-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OilodC/SVqbhCIWh2QKHwmhTrWngOIxksmVjdHhABl5klgABwuGrbvjfmSIKaYS9 cu3sj8vWgptaq5IRmK21dQ== 0000950134-98-008752.txt : 19981113 0000950134-98-008752.hdr.sgml : 19981113 ACCESSION NUMBER: 0000950134-98-008752 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST PIPELINE CORP CENTRAL INDEX KEY: 0000110019 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 870269236 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07414 FILM NUMBER: 98744743 BUSINESS ADDRESS: STREET 1: 295 CHIPETA WAY CITY: SALT LAKE CITY STATE: UT ZIP: 84158-0900 BUSINESS PHONE: 8015838800 MAIL ADDRESS: STREET 1: 295 CHIPETA WAY CITY: SALT LAKE STATE: UT ZIP: 84158 10-Q 1 FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q -------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Period Ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number 1-7414 NORTHWEST PIPELINE CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 87-0269236 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 295 Chipeta Way Salt Lake City, Utah 84108 ----------------------------------------------------- (Address of principal executive offices and Zip Code) (801) 583-8800 ---------------------------------------------------- (Registrant's telephone number, including area code) No Change ---------------------------------------------------- (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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at November 11, 1998 - -------------------------- -------------------------------- Common stock, $1 par value 1,000 shares The registrant meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. 2 NORTHWEST PIPELINE CORPORATION TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements - Condensed Consolidated Statement of Income, three and nine months ended September 30, 1998 and 1997 ................................. 1 Condensed Consolidated Balance Sheet as of September 30, 1998 and December 31, 1997 ................................................. 2 Condensed Consolidated Statement of Cash Flows, nine months ended September 30, 1998 and 1997 .......................... 4 Notes to Condensed Consolidated Financial Statements ................... 5 Item 2. Management's Narrative Analysis of the Results of Operations ........ 8 PART II. OTHER INFORMATION ..................................................... 11
Certain matters discussed in this report, excluding historical information, include forward-looking statements. Although Northwest Pipeline Corporation believes such forward-looking statements are based on reasonable assumptions, no assurance can be given that every objective will be reached. 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 Northwest Pipeline Corporation's annual report on Form 10-K. 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) ================================================================================
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- (Thousands) OPERATING REVENUES ..................... $ 73,908 $ 71,197 $ 215,438 $ 204,453 ---------- ---------- ---------- ---------- OPERATING EXPENSES: General and administrative .......... 12,511 10,262 33,338 34,501 Operation and maintenance ........... 9,339 9,178 27,010 26,080 Depreciation and amortization ....... 12,799 13,222 38,723 38,490 Taxes, other than income taxes ...... 3,131 2,966 10,152 10,641 ---------- ---------- ---------- ---------- 37,780 35,628 109,223 109,712 ---------- ---------- ---------- ---------- Operating income ................. 36,128 35,569 106,215 94,741 ---------- ---------- ---------- ---------- OTHER INCOME - net .................... 652 587 3,057 2,556 ---------- ---------- ---------- ---------- INTEREST CHARGES: Interest on long-term debt .......... 7,449 8,164 22,113 24,808 Other interest ...................... 1,903 1,840 7,023 5,395 Allowance for borrowed funds used during construction ............... (195) (168) (397) (493) ---------- ---------- ---------- ---------- 9,157 9,836 28,739 29,710 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES ............. 27,623 26,320 80,533 67,587 PROVISION FOR INCOME TAXES ............. 10,936 7,794 30,271 23,207 ---------- ---------- ---------- ---------- NET INCOME ............................. $ 16,687 $ 18,526 $ 50,262 $ 44,380 ========== ========== ========== ========== CASH DIVIDENDS ON COMMON STOCK ......... $ 12,000 $ 21,400 $ 36,000 $ 51,837 ========== ========== ========== ==========
- ----------------------- See accompanying notes. - 1 - 4 NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ================================================================================ ASSETS
