UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2021
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 COMPANY, LLC
(Exact name of registrant as specified in its charter)
Delaware | 74-1079400 | |||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
2800 Post Oak Boulevard | ||||||||||||||
Houston | Texas | 77056 | ||||||||||||
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (713) 215-2000
NO CHANGE |
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | Non-accelerated Filer | þ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H (1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
Index
Page | |||||
Forward Looking Statements
The reports, filings, and other public announcements of Transcontinental Gas Pipe Line Company, LLC may contain or incorporate by reference statements that do not directly or exclusively relate to historical facts. Such statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These forward-looking statements relate to anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, and other matters.
All statements, other than statements of historical facts, included in this report that address activities, events, or developments that we expect, believe, or anticipate will exist or may occur in the future are forward-looking statements. Forward-looking statements can be identified by various forms of words such as “anticipates,” “believes,” “seeks,” “could,” “may,” “should,” “continues,” “estimates,” “expects,” “forecasts,” “intends,” “might,” “goals,” “objectives,” “targets,” “planned,” “potential,” “projects,” “scheduled,” “will,” “assumes,” “guidance,” “outlook,” “in-service date,” or other similar expressions. These forward-looking statements are based on management’s beliefs and assumptions and on information currently available to management and include, among others, statements regarding:
•Our and our affiliates’ future credit ratings;
•Amounts and nature of future capital expenditures;
•Expansion and growth of our business and operations;
•Expected in-service dates for capital projects;
•Financial condition and liquidity;
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•Business strategy;
•Cash flow from operations or results of operations;
•Rate case filings;
•Natural gas prices, supply, and demand;
•Demand for our services; and
•The impact of the coronavirus (COVID-19) pandemic.
Forward-looking statements are based on numerous assumptions, uncertainties, and risks that could cause future events or results to be materially different from those stated or implied in this report. Many of the factors that will determine these results are beyond our ability to control or predict. Specific factors that could cause actual results to differ from results contemplated by the forward-looking statements include, among others, the following:
•The impact of operational and developmental hazards and unforeseen interruptions;
•Development and rate of adoption of alternative energy sources;
•The strength and financial resources of our competitors and the effects of competition;
•Availability of supplies, including lower than anticipated volumes from third parties, and market demand;
•Volatility of pricing including the effect of lower than anticipated energy commodity prices;
•Changes in maintenance and construction costs, as well as our ability to obtain sufficient construction- related inputs, including skilled labor;
•The impact of existing and future laws and regulations, the regulatory environment, environmental matters, and litigation, as well as our ability to obtain necessary permits and approvals, and achieve favorable rate proceeding outcomes;
•Increasing scrutiny and changing expectations from stakeholders with respect to our environmental, social, and governance practices;
•The physical and financial risks associated with climate change;
•Our exposure to the credit risk of our customers and counterparties;
•Our ability to successfully expand our facilities and operations;
•Whether we are able to successfully identify, evaluate, and timely execute our capital projects and investment opportunities;
•Risks related to financing, including restrictions stemming from debt agreements, future changes in credit ratings as determined by nationally recognized credit rating agencies, and the availability and cost of capital;
•Inflation, interest rates, and general economic conditions (including future disruptions and volatility in the global credit markets and the impact of these events on customers and suppliers);
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•Our costs for defined benefit pension plans and other postretirement benefit plans sponsored by our affiliates;
•The risks resulting from outbreaks or other public health crises, including COVID-19;
•Changes in the current geopolitical situation;
•Changes in U.S. governmental administration and policies;
•Risks associated with weather and natural phenomena, including climate conditions and physical damage to our facilities;
•Acts of terrorism, cybersecurity incidents, and related disruptions; and
•Additional risks described in our filings with the Securities and Exchange Commission (SEC).
Given the uncertainties and risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement, we caution investors not to unduly rely on our forward-looking statements. We disclaim any obligations to and do not intend to update the above list or announce publicly the result of any revisions to any of the forward-looking statements to reflect future events or developments.
In addition to causing our actual results to differ, the factors listed above and referred to below may cause our intentions to change from those statements of intention set forth in this report. Such changes in our intentions may also cause our results to differ. We may change our intentions, at any time and without notice, based upon changes in such factors, our assumptions, or otherwise.
Because forward-looking statements involve risks and uncertainties, we caution that there are important factors, in addition to those listed above, that may cause actual results to differ materially from those contained in the forward-looking statements. For a detailed discussion of those factors, see Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K filed with the SEC on February 24, 2021.
