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, 2001
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, 2001 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 2000 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, 2001, and results of operations and cash flows
for the three months ended March 31, 2001 and 2000.
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 2000 Annual
Report on Form 10-K.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2001 2000
----------------- -----------------
ASSETS
Current Assets:
Cash $ 680 $ 531
Receivables:
Affiliates 7,102 10,063
Advances to affiliates 359,404 437,706
Other 73,200 139,022
Transportation and exchange gas receivables:
Affiliates 339 189
Others 24,283 20,640
Inventories 130,428 85,410
Deferred income taxes 24,056 32,909
Other 21,139 17,837
----------------- -----------------
Total current assets 640,631 744,307
----------------- -----------------
Long-term advances to affiliates 20,679 20,679
----------------- -----------------
Investments, at cost plus equity in undistributed earnings 58,013 62,771
----------------- -----------------
Property, Plant and Equipment:
Natural gas transmission plant 4,833,196 4,767,596
Less-Accumulated depreciation and amortization 1,004,002 957,964
----------------- -----------------
Total property, plant and equipment, net 3,829,194 3,809,632
----------------- -----------------
Other Assets 175,906 173,739
----------------- -----------------
$ 4,724,423 $ 4,811,128
================= =================
The accompanying condensed notes are an integral part of these condensed
consolidated financial statements.
TRANSCONTINENTAL GAS PIPE LINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET (Continued)
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2001 2000
---------------- ----------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Payables:
Affiliates $ 86,058 $ 153,240
Advances from affiliates 5,428 4,662
Other 96,196 96,514
Transportation and exchange gas payables 7,244 6,555
Accrued liabilities 110,917 152,147
Reserve for rate refunds 8,500 31,910
Current maturities of long-term debt 200,000 200,000
---------------- ----------------
Total current liabilities 514,343 645,028
---------------- ----------------
Long-Term Debt 774,723 774,850
---------------- ----------------
Other Long-Term Liabilities:
Deferred income taxes 867,407 860,784
Other 131,457 137,053
---------------- ----------------
Total other long-term liabilities 998,864 997,837
---------------- ----------------
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 784,578 740,983
Accumulated other comprehensive income (loss) (515) -
---------------- ----------------
Total common stockholder's equity 2,436,493 2,393,413
---------------- ----------------
$ 4,724,423 $ 4,811,128
================ ================
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
March 31,
----------------------------------------
2001 2000
----------------- -----------------
Operating Revenues:
Natural gas sales $ 360,664 $ 201,082
Natural gas transportation 178,967 172,490
Natural gas storage 35,789 36,243
Other 1,705 1,222
----------------- -----------------
Total operating revenues 577,125 411,037
----------------- -----------------
Operating Costs and Expenses:
Cost of natural gas sales 360,664 201,089
Cost of natural gas transportation 14,127 15,114
Operation and maintenance 44,958 43,634
Administrative and general 31,740 33,712
Depreciation and amortization 42,791 40,320
Taxes - other than income taxes 10,618 10,195
Other 814 1,272
----------------- -----------------
Total operating costs and expenses 505,712 345,336
----------------- -----------------
Operating Income 71,413 65,701
----------------- -----------------
Other (Income) and Other Deductions:
Interest expense 18,793 25,230
Interest income - affiliates (7,296) (8,699)
Allowance for equity and borrowed funds used during construction (AFUDC) (5,392) (2,717)
Equity in earnings of unconsolidated affiliates (2,172) (1,893)
Miscellaneous other (income) deductions, net (2,599) (174)
----------------- -----------------
Total other deductions 1,334 11,747
----------------- -----------------
Income before Income Taxes 70,079 53,954
Provision for Income Taxes 26,351 19,959
----------------- -----------------
Net Income $ 43,728 $ 33,995
================= =================
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
March 31,
---------------------------------
2001 2000
------------- -------------
Cash flows from operating activities:
Net income $ 43,728 $ 33,995
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 44,047 41,649
Deferred income taxes 15,476 (11,403)
Allowance for equity funds used during construction (AFUDC) (3,981) (1,939)
Changes in operating assets and liabilities:
Receivables 68,783 18,926
Receivables sold - 6,100
Transportation and exchange gas receivables (3,793) 9,210
Inventories (45,018) 8,999
Payables (62,975) (4,260)
Transportation and exchange gas payables 689 136
Accrued liabilities (41,261) (3,019)
Reserve for rate refunds (23,410) 11,199
Other, net (6,554) (5,996)
------------- -------------
Net cash provided by (used in) operating activities (14,269) 103,597
------------- -------------
Cash flows from financing activities:
Advances from affiliate, net 766 1,164
------------- -------------
Net cash provided by financing activities 766 1,164
------------- -------------
Cash flows from investing activities:
Property, plant and equipment:
Additions, net of equity AFUDC (61,988) (43,625)
Changes in accounts payable (4,525) (7,804)
Advances to affiliates, net 78,302 (53,165)
Investments in affiliates, net (365) (608)
Other, net 2,228 795
------------- -------------
Net cash provided by (used in) investing activities 13,652 (104,407)
------------- -------------
Net increase in cash 149 354
Cash at beginning of period 531 843
------------- -------------
Cash at end of period $ 680 $ 1,197
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (exclusive of amount capitalized) $ 24,599 $ 23,839
Income taxes paid 34,349 13,457
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 and/or
exercise significant influence are accounted for under the equity method.
