UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ......... to ..........
Commission File Number 1-7584
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 74-1079400 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
2800 Post Oak Boulevard | ||
P. O. Box 1396 | ||
Houston, Texas | 77251 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code | (713) 215-2000 | |
None | ||
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No
The number of shares of Common Stock, par value $1.00 per share, outstanding as of March 31, 2002 was 100.
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Company or Group of Companies for Which Report Is Filed:
Transcontinental Gas Pipe Line Corporation and Subsidiaries (Transco)
The accompanying interim condensed consolidated financial statements of Transco do not include all notes in annual financial statements and therefore should be read in conjunction with the consolidated financial statements and notes thereto in Transco's 2001 Annual Report on Form 10-K. The accompanying condensed consolidated financial statements have not been audited by independent auditors but include all adjustments both normal recurring and others which, in the opinion of Transco's management, are necessary to present fairly its financial position at March 31, 2002, and results of operations and cash flows for the three months ended March 31, 2002 and 2001.
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although Transco believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be achieved. Such statements are made in reliance on the "safe harbor" protections provided under the Private Securities Litigation Reform Act of 1995. Additional information about issues that could lead to material changes in performance is contained in Transco's 2001 Annual Report on Form 10-K.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET | |||
March 31, | December 31, | ||
ASSETS | |||
Current Assets: | |||
Cash | $ 444 | $ 472 | |
Receivables: |
| ||
Affiliates | 15,569 | 79,209 | |
Advances to affiliates | 424,621 | 324,073 | |
Other | 59,197 | 66,214 | |
Transportation and exchange gas receivables | 17,569 | 15,353 | |
Inventories | 114,221 | 115,447 | |
Deferred income taxes | 70,067 | 55,073 | |
Other | 20,869 | 19,241 | |
Total current assets | 722,557 | 675,082 | |
Long-term advances to affiliates | 20,679 | 20,679 | |
Investments, at cost plus equity in undistributed earnings | 62,053 | 62,228 | |
Property, Plant and Equipment: | |||
Natural gas transmission plant | 5,246,714 | 5,170,692 | |
Less - Accumulated depreciation and amortization | 1,174,061 | 1,136,126 | |
Total property, plant and equipment, net | 4,072,653 | 4,034,566 | |
Other Assets | 184,365 | 180,430 | |
$ 5,062,307 | $ 4,972,985 | ||
The accompanying condensed notes are an integral part of these condensed consolidated financial statements. | |||
TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Continued) | |||
March 31, | December 31, | ||
LIABILITIES AND STOCKHOLDER'S EQUITY |
| ||
Current Liabilities: |
| ||
Payables: |
| ||
Affiliates | $ 30,314 | $ 44,030 | |
Advances from affiliates | 6,459 | 7,970 | |
Other | 88,121 | 89,393 | |
Transportation and exchange gas payables: |
| ||
Affiliates | - | 176 | |
Others | 9,187 | 10,690 | |
Accrued liabilities | 171,550 | 146,752 | |
Reserve for rate refunds | 100,320 | 60,681 | |
Current maturities of long-term debt | 282,863 | 283,056 | |
Total current liabilities | 688,814 | 642,748 | |
Long-Term Debt (Note 4) | 798,063 | 797,994 | |
Other Long-Term Liabilities: |
| ||
Deferred income taxes | 908,320 | 910,239 | |
Other | 105,935 | 100,064 | |
Total other long-term liabilities | 1,014,255 | 1,010,303 | |
Commitments and contingencies (Note 3) |
| ||
Common Stockholder's Equity: |
| ||
Common stock $1.00 par value: | |||
100 shares authorized, issued and outstanding | - | - | |
Premium on capital stock and other paid-in capital | 1,652,430 | 1,652,430 | |
Retained earnings | 909,128 | 870,082 | |
Accumulated other comprehensive loss | (383) | (572) | |
Total common stockholder's equity | 2,561,175 | 2,521,940 | |
$ 5,062,307 | $ 4,972,985 | ||
The accompanying condensed notes are an integral part of these condensed consolidated financial statements. | |||
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
Three Months Ended | |||
2002 | 2001 | ||
Operating Revenues: | |||
Natural gas sales | $ 87,471 | $ 360,664 | |
Natural gas transportation | 174,525 | 178,967 | |
Natural gas storage | 35,432 | 35,789 | |
Other | 2,904 | 1,705 | |