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PART I — FINANCIAL INFORMATION
ITEM 1. | Financial Statements. |
TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
CONDENSED STATEMENT OF NET INCOME
(Thousands of Dollars)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||||||||
Operating Revenues: | ||||||||||||||||||||||||||
Natural gas sales | $ | 14,224 | $ | 19,654 | ||||||||||||||||||||||
Natural gas transportation | 582,557 | 566,006 | ||||||||||||||||||||||||
Natural gas storage | 42,502 | 38,374 | ||||||||||||||||||||||||
Other | 4,494 | 3,334 | ||||||||||||||||||||||||
Total operating revenues | 643,777 | 627,368 | ||||||||||||||||||||||||
Operating Costs and Expenses: | ||||||||||||||||||||||||||
Cost of natural gas sales | 14,224 | 19,654 | ||||||||||||||||||||||||
Cost of natural gas transportation | 17,614 | 13,396 | ||||||||||||||||||||||||
Operation and maintenance | 78,470 | 80,689 | ||||||||||||||||||||||||
Administrative and general | 50,753 | 42,171 | ||||||||||||||||||||||||
Depreciation and amortization | 117,797 | 113,635 | ||||||||||||||||||||||||
Taxes — other than income taxes | 24,528 | 22,437 | ||||||||||||||||||||||||
Regulatory credit resulting from tax rate changes | (7,688) | (7,688) | ||||||||||||||||||||||||
Other expense, net | 1,423 | 3,290 | ||||||||||||||||||||||||
Total operating costs and expenses | 297,121 | 287,584 | ||||||||||||||||||||||||
Operating Income | 346,656 | 339,784 | ||||||||||||||||||||||||
Other (Income) and Other Expenses: | ||||||||||||||||||||||||||
Interest expense | 80,175 | 73,109 | ||||||||||||||||||||||||
Allowance for equity and borrowed funds used during construction (AFUDC) | (3,997) | (10,953) | ||||||||||||||||||||||||
Miscellaneous other (income) expenses, net | 52 | (356) | ||||||||||||||||||||||||
Total other (income) and other expenses | 76,230 | 61,800 | ||||||||||||||||||||||||
Net Income | $ | 270,426 | $ | 277,984 | ||||||||||||||||||||||
See accompanying notes.
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TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, 2021 | December 31, 2020 | |||||||||||||
ASSETS | ||||||||||||||
Current Assets: | ||||||||||||||
Cash | $ | 0 | $ | 0 | ||||||||||
Receivables: | ||||||||||||||
Affiliates | 1,288 | 1,011 | ||||||||||||
Advances to affiliate | 968,838 | 642,734 | ||||||||||||
Trade | 214,516 | 223,864 | ||||||||||||
Other | 13,962 | 14,660 | ||||||||||||
Transportation and exchange gas receivables | 7,678 | 4,627 | ||||||||||||
Inventories | 60,610 | 56,297 | ||||||||||||
Regulatory assets | 69,351 | 62,861 | ||||||||||||
Other | 8,849 | 13,847 | ||||||||||||
Total current assets | 1,345,092 | 1,019,901 | ||||||||||||
Property, Plant and Equipment: | ||||||||||||||
Natural gas transmission plant | 17,212,718 | 17,123,779 | ||||||||||||
Less-Accumulated depreciation and amortization | 4,903,794 | 4,802,256 | ||||||||||||
Total property, plant and equipment, net | 12,308,924 | 12,321,523 | ||||||||||||
Other Assets: | ||||||||||||||
Regulatory assets | 271,289 | 281,870 | ||||||||||||
Right-of-use assets | 75,974 | 78,899 | ||||||||||||
Other | 259,234 | 252,051 | ||||||||||||
Total other assets | 606,497 | 612,820 | ||||||||||||
Total assets | $ | 14,260,513 | $ | 13,954,244 |
(continued)
See accompanying notes.