The condensed consolidated financial statements have been prepared from
the books and records of Transco without audit. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto included in
Transco's 2000 Annual Report on Form 10-K.
Through an agency agreement, Williams Energy Services Company (WESCO), an
affiliate of Transco, manages all jurisdictional merchant gas sales of Transco,
receives all margins associated with such business and, as Transco's agent,
assumes all market and credit risk associated with Transco's jurisdictional
merchant gas sales. Consequently, Transco's merchant gas sales service has no
impact on its operating income or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of SFAS No. 133. This was
followed in June 2000 by the issuance of SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which amends SFAS No.
133. SFAS No. 133 and 138 establish accounting and reporting standards for
derivative financial instruments. The standards require that all derivative
financial instruments be recorded on the balance sheet at their fair value.
Changes in fair value of derivatives will be recorded each period in earnings if
the derivative is not a hedge. If a derivative is a hedge, changes in the fair
value of the derivative will either be recognized in earnings along with the
change in fair value of the hedged asset, liability or firm commitment also
recognized in earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. For a derivative recognized in other
comprehensive income, the ineffective portion of a derivative's change in fair
value will be recognized immediately in earnings. Transco adopted these
standards effective January 1, 2001. The adoption of these standards did not
have a material impact on Transco's results of operations and financial
position.
The FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The statement provides
guidance for determining whether a transfer of financial assets should be
accounted for as a sale or a secured borrowing, and whether a liability has been
extinguished. The statement is effective for recognition and reclassification of
collateral and for disclosures which relate to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The statement became
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The initial application of SFAS No.
140 did not have a material impact on Transco's results of operations and
financial position.
Certain reclassifications have been made in the 2000 financial statements
to conform to the 2001 presentation.
3. CONTINGENT LIABILITIES AND COMMITMENTS
There have been no new developments from those described in Transco's 2000
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 projects.
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.
General Rate Case (Docket No. RP97-71). On November 1, 1996, Transco
submitted to the FERC a general rate filing principally designed to recover
costs associated with increased capital expenditures. These increased capital
expenditures primarily relate to system reliability, integrity and Clean Air Act
compliance.
When stated on a comparable basis, the rates Transco placed into effect on
May 1, 1997, subject to refund, represented an annual cost of service increase
of approximately $47 million over the cost of service underlying the rates
contained in the settlement of Transco's last general rate filing (Docket No.
RP95-197).
The filing also included (1) a pro-forma proposal to roll-in the costs of
Transco's Leidy Line and Southern expansion incremental projects and (2) a
pro-forma proposal to make interruptible transportation (IT) backhaul rates
equal to the IT forward haul rates.
On November 29, 1996, the FERC issued an order accepting Transco's filing,
suspending its effectiveness until May 2, 1997 (subsequently revised, on
rehearing, to May 1, 1997) and establishing a hearing to examine the
reasonableness of Transco's proposed rates. In addition, the order consolidated
Transco's pro forma roll-in proposal with the Phase II hearing in Docket No.
RP95-197.