Total operating revenues | 300,332 | 577,125 | |
Operating Costs and Expenses: | |||
Cost of natural gas sales | 87,471 | 360,664 | |
Cost of natural gas transportation | 9,245 | 14,127 | |
Operation and maintenance | 43,814 | 44,958 | |
Administrative and general | 32,083 | 31,740 | |
Depreciation and amortization | 46,028 | 42,791 | |
Taxes - other than income taxes | 11,173 | 10,618 | |
Other | 1,133 | 814 | |
Total operating costs and expenses | 230,947 | 505,712 | |
Operating Income | 69,385 | 71,413 | |
Other (Income) and Other Deductions: | |||
Interest expense | 20,666 | 18,793 | |
Interest income - affiliates | (2,750) | (7,296) | |
Allowance for equity and borrowed funds used during construction (AFUDC) | (6,314) | (5,392) | |
Equity in earnings of unconsolidated affiliates | (1,951) | (2,172) | |
Miscellaneous other (income) deductions, net | (3,875) | (2,599) | |
Total other (income) and other deductions | 5,776 | 1,334 | |
Income before Income Taxes | 63,609 | 70,079 | |
Provision for Income Taxes | 24,562 | 26,351 | |
Net Income | $ 39,047 | $ 43,728 | |
The accompanying condensed notes are an integral part of these condensed consolidated financial statements. |
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Three Months Ended | |||
2002 | 2001 | ||
Cash flows from operating activities: | |||
Net income | $ 39,047 | $ 43,728 | |
Adjustments to reconcile net income to net cash provided by (used in) | |||
operating activities: | |||
Depreciation and amortization | 46,761 | 44,047 | |
Deferred income taxes | (17,030) | 15,476 | |
Allowance for equity funds used during construction (Equity AFUDC) | (4,686) | (3,981) | |
Changes in operating assets and liabilities: | |||
Receivables | 70,660 | 70,417 | |
Transportation and exchange gas receivables | (2,216) | (3,793) | |
Inventories | 1,226 | (45,018) | |
Payables | (6,977) | (64,609) | |
Transportation and exchange gas payables | (1,679) | 689 | |
Accrued liabilities | 24,788 | (41,261) | |
Reserve for rate refunds | 39,639 | (23,410) | |
Other, net | 772 | (6,554) | |
Net cash provided by (used in) operating activities | 190,305 | (14,269) | |
Cash flows from financing activities: | |||
Debt issue costs | (101) | - | |
Advances from affiliate, net | (1,511) | 766 | |
Net cash provided by (used in) financing activities | (1,612) | 766 | |
Cash flows from investing activities: | |||
Property, plant and equipment: | |||
Additions, net of equity AFUDC | (79,839) | (61,988) | |
Changes in accounts payable | (8,011) | (4,525) | |
Advances to affiliates, net | (100,548) | 78,302 | |
Investments in affiliates, net | - | (365) | |
Other, net | (323) | 2,228 | |
Net cash provided by (used in) investing activities | (188,721) | 13,652 | |
Net increase (decrease) in cash | (28) | 149 | |
Cash at beginning of period | 472 | 531 | |
Cash at end of period | $ 444 | $ 680 | |
Supplemental disclosures of cash flow information: | |||
Cash paid during the year for: | |||
Interest (exclusive of amount capitalized) | $ 24,690 | $ 24,599 | |
Income taxes paid | 14,724 | 34,349 | |
The accompanying condensed notes are an integral part of these condensed consolidated financial statements. | |||
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. CORPORATE STRUCTURE AND CONTROL
Transcontinental Gas Pipe Line Corporation (Transco) is a wholly-owned subsidiary of Williams Gas Pipeline Company, LLC (WGP). WGP is a wholly-owned subsidiary of The Williams Companies, Inc. (Williams).
2. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Transco and its majority-owned subsidiaries. Companies in which Transco and its subsidiaries own 20 percent to 50 percent of the voting common stock or otherwise exercise significant influence over operating and financial policies of the company are accounted for under the equity method.
The condensed consolidated financial statements have been prepared from the books and records of Transco without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Transco's 2001 Annual Report on Form 10-K.
Through an agency agreement, Williams Energy Marketing & Trading Company (WEM&T), an affiliate of Transco, manages all jurisdictional merchant gas sales of Transco, receives all margins associated with such business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on its operating income or results of operations.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include: 1) revenues subject to refund; 2) litigation-related contingencies; 3) environmental remediation obligations; and 4) impairment assessments of long-lived assets.