September 30, December 31, 1998 1997 ------------ ------------ (Thousands) PROPERTY, PLANT AND EQUIPMENT, at cost ..................... $ 1,487,406 $ 1,471,027 Less - Accumulated depreciation and amortization ....... 606,881 570,521 ------------ ------------ 880,525 900,506 Construction work in progress .......................... 40,931 18,819 ------------ ------------ 921,456 919,325 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents .............................. 317 627 Advances to parent ..................................... 57,269 71,823 Accounts receivable - Trade ............................................... 15,973 26,873 Affiliated companies ................................ 2,823 668 Materials and supplies (principally at average cost) ... 10,651 10,619 Exchange gas due from others ........................... 8,390 12,859 Costs recoverable through rate adjustments ............. 492 -- Deferred income taxes .................................. 17,853 25,867 Prepayments and other .................................. 1,924 2,597 ------------ ------------ 115,692 151,933 ------------ ------------ OTHER ASSETS: Deferred charges ....................................... 51,527 54,181 ------------ ------------ $ 1,088,675 $ 1,125,439 ============ ============
- ----------------------- See accompanying notes. - 2 - 5 NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ================================================================================ LIABILITIES AND STOCKHOLDER'S EQUITY
September 30, December 31, 1998 1997 ------------ ------------ (Thousands) CAPITALIZATION: Common stockholder's equity - Common stock, par value $1 per share; authorized and outstanding, 1,000 shares .......... $ 1 $ 1 Additional paid-in capital .......................... 262,844 262,844 Retained earnings ................................... 176,879 162,617 ------------ ------------ 439,724 425,462 Long-term debt, less current maturities (Note 3) ....... 372,435 408,287 ------------ ------------ 812,159 833,749 ------------ ------------ CURRENT LIABILITIES: Current maturities of long-term debt ................... 35,667 1,667 Accounts payable - Trade ............................................... 14,782 14,934 Affiliated companies ................................ 4,818 15,456 Accrued liabilities - Taxes, other than income taxes ...................... 6,366 4,044 Interest ............................................ 16,781 17,227 Employee costs ...................................... 7,696 8,103 Exchange gas due to others .......................... 9,571 9,650 Costs refundable through rate adjustments ........... -- 2,766 Reserves for estimated rate refunds .............. 39,074 74,083 Other ............................................... 2,489 8,705 ------------ ------------ 137,244 156,635 ------------ ------------ DEFERRED INCOME TAXES ...................................... 132,446 126,801 ------------ ------------ OTHER DEFERRED CREDITS ..................................... 6,826 8,254 ------------ ------------ CONTINGENT LIABILITIES AND COMMITMENTS (Note 4) ............ -- -- ------------ ------------ $ 1,088,675 $ 1,125,439 ============ ============
- ----------------------- See accompanying notes. - 3 - 6 NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ================================================================================
Nine Months Ended September 30, ------------------------------ 1998 1997 ------------ ------------ (Thousands) OPERATING ACTIVITIES: Net income .................................................. $ 50,262 $ 44,380 Adjustments to reconcile to cash provided by operations - Depreciation and amortization ........................... 38,723 38,490 Provision for deferred income taxes ..................... 13,659 13,105 Amortization of deferred charges and credits ............ 67 (1,099) Sale of receivables ..................................... -- 8,000 Allowance for equity funds used during construction ..... (620) (577) Increase (decrease) from changes in: Accounts receivable and exchange gas due from others .. 13,214 (197) Inventory ............................................. (32) (103) Other current assets .................................. (2,585) 5,657 Other assets and deferred charges ..................... 1,527 (2,190) Accounts payable and exchange gas due to others ....... (11,797) 4,510 Other accrued liabilities ............................. (39,755) 16,791 Other deferred credits ................................ (334) 1,203 Other ................................................... (7) (516) ------------ ------------ Net cash provided by operating activities ................... 62,322 127,454 ------------ ------------ INVESTING ACTIVITIES: Property, plant and equipment - Capital expenditures .................................... (41,761) (31,241) Proceeds from sales ..................................... 1,533 366 Changes in accounts payable ............................. 928 (9,291) Advances to parent .......................................... 14,554 (27,137) ------------ ------------ Net cash used by investing activities ....................... (24,746) (67,303) ------------ ------------ FINANCING ACTIVITIES: Principal payments on long-term debt ........................ (1,867) (192,020) Premium on early retirement of long-term debt ............... (19) (22,695) Proceeds from notes payable to bank ......................... -- 207,000 Dividends paid .............................................. (36,000) (51,837) ------------ ------------ Net cash used by financing activities ....................... (37,886) (59,552) ------------ ------------ NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............ (310) 599 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................................................... 627 240 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 317 $ 839 ============ ============
