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 SEPTEMBER 30, 1999 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 SEPTEMBER 30, 1999 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 1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form 10-Q. 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 September 30, 1999, and results of operations for the three and nine months ended September 30, 1999 and 1998, and cash flows for the nine months ended September 30, 1999 and 1998. 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 Reform Act of 1995. Additional information about issues that could lead to material changes in performance is contained in Transco's 1998 Annual Report on Form 10-K, 1999 First and Second Quarter Reports on Form 10-Q and Year 2000 disclosure contained in this document. TRANSCONTINENTAL GAS PIPE LINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Thousands of Dollars) (Unaudited) September 30, December 31, 1999 1998 ----------------- ----------------- ASSETS Current Assets: Cash $ 1,924 $ 1,470 Receivables: Affiliates 571 10,892 Others 20,187 21,689 Advances to affiliates 460,399 416,164 Transportation and exchange gas receivables: Affiliates 1,590 1,370 Others 30,662 56,475 Inventories 74,798 79,787 Deferred income taxes 107,560 99,598 Other 17,628 16,714 ----------------- ----------------- Total current assets 715,319 704,159 ----------------- ----------------- Long-term advances to affiliates 7,398 - ----------------- ----------------- Investments, at cost plus equity in undistributed earnings 31,429 8,915 ----------------- ----------------- Property, Plant and Equipment: Natural gas transmission plant 4,296,682 4,259,502 Less-Accumulated depreciation and amortization 667,720 616,120 ----------------- ----------------- Total property, plant and equipment, net 3,628,962 3,643,382 ----------------- ----------------- Other Assets 175,816 168,495 ----------------- ----------------- $ 4,558,924 $ 4,524,951 ================= ================= 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) September 30, December 31, 1999 1998 ---------------- ---------------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Payables: Affiliates $ 68,927 $ 25,050 Others 68,149 72,285 Transportation and exchange gas payables: Affiliates 376 379 Others 11,137 8,354 Accrued liabilities 127,218 156,631 Reserve for rate refunds 159,409 238,403 ---------------- ---------------- Total current liabilities 435,216 501,102 ---------------- ---------------- Long-Term Debt, less current maturities 975,443 975,768 ---------------- ---------------- Other Long-Term Liabilities: Deferred income taxes 858,538 846,306 Other 113,811 139,734 ---------------- ---------------- Total other long-term liabilities 972,349 986,040 ---------------- ---------------- 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 523,486 409,611 ---------------- ---------------- Total common stockholder's equity 2,175,916 2,062,041 ---------------- ---------------- $ 4,558,924 $ 4,524,951 ================ ================ 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 September 30 ---------------------------------------- 1999 1998 ----------------- ----------------- Operating Revenues: Natural gas sales $ 195,715 $ 125,576 Natural gas transportation 152,964 160,753 Natural gas storage 33,825 35,993 Other 2,147 1,811 ----------------- ----------------- Total operating revenues 384,651 324,133 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 195,715 125,576 Cost of natural gas transportation 6,893 11,938 Operation and maintenance 41,241 44,311 Administrative and general 31,242 30,852 Depreciation and amortization 40,268 39,744 Taxes - other than income taxes 9,107 9,305 Other 901 1,815 ----------------- ----------------- Total operating costs and expenses 325,367 263,541 ----------------- ----------------- Operating Income 59,284 60,592 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 20,282 23,769 Interest income - affiliates (6,640) (7,241) Allowance for equity and borrowed funds used during construction (AFUDC) (1,479) (3,316) Miscellaneous other (income) deductions, net 37 (236) ----------------- ----------------- Total other deductions 12,200 12,976 ----------------- ----------------- Income before Income Taxes 47,084 47,616 Provision for Income Taxes 17,762 18,000 ----------------- ----------------- Net Income $ 29,322 $ 29,616 ================= ================= 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) Nine months ended September 30 ---------------------------------------- 1999 1998 ----------------- ----------------- Operating Revenues: Natural gas sales $ 512,063 $ 401,533 Natural gas transportation 506,681 481,633 Natural gas storage 102,718 108,115 Other 7,726 6,660 ----------------- ----------------- Total operating revenues 1,129,188 997,941 ----------------- ----------------- Operating Costs and Expenses: Cost of natural gas sales 512,063 401,533 Cost of natural gas transportation 28,534 32,891 Operation and maintenance 123,550 127,051 Administrative and general 98,806 92,241 Depreciation and amortization 120,655 111,526 Taxes - other than income taxes 26,116 27,091 Other 2,673 2,605 ----------------- ----------------- Total operating costs and expenses 912,397 794,938 ----------------- ----------------- Operating Income 216,791 203,003 ----------------- ----------------- Other (Income) and Other Deductions: Interest expense 52,209 69,158 Interest income - affiliates (18,034) (20,884) Allowance for equity and borrowed funds used during construction (AFUDC) (3,473) (7,989) Miscellaneous other deductions, net 1,756 660 ----------------- ----------------- Total other deductions 32,458 40,945 ----------------- ----------------- Income before Income Taxes 184,333 162,058 Provision for Income Taxes 70,458 61,492 ----------------- ----------------- Net Income $ 113,875 $ 100,566 ================= ================= 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) Nine months ended September 30 --------------------------------- 1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 113,875 $ 100,566 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 124,528 116,413 Deferred income taxes 4,270 (2,370) Allowance for equity funds used during construction (AFUDC) (2,414) (5,845) Changes in operating assets and liabilities: Receivables (31) 18,836 Receivables sold 13,000 (12,000) Transportation and exchange gas receivables 25,593 1,589 Inventories 4,989 1,603 Payables 47,309 (22,994) Transportation and exchange gas payables 2,780 (6,818) Accrued liabilities (28,470) 23,183 Reserve for rate refunds (78,994) 101,929 Other, net (37,726) (32,377) ------------- ------------- Net cash provided by operating activities 188,709 281,715 ------------- ------------- Cash flows from financing activities: Additions to long-term debt - 298,343 Retirement of long-term debt - (160,000) Debt issue costs - (2,060) ------------- ------------- Net cash provided by financing activities - 136,283 ------------- ------------- Cash flows from investing activities: Property, plant and equipment: Additions, net of equity AFUDC (108,590) (233,807) Changes in accounts payable (7,596) (9,552) Advances to affiliates, net (51,633) (177,236) Investments in affiliates (21,331) (1,919) Other, net 895 3,996 ------------- ------------- Net cash used in investing activities (188,255) (418,518) ------------- ------------- Net increase (decrease) in cash 454 (520) Cash at beginning of period 1,470 1,321 ------------- ------------- Cash at end of period $ 1,924 $ 801 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for : Interest (exclusive of amount capitalized) $ 76,797 $ 47,797 Income taxes paid 68,796 61,584 Income tax refunds received - (77) 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 (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 are accounted for under the equity method. Equity in earnings and losses of unconsolidated affiliates is included in other operating revenues. 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 1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form 10-Q. 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. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. Certain reclassifications have been made in the 1998 financial statements to conform to the 1999 presentation. 3. CONTINGENT LIABILITIES AND COMMITMENTS There have been no new developments from those described in Transco's 1998 Annual Report on Form 10-K or 1999 First and Second Quarter Reports on Form 10-Q other than as described below. RATE AND REGULATORY MATTERS PRODUCTION AREA RATE DESIGN (DOCKET NOS. RP92-137, RP93-136 AND RP98-381) Transco has expressed to the Federal Energy Regulatory Commission (FERC) concerns that inconsistent treatment under Order 636 of Transco and its competitor pipelines with regard to rate design and cost allocation issues in the production area may result in rates which could make Transco less competitive, both in terms of production-area and long-haul transportation. A hearing before a FERC Administrative Law Judge (ALJ) (Docket Nos. RP92-137 and RP93-136), dealing with, among other things, Transco's production-area rate design, concluded in June 1994. On July 19, 1995, the ALJ issued an initial decision finding that Transco's proposed production area rate design, and its existing use of a system wide cost of service and allocation of firm capacity in the production area are unjust and unreasonable. The ALJ therefore recommended that Transco divide its costs between its production area and market area, and permit its customers to renominate their firm entitlements. On July 3, 1996, the FERC issued an order on review of the ALJ's initial decision concerning, among other things, Transco's production area rate design. The FERC rejected the ALJ's recommendations that Transco divide its costs between its production area and market area, and permit its customers to renominate their firm entitlements. The FERC also concluded that Transco may offer firm service on its supply laterals through an open season and eliminate its IT feeder service in favor of an interruptible service option that does not afford shippers feeding firm transportation on Transco's production area mainline a priority over other interruptible transportation. On December 18, 1996, the FERC denied rehearing of its July 3, 1996 Order. Several parties, including Transco, have filed petitions for review in the United States Court of Appeals for the District of Columbia (D.C. Circuit Court) of the FERC's orders addressing production area rate design issues. On November 4, 1998, the D.C. Circuit Court issued an order granting the FERC's motion to hold these appeals in abeyance pending the outcome of the proceedings in Transco's Docket No. RP98-381. On October 7, 1999, in light of the FERC's orders rejecting Transco's proposal in Docket No. RP98-381, the D.C. Circuit Court issued an order restoring the appeals to the active docket. TILDEN/MCMULLEN FACILITIES SPIN-DOWN PROCEEDING (DOCKET NOS. CP98-236 AND 242) In February 1998, Transco filed an application with the FERC seeking authorization to abandon Transco's onshore Tilden/McMullen Gathering System located in Texas by conveyance to Williams Gas Processing - Gulf Coast Company (Gas Processing), an affiliate of Transco. 