Comprehensive income for the three months ended March 31, 2002 and 2001, respectively, are as follows (in thousands):
Three Months Ended March 31, | |||
2002 | 2001 | ||
Net income | $ 39,047 | $ 43,728 | |
Equity interest in unrealized gain (loss) on interest rate hedge | 189 | (515) | |
Total comprehensive income | $ 39,236 | $ 43,213 | |
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 establishes accounting and reporting standards for business combinations and requires all business combinations to be accounted for by the purchase method. The statement is effective for all business combinations initiated after June 30, 2001, and any business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. SFAS No. 142 addresses accounting and reporting standards for goodwill and other intangible assets. Under the provisions of this statement, goodwill and intangible assets with indefinite useful lives are no longer amortized, but will be tested annually for impairment. Transco applied the new rules beginning January 1, 2002. Because Transco has no goodwill and intangible assets are amortized at r ates approved by the Federal Energy Regulatory Commission (FERC) through regulatory proceedings, the adoption of these standards did not have a material effect on Transco's results of operations and financial position.
Certain reclassifications have been made in the 2001 financial statements to conform to the 2002 presentation.
3. CONTINGENT LIABILITIES AND COMMITMENTS
There have been no new developments from those described in Transco's 2001 Annual Report on Form 10-K other than as described below.
Rate and Regulatory Matters
General rate case (Docket No. RP01-245) On March 1, 2001, Transco submitted to the FERC a general rate filing principally designed to recover costs associated with an increase in rate base resulting from additional plant, an increase in rate of return and related taxes, and an increase in operation and maintenance expenses. The filing reflects an annual cost of service increase of approximately $227 million over the cost of service underlying the rates reflected in the settlement of Transco's Docket No. RP97-71 rate proceeding, as subsequently adjusted pursuant to the terms of that settlement and FERC orders resolving issues reserved by the settlement for FERC decision. The filing also reflects certain changes to Transco's tariff, cost allocation and rate design methods, including, among other things, the roll-in of Transco's Mobile Bay expansion project, and a pro forma proposal to roll-in the costs of Transco's SunBelt, Pocono and Cherokee expansion proje cts.
On March 28, 2001, the FERC issued an order accepting and suspending Transco's March 1, 2001 general rate filing to be effective September 1, 2001, subject to refund and the outcome of a hearing. On August 31, 2001, Transco filed a motion to place the rates into effect on September 1, 2001, in accordance with the FERC's March 28, 2001 order. On September 27, 2001, the FERC accepted that filing, subject to certain conditions, including the condition that Transco file tariff sheets regarding the elimination of costs associated with facilities that the FERC had approved for abandonment in various spindown proceedings in Transco's Docket Nos. CP01-34, CP01-103 and CP01-368. On October 9, 2001, Transco filed a request for rehearing of that condition, and on November 6, 2001, the FERC granted Transco an extension of time to comply with the condition until 30 days after the FERC acts on Transco's request for rehearing of the September 27, 2001 order.
On December 19, 2001, the FERC issued an order on rehearing of its September 27, 2001 order. In the December 19 order, the FERC granted rehearing of the requirement that Transco adjust its rates to eliminate costs related to the facilities that have not yet been abandoned and transferred, but denied rehearing of that requirement with respect to certain facilities that were abandoned and transferred effective December 1, 2001 since Transco no longer owns those facilities and the facilities are no longer used by Transco to provide jurisdictional service. As to the facilities that have not yet been abandoned and transferred, the FERC issued orders in Docket Nos. CP01-34, CP01-103 and CP01-368 directing Transco to "show cause" why it should not be required to file revised rates reflecting the removal of the costs associated with those facilities effective with the date the facilities are abandoned and transferred. As to the facilities that were abandoned and transferred effective Decembe r 1, 2001, the FERC directed that Transco file revised tariff sheets to be effective December 1, 2001, reflecting the removal of the costs of the facilities that were abandoned and transferred. Various appeals of the rate and gathering determination decisions in Docket Nos. CP01-34, CP01-103 and CP01-368 were filed by interested parties in the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit Court).
On January 18, 2002, Transco filed answers to the "show cause" orders in Docket Nos. CP01-34, CP01-103 and CP01-368, stating that it should not be required to adjust its rates upon abandonment and transfer of the facilities but that the rate effects should be addressed in the next general rate case following any abandonment and transfer of the facilities. On January 18, 2002, Transco also filed a request for rehearing of the December 19, 2001 order with respect to the facilities that were abandoned and transferred effective December 1, 2001, stating that it should not be required to adjust its rates effective December 1, 2001, and that the rate effects of that abandonment and transfer should be addressed in Transco's next general rate case. Subject to that request for rehearing, Transco filed on January 18, 2002 a compliance filing to adjust its rates, effective December 1, 2001, to reflect the removal of the costs of the facilities that were abandoned and transfer red. On February 28, 2002, the FERC issued an order on Transco's January 18, 2002 filing, which consolidates the issues concerning whether Transco's filing complies with the directive of the December 19, 2001 order with the hearing established in this general rate case proceeding, and accepts the January 18, 2002 filing effective December 1, 2001, subject to refund, the outcome of rehearing of the December 19, 2001 order and the outcome of the hearing in Docket No. RP01-245.