- ----------------------- See accompanying notes. - 4 - 7 NORTHWEST PIPELINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ================================================================================ (1) GENERAL The accompanying, unaudited interim condensed consolidated financial statements of Northwest Pipeline Corporation ("Pipeline"), included herein, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, Pipeline believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of Pipeline, all adjustments, which include only normal operating adjustments, have been made to present fairly the financial position of Pipeline as of September 30, 1998 and December 31, 1997, the results of operations for the three and nine month periods ended September 30, 1998 and 1997, and cash flows for the nine month periods ended September 30, 1998 and 1997. The results of operations for the periods presented are not necessarily indicative of the results for the respective complete years. It is suggested that these condensed financial statements be read in conjunction with the statements and the notes thereto included in Pipeline's 1997 Annual Report on Form 10-K. Effective May 7, 1998, Pipeline became a wholly-owned subsidiary of Williams Gas Pipeline Company, which is a wholly-owned subsidiary of The Williams Companies, Inc. ("Williams"). Prior to May 7, 1998, Pipeline was a wholly-owned subsidiary of Williams Interstate Natural Gas Systems, Inc.. (2) BASIS OF PRESENTATION The financial position of Pipeline as of September 30, 1998 and December 31, 1997, the results of operations for the three and nine month periods ended September 30, 1998 and 1997 and cash flows for the nine month periods ended September 30, 1998 and 1997 include the operating results of NWP Enterprises ("Enterprises"), a wholly owned subsidiary of Pipeline, since its incorporation on January 2, 1997. (3) LONG-TERM DEBT AND BANKING ARRANGEMENTS During September 1998, Pipeline announced an early redemption with premium of the remaining $34 million of its 10.65% Debentures, due 2018, under the early redemption provisions of the indenture. The redemption will take place on November 15, 1998 at a premium of $1.8 million plus accrued interest. The early redemption premium and the unamortized debt expense associated with the 10.65% Debentures, totaling $2 million, will be amortized over the life of the retired debt. Excess funds previously advanced to Williams will be used to fund the prepayment and the premium. Pipeline shares in a $1 billion Revolving Credit Facility with Williams and four affiliated companies. Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, is $400 million, none of which was used by Pipeline at September 30, 1998. Interest rates vary with current market conditions. The Facility 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 Pipeline. Any borrowings by Pipeline under this Facility are not guaranteed by Williams and are based on Pipeline's financial need and credit worthiness. Pipeline has also arranged various uncommitted lines-of-credit at market interest rates. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness. - 5 - 8 NORTHWEST PIPELINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ================================================================================ (4) CONTINGENT LIABILITIES AND COMMITMENTS Pending Rate Cases On April 1, 1993, Pipeline began collecting new rates, subject to refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31, 1995, Pipeline received an order from the Federal Energy Regulatory Commission ("FERC") on this rate case, which among other issues, supported an equity rate of return of 13.2 percent. In a further order issued on July 19, 1996, FERC required an Administrative Law Judge ("ALJ") to reconsider the long-term growth component of the equity rate of return formula, and upheld its May 31, 1995 decision on all other issues. On October 22, 1996, the ALJ issued an initial decision which recommended an equity rate of return of 11.62 percent. Pipeline took exception to this decision before the FERC. On June 11, 1997, the FERC issued an order revising its approved equity rate of return to 12.59 percent based on a new policy for industry-wide application that requires the use of forecasts of growth in the gross domestic product as the long-term growth component of the rate of return formula. On July 11, 1997, Pipeline and several parties in the case sought rehearing of the June 11 rate of return on equity decision, seeking to have the FERC reconsider various aspects of its new rate of return on equity policy. On October 16, 1997, the FERC issued an opinion denying rehearing and reaffirming its previous policy pronouncements concerning