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TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, 2021 | December 31, 2020 | |||||||||||||
LIABILITIES AND MEMBER’S EQUITY | ||||||||||||||
Current Liabilities: | ||||||||||||||
Payables: | ||||||||||||||
Affiliates | $ | 45,187 | $ | 32,676 | ||||||||||
Trade and other | 107,868 | 128,449 | ||||||||||||
Transportation and exchange gas payables | 6,778 | 1,905 | ||||||||||||
Regulatory liabilities | 58,412 | 57,086 | ||||||||||||
Accrued liabilities | 215,228 | 242,379 | ||||||||||||
Long-term debt due within one year | 23,152 | 22,640 | ||||||||||||
Total current liabilities | 456,625 | 485,135 | ||||||||||||
Long-Term Debt | 5,212,630 | 5,217,140 | ||||||||||||
Other Long-Term Liabilities: | ||||||||||||||
Asset retirement obligations | 400,791 | 397,737 | ||||||||||||
Regulatory liabilities | 944,566 | 946,774 | ||||||||||||
Deferred revenue | 202,391 | 205,030 | ||||||||||||
Lease liability | 77,281 | 78,688 | ||||||||||||
Other | 54,984 | 42,921 | ||||||||||||
Total other long-term liabilities | 1,680,013 | 1,671,150 | ||||||||||||
Contingent Liabilities and Commitments (Note 3) | 0 | 0 | ||||||||||||
Member’s Equity: | ||||||||||||||
Member’s capital | 4,603,499 | 4,543,499 | ||||||||||||
Retained earnings | 2,307,746 | 2,037,320 | ||||||||||||
Total member’s equity | 6,911,245 | 6,580,819 | ||||||||||||
Total liabilities and member’s equity | $ | 14,260,513 | $ | 13,954,244 |
See accompanying notes.
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TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
CONDENSED STATEMENT OF MEMBER’S EQUITY
(Thousands of Dollars)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||||||||
2021 | 2020 | |||||||||||||||||||
Member’s Capital: | ||||||||||||||||||||
Balance at beginning of period | $ | 4,543,499 | $ | 4,428,499 | ||||||||||||||||
Cash contributions from parent | 60,000 | 0 | ||||||||||||||||||
Balance at end of period | 4,603,499 | 4,428,499 | ||||||||||||||||||
Retained Earnings: | ||||||||||||||||||||
Balance at beginning of period | 2,037,320 | 2,177,284 | ||||||||||||||||||
Net income | 270,426 | 277,984 | ||||||||||||||||||
Cash distributions to parent | 0 | (270,000) | ||||||||||||||||||
Balance at end of period | 2,307,746 | 2,185,268 | ||||||||||||||||||
Total Member’s Equity | $ | 6,911,245 | $ | 6,613,767 |
See accompanying notes.
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TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
CONDENSED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
2021 | 2020 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | $ | 270,426 | $ | 277,984 | ||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||
Depreciation and amortization | 117,797 | 113,635 | ||||||||||||
Allowance for equity funds used during construction (equity AFUDC) | (3,052) | (8,121) | ||||||||||||
Regulatory credit resulting from tax rate changes | (7,688) | (7,688) | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||
Receivables — affiliates | (277) | (1,016) | ||||||||||||
— trade and other | 10,046 | 20,227 | ||||||||||||
Transportation and exchange gas receivable | (3,051) | 697 | ||||||||||||
Inventories | (4,313) | 1,130 | ||||||||||||
Payables — affiliates | 12,511 | (6,973) | ||||||||||||
— trade | (26,077) | (31,120) | ||||||||||||
Accrued liabilities | (22,381) | (40,343) | ||||||||||||
Reserve for rate refunds | 0 | 59,449 | ||||||||||||
Asset retirement obligations | 4,653 | 5,432 | ||||||||||||
Deferred revenue | (2,638) | (2,641) | ||||||||||||
Other, net | 2,748 | 9,572 | ||||||||||||
Net cash provided by operating activities | 348,704 | 390,224 | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Proceeds from other financing obligations | 817 | 1,685 | ||||||||||||
Payments on other financing obligations | (5,430) | (4,837) | ||||||||||||
Payments for debt issuance costs | (32) | 0 | ||||||||||||
Cash distributions to parent | 0 | (270,000) | ||||||||||||
Cash contributions from parent | 60,000 | 0 | ||||||||||||
Advances from affiliate, net | 0 | 64,358 | ||||||||||||
Net cash provided by (used in) financing activities | 55,355 | (208,794) | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Capital expenditures* | (89,200) | (173,184) | ||||||||||||
Contributions and advances for construction costs | 12,454 | 10,149 | ||||||||||||
Disposal of property, plant and equipment, net | (1,635) | (4,782) | ||||||||||||
Advances to affiliate, net | (326,104) | 0 | ||||||||||||
Purchase of ARO Trust investments | (14,573) | (28,686) | ||||||||||||
Proceeds from sale of ARO Trust investments | 14,999 | 15,073 | ||||||||||||
Net cash used in investing activities | (404,059) | (181,430) | ||||||||||||
Increase (decrease) in cash | 0 | 0 | ||||||||||||
Cash at beginning of period | 0 | 0 | ||||||||||||
Cash at end of period | $ | 0 | $ | 0 | ||||||||||
* Increase to property, plant and equipment, exclusive of equity AFUDC | $ | (84,631) | $ | (132,575) | ||||||||||
Changes in related accounts payable and accrued liabilities | (4,569) | (40,609) | ||||||||||||
Capital expenditures | $ | (89,200) | $ | (173,184) |
See accompanying notes.