On April 12, 2002, Transco filed a Stipulation and Agreement (Settlement) for approval by the FERC, which resolves all cost of service, throughput and throughput mix issues, with the exception of one cost of service issue related to the valuation of certain right-of-way access, the resolution of which is to be applied prospectively. The Settlement also contains provisions that resolve various cost allocation, tariff and other matters, including provisions to resolve all issues related to Transco's January 18, 2002 compliance filing to adjust Transco's rates effective December 1, 2001 to reflect the removal of the cost of facilities that were abandoned and transferred, the requests for rehearing of the FERC's December 19, 2001 order requiring that filing, the "show cause" requirement in the FERC's December 19, 2001 orders in Docket Nos. CP01-34, CP01-103 and CP01-368, and certain other proceedings that were consolidated with or made subject to the outcome of the pro ceedings in Docket No. RP01-245. Issues not resolved by the Settlement will be the subject of litigation or further settlement. Initial comments on the Settlement have been filed with the FERC and reply comments are due on May 13, 2002. Transco has provided a reserve for rate refunds which it believes is adequate for any refunds that may be required.
General rate case (Docket No. RP95-197) On March 1, 1995, Transco filed with the FERC a general rate case that proposed changes in the rates for Transco's transportation, sales and storage service rate schedules effective April 1, 1995. The changes in rates, if accepted as proposed, would have generated additional annual jurisdictional revenues of approximately $132 million over the pre-filed rates in effect, based, among other things, on an increase in Transco's cost of capital resulting from an increase in the equity component of the capital structure used (the filing was based on Transco's own capital structure) and in the cost of equity from the pre-filed rate of return on equity of 14.45% to the proposed rate of return on equity of 15.25%.
On March 31, 1995, the FERC issued an order on Transco's filing which accepted and suspended the tariff sheets relating to Transco's rates, to be effective September 1, 1995, subject to refund, and established hearing procedures.
Through settlement and litigation, all issues in this proceeding have been resolved, except certain cost allocation and rate design issues discussed below.
A hearing concerning the cost allocation and rate design issues not resolved by settlement concluded in November 1996. A supplemental hearing to consider Transco's roll-in proposal filed in Docket No. RP97-71 was completed in June 1997. On March 24, 1998, the Administrative Law Judge (ALJ) issued an initial decision on all of these issues. As to the main issue addressed in the decision, rolled-in pricing, the ALJ determined that the proponents of roll-in, including Transco, must satisfy the burden under Section 5 of the Natural Gas Act of 1938 (NGA) and demonstrate that Transco's existing incremental rate treatment is unjust and unreasonable and that the proposed rolled-in rate treatment is just and reasonable. The ALJ ruled that neither Transco nor any of the other roll-in proponents had satisfied that burden and, therefore, that Transco's existing incremental rate treatment must remain in effect. On April 16, 1999, the FERC issued an order reversing the ALJ, conc luding that Transco's proposal did not have to meet the Section 5 burden discussed above and that under the appropriate standard, Section 4, Transco had demonstrated that its proposal was just and reasonable. As a result, the FERC remanded to the ALJ issues regarding the implementation of Transco's roll-in proposal. Several parties filed requests for rehearing of the FERC's April 16, 1999 order, and on March 28, 2001, the FERC issued an order denying those requests for rehearing. On April 27, 2001, several parties filed a request for rehearing of the March 28, 2001 order, and on June 13, 2001, the FERC denied that request for rehearing. On August 10, 2001, several parties filed a petition for review in the D.C. Circuit Court of the FERC's April 16, 1999, March 28, 2001 and June 13, 2001 orders. On April 4, 2000, the ALJ issued an initial decision on the remanded issues relating to the implementation of Transco's roll-in proposal. The ALJ ruled in favor of Transco's positions, with the exception of one of Tra nsco's proposed cost allocation changes and a requirement that the roll-in of the costs of the incremental projects into Transco's system rates be phased in over a three-year period. On October 12, 2001 the FERC issued an order on the ALJ's April 4, 2000 initial decision which generally upholds the decision, with the exception of the ALJ's approval of a change in the allocation of costs to a Transco storage service and the ALJ's decision to phase the roll-in of the costs of the incremental projects into Transco's system rates. The FERC determined that Transco must retain its existing method of allocating costs to the storage service, and that it is not necessary to phase the roll-in of the costs. On November 13, 2001, Transco and certain other parties each filed requests for rehearing of the FERC's October 12, 2001 order. On April 1, 2002, the FERC issued an order denying the requests for rehearing of the FERC's October 12, 2001 order. Pursuant to the terms of the settlement in this proceeding, the resolutio n of the roll-in issue will be effective prospectively after a final FERC order no longer subject to rehearing.