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. In May 1999, the FERC issued an order in which it determined that certain of the facilities would be gathering facilities upon transfer to Gas Processing, i.e., 1) those facilities upstream of and including the Tilden Plant, 2) the South McMullen and Goebel Laterals located downstream of the Tilden Plant, and 3) the small, short laterals which branch out from the McMullen Lateral downstream of the Tilden Plant at several points along its length. However, the FERC determined that the McMullen Lateral itself, as well as two compressor units, are jurisdictional facilities, but authorized their abandonment subject to Gas Processing obtaining a certificate to operate those facilities. The net book value at September 30, 1999 of the Tilden/McMullen facilities was approximately $67 million. Operating income for the year ended December 31, 1998 associated with those facilities is estimated to be less than $3 million; however, such operating income may not be representative of the effects of the spin-down on Transco's future operating income due to various factors, including future regulatory actions. Transco's abandonment authority is effective for one year from the date of issuance of the order. Transco must notify the FERC of the effective date of the abandonment within 10 days of the transfer. On June 3, 1999, Transco and Gas Processing filed for rehearing of the order with regard to the facilities classified by the FERC as jurisdictional facilities, and on October 5, 1999, the FERC denied the rehearing request. LEGAL PROCEEDINGS OTHER LITIGATION In 1998, the United States Department of Justice informed Williams that Jack Grynberg, an individual, had filed claims in the United States District Court for the District of Colorado under the False Claims Act against Williams and certain of its wholly owned subsidiaries, including Transco. Mr. Grynberg has also filed claims against approximately 300 other energy companies and alleges that the defendants violated the False Claims Act in connection with the measurement and purchase of hydrocarbons. The relief sought was an unspecified amount of royalties allegedly not paid to the federal government, treble damages, a civil penalty, attorneys' fees, and costs. On April 9, 1999, the United States Department of Justice announced that it was declining to intervene in any of the Grynberg qui tam cases; including the action filed against the Williams entities in the United States District Court for the District of Colorado. On October 21, 1999, the Panel on Multi-District Litigation transferred all of the Grynberg qui tam cases, including the ones filed against Williams, to the United States District Court for the District of Wyoming for pre-trial purposes. ENVIRONMENTAL MATTERS In July 1999, Transco received a letter stating that the U.S. Department of Justice (DOJ), at the request of the U.S. Environmental Protection Agency (EPA), intends to file a civil action against Transco arising from its waste management practices at Transco's compressor stations and metering stations located in eleven (11) states from Texas to New Jersey. DOJ stated in the letter that its complaint will seek civil penalties and injunctive relief under federal environmental laws. DOJ offered to discuss settlement of the claim and discussions began in September 1999. While no specific amount was proposed, DOJ stated that any settlement must include an appropriate civil penalty for the alleged violations. Transco cannot reasonably estimate the amount of its potential liability, if any, at this time. However, Transco believes it has substantially addressed environmental concerns on its system through ongoing voluntary remediation and management programs. 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 1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form 10-Q, taken as a whole and after consideration of amounts accrued, recovery from customers, insurance coverage or other indemnification arrangements, will have a materially adverse effect upon Transco's future financial position, results of operations and cash flow requirements. 4. DEBT AND FINANCING ARRANGEMENTS LONG-TERM DEBT Williams and certain of its subsidiaries, including Transco, are parties to a $1 billion credit agreement (Credit Agreement), under which Transco can borrow up to $400 million if the funds available under the Credit Agreement have not been borrowed by Williams or other subsidiaries. Interest rates vary with current market conditions based on the base rate of Citibank N.A., three-month certificates of deposit of major United States money market banks, federal funds rate or the London Interbank Offered Rate. 