On January 20, 1998, Transco filed a Stipulation and Agreement for
approval by the FERC, which resolves all cost of service, throughput and other
issues in this proceeding, except rate of return, capital structure and certain
minor cost allocation and rate design issues. On June 12, 1998, the FERC issued
an order approving the settlement. On October 30, 1998, Transco issued refunds
in connection with the settlement in the amount of $89.5 million, including
interest, for which Transco had previously provided a reserve. The issues not
resolved by the settlement were litigated by the parties before a FERC
Administrative Law Judge (ALJ). On March 30, 1999, the ALJ issued her initial
decision which is consistent with the rate of return and capital structure
policies FERC announced in Docket No. RP95-197. Applying these policies, the ALJ
recommended utilization of Transco's own capital structure, consisting of 60.2%
equity, and a return on equity of 12.40%. Based on developments in regulatory
proceedings involving Transco, and on advice from counsel, in the fourth quarter
of 1999, Transco adjusted its reserve for rate refunds by $26.0 million ($23.4
million of principal and $2.6 million of interest) to reflect its conclusion
that the risk associated with one of the issues in this proceeding has been
eliminated. On March 17, 2000, the FERC issued an order which, among other
things, affirmed the ALJ's decision on the rate of return and capital structure
issues. On April 17, 2000, several parties requested rehearing of, among other
things, issues related to the FERC's rate of return decision in the March 17,
2000, order. Transco evaluated the effect of the order and requests for
rehearing and, during the second quarter of 2000, reduced its reserve for rate
refunds by $71.2 million ($62.7 million of principal and $8.5 million of
interest) to reflect its conclusion that the risk associated with certain of the
issues in this proceeding has been eliminated. On November 1, 2000, Transco made
rate refunds of $95 million, including interest, for the period May 1, 1997
through February 29, 2000. On January 24, 2001, the FERC issued an order denying
all of the requests for rehearing of the March 17, 2000 order, and directing
Transco to file revised tariff sheets consistent with the order effective
February 1, 2001 and to make appropriate refunds. On March 26, 2001, Transco
made final rate refunds of $25 million, including interest, for the period March
1, 2000 through January 31, 2001, for which Transco had previously provided a
reserve.
General rate case (Docket No. RP95-197). On March 1, 1995, Transco filed
with the FERC a general rate filing 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, as discussed
above, was completed in June 1997. On March 24, 1998, the 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 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,
concluding 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. 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 Transco'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. The ALJ's initial
decision is subject to review by the FERC.
Gathering facilities spin-down order (Docket Nos. CP96-206-000 and
CP96-207-000. In February 1996, Transco filed an application with the FERC for
an order authorizing the abandonment of certain facilities located onshore and
offshore in Texas, Louisiana and Mississippi by conveyance to Williams Gas
Processing - Gulf Coast Company (Gas Processing), an affiliate of Transco.
Concurrently, Gas Processing filed a petition for declaratory order requesting a
determination that its gathering services and rates be exempt from FERC
regulation under the NGA. On September 25, 1996, the FERC issued an order
dismissing Transco's application and Gas Processing's petition for declaratory
order. On October 25, 1996, Transco and Gas Processing filed a joint request for
rehearing of the FERC's September 25 order, and in August 1997, filed a request
that rehearing be expedited.
In the absence of any action by the FERC in response to Transco's
rehearing request, Transco has filed with the FERC the two applications
described below seeking authorization to abandon portions of the facilities
included in the February 1996 application.
North Padre Island/Central Texas System Spin-down Proceeding (Docket Nos.
CP01-32-000 and CP01-34-000). In November 2000, Transco filed an application
with the FERC seeking authorization to abandon certain of Transco's offshore
Texas facilities by conveyance to Gas Processing. Gas Processing filed a
contemporaneous request that the FERC declare that the facilities sought to be
abandoned would be considered nonjurisdictional gathering facilities upon
transfer to Gas Processing. These applications are currently pending before the
FERC.
North High Island/West Cameron Systems Spin-down Proceeding (Docket Nos.
CP01-103-000 and CP01-104-000). In March 2001, Transco filed an application with
the FERC seeking authorization to abandon certain of Transco's offshore Texas
and offshore and onshore Louisiana facilities by conveyance to Gas Processing.
Gas Processing filed a contemporaneous request that the FERC declare that the
facilities sought to be abandoned would be considered nonjurisdictional
gathering facilities upon transfer to Gas Processing. These applications are
currently pending before the FERC.
The net book value of the North Padre Island and the North High Island
facilities included in these two applications is approximately $56 million. The
transfer of these facilities will not have a material impact on Transco's
results of operations and financial position.
Legal Proceedings
Royalty claims and litigation. On March 15, 1994, a lawsuit was filed in
the 189th Judicial District Court of Harris County, Texas (Texaco, Inc. vs.