Notice of Proposed Rulemaking (Docket No. RM01-10-000) On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking (NOPR) proposing to adopt uniform standards of conduct for transmission providers. The proposed rules define transmission providers as interstate natural gas pipelines and public utilities that own, operate or control electric transmission facilities. The proposed standards would regulate the conduct of transmission providers with their energy affiliates. The FERC proposes to define energy affiliates broadly to include any transmission provider affiliate that engages in or is involved in transmission (gas or electric) transactions, or manages or controls transmission capacity, or buys, sells, trades or administers natural gas or electric energy or engages in financial transactions relating to the sale or transmission of natural gas or electricity. Current rules regulate the conduct of Transco and its natural gas marketing affiliates. If adopted, these new standards would require the adoption of new compliance measures by Transco. On April 25, 2002, the FERC announced its intention to convene a public conference to discuss issues raised in the NOPR.
Legal Proceedings
Royalty claims and litigation In connection with Transco's renegotiations with producers to resolve take-or-pay and other contract claims and to amend gas purchase contracts, Transco entered into certain settlements which may require the indemnification by Transco of certain claims for additional royalties which the producers may be required to pay as a result of such settlements. Transco has been made aware of demands on producers for additional royalties and such producers may receive other demands which could result in claims against Transco pursuant to the indemnification provisions in their respective settlements. Indemnification for royalties will depend on, among other things, the specific lease provisions between the producer and the lessor and the terms of the settlement between the producer and Transco.
On March 15, 1994, a lawsuit was filed in the 189th Judicial District Court of Harris County, Texas (Texaco, Inc. vs. Transcontinental Gas Pipe Line Corporation). In this lawsuit, the plaintiff has claimed approximately $23 million, including interest and attorneys' fees for reimbursements of settlement amounts paid to royalty owners. In October 1997, a jury verdict in this case found that Transco was required to pay Texaco damages of $14.5 million plus $3.75 million in attorney's fees. In 1998, the trial judge entered judgment consistent with the jury verdict and also awarded prejudgment interest of $5.0 million. In addition, through December 31, 2001, postjudgment interest was approximately $10.5 million. On June 8, 2000, the Texas Court of Appeals affirmed the trial court judgment and on February 1, 2001, Transco's rehearing request was denied. Transco filed a petition for review on April 2, 2001 with the Texas Supreme Court. On February 21, 2002, the Texa s Supreme Court denied Transco's petition for review. As a result, Transco recorded a pre-tax charge to income for the year ended December 31, 2001 in the amount of $37 million representing management's estimate of the effect of this ruling. Transco has requested rehearing of the court's decision. In response to the court's request, Texaco filed a response on April 25, 2002.
On June 8, 2001, 14 Williams entities were named as defendants in a nationwide class action lawsuit which has been pending against other defendants, generally pipeline and gathering companies, for more than one year. The plaintiffs allege that the defendants, including the Williams defendants, have engaged in mismeasurement techniques that distort the heating content of natural gas, resulting in an alleged underpayment of royalties to the class of producer plaintiffs. In September 2001, the plaintiffs voluntarily dismissed two of the 14 Williams entities named as defendants in the lawsuit. In November 2001, Williams, along with other Coordinating Defendants, filed a motion to dismiss under Rules 9b and 12b of the Kansas Rules of Civil Procedure. In January 2002, most of the Williams defendants, along with a group of Coordinating Defendants, filed a motion to dismiss for lack of personal jurisdiction. The court has not yet ruled on these motions. In the next several months, the Williams entities will join with other defendants in contesting certification of the plaintiff class.
Summary
While no assurances may be given, Transco does not believe that the ultimate resolution of the foregoing matters, taken as a whole and after consideration of amounts accrued, recovery from customers, insurance coverage or other indemnification arrangements, will have a materially adverse effect upon Transco's future financial position, results of operations or cash flow requirements.
Other Commitments
Commitments for construction Transco has commitments for construction and acquisition of property, plant and equipment of approximately $176 million at March 31, 2002 of which the majority relates to construction materials for pipeline expansion projects.