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TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
In this report, Transcontinental Gas Pipe Line Company, LLC (Transco) is at times referred to in the first person as “we,” “us” or “our.”
Transco is indirectly owned by The Williams Companies, Inc. (Williams).
General
The accompanying condensed unaudited financial statements have been prepared from our books and records. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted in this Form 10-Q pursuant to Securities and Exchange Commission rules and regulations. The condensed unaudited financial statements include all normal recurring adjustments and others which, in the opinion of our management, are necessary to present fairly our interim financial statements. These condensed unaudited financial statements should be read in conjunction with the financial statements and the notes thereto included in our 2020 Annual Report on Form 10-K.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed unaudited financial statements and accompanying notes. Actual results could differ from those estimates.
2. REVENUE RECOGNITION
Revenue by Category
Our revenue disaggregation by major service line includes Natural gas sales, Natural gas transportation, Natural gas storage, and Other, which are separately presented on the Condensed Statement of Net Income.
Contract Liabilities
The following table presents a reconciliation of our contract liabilities:
Three Months Ended March 31, | |||||||||||||||||||||||
2021 | 2020 | ||||||||||||||||||||||
(Thousands) | |||||||||||||||||||||||
Balance at beginning of period | $ | 215,596 | $ | 226,164 | |||||||||||||||||||
Recognized in revenue | (2,638) | (2,641) | |||||||||||||||||||||
Balance at end of period | $ | 212,958 | $ | 223,523 |
Remaining Performance Obligations
Our remaining performance obligations primarily include reservation charges on contracted capacity on our firm transportation and storage contracts with customers. Amounts from certain contracts included in the table below, which are subject to periodic review and approval by the Federal Energy Regulatory Commission (FERC), reflect the rates for such services in our current FERC tariffs, net of estimated reserve for refund, for the life of the related contracts; however, these rates may change based on future tariffs approved by the FERC and the amount and timing of these changes is not currently known. This table excludes the variable consideration component for commodity charges. Certain of our contracts contain evergreen provisions for periods beyond the initial term of the contract. The remaining performance obligations, as of March 31, 2021, do not consider potential future performance obligations for which the renewal has not been exercised. The table below also does not include
9
contracts with customers for which the underlying facilities have not received FERC authorization to be placed into service.
The following table presents the amount of the contract liabilities balance expected to be recognized as revenue when performance obligations are satisfied and the transaction price allocated to the remaining performance obligations under certain contracts as of March 31, 2021.
Contract Liabilities | Remaining Performance Obligations | ||||||||||
(Thousands) | |||||||||||
2021 (remainder) | $ | 7,928 | $ | 1,764,521 | |||||||
2022 | 10,566 | 2,219,717 | |||||||||
2023 | 10,566 | 2,052,380 | |||||||||
2024 | 10,568 | 1,617,624 | |||||||||
2025 | 10,566 | 1,454,637 | |||||||||
Thereafter | 162,764 | 12,210,945 | |||||||||
Total | $ | 212,958 | $ | 21,319,824 |
Accounts Receivable
Receivables from contracts with customers are included within Receivables - Trade and Receivables - Affiliates, and receivables that are not related to contracts with customers are included within the balance of Receivables - Advances to affiliate and Receivables - Other in our Condensed Balance Sheet.
3. CONTINGENT LIABILITIES AND COMMITMENTS
Environmental Matters
We have had studies underway for many years to test some of our facilities for the presence of toxic and hazardous substances such as polychlorinated biphenyls (PCBs) and mercury to determine to what extent, if any, remediation may be necessary. We have also similarly evaluated past on-site disposal of hydrocarbons at a number of our facilities. We have worked closely with and responded to data requests from the U.S. Environmental Protection Agency (EPA) and state agencies regarding such potential contamination of certain of our sites. We are conducting environmental assessments and implementing a variety of remedial measures that may result in increases or decreases in the total estimated costs. At March 31, 2021, we have accrued approximately $2.9 million for the expense portion of these estimated costs, $0.7 million of which is recorded in Accrued liabilities and $2.2 million of which is recorded in Other Long-Term Liabilities - Other in the accompanying Condensed Balance Sheet. At December 31, 2020, we had a balance of approximately $2.4 million for the expense portion of these estimated costs, $0.7 million of which is recorded in Accrued liabilities and $1.7 million of which is recorded in Other Long-Term Liabilities - Other in the accompanying Condensed Balance Sheet.