rate of return on equity, but convened a conference on January 30, 1998 to consider, on an industry-wide basis, issues with respect to pipeline rates of return. Pipeline made refunds to customers in June 1998 totaling $27 million, including interest, in this rate case. Pipeline also sought judicial review of FERC's decision concerning rate of return. In July 1998, FERC issued orders concerning its rate of return on equity policy in rate proceedings of other pipelines adopting a formula that gives less weight to the long-term growth component. If this most recent formula modification were to be applied in this rate proceeding, the rate of return result would be somewhat higher. Any additional revenues to which Pipeline might be entitled would be collected through a special FERC-authorized surcharge. On February 1, 1996, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate Case"). On October 18, 1996, the Commission issued an order approving a settlement concerning certain liquid revenue credit issues relating to Pipeline's agreement with an affiliate to have liquid hydrocarbon products extracted from Pipeline's transportation stream at Ignacio, Colorado. The litigation of all remaining issues took place in late 1996. Pipeline's rate application seeks a revenue increase for increases in rate base related primarily to the Northwest Natural and Expansion II facilities placed into service December 1, 1995 and increased operating costs primarily associated with an increase in headquarters office rent. During the first quarter of 1998, the ALJ issued an Initial Decision. The ALJ found that the facts of this case continue to support Pipeline's capital structure of 55% equity and 45% debt. The ALJ also determined that Pipeline fits within the average risk range for determining pipeline return on equity. However, the ALJ allowed a return on equity of 11.2 percent. Pipeline is seeking FERC review of this and other aspects of the ALJ decision. If the FERC applies its recently announced modifications to the rate of return formula giving less weight to long-term growth factors, the resulting rate of return on equity would be somewhat higher. Pipeline has not yet made any changes to its accounting reserves pending FERC action in this proceeding. On March 1, 1997, Pipeline began collecting new rates, subject to refund, under the provisions of its rate case filed August 30, 1996 ("1996 Rate Case"). The application sought an increase in rates due to a proposed use of a higher depreciation rate which also considers a net negative salvage value for Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates because of impacts relating to the sale of Pipeline's south-end facilities in the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement which would resolve all issues in this rate case. On November 25, 1997, the FERC, over the objection of one dissenting party, issued an order approving all aspects of the settlement. The one dissenting party sought and was denied rehearing of the FERC's order. That party has now sought judicial review of the FERC's decisions. Pipeline made refunds to customers in August 1998 totaling $16.7 million, including interest, in this rate case. - 6 - 9 NORTHWEST PIPELINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ================================================================================ Significant Litigation In October 1995, Pipeline received a judge's order following a non-jury trial involving claims arising from a transportation agreement of a former customer. In the decision, which was amended in January 1996, it was held that Pipeline was liable to the former customer in the amount of $5.3 million, plus interest. Pipeline settled this case in May 1998 for an amount that approximated its previously recorded financial reserve. Other Legal and Regulatory Matters In addition to the foregoing, various other proceedings are pending against Pipeline incidental to its operations. Summary of Contingent Liabilities Management believes that the ultimate resolution of the foregoing matters, after consideration of amounts accrued, insurance coverage or other indemnification arrangements, will not have a materially adverse effect upon Pipeline's future financial position, results of operations, and future cash flow requirements. Other Matters In February 1997, Enterprises entered into a new agreement for the sale, with limited recourse, of certain receivables of Pipeline. Net proceeds to Enterprises are limited to $15 million of which $10 million was utilized at September 30, 1998. - 7 - 10 Item 2. Management's Narrative Analysis of the Results of Operations This analysis discusses financial results of Pipeline's operations for the nine month periods ended September 30, 1998 and 1997. Variances due to changes in price and volume do not have a significant impact on revenues, because under its straight-fixed-variable rate design methodology, the majority of Pipeline's overall cost of service is recovered through fixed demand charges in its transportation rates. This analysis should be read in conjunction with the consolidated