4. DEBT AND FINANCING ARRANGEMENTS
Long-term Debt
Williams and certain of its subsidiaries, including Transco, are parties to a $700 million credit agreement (Credit Agreement), under which Transco can borrow up to $400 million if the funds available under the Credit Agreement have not been borrowed by Williams or other subsidiaries. Interest rates vary with current market conditions based on the base rate of Citibank N.A., three-month certificates of deposit of major United States money market banks, federal funds rate or the London Interbank Offered Rate. The Credit Agreement contains restrictions which limit, under certain circumstances, the issuance of additional debt, the attachment of liens on any assets and any change of ownership of Transco. As of March 31, 2002, Transco had no outstanding borrowings under this agreement.
Current Maturities of Long-term Debt
The $283 million of current maturities of long-term debt consists of $125 million of 8 7/8% Notes that mature on September 15, 2002, $150 million of variable rate notes that mature on July 31, 2002 and $7.5 million of 7.08% Debentures that mature on July 15, 2026, but which Transco intends to redeem within the next twelve months.
Sale of Receivables
Transco, through a wholly-owned bankruptcy remote subsidiary, sells certain trade accounts receivable to a special purpose entity (SPE) in a securitization structure requiring annual renewal. Transco acts as the servicing agent for sold receivables and receives a servicing fee approximating the fair value of such services.
ITEM 2. Management's Narrative Analysis of Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements, notes and management's narrative analysis contained in Items 7 and 8 of Transco's 2001 Annual Report on Form 10-K and with the condensed consolidated financial statements and notes contained in this report.
RESULTS OF OPERATIONS
Net Income and Operating Income
Transco's net income for the three months ended March 31, 2002 was $39.0 million compared to net income of $43.7 million for the three months ended March 31, 2001. Operating income for the three months ended March 31, 2002 was $69.4 million compared to $71.4 million for the three months ended March 31, 2001. The lower operating income of $2.0 million was primarily the result of lower gas transportation revenues, and higher depreciation and amortization expense, partially offset by lower cost of natural gas transportation and lower operation and maintenance expense, as discussed below. The decrease in net income of $4.7 million was attributable to the decreased operating income, decreased interest income due primarily to lower interest rates and increased interest expense due to litigation interest and greater long-term debt, partially offset by a higher allowance for funds used during construction due primarily to a greater amount of capital projects under constru ction.
Transportation Revenues
Transco's operating revenues related to its transportation services for the three months ended March 31, 2002 were $174.5 million, compared to $179.0 million for the three months ended March 31, 2001. The lower transportation revenues of $4.5 million were primarily due to lower fuel costs billed to customers and a decrease in commodity revenues, partially offset by an increase in demand revenues primarily due to the effects of Transco's general rate case Docket No RP01-245, which was effective September 1, 2001.
As shown in the table below, Transco's total market-area deliveries for the three months ended March 31, 2002 increased 3.1 trillion British Thermal Units (TBtu) (0.8%) when compared to the same period in 2001. This is primarily the result of lower natural gas prices.Transco's production area deliveries for the three months ended March 31, 2002 increased 1.4 TBtu (4.5%) when compared to the same period in 2001. This is primarily due to increased liquefiables transportation resulting from the effects of lower natural gas prices on the level of natural gas liquids processing activity.
As a result of a straight fixed-variable (SFV) rate design, increases or decreases in firm transportation volumes in comparable facilities have no significant impact on operating income; however, because interruptible transportation rates have components of fixed and variable cost recovery, increases or decreases in interruptible transportation volumes do have an impact on operating income.
| Three Months | ||
Transco System Deliveries (TBtu) | 2002 | 2001 | |
Market-area deliveries: |
| ||
Long-haul transportation | 206.7 | 223.1 | |
Market-area transportation | 209.6 | 190.1 | |
Total market-area deliveries | 416.3 | 413.2 | |
Production-area transportation | 32.8 | 31.4 | |
Total system deliveries | 449.1 | 444.6 | |
| |||
Average Daily Transportation Volumes (TBtu) | 5.0 | 4.9 | |
Average Daily Firm Reserved Capacity (TBtu) | 6.1 | 5.9 |
Transco's facilities are divided into eight rate zones. Five are located in the production area and three are located in the market area. Long-haul transportation is gas that is received in one of the production-area zones and delivered in a market-area zone. Market-area transportation is gas that is both received and delivered within market-area zones. Production-area transportation is gas that is both received and delivered within production-area zones.