We have been identified as a potentially responsible party (PRP) at various Superfund and state waste disposal sites. Based on present volumetric estimates and other factors, our estimated aggregate exposure for remediation of these sites is less than $0.5 million. The estimated remediation costs for all of these sites are included in the environmental liabilities discussed above. Liability under the Comprehensive Environmental Response, Compensation and Liability Act and applicable state law can be joint and several with other PRPs. Although volumetric allocation is a factor in assessing liability, it is not necessarily determinative; thus, the ultimate liability could be substantially greater than the amounts described above.
The EPA and various state regulatory agencies routinely promulgate and propose new rules, and issue updated guidance to existing rules. These rulemakings include, but are not limited to, rules for reciprocating internal combustion engine and combustion turbine maximum achievable control technology, air quality standards for one-hour nitrogen dioxide emissions, and volatile organic compound and methane new source performance standards impacting design and operation of storage vessels, pressure valves, and compressors. The EPA previously issued its
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rule regarding National Ambient Air Quality Standards for ground-level ozone. We are monitoring the rule’s implementation as it will trigger additional federal and state regulatory actions that may impact our operations. Implementation of the regulations is expected to result in impacts to our operations and increase the cost of additions to Total property, plant and equipment, net in the Condensed Balance Sheet for both new and existing facilities in affected areas. We are unable to reasonably estimate the cost of additions that may be required to meet the regulations at this time due to uncertainty created by various legal challenges to these regulations and the need for further specific regulatory guidance.
We consider prudently incurred environmental assessment and remediation costs and the costs associated with compliance with environmental standards to be recoverable through rates. To date, we have been permitted recovery of environmental costs, and it is our intent to continue seeking recovery of such costs through future rate filings.
Other Matters
Various other proceedings are pending against us and are considered incidental to our operations.
Summary
We estimate that for all matters for which we are able to reasonably estimate a range of loss, including those noted above and others that are not individually significant, our aggregate reasonably possible losses beyond amounts accrued for all of our contingent liabilities are immaterial to our expected future annual results of operations, liquidity and financial position. These calculations have been made without consideration of any potential recovery from third parties. We have disclosed all significant matters for which we are unable to reasonably estimate a range of possible loss.
4. DEBT AND FINANCING ARRANGEMENTS
Credit Facility
We, along with Williams and Northwest Pipeline LLC (Northwest), are party to a credit agreement with aggregate commitments available of $4.5 billion, with up to an additional $500 million increase in aggregate commitments available under certain circumstances. We and Northwest are each subject to a $500 million borrowing sublimit. Letter of credit commitments of $1.0 billion are subject to the $500 million borrowing sublimit applicable to us and Northwest. At March 31, 2021, 0 letters of credit have been issued, and 0 loans were outstanding under the credit facility.
Williams participates in a commercial paper program and Williams’ management considers amounts outstanding under this program to be a reduction of available capacity under the credit facility. The program allows a maximum outstanding amount at any time of $4.0 billion of unsecured commercial paper notes. At March 31, 2021, Williams had 0 outstanding commercial paper.
Other Financing Obligations
Dalton Expansion Project
At March 31, 2021, the amount included in Long-Term Debt on our Condensed Balance Sheet for this financing obligation is $253.8 million, and the amount included in Long-term debt due within one year on our Condensed Balance Sheet for this financing obligation is $2.4 million.
Atlantic Sunrise Project
During the first three months of 2021, we received an additional $0.8 million of funding from a co-owner for its proportionate share of construction costs related to its undivided ownership interest in certain parts of the project. This additional funding is reflected in Long-Term Debt on our Condensed Balance Sheet. At March 31, 2021, the amount included in Long-Term Debt on our Condensed Balance Sheet for this financing obligation is $822.5 million, and the amount included in Long-term debt due within one year on our Condensed Balance Sheet for this financing obligation is $20.8 million.
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5. ARO TRUST
We are entitled to collect in rates the amounts necessary to fund our asset retirement obligations (ARO). We deposit monthly, into an external trust account (ARO Trust), the revenues specifically designated for ARO. The ARO Trust carries a moderate risk portfolio. The Money Market Funds held in our ARO Trust are considered investments. We measure the financial instruments held in our ARO Trust at fair value. However, in accordance with the ASC Topic 980, Regulated Operations, both realized and unrealized gains and losses of the ARO Trust are recorded as regulatory assets or liabilities.
Effective March 1, 2020, the annual funding obligation is approximately $16.0 million, with deposits made monthly.