financial statements, notes and management's discussion and analysis contained in Items 7 and 8 of Pipeline's 1997 Annual Report on Form 10-K and in Pipeline's 1998 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 Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997 Operating revenues increased $11 million, or 5%, due primarily to the 1998 reversal of rate reserves associated with the 1993 and 1996 rate cases and the reversal of a demand charge credit reserve, coupled with increases in rate reserves in 1997. Pipeline's transportation service accounted for 95% and 94% of operating revenues for the nine month periods ended September 30, 1998 and 1997, respectively. Additionally, 3% and 4% of operating revenues represented gas storage service for the nine month periods ended September 30, 1998 and 1997, respectively. Operating expenses decreased $.5 million due primarily to lower general and administrative expenses and taxes other than income, partially offset by an increase in property damage reserves and increased depreciation and amortization expense. Operating income increased $11.5 million, or 12%, primarily due to the 1998 reversal of rate reserves associated with the 1993 and 1996 rate cases, the 1997 increases in rate reserves, and lower general and administrative expenses and taxes other than income, partially offset by increased depreciation and amortization expense. Interest on long-term debt decreased $2.7 million as a result of the 1997 early retirement of over $200 million of high cost debt under a Williams-wide debt restructuring plan. Other interest expense increased $1.6 million due to higher revenues subject to refund and increased amortization of loss on reacquired debt as a result of the 1997 early debt retirements. The following table summarizes volumes and capacity for the periods indicated:
Nine Months Ended September 30, ---------------------------------------- 1998 1997 ----------------- --------------- Total Gas Volumes Throughput (TBtu) 546 521 Average Daily Transportation Volumes (TBtu) 2.0 1.9 Average Daily Firm Reserved Capacity (TBtu) 2.6 2.4
- 8 - 11 FINANCIAL CONDITION AND LIQUIDITY Pipeline anticipates 1998 capital expenditures will total approximately $67.6 million, of which $41.8 million has been expended through September 30, 1998. Funds necessary to complete capital projects are expected to come from several sources, including Pipeline's operations and the return of funds previously advanced to Williams. In addition, Pipeline expects to be able to obtain financing, when necessary, on reasonable terms. To allow flexibility in the timing of issuance of long-term securities, financing may be provided on an interim basis with bank debt and from sources discussed below. Pipeline shares in a $1 billion Revolving Credit Facility with Williams and four affiliated companies. Pipeline's maximum borrowing availability, subject to prior borrowing by other affiliated companies, is $400 million, none of which was used by Pipeline at September 30, 1998. Interest rates vary with current market conditions. The Facility 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 Pipeline. Any borrowings by Pipeline under this Facility are not guaranteed by Williams and are based on Pipeline's financial need and credit worthiness. Pipeline has also arranged various uncommitted lines-of-credit at market interest rates. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness. OTHER Reference is made to Note 4 of Notes to Condensed Consolidated Financial Statements for information about regulatory, judicial and business developments which cause operating and financial uncertainties. Year 2000 Compliance Williams and its wholly-owned subsidiaries, which include Pipeline, initiated an enterprise-wide project in 1997 to address the year 2000 compliance issue for both traditional information technology areas and non-traditional 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. 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 - 3 were designated as critical and are the major focus of this project. Renovation/replacement and testing/validation of critical systems are expected to be completed by June 30, 1999, except for replacement of certain critical systems scheduled for completion by September 1, 1999. Certain non-critical systems may not be compliant by January 1, 2000. Testing and validation activities have begun and will continue throughout the process with substantial completion expected by June 30, 1999. Year 2000 test labs are in place and operational. As was expected, few problems have been detected during testing for items believed to be compliant. The following table indicates the approximate project status, at September 30, 1998, for traditional information technology and non-traditional areas. The tested category indicates the percentage that has been fully tested or otherwise validated as compliant. The untested category includes items that are believed to be compliant but which have not yet been validated. The not compliant category includes items which have been identified as not year 2000 compliant.