Sales Revenues
Transco makes jurisdictional merchant gas sales to customers pursuant to a blanket sales certificate issued by the FERC, with most of those sales being made through a Firm Sales (FS) program which gives customers the option to purchase daily quantities of gas from Transco at market-responsive prices in exchange for a demand charge payment.
Through an agency agreement with Transco, WEM&T, an affiliate of Transco, manages Transco's jurisdictional merchant gas sales, excluding Transco's cash out sales in settlement of gas imbalances. The long-term purchase agreements managed by WEM&T remain in Transco's name, as do the corresponding sales of such purchased gas. Therefore, Transco continues to record natural gas sales revenues and the related accounts receivable and cost of natural gas sales and the related accounts payable for the jurisdictional merchant sales that are managed by WEM&T. Through the agency agreement, WEM&T receives all margins associated with jurisdictional merchant gas sales business and, as Transco's agent, assumes all market and credit risk associated with Transco's jurisdictional merchant gas sales. Consequently, Transco's merchant gas sales service has no impact on Transco's operating income or results of operations.
Transco's operating revenues related to its sales services, including Transco's cash out sales in settlement of gas imbalances, were $87 million for the three months ended March 31, 2002, compared to $361 million for the same period in 2001. The decrease was primarily due to a lower average sales price of $2.36 per dekatherm (Dt) for the three months ending March 31, 2002, versus $7.12 per Dt for the same period of 2001 and a lower volume of merchant sales, partially offset by higher cash out sales volumes related to the monthly settlement of imbalances.
Three Months | |||
Gas Sales Volumes (TBtu) | 2002 | 2001 | |
Long-term sales | 12.0 | 37.8 | |
Short-term sales | 10.3 | 8.2 | |
Total gas sales | 22.3 | 46.0 | |
In the course of providing transportation services to customers, Transco may receive different quantities of gas from shippers than the quantities delivered on behalf of those shippers. Additionally, Transco transports gas on various pipeline systems which may deliver different quantities of gas on behalf of Transco than the quantities of gas received from Transco. These transactions result in gas transportation and exchange imbalance receivables and payables. Transco's tariff includes a method whereby most transportation imbalances generated after August 1, 1991 are settled on a monthly basis through cash out sales or purchases. During 2001, Transco settled certain transportation imbalances through cash out purchases at market prices, which resulted in a significant increase in gas inventory during the period. This gas inventory is expected to be used in future periods to settle transportation imbalances that require cash out sales.
Operating Costs and Expenses
Excluding the cost of natural gas sales of $87 million for the three months ended March 31, 2002 and $361 million for the comparable period in 2001, Transco's operating expenses for the three months ended March 31, 2002, were approximately $1.6 million lower than the comparable period in 2001. This decrease was primarily attributable to the lower cost of natural gas transportation and lower operation and maintenance expense, partially offset by higher depreciation and amortization expense. The lower cost of natural gas transportation was primarily due to lower fuel expense and lower transportation expense charged to Transco by others. The lower operations and maintenance expense is primarily due to lower telecommunication, labor and professional services expense. The higher depreciation and amortization was due primarily to plant and property additions.
Rate and Regulatory Matters
See Note 3 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent developments in Transco's rate and regulatory matters.
CAPITAL RESOURCES AND LIQUIDITY
Method of Financing
Transco funds its capital requirements with cash flows from operating activities, including the sale of trade receivables, by accessing capital markets, by repayments of funds advanced to WGP, by borrowings under the Credit Agreement and, if required, advances from WGP.
Transco has an effective registration statement on file with the Securities and Exchange Commission. At March 31, 2002, $200 million of shelf availability remains under this registration statement which may be used to issue debt securities. Interest rates and market conditions will affect amounts borrowed, if any, under this arrangement. Transco believes any additional financing arrangements, if required, can be obtained on reasonable terms.
Williams and certain of its subsidiaries, including Transco, are parties to a $700 million Credit Agreement, under which Transco can borrow up to $400 million if the funds available under the Credit Agreement have not been borrowed by Williams or other subsidiaries. At March 31, 2002, Transco had no outstanding borrowings under the Credit Agreement.
As a participant in Williams' cash management program, Transco and its subsidiaries have advances to and from Williams through Transco's parent company, WGP. At March 31, 2002, the advances due Transco by WGP totaled $445.3 million, of which $20.7 million associated with WGP's long-term investments was classified as a long-term advance in the accompanying Condensed Consolidated Balance Sheet.
Capital Expenditures
As shown in the table below, Transco's capital expenditures and investments in affiliates for the three months ended March 31, 2002 were $87.9 million, compared to $66.9 million for the three months ended March 31, 2001.