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 September 30, 1999, Transco had no outstanding borrowings under this agreement. SHORT-TERM DEBT Transco is a party to a short-term money market facility under which it can borrow up to $40 million. Interest rates vary with current market conditions based on the applicable bank rate at the time of the borrowings. As of September 30, 1999, Transco had no outstanding borrowings under these facilities. SALE OF RECEIVABLES Transco is a party to an agreement that expires on January 28, 2000 pursuant to which Transco can sell to an investor up to $100 million of undivided interest in certain of its trade receivables. At September 30, 1999 and December 31, 1998, interests in these receivables held by the investor were $100 million and $87 million, respectively. 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 1998 Annual Report on Form 10-K and in Transco's 1999 First and Second Quarter Reports on Form 10-Q 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 nine months ended September 30, 1999 was $113.9 million compared to net income of $100.6 million for the nine months ended September 30, 1998. Operating income for the nine months ended September 30, 1999 was $216.8 million compared to $203.0 million for the nine months ended September 30, 1998. The higher operating income of $13.8 million was primarily the result of higher transportation revenues and lower operation and maintenance expense, partially offset by higher administrative and general expense and depreciation and amortization expense discussed below. The increase in net income was attributable to the increased operating income, as well as, lower net interest expense due primarily to the adjustment to reserves for rate refunds discussed below and rate refunds made in 1998 and early 1999, partially offset by lower allowance for funds used during construction due to lower capital expenditures. Because of its rate structure and historical maintenance schedule, Transco typically experiences lower operating income in the second and third quarters as compared to the first and fourth quarters. TRANSPORTATION REVENUES Transco's operating revenues related to its transportation services for the nine months ended September 30, 1999 were $507 million, compared to $482 million for the nine months ended September 30, 1998. The higher transportation revenues were primarily due to a positive adjustment to the reserve for rate refunds in Transco's general rate case Docket No. RP95-197 ($28.1 million), benefits of expansion projects placed into service in 1998 ($13.4 million) and new services begun in 1998 ($2.6 million). These increases were partly offset by a decrease in commodity revenues ($8.6 million) due primarily to lower long-haul and production-area volumes, a lower level of reimbursable costs ($4.2 million) that are included in operating expenses and recovered in Transco's rates and the positive impact of a $4 million adjustment recorded in 1998 related to settlement rates contained in the January 1998 stipulation and agreement in Transco's general rate case Docket No. RP97-71 approved by the FERC in June 1998. During the first half of 1999, Transco engaged in an analysis of the court appeal related to Transco's general rate case Docket No. RP95-197 and, particularly, its likely results. Based on developments in regulatory proceedings in the second quarter of 1999 involving Transco and others, and advice received from counsel, Transco adjusted its remaining reserve for rate refunds ($28.1 million of principal and $5.9 million of interest) in the second quarter of 1999 to reflect the FERC's revised rate of return methodology as applied in the July 29, 1998, and December 1, 1998 orders. As shown in the table below, Transco's total market-area deliveries for the nine months ended September 30, 1999 increased 41.7 trillion British Thermal Units (TBtu) (4.1%) when compared to the same period in 1998. The increased deliveries were mainly due to higher deliveries under the Mobile Bay Lateral Expansion Project and the Cherokee Expansion Project in the first nine months of 1999. Transco's production area deliveries for the nine months ended September 30, 1999 decreased 5.0 TBtu (3.0%) when compared to the same period in 1998 as a result of milder weather conditions. As a result of a straight fixed-variable (SFV) rate design, increases or decreases in firm transportation volumes in comparable facilities have no significant impact on operating income; however, because interruptible transportation rates have components of fixed and variable cost recovery, increases or decreases in interruptible transportation volumes do have an impact on operating income. Nine Months Ended September 30, ------------------------- Transco System Deliveries (TBtu) 1999 1998 - -------------------------------- ---------- ---------- Market-area deliveries: Long-haul transportation 626.8 651.3 Market-area transportation 435.2 369.0 ---------- ---------- Total market-area deliveries 1,062.0 1,020.3 Production-area transportation 161.0 166.0 ---------- ---------- Total system deliveries 1,223.0 1,186.3 ========== ========== Average Daily Transportation Volumes (TBtu) 4.5 4.3 Average Daily Firm Reserved Capacity (TBtu) 6.3 6.4 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. See Note 3 of the Notes to Condensed Consolidated Financial Statements for a discussion of recent developments in Transco's rate and regulatory matters. 