Transcontinental Gas Pipe Line Corporation). In this lawsuit, the plaintiff has
claimed approximately $23 million, including interest and attorneys' fees for
reimbursements of settlement amounts paid to royalty owners. On October 16,
1997, a jury verdict in this case found that Transco was required to pay Texaco
damages of $14.5 million plus $3.75 million in attorney's fees. The trial judge
initially deferred entering judgment and directed the parties to participate in
mediation of this matter. Following mediation in 1998, which did not result in a
resolution of this matter, the trial judge entered judgment consistent with the
jury verdict and also awarded prejudgment interest of $5.0 million. In addition,
through March 31, 2001, postjudgment interest was approximately $8.2 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 and continues
to believe that it has meritorious defenses to Texaco's claims.
In addition, Transco was notified by Freeport-McMoRan, Inc. (FMP) in
February 1995, that pursuant to a settlement with the Mineral Management Service
(MMS) of the MMS' claim for royalties due under gas contracts between Transco
and FMP which had been modified pursuant to settlement agreements made in 1986
and 1989, FMP was asserting a claim for indemnification under the excess royalty
provisions of those settlement agreements. On or about March 30, 1995, FMP filed
a petition for specific performance seeking recovery against Transco for the
sums claimed under the settlement agreements. In May 1998, FMP filed a motion
or summary judgment which Transco opposed. In September 1998, the court granted
FMP's motion finding that at least a portion of FMP's payment to the MMS was
subject to indemnification. Transco appealed the court's ruling, and in March
2000, the appellate court reversed the trial court and remanded the case for
trial. FMP's claim, including interest calculated through March 31, 2001,
is $8.9 million.
Summary
While no assurances may be given, Transco does not believe that the
ultimate resolution of the foregoing matters and those described in Transco's
2000 Annual Report on Form 10-K, 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.
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, 2001, Transco had no outstanding
borrowings under this agreement.
Current Maturities of Long-term Debt
The $200 million of current maturities of long-term debt consists of 7.08%
Debentures that mature on July 15, 2026, but are subject to redemption, at
anytime after July 15, 2001, at Transco's option, in whole or part, at a
specified redemption price, plus accrued and unpaid interest to the date of
redemption. The holder of each 7.08% Debenture may elect between May 15, 2001
and June 15, 2001 to have such 7.08% Debenture repaid on July 15, 2001 at 100%
of the principal amount. Because of this option available to the holder, the
7.08% Debentures have been included in current maturities for the year 2001. The
7.08% Debentures have no sinking fund provisions. If the holders of the 7.08%
Debentures elect to have the 7.08% Debentures repaid, Transco intends to
refinance the debt on a long-term basis by accessing public and private markets
and utilizing any shelf availability under the registration statement previously
filed with the Securities and Exchange Commission.
Sale of Receivables
Transco is a party to an agreement that expires on January 25, 2002
pursuant to which Transco can sell to an investor up to $100 million of
undivided interest in certain of its trade receivables. At both March 31, 2001
and December 31, 2000, interests in these receivables held by the investor were
$100 million.
Comprehensive Income (Loss)
The accumulated net loss on derivative instruments included within
accumulated other comprehensive income (loss) as of March 31, 2001, was $0.5
million and represents Transco's share, through an equity investment, of an
interest rate swap designated as a cash flow hedge. There was no accumulated net
gain or loss on derivative instruments at December 31, 2000.
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 2000 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, 2001 was $43.7
million compared to net income of $34.0 million for the three months ended March
31, 2000. Operating income for the three months ended March 31, 2001 was $71.4
million compared to $65.7 million for the three months ended March 31, 2000. The
higher operating income of $5.7 million was primarily the result of higher gas
transportation revenues, and lower administrative and general expense combined
with a $4.1 million loss accrual in 2000 associated with the settlement of
historical transportation and exchange gas imbalances, partly offset by higher
depreciation and amortization expense and operation and maintenance expense, as
discussed below. The increase in net income of $9.7 million was attributable to
the increased operating income, decreased interest expense due primarily to
adjustments in 2000 to estimates of interest associated with the recovery of
prior years' tracked gas costs and a higher allowance for funds used during
construction due primarily to a greater amount of capital projects under
construction.
Transportation Revenues
Transco's operating revenues related to its transportation services for
the three months ended March 31, 2001 were $179.0 million, compared to $172.5
million for the three months ended March 31, 2000. The higher transportation
revenues of $6.5 million were primarily due to the recovery of fuel costs used
in operations and higher demand revenues due to pipeline expansion projects.