Tested Untested Not Compliant ------ -------- ------------- Traditional Information Technology 10% 87% 3% Non-Traditional Information Technology 32% 65% 3%
Pipeline has initiated a formal communications process with other companies with which Pipeline'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, Pipeline has sent approximately 80 letters and questionnaires to third parties including customers, vendors, service providers, etc. Additional communications are being - 9 - 12 mailed during the fourth quarter of 1998. Pipeline is evaluating responses as they are received or otherwise investigating the status of these companies' year 2000 compliance efforts. Where necessary Pipeline will be working 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 Pipeline. Pipeline expects to utilize both internal resources and external contractors to complete the year 2000 compliance project. Existing resources will be redeployed, and several previously planned system implementations currently in process are scheduled for completion on or before September 1, 1999, which are expected to lessen possible year 2000 impacts. In situations where planned system implementations will not be in service timely, alternative steps are being taken to make existing systems compliant. Although all critical systems over which Pipeline has control are planned to be compliant and tested before the year 2000, there is a possibility of service interruptions due to non-compliance by third parties. In particular, power failures along the communications network or transportation system would cause service interruptions. This risk should be minimized by the enterprise-wide effort to communicate with and evaluate third-party compliance plans. Another area of risk for non-compliance is the delay of system replacements scheduled for completion during 1999. The status of these systems is being closely monitored to reduce the chance of delays in completion dates. Contingency plans are being developed for critical business processes, critical business partners, suppliers and system replacements that experience significant delays. These plans are expected to be defined by August 31, 1999 and implemented where appropriate. Costs incurred for new software and hardware purchases are being capitalized and other costs are being expensed as incurred. While estimates of the total cost of Pipeline's project continue to be refined, Pipeline estimates that future costs, including the cost to accelerate system replacements, necessary to complete the project within the schedule described will total approximately $2.1 million. Of this total, approximately $1 million will be expensed and the remainder capitalized. This estimate does not include Pipeline'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. To date, approximately $.8 million and $.1 million of costs have been capitalized and expensed, respectively. The costs of the project and the completion dates 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 year 2000 compliance modification plans and other factors. There can be no guarantee that these estimates will be achieved and actual results could differ materially from these estimates. The above 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. - 10 - 13 PART II. OTHER INFORMATION The information required by items in Part II is omitted because the items are inapplicable, the answer is negative or substantially the same information is included elsewhere in this report or has been previously reported by the Registrant. - 11 - 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST PIPELINE CORPORATION --------------------------------------- Registrant By: /s/ Curtis C. Kennedy --------------------------------------- Curtis C. Kennedy Controller (Duly Authorized Officer and Chief Accounting Officer) Date: November 11, 1998 - 12 - 15 EXHIBIT INDEX
Exhibit Description - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-1998 SEP-30-1998 317 0 18,796 0 10,651 115,692 1,528,337 606,881 1,088,675 137,244 372,435 0 0 1 439,723 1,088,675 0 215,438 0 109,223 0 0 28,739 80,533 30,271 50,262 0 0 0 50,262 0 0
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