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. 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 nine months ended September 30, 1999 related to its sales services, including Transco's cash out sales in settlement of gas imbalances, increased $110.5 million to $512 million, when compared to the same period in 1998. The increase was primarily due to higher cash out sales related to the settlement of imbalances, higher sales volumes and a slightly higher average sales price. Nine Months Ended September 30, ------------------------- Gas Sales Volumes (TBtu) 1999 1998 - ------------------------ -------- -------- Long-term sales 150.1 135.7 Short-term sales 28.1 18.3 -------- -------- Total gas sales 178.2 154.0 ======== ======== STORAGE REVENUES Transco's operating revenues related to storage services decreased $5.4 million to $102.7 million for the nine months ended September 30, 1999 when compared to the same period in 1998. This revenue decrease included a $5.7 million decrease due to lower underground storage rates charged by others, the majority of which is included in operation and maintenance expenses and a $1.2 million decrease primarily due to lower storage demand charges, partly offset by the impact of an adjustment recorded in 1998 to the revenue refund reserve to reflect the actual rates contained in the RP97-71 Settlement Agreement. OPERATING COSTS AND EXPENSES Excluding the cost of sales and transportation of $541 million for the nine months ended September 30, 1999 and $434 million for the comparable period in 1998, Transco's operating expenses for the nine months ended September 30, 1999, were approximately $11.3 million higher than the comparable period in 1998. This increase was primarily attributable to higher administrative and general expense and higher depreciation and amortization expense partially offset by lower operation and maintenance expense. The higher administrative and general expense was primarily attributable to higher professional services ($1.5 million), building rent ($1.2 million), pension expense ($1.1 million) and labor ($2.3 million). The higher depreciation and amortization expense was due to a $3.8 million adjustment related to the RP97-71 settlement rates recorded in 1998, a $3.2 million adjustment on computer software recorded in 1998 and a $2.2 million increase in 1999, primarily due to plant and property additions. Lower operation and maintenance expense was primarily attributable to lower underground storage rates charged by others ($5.5 million), lower professional services ($2.1 million) and lower contractual services ($1.5 million), partly offset by the effects of a $5.7 million adjustment recorded in 1998 related to the RP97-71 settlement rates. CAPITAL RESOURCES AND LIQUIDITY METHOD OF FINANCING Transco funds its capital requirements with cash flows from operating activities, including the sale of trade receivables, by accessing capital markets, by repayments of funds advanced to Williams, by borrowings under the Credit Agreement and short-term money market facilities and, if required, advances from Williams. At September 30, 1999, there were no outstanding borrowings under the Credit Agreement or short-term money market facilities. As a participant in Williams' cash management program, Transco and its subsidiaries have made advances to Williams. At September 30, 1999, net advances due Transco and its subsidiaries by Williams totaled $460 million. Additionally, Transco has made advances to WGP. At September 30, 1999, the advances due Transco by WGP totaled $7.4 million and was classified as a long-term advance in the accompanying Condensed Consolidated Balance Sheet. CAPITAL EXPENDITURES AND INVESTMENTS IN AFFILIATES As shown in the table below, Transco's capital expenditures and investments in affiliates for the nine months ended September 30, 1999 were $ 137.5 million, compared to $245.3 million for the nine months ended September 30, 1998. [CAPTION] Nine Months Ended September 30, ---------------------- Capital Expenditures and Investments in Affiliates 1999 1998 - -------------------------------------------------- --------- --------- (In Millions) Market-area projects $ 25.5 $ 79.9 Supply-area projects (1.8) 113.2 Maintenance of existing facilities and other projects 92.5 50.3 Investments in affiliates 21.3 1.9 --------- --------- Total capital expenditures and investments in affiliates $ 137.5 $ 245.3 ========= ========= Transco's capital expenditures budget for 1999 and future capital projects are discussed in its 1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form 10-Q. The following describes significant developments related to those projects and any new projects proposed by Transco. BUCCANEER PIPELINE PROJECT On October 28, 1999, Buccaneer Gas Pipeline Company, L.L.C. (Buccaneer), a wholly-owned subsidiary of Transco, filed an application with the Federal Energy Regulatory Commission for certificate authorization of its proposed natural gas pipeline project extending from the Mobile Bay area in Alabama to delivery points in Florida. The application states that Buccaneer's pipeline system will be designed to transport up to 900,000 dekatherms (dt) of natural gas per day. The proposed in-service date of the pipeline is April 1, 2002. Buccaneer estimates that the total cost of the project