been affected by concerns over U.S. fiscal and monetary policies. These concerns, as well as actions taken by the U.S. federal government in response to these concerns, could significantly and adversely impact the global and U.S. economies and financial markets, which could negatively impact us in the manner described above.
Our business could be negatively impacted by acts of terrorism and related disruptions.
Given the volatile nature of the commodities we transport and store, our assets and the assets of our customers and others in our industry may be targets of terrorist activities. Uncertainty surrounding the Russian invasion of Ukraine, or other sustained military campaigns, may affect our operations in unpredictable ways, including the possibility that infrastructure facilities could be direct targets of, or indirect casualties of, an act of terrorism. A terrorist attack could create significant price volatility, disrupt our business, limit our access to capital markets, or cause significant harm to our operations, such as full or partial disruption to our ability to transport natural gas. Acts of terrorism, as well as events occurring in response to or in connection with acts of terrorism, could cause environmental repercussions that could result in a significant decrease in revenues or significant reconstruction or remediation costs, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
A breach of our information technology infrastructure, including a breach caused by a cybersecurity attack on us or third parties with whom we are interconnected, may interfere with the safe operation of our assets, result in the disclosure of personal or proprietary information, and harm our reputation.
We rely on our information technology infrastructure to process, transmit, and store electronic information, including information we use to safely operate our assets. In addition to the oversight of our business provided by our Management Committee, the Williams’ Board of Directors has oversight responsibility with regard to enterprise-wide assessment of the major risks inherent in its businesses, including cybersecurity risks. Accordingly, the Williams’ Board of Directors reviews management’s efforts to address and mitigate such risks, including the establishment and implementation of policies to address cybersecurity threats. We have invested, and expect to continue to invest, significant time, manpower, and capital in our information technology infrastructure. However, the age, operating systems, or condition of our current information technology infrastructure and software assets and our ability to maintain and upgrade such assets could affect our ability to resist cybersecurity threats. While we
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believe that we maintain appropriate information security policies, practices, and protocols, we regularly face cybersecurity and other security threats to our information technology infrastructure, which could include threats to our operational industrial control systems and safety systems that operate our pipelines, plants, and assets. We face unlawful attempts to gain access to our information technology infrastructure, including coordinated attacks from hackers, whether state-sponsored groups, “hacktivists”, or private individuals. We face the threat of theft and misuse of sensitive data and information, including customer and employee information. We also face attempts to gain access to information related to our assets through attempts to obtain unauthorized access by targeting acts of deception against individuals with legitimate access to physical locations or information. We also are subject to cybersecurity risks arising from the fact that our business operations are interconnected with third parties, including third-party pipelines, other facilities, and our contractors and vendors. In addition, the breach of certain business systems could affect our ability to correctly record, process, and report financial information. Breaches in our information technology infrastructure or physical facilities, or other disruptions, including those arising from theft, vandalism, fraud, or unethical conduct, which may increase as a result of the Russian invasion of Ukraine, could result in damage to or destruction of our assets, unnecessary waste, safety incidents, damage to the environment, reputational damage, potential liability, the loss of contracts, the imposition of significant costs associated with remediation and litigation, heightened regulatory scrutiny, increased insurance costs, and have a material adverse effect on our operations, financial condition, results of operations, and cash flows.
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Item 6. Exhibits
The following instruments are included as exhibits to this report.
Exhibit | Description | |||||||
2 | ||||||||
3.1 | ||||||||
3.2 | ||||||||
31.1* | ||||||||
31.2* | ||||||||
32** | ||||||||
101.INS* | XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |||||||
101.SCH* | XBRL Taxonomy Extension Schema. | |||||||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase. | |||||||
101.DEF* | XBRL Taxonomy Definition Linkbase. | |||||||
101.LAB* | XBRL Taxonomy Extension Label Linkbase. | |||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase. | |||||||
104* | Cover Page Interactive Data File. The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document (contained in Exhibit 101). |
* | Filed herewith. | ||||
** | Furnished herewith. |
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SIGNATURE
Pursuant to the requirements 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.
NORTHWEST PIPELINE LLC (Registrant) | ||||||||||||||
Date: | May 2, 2022 | By: | /s/ Billeigh W. Mark | |||||||||||
Billeigh W. Mark | ||||||||||||||
Controller | ||||||||||||||
(Principal Accounting Officer) |