Investments within the ARO Trust at fair value were as follows (in millions):
March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
Amortized Cost Basis | Fair Value | Amortized Cost Basis | Fair Value | ||||||||||||||||||||
Money Market Funds | $ | 6.5 | $ | 6.5 | $ | 5.8 | $ | 5.8 | |||||||||||||||
U.S. Equity Funds | 52.7 | 103.8 | 59.9 | 108.0 | |||||||||||||||||||
International Equity Funds | 31.7 | 42.5 | 34.2 | 43.7 | |||||||||||||||||||
Municipal Bond Funds | 87.5 | 89.9 | 74.9 | 78.0 | |||||||||||||||||||
Total | $ | 178.4 | $ | 242.7 | $ | 174.8 | $ | 235.5 |
6. FAIR VALUE MEASUREMENTS
The following table presents, by level within the fair value hierarchy, certain of our financial assets and liabilities. The carrying values of short-term financial assets (advances to affiliate) that have variable interest rates, accounts receivable and accounts payable approximate fair value because of the short-term nature of these instruments. Therefore, these assets and liabilities are not presented in the following table.
Fair Value Measurements Using | ||||||||||||||||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
(Millions) | ||||||||||||||||||||||||||||||||
Assets (liabilities) at March 31, 2021: | ||||||||||||||||||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||||||||||||||||||
ARO Trust investments | $ | 242.7 | $ | 242.7 | $ | 242.7 | $ | 0 | $ | 0 | ||||||||||||||||||||||
Additional disclosures: | ||||||||||||||||||||||||||||||||
Long-term debt, including current portion | (5,235.8) | (6,504.6) | 0 | (6,504.6) | 0 | |||||||||||||||||||||||||||
Assets (liabilities) at December 31, 2020: | ||||||||||||||||||||||||||||||||
Measured on a recurring basis: | ||||||||||||||||||||||||||||||||
ARO Trust investments | $ | 235.5 | $ | 235.5 | $ | 235.5 | $ | 0 | $ | 0 | ||||||||||||||||||||||
Additional disclosures: | ||||||||||||||||||||||||||||||||
Long-term debt, including current portion | (5,239.8) | (6,949.0) | 0 | (6,949.0) | 0 |
Fair Value Methods
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
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ARO Trust investments — We deposit a portion of our collected rates, pursuant to the terms of the Docket No. RP18-1126 rate case settlement, into the ARO Trust, which is specifically designated to fund future asset retirement obligations. The ARO Trust invests in a portfolio of actively traded mutual funds that are measured at fair value on a recurring basis based on quoted prices in an active market and are reported in Other Assets-Other in the Condensed Balance Sheet. However, both realized and unrealized gains and losses are ultimately recorded as regulatory assets or liabilities. (See Note 5. ARO Trust for more information regarding the ARO Trust.)
Long-term debt, including current portion — The disclosed fair value of our long-term debt is determined primarily by a market approach using broker quoted indicative period-end bond prices. The quoted prices are based on observable transactions in less active markets for our debt or similar instruments. The fair value of the financing obligations associated with our Dalton and Atlantic Sunrise expansions, which are included within long-term debt, were determined using an income approach (See Note 4. Debt and Financing Arrangements).
7. TRANSACTIONS WITH AFFILIATES
We are a participant in Williams’ cash management program, and we receive advances from and make advances to Williams. At March 31, 2021 and December 31, 2020, our advances to Williams totaled approximately $968.8 million and $642.7 million, respectively. These advances are classified as Receivables - Advances to affiliate in the accompanying Condensed Balance Sheet. Advances are stated at the historical carrying amounts. The interest rate on these intercompany demand notes is based upon the daily overnight investment rate paid on Williams’ excess cash at the end of each month. At March 31, 2021, the interest rate was 0.01 percent.
Included in Operating Revenues in the accompanying Condensed Statement of Net Income are revenues received from affiliates of $2.6 million for the three months ended March 31, 2021 and 2020. The rates charged to provide sales and services to affiliates are the same as those that are charged to similarly-situated nonaffiliated customers.
Included in Cost of natural gas sales in the accompanying Condensed Statement of Net Income are costs of gas purchased from affiliates of $3.4 million and $2.5 million for the three months ended March 31, 2021 and 2020, respectively. All gas purchases are made at market or contract prices.