will be approximately $1.455 billion. Buccaneer is proposing a 75/25 debt to equity capital structure and will seek non-recourse project financing. CARDINAL PIPELINE PROJECT On November 1, 1999, Cardinal Extension Company, LLC, a North Carolina limited liability company formed between wholly-owned subsidiaries of Transco and three of Transco's North Carolina customers, placed its pipeline project into service. The project involved the acquisition of an existing 37-mile pipeline in North Carolina and the construction of approximately 67 miles of pipeline to new interconnections in Clayton County, North Carolina. The pipeline provides transportation service of up to 270,000 Mcf of natural gas per day. The total cost to complete the project was approximately $98 million. Transco's wholly-owned subsidiary holds a 45% ownership interest in Cardinal. A separate wholly owned subsidiary of Transco is the operator of Cardinal. OTHER CAPITAL REQUIREMENTS AND CONTINGENCIES Transco's capital requirements and contingencies are discussed in its 1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form 10-Q. 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 1998 Annual Report on Form 10-K and 1999 First and Second Quarter Reports on Form 10-Q with regard to other capital requirements and contingencies. RATE AND REGULATORY REFUNDS Transco has provided reserves which it believes are adequate for any rate refunds that may be required. YEAR 2000 COMPLIANCE Williams and its wholly-owned subsidiaries, which includes Transco, initiated an enterprise-wide project in 1997 to address the year 2000 compliance issue for both traditional and non-traditional information technology areas, including embedded technology which is prevalent throughout the company. The project focuses on all technology hardware and software, external interfaces with customers and suppliers, operations process control, automation and instrumentation systems, and facility items. The phases of the project are awareness, inventory and assessment, renovation and replacement, testing and validation, and contingency planning. The awareness and inventory/assessment phases of this project as they relate to both traditional and non-traditional information technology areas have been completed. During the inventory and assessment phase, all systems with possible year 2000 implications were inventoried and classified into five categories: 1) highest, business critical, 2) high, compliance necessary within a short period of time following January 1, 2000, 3) medium, compliance necessary within 30 days from January 1, 2000, 4) low, compliance desirable but not required, and 5) unnecessary. Categories 1 through 3 were designated as critical and are the major focus of this project. Renovation/replacement and testing/validation of critical systems has been completed. While year 2000 date processes have been successfully validated, ongoing testing will continue to ensure data integrity and core functionality. Certain non-critical systems may not be compliant by January 1, 2000. Testing and validation activities have been completed and at September 30, 1999, 100% of the critical systems have been fully tested or validated as compliant. Year 2000 test labs remain in place and operational. As was expected, few problems have been detected during testing for items believed to be compliant. Transco has initiated a formal communications process with other companies with which Transco's systems interface or rely on to determine the extent to which those companies are addressing their year 2000 compliance. In connection with this process, Transco has sent more than 3,100 letters and questionnaires to third parties including customers, vendors, and service providers. Transco is evaluating responses as they are received or otherwise investigating the status of these companies' year 2000 compliance efforts. Because only approximately 21 percent of the companies contacted have responded to this inquiry (all of these have indicated that they are already compliant or will be compliant on a timely basis), Transco has also been working directly with key business partners to reduce the risk of a break in service or supply and with non-compliant companies to mitigate any material adverse effect on Transco. Transco has utilized both internal resources and external contractors to complete the year 2000 compliance project. Transco has a core group of 121 people assigned to this project. This group includes one individual responsible for coordinating, organizing, managing, communicating, and monitoring the project and another 120 part-time representatives responsible for completing the project. Depending on which phase the project is in and what area is being focused on at any given point in time, there can be an additional 36 to 40 employees who are also contributing a portion of their time to the completion of this project. Transco has contracted with an external contractor for a cost of up to $6.0 million for the remediation of Transco's customer service system. Although all critical systems over which Transco has control are planned to be compliant and tested before the year 2000, Transco has identified an area that would equate to a most reasonably likely worst case scenario. There is the possibility of service interruptions due to non-compliance by third parties. For example, power