As shown in the table below, Transco's total market-area deliveries for
the three months ended March 31, 2001 decreased 10.2 trillion British Thermal
Units (TBtu) (2.4%) when compared to the same period in 2000. This is primarily
the result of higher natural gas prices and the use of alternate fuels by
customers. Transco's production area deliveries for the three months ended March
31, 2001 decreased 34.3 TBtu (52.2%) when compared to the same period in 2000.
This is primarily due to decreased liquefiables transportation and interruptible
transportation resulting from the effects of higher natural gas prices on the
level of natural gas liquids processing activity and lower deliveries to other
pipelines in the production area, respectively.
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
Ended March 31,
-------------------------
Transco System Deliveries (TBtu) 2001 2000
---------- ----------
Market-area deliveries:
Long-haul transportation 223.1 213.3
Market-area transportation 190.1 210.1
---------- ---------
Total market-area deliveries 413.2 423.4
Production-area transportation 31.4 65.7
---------- ----------
Total system deliveries 444.6 489.1
========== ==========
Average Daily Transportation Volumes (TBtu) 4.9 5.4
Average Daily Firm Reserved Capacity (TBtu) 5.9 6.5
Transco's facilities are divided into seven rate zones. Four are located in
the production area and three are located in the market area. Long-haul
transportation is gas that is received in one of the production-area zones and
delivered in a market-area zone. Market-area transportation is gas that is both
received and delivered within market-area zones. Production-area transportation
is gas that is both received and delivered within production-area zones.
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, WESCO, 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 WESCO remain in Transco's name, as do the corresponding sales of such
purchased gas. Therefore, Transco continues to record natural gas sales revenues
and the related accounts receivable and cost of natural gas sales and the
related accounts payable for the jurisdictional merchant sales that are managed
by WESCO. Through the agency agreement, WESCO receives all margins associated
with jurisdictional merchant gas sales business and, as Transco's agent, assumes
all market and credit risk associated with Transco's jurisdictional merchant gas
sales. Consequently, Transco's merchant gas sales service has no impact on
Transco's operating income or results of operations.
Transco's operating revenues for the three months ended March 31, 2001
related to its sales services, including Transco's cash out sales in settlement
of gas imbalances, increased $160 million to $361 million, when compared to the
same period in 2000. The increase was primarily due to a higher average sales
price of $7.12 per dekatherm (Dt) for the three months ending March 31, 2001,
versus $2.55 per Dt for the same period of 2000, partially offset by lower cash
out sales volumes related to the settlement of imbalances.
Three Months
Ended March 31,
-------------------------
Gas Sales Volumes (TBtu) 2001 2000
-------- --------
Long-term sales 37.8 50.2
Short-term sales 8.2 8.7
-------- --------
Total gas sales 46.0 58.9
======== ========
Operating Costs and Expenses
Excluding the cost of natural gas sales and transportation of $375 million
for the three months ended March 31, 2001 and $216 million for the comparable
period in 2000, Transco's operating expenses for the three months ended March
31, 2001, were approximately $1.8 million higher than the comparable period in
2000. This increase was primarily attributable to higher depreciation and
amortization and operation and maintenance expense, partially offset by lower
administrative and general expense. The higher depreciation and amortization was
due primarily to plant and property additions. The higher operation and
maintenance expense was due to charges from others to operate certain Transco
facilities. The lower administrative and general expense was primarily due to
lower Gas Research Institute charges.
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.
In 1997, Transco filed a registration statement with Securities and
Exchange Commission and, at March 31, 2001, $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, 2001, 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, 2001, the advances due Transco by WGP totaled $380.1
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, 2001 were $66.5 million,
compared to $52.0 million for the three months ended March 31, 2000.
Three Months
Ended March 31,
------------------
Capital Expenditures and Investments in Affiliates 2001 2000
------- ------
(In Millions)
Market-area projects $ 15.2 $ 23.1
Supply-area projects 5.4 2.0
Maintenance of existing facilities and other projects 45.5 26.3
Investment in affiliates 0.4 0.6
------ ------
Total capital expenditures and investments in affiliates $ 66.5 $ 52.0
====== ======
Transco's capital expenditures budget for 2001 and future capital projects
are discussed in its 2000 Annual Report on Form 10-K. The following describes
significant developments related to those projects and any new projects proposed
by Transco.