We have 0 employees. Services necessary to operate our business are provided to us by Williams and certain affiliates of Williams. We reimburse Williams and its affiliates for all direct and indirect expenses incurred or payments made (including salary, bonus, incentive compensation and benefits) in connection with these services. Employees of Williams also provide general, administrative and management services to us, and we are charged for certain administrative expenses incurred by Williams. These charges are either directly identifiable or allocated to our assets. Direct charges are for goods and services provided by Williams at our request. Allocated charges are based on a three-factor formula, which considers revenues; property, plant and equipment; and payroll. In management’s estimation, the allocation methodologies used are reasonable and result in a reasonable allocation to us of our costs of doing business incurred by Williams. We were billed $94.7 million and $86.9 million for the three months ended March 31, 2021 and 2020, respectively, for these services. Such expenses are primarily included in Operation and maintenance and Administrative and general expenses in the accompanying Condensed Statement of Net Income.
We provide services to certain of our affiliates. We recorded reductions in operating expenses for services provided to and reimbursed by our affiliates of $1.7 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.
We made equity distributions totaling $270.0 million during the three months ended March 31, 2020. During April 2021, we made a distribution of $231.4 million. Our parent made contributions to us totaling $60.0 million during the three months ended March 31, 2021 to fund a portion of our expenditures for additions to property, plant, and equipment. During April 2021, our parent made an additional $73.0 million contribution to us.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
The following discussion should be read in conjunction with the Financial Statements, Notes and Management’s Discussion and Analysis contained in Items 7 and 8 of our 2020 Annual Report on Form 10-K and with the Condensed Financial Statements and Notes contained in this Form 10-Q.
RESULTS OF OPERATIONS
Operating Income and Net Income
Operating Income for the three months ended March 31, 2021 was $346.7 million compared to $339.8 million for the same period in 2020. The increase in Operating Income of $6.9 million (2.0 percent) was primarily due to higher Natural gas transportation revenues in the first three months of 2021 compared to the same period in 2020, partially offset by an unfavorable change in Operating Costs and Expenses, as discussed below. Net Income for the three months ended March 31, 2021 was $270.4 million compared to $278.0 million for the same period in 2020. The decrease in Net Income of $7.6 million (2.7 percent) was mostly attributable to an increase in Other (Income) and Other Expenses, as discussed below.
Operating Revenues
Natural gas sales decreased $5.4 million (27.6 percent) for the three months ended March 31, 2021 compared to the same period in 2020. The decrease was due to lower cash out sales. Cash out sales are offset in our cost of natural gas sales and therefore have no impact on our operating income or net income.
Natural gas transportation for the three months ended March 31, 2021 increased $16.6 million (2.9 percent) over the same period in 2020. The increase was primarily attributable to:
•$17.0 million from our Southeastern Trail project placed in service in November 2020;
•$6.0 million from our Hillabee 2 project placed in service in May 2020;
•$5.1 million due to our Leidy South project partially placed in service in November 2020;
•$4.2 million higher electric power costs. Electric power costs are recovered from our customers through transportation rates resulting in no net impact on our operating income or results of operations.
•Partially offset by $6.0 million lower revenue due to one less billable day;
•$8.8 million lower due to rate decreases;
•$1.0 million lower due to commodity revenues.
Natural gas storage increased $4.1 million (10.8 percent) for the three months ended March 31, 2021 compared to the same period in 2020. The increase was primarily due to an increase in rates effective in the second quarter of 2020.
Winter Storm Uri did not significantly impact our operating revenues.
Operating Costs and Expenses
Excluding the Cost of natural gas sales, which is directly offset in revenues, our operating costs and expenses increased $15.0 million (5.6 percent) for the three months ended March 31, 2021 compared to the same period in 2020. This increase was primarily attributable to:
•$8.6 million (20.4 percent) unfavorable change in Administrative and general costs primarily due to $6.6 million unfavorable change in corporate allocations and $1.7 million increase in employee labor and benefit costs;
•$4.2 million (31.5 percent) increase in Cost of natural gas transportation primarily due to $4.2 million higher electric power costs. Electric power costs are recovered from customers through transportation rates resulting in no net income impact on our operating income or results of operations; and
•$4.2 million (3.7 percent) increase in Depreciation and amortization costs primarily resulting from additional assets placed into service.
•Partially offset by $2.2 million (2.8 percent) favorable change in Operation and maintenance costs primarily resulting from $2.8 million decrease in contracted services, and $0.9 million decrease in employee labor and related benefit costs, reduced by a $1.3 million increase in corporate allocations.
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Other (Income) and Other Expenses
Other (income) and other expenses for the three months ended March 31, 2021 had an unfavorable change of $14.4 million (23.3 percent) compared to the same period in 2020. Due to $7.1 million in interest expense primarily due to interest incurred on new debt issued May 2020 and an unfavorable change of $7.0 million in Allowance for equity and borrowed funds used during construction (AFUDC) due to a decrease in capital spending.