Three Months | |||
Ended March 31, | |||
Capital Expenditures and Investments in Affiliates | 2002 | 2001 | |
(In Millions) | |||
Market-area projects | $ 25.1 | $ 15.2 | |
Supply-area projects | 1.8 | 3.6 | |
Maintenance of existing facilities and other projects | 61.0 | 47.7 | |
Investment in affiliates | - | 0.4 | |
Total capital expenditures and investments in affiliates | $ 87.9 | $ 66.9 | |
Transco's capital expenditures estimate for 2002 and future capital projects are discussed in its 2001 Annual Report on Form 10-K. The following describes significant developments related to those projects and any new projects proposed by Transco.
Sundance Expansion Project On April 3, 2000, Transco filed an application with the FERC for its Sundance Expansion project, which will create approximately 228 MMcf/d of additional firm transportation capacity from Transco's Station 65 in Louisiana to delivery points in Georgia, South Carolina and North Carolina. On March 29, 2001, the FERC issued an order authorizing Transco to construct and operate the project, and Transco accepted the order on April 6, 2001. Approximately 38 miles of new pipeline loop along the existing mainline system was installed along with approximately 41,225 horsepower of new compression and modifications to existing compressor stations in Georgia, South Carolina and North Carolina. The project has an estimated cost of approximately $134 million and was placed in service on May 1, 2002.
MarketLink Expansion ProjectOn September 20, 2000, Transco filed an application to amend the certificate of public convenience and necessity issued in this proceeding to enable Transco to (a) phase the construction of the MarketLink project to satisfy phased in-service dates requested by the project shippers, and (b) redesign the recourse rate based on phased construction of the project. On December 13, 2000, the FERC issued an order permitting Transco to construct the MarketLink project in phases as proposed. Phase 1 of the project, providing approximately 160 MMcf/d of additional firm transportation service, was placed into service on December 19, 2001. Phase 2 of the project will consist of 126 MMcf/d of additional firm service. Construction began in March 2002 with an expected in-service date of November 1, 2002.
Leidy East ProjectTransco filed an application with the FERC on June 19, 2001 to construct and operate the Leidy East project, which will provide an additional 126 MMcf/d of firm natural gas transportation service from Leidy, Pennsylvania to the northeastern United States. Project facilities include approximately 31 miles of pipeline looping and 3,400 horsepower of uprated compression. On October 24, 2001, the FERC issued an order approving the project and Transco accepted the order on November 9, 2001. Construction began in March 2002. The proposed in-service date for the project is November 1, 2002. The capital cost of the project is estimated to be approximately $98 million.
Trenton-Woodbury Expansion ProjectTransco held an open season in February 2001 for an expansion of the Trenton-Woodbury Line, which runs from Transco's mainline at Station 200 in eastern Pennsylvania, around the metropolitan Philadelphia area and southern New Jersey area, to Transco's mainline near Station 205. As a result of the open season, binding precedent agreements have been executed with two shippers for a total of 49 MMcf/d of incremental firm transportation capacity to the shippers' respective delivery points on the Trenton-Woodbury Line. Transco filed an application for FERC approval of the project on May 6, 2002. The target in-service date for the project is November 1, 2003. The project will require approximately 7 miles of pipeline looping at a capital cost of approximately $20 million.
Other Capital Requirements and Contingencies
Transco's capital requirements and contingencies are discussed in its 2001 Annual Report on Form 10-K. Other than as described in Note 3 of the Notes to Condensed Consolidated Financial Statements, there have been no new developments from those described in Transco's 2001 Annual Report on Form 10-K with regard to other capital requirements and contingencies.
Rate and Regulatory RefundsAs discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements, Transco filed a general rate case (Docket No. RP01-245) and placed new rates into effect on September 1, 2001. Transco has provided reserves which it believes are adequate for any rate refunds that may be required.
CONCLUSION
Although no assurances can be given, Transco currently believes that the aggregate of cash flows from operating activities, supplemented, when necessary, by repayments of funds advanced to WGP, advances or capital contributions from Williams and borrowings under the Credit Agreement will provide Transco with sufficient liquidity to meet its capital requirements. When necessary, Transco also expects to access public and private markets on reasonable terms to finance its capital requirements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See discussion in Note 3 of the Notes to Condensed Consolidated Financial Statements included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TRANSCONTINENTAL GAS PIPE LINE
CORPORATION (Registrant)
Dated: May 9, 2002 By /s/ James C. Bourne
James C. Bourne
Controller
(Principal Accounting Officer)