Momentum Expansion Project. Transco announced in April 2001 that it has
subscribed 526,000 dekatherms per day of binding commitments for firm
transportation service under its Momentum Expansion Project, a proposed
expansion of the Transco pipeline system from Station 65 in Louisiana to Station
165 in Virginia designed to meet increasing natural gas demand in the
southeastern United States. The project has a target in-service date of May 1,
2003. Transco plans to file for FERC approval of the project during the second
quarter of 2001. The capital cost of the project is estimated to be
approximately $313 million.
MarketLink Expansion Project. On May 13, 1998, Transco filed an applica-
tion with the FERC for approval to construct and operate mainline and Leidy Line
facilities to create an additional 676 million cubic feet per day (MMcf/d) of
firm transportation capacity to serve increased demand in the mid-Atlantic and
south Atlantic regions of the United States by a targeted in-service date of
November 1, 2000, at an estimated cost of $529 million. On December 17, 1999,
the FERC issued an interim order giving Transco conditional approval for
MarketLink. Transco filed for rehearing of the interim order and on April 26,
2000, the FERC issued an order on rehearing which authorized Transco to proceed
with the Market Link project subject to certain conditions. On May 23, 2000,
Transco filed a letter with the FERC accepting the MarketLink certificate.
On 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. The
initial two phases of the project would consist of 286 MMcf/d of firm
transportation service with in-service dates of November 1, 2001 and November 1,
2002. On December 13, 2000, the FERC issued an order permitting Transco to
construct the MarketLink project in phases as proposed. The order required
Transco to file executed contracts fully subscribing the remaining capacity of
the project (approximately 390 MMcf/d) by April 13, 2001. Transco accepted the
amended certificate on December 21, 2000. Certain parties filed with the FERC
requests for rehearing of the December 13, 2000 order, and on February 12, 2001,
the FERC denied the requests.
On April 3, 2001, Transco filed a motion requesting that the FERC clarify
that Transco could construct Phase 3 of the MarketLink project that consisted of
less than all of the remaining certificated MarketLink facilities after the
construction of Phases 1 and 2 (e.g. 390 MMcf/d), and that Transco could file by
May 1 a report identifying the certificated facilities to be constructed in
Phase 3 and a revised project recourse rate. On April 13, 2001, Transco filed
firm service agreements with 5 shippers for 205 MMcf/d of capacity as required
by the December 13, 2000 order approving the phasing of the project. On April
26, 2001, the FERC issued an order denying Transco's pending motion for
clarification and stating that Phase 3 of the MarketLink project must consist of
all the remaining certificated facilities. The order stated that as of April 13
the certificate authority to construct additional MarketLink capacity in excess
of the 286 MMcf/d to be constructed as Phases 1 and 2 expired, but that Transco
could file a new application to serve the contracts filed on April 13, 2001.
Transco is proceeding with the preparation of a new application.
Sundance Expansion Project. On April 3, 2000, Transco filed an application
with the FERC for its Sundance Expansion Project, which would 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. Approximately 38 miles of new pipeline loop along the
existing mainline system will be installed along with approximately 33,000
horsepower of new compression and modifications to existing compressor stations
in Georgia, South Carolina and North Carolina. The project has a target
in-service date of May 2002 and an estimated cost of approximately $134 million.
On March 29, 2001, the FERC issued an order authorizing Transco to construct and
operate the project. Transco accepted the order on April 6, 2001.
Other Capital Requirements and Contingencies
Transco's capital requirements and contingencies are discussed in its 2000
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 2000 Annual Report on Form 10-K with regard to
other capital requirements and contingencies.
Rate and Regulatory Refunds. On March 26, 2001, Transco made final rate
refunds of $25 million, including interest, for the period March 1, 2000 through
January 31, 2001 under its Docket No. RP97-71 general rate case.
Current Maturities of Long-term Debt. The $200 million of current
maturities of long-term debt consists of 7.08% Debentures that mature on July
15, 2026. The holder of each 7.08% Debenture may elect between May 15, 2001 and
June 15, 2001 to have such 7.08% Debenture repaid on July 15, 2001 at 100% of
the principal amount. If the holders of the 7.08% Debentures elect to have the
7.08% Debentures repaid, Transco intends to refinance the debt on a long-term
basis by accessing public and private markets and utilizing any shelf
availability under the registration statement previously filed with the
Securities and Exchange Commission.
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 14, 2001 By /s/ James C. Bourne
----------------------------------
James C. Bourne
Controller
(Principal Accounting Officer)