Recent Developments
COVID-19
The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. We continue to monitor the COVID-19 pandemic and have taken steps intended to protect the safety of our customers, employees and communities, and to support the continued delivery of safe and reliable service to our customers and the communities we serve. Our financial condition, results of operations, and liquidity have not been materially impacted by direct effects of COVID-19.
Pipeline Expansion Projects
Southeastern Trail
The Southeastern Trail Project involved an expansion of our existing natural gas transmission system to provide incremental firm transportation capacity from the Pleasant Valley interconnect with Dominion’s Cove Point Pipeline in Virginia to the Station 65 Pooling Point in Louisiana. In October 2019, we received approval from the FERC for the project. We placed 230 Mdth/d of capacity under the project into service in the fourth quarter of 2020, and the project was fully in service on January 1, 2021. In total, the project increased capacity by 296 Mdth/d.
Leidy South
The Leidy South Project involves an expansion of our existing natural gas transmission system and an extension of our system through a capacity lease with National Fuel Gas Supply Corporation that will enable us to provide incremental firm transportation from Clermont, Pennsylvania and from the Zick interconnection on Transco’s Leidy Line to the River Road regulating station in Lancaster County, Pennsylvania. In July 2020, we received approval from the FERC for the project. We placed 125 Mdth/d of capacity under the project into service in the fourth quarter of 2020, and we plan to place the remainder of the project into service as early as the fourth quarter of 2021. The project is expected to increase capacity by 582 Mdth/d.
Regional Energy Access
The Regional Energy Access Expansion involves an expansion of our existing natural gas transmission system to provide incremental firm transportation capacity from receipt points in northeastern Pennsylvania to multiple delivery points in Pennsylvania, New Jersey, and Maryland. We filed our certificate application for the project with the FERC on March 26, 2021. We plan to place the project into service as early as the fourth quarter of 2023, assuming timely receipt of all necessary regulatory approvals. The project is expected to increase capacity by 829 Mdth/d.
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ITEM 4. | Controls and Procedures |
Our management, including our Senior Vice President and our Vice President and Chief Accounting Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Disclosure Controls)) or our internal control over financial reporting (Internal Controls) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We monitor our Disclosure Controls and Internal Controls and make modifications as necessary; our intent in this regard is that the Disclosure Controls and Internal Controls will be modified as systems change and conditions warrant.
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our Disclosure Controls was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of our management, including our Senior Vice President and our Vice President and Chief Accounting Officer. Based upon that evaluation, our Senior Vice President and our Vice President and Chief Accounting Officer concluded that these Disclosure Controls are effective at a reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There have been no changes during the first quarter of 2021 that have materially affected, or are reasonably likely to materially affect, our Internal Control over Financial Reporting.
PART II — OTHER INFORMATION.
ITEM 1. | Legal Proceedings |
Environmental
While it is not possible for us to predict the final outcome of any pending legal proceedings involving governmental authorities under federal, state, and local laws regulating the discharge of materials into the environment, we do not anticipate a material effect on our financial position if we were to receive an unfavorable outcome in any one or more of such proceedings. Our threshold for disclosing material environmental legal proceedings involving a governmental authority where potential monetary sanctions are involved is $1 million.
Other
The additional information called for by this item is provided in Note 3. Contingent Liabilities and Commitments, included in the Notes to Financial Statements included under Part 1, Item 1. Financial Statements of this Form 10-Q, which information is incorporated by reference into this item.
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ITEM 1A. | Risk Factors |
Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020 includes certain risk factors that could materially affect our business, financial condition, or future results. Those Risk Factors have not materially changed.
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ITEM 6. | Exhibits |
The following instruments are included as exhibits to this report.
Exhibit Number | Description | |||||||
2 | ||||||||
3.1 | ||||||||
3.2 | ||||||||
31.1* | ||||||||
31.2* | ||||||||
32** | ||||||||
101.INS* | XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |||||||
101.SCH* | XBRL Taxonomy Extension Schema. | |||||||
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase. | |||||||
101.DEF* | XBRL Taxonomy Extension Definition Linkbase. | |||||||
101.LAB* | XBRL Taxonomy Extension Label Linkbase. | |||||||
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase. | |||||||
104* | Cover Page Interactive Data File. The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document (contained in Exhibit 101). |
* | Filed herewith. | ||||
** | Furnished herewith. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TRANSCONTINENTAL GAS PIPE LINE COMPANY, LLC (Registrant) | ||||||||||||||
Dated: | May 3, 2021 | By: | /s/ Billeigh W. Mark | |||||||||||
Billeigh W. Mark | ||||||||||||||
Controller | ||||||||||||||
(Principal Accounting Officer) |