failures along the communications network or transportation systems could cause service interruptions. This risk should be minimized by the enterprise-wide communications effort with and evaluation of third-party compliance plans and by the development of contingency plans. It is not possible to quantify the possible financial impact if this most reasonably likely worst case scenario were to come to fruition. Significant focus on the contingency plan phase of the project has been taking place in 1999. Guidelines for the contingency planning process were issued in January 1999. Contingency plans have been developed for critical business processes, critical business partners, suppliers and system replacements that experience significant delays. Transco's contingency plans include manning all operational stations twenty-four hours a day, putting extra security measures into place and stocking up on supplies. In addition, most of Transco's compressor stations are capable of independently generating electricity in the event of a loss of electricity, and operation of the pipeline can be done manually in case there is a loss of telecommunications capability. These plans are subject to on-going review as we continue to assess the readiness of vendors and suppliers, and make changes as appropriate. Costs incurred for new software and hardware purchases are being capitalized and other costs are being expensed as incurred. Transco currently estimates the total cost of the project, including any accelerated system replacements, to be approximately $7.8 million. This $7.8 million has been or is expected to be spent as follows: Prior to 1998 and during the first quarter of 1998, Transco conducted the project awareness and inventory/assessment phases of the project and incurred minimal costs. During the second quarter of 1998, $0.1 million was spent on the renovation/replacement and testing/validation phases and completion of the inventory/assessment phase. The third and fourth quarters of 1998, focused on the renovation/replacement and testing/validation phases and $2.1 million of costs were incurred. During the first quarter of 1999, renovation/replacement and testing/validation continued, contingency planning began and $2.0 million was expended. During the second quarter of 1999, the primary focus shifted to testing/validation and contingency planning and $1.3 million was spent. During the third quarter of 1999, contingency planning continued and final testing began with $1.8 million spent. The fourth quarter of 1999 will continue to focus mainly on completion of contingency planning and final testing with $0.5 million expected to be spent. The amount estimated to be spent during the first two quarters of 2000 for monitoring and problem resolution is considered minimal. Virtually all of the $7.3 million incurred through September 30, 1999 has been expensed with a minimal amount capitalized. Of the $0.5 million of future costs necessary to complete the project within the schedule described, virtually all costs will be expensed, with a minimal amount capitalized. This estimate does not include Transco's potential share of year 2000 costs that may be incurred by partnerships and joint ventures in which the company participates but is not the operator. The costs of previously planned system replacements are not considered to be year 2000 costs and are, therefore, excluded from the amounts discussed above. The preceding discussion contains forward-looking statements including, without limitation, statements relating to the company's plans, strategies, objectives, expectations, intentions, and adequate resources, that are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements contained in the year 2000 update are based on certain assumptions which may vary from actual results. Specifically, the dates on which the company believes the year 2000 project will be completed and computer systems will be implemented are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the year 2000 project. Other specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer code, timely responses to and corrections by third-parties and suppliers, the ability to implement interfaces between the new systems and the systems not being replaced, and similar uncertainties. Due to the general uncertainty inherent in the year 2000 problem, resulting in large part from the uncertainty of the year 2000 readiness of third-parties, the company cannot ensure its ability to timely and cost-effectively resolve problems associated with the year 2000 issue that may affect its operations and business, or expose it to third-party liability. CONCLUSION Although no assurances can be given, Transco currently believes that the aggregate of cash flows from operating activities, supplemented, when necessary, by repayments of funds advanced to Williams, advances or capital contributions from Williams and borrowings under the Credit Agreement or short-term money market facilities, will provide Transco with sufficient liquidity to meet its capital requirements. Transco also expects to access public and private markets on reasonable terms to finance its capital requirements. 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: November 12, 1999 By /s/ James C. Bourne ------------------------------- James C. Bourne Controller (Principal Accounting Officer)