-----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, NKVzE0WtHIcN85P2a81RqvYYxdo+C32wFG2ct6D87951Ao1HVwfInuhHFsZoFiH1 AmiR4njWqM36fsSSIZhiBg== 0000950134-99-007326.txt : 19990816 0000950134-99-007326.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950134-99-007326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687151 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 JUNE 30, 1999 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 Quarterly Period Ended June 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 1-7414 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 August 12, 1999 - -------------------------- ------------------------------ 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 six months ended June 30, 1999 and 1998............................................................ 1 Condensed Consolidated Balance Sheet as of June 30, 1999 and December 31, 1998....................................................................... 2 Condensed Consolidated Statement of Cash Flows, six months ended June 30, 1999 and 1998..................................................... 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 and 1999 first quarter report on Form 10-Q. 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) ================================================================================
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1999 1998 1999 1998 --------- --------- --------- --------- (Thousands) OPERATING REVENUES ....................... $ 77,276 $ 70,312 $ 147,417 $ 141,530 --------- --------- --------- --------- OPERATING EXPENSES: General and administrative ............ 10,307 8,982 23,651 20,827 Operation and maintenance ............. 9,545 9,404 18,435 17,671 Depreciation and amortization ......... 11,329 12,825 24,503 25,924 Taxes, other than income taxes ........ 3,625 3,258 8,377 7,021 --------- --------- --------- --------- 34,806 34,469 74,966 71,443 --------- --------- --------- --------- Operating income .................... 42,470 35,843 72,451 70,087 --------- --------- --------- --------- OTHER INCOME - net ....................... 564 1,158 1,297 2,405 --------- --------- --------- --------- INTEREST CHARGES: Interest on long-term debt ............ 6,507 7,450 13,051 14,664 Other interest ........................ (432) 2,521 1,404 5,120 Allowance for borrowed funds used during construction ........................ (217) (131) (360) (202) --------- --------- --------- --------- 5,858 9,840 14,095 19,582 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES ............... 37,176 27,161 59,653 52,910 PROVISION FOR INCOME TAXES ............... 13,259 9,776 22,460 19,335 --------- --------- --------- --------- NET INCOME ............................... $ 23,917 $ 17,385 $ 37,193 $ 33,575 ========= ========= ========= ========= CASH DIVIDENDS ON COMMON STOCK ........... $ 18,000 $ 12,000 $ 36,000 $ 24,000 ========= ========= ========= =========
- --------------------------- See accompanying notes. 1 4 NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ================================================================================ ASSETS
June 30, December 31, 1999 1998 -------------- -------------- (Thousands) PROPERTY, PLANT AND EQUIPMENT, at cost ................ $ 1,577,301 $ 1,573,593 Less - Accumulated depreciation and amortization ... 680,888 667,163 -------------- -------------- 896,413 906,430 Construction work in progress ...................... 32,331 21,258 -------------- -------------- 928,744 927,688 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents .......................... 369 1,164 Advances to parent ................................. 26,343 26,734 Accounts receivable - Trade ............................................ 12,384 16,023 Affiliated companies ............................. 1,884 3,395 Materials and supplies (principally at average cost)............................................. 10,566 10,575 Exchange gas due from others ....................... 7,255 19,792 Deferred income taxes .............................. 18,756 20,261 Prepayments and other .............................. 1,585 1,763 -------------- -------------- 79,142 99,707 -------------- -------------- OTHER ASSETS: Deferred charges ................................... 54,701 52,876 -------------- -------------- $ 1,062,587 $ 1,080,271 ============== ==============
- -------------------------- See accompanying notes. 2 5 NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ================================================================================ LIABILITIES AND STOCKHOLDER'S EQUITY
June 30, December 31, 1999 1998 -------------- -------------- (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 .................................. 191,701 190,507 -------------- -------------- 454,546 453,352 Long-term debt, less current maturities ................ 370,783 372,440 -------------- -------------- 825,329 825,792 -------------- -------------- CURRENT LIABILITIES: Current maturities of long-term debt ................... 1,667 1,667 Accounts payable - Trade .............................................. 8,861 12,576 Affiliated companies ............................... 9,601 7,900 Accrued liabilities - Income taxes ....................................... 1,257 -- Taxes, other than income taxes ..................... 6,016 4,138 Interest ........................................... 10,836 11,225 Employee costs ..................................... 9,743 10,602 Exchange gas due to others ......................... 7,944 20,481 Reserves for estimated rate refunds ................ 29,653 38,958 Other .............................................. 2,866 818 -------------- -------------- 88,444 108,365 -------------- -------------- DEFERRED INCOME TAXES ..................................... 139,634 135,920 -------------- -------------- OTHER DEFERRED CREDITS .................................... 9,180 10,194 -------------- -------------- CONTINGENT LIABILITIES AND COMMITMENTS..................... -------------- -------------- $ 1,062,587 $ 1,080,271 ============== ==============
- --------------------------- See accompanying notes. 3 6 NORTHWEST PIPELINE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ================================================================================
Six Months Ended June 30, -------------------------------- 1999 1998 -------------- -------------- (Thousands) OPERATING ACTIVITIES: Net income ........................................................ $ 37,193 $ 33,575 Adjustments to reconcile to cash provided by operations - Depreciation and amortization .................................. 24,503 25,924 Provision for deferred income taxes ............................ 5,219 7,563 Amortization of deferred charges and credits ................... 1,088 259 Allowance for equity funds used during construction ............ (639) (316) Increase (decrease) from changes in: Accounts receivable and exchange gas due from others ...................................................... 32,886 15,801 Inventory .................................................... 9 (272) Other current assets ......................................... (15,341) (313) Other assets and deferred charges ............................ (3,462) (403) Accounts payable and exchange gas due to others .............. (12,040) (7,099) Other accrued liabilities .................................... (5,370) (29,024) Other deferred credits ....................................... (455) (472) Other .......................................................... 1 (7) -------------- -------------- Net cash provided by operating activities ......................... 63,592 45,216 -------------- -------------- INVESTING ACTIVITIES: Property, plant and equipment - Capital expenditures ........................................... (25,288) (26,182) Proceeds from sales ............................................ 368 1,737 Changes in accounts payable .................................... (2,191) (3,064) Advances to parent ................................................ 391 7,760 -------------- -------------- Net cash used by investing activities ............................. (26,720) (19,749) -------------- -------------- FINANCING ACTIVITIES: Principal payments on long-term debt .............................. (1,667) (1,867) Premium on early retirement of long-term debt ..................... -- (19) Dividends paid .................................................... (36,000) (24,000) -------------- -------------- Net cash used by financing activities ............................. (37,667) (25,886) -------------- -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS ....................................................... (795) (419) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 1,164 627 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 369 $ 208 ============== ==============
- ------------------------- 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 June 30, 1999 and December 31, 1998, the results of operations for the three and six month periods ended June 30, 1999 and 1998, and cash flows for the six month periods ended June 30, 1999 and 1998. 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, notes thereto and management's narrative analysis included in Pipeline's 1998 Annual Report on Form 10-K. Pipeline is a wholly owned subsidiary of Williams Gas Pipeline Company ("WGP") (formerly Williams Interstate Natural Gas Systems, Inc.). WGP is a wholly owned subsidiary of The Williams Companies, Inc. ("Williams"). (2) Basis of Presentation The condensed consolidated financial statements include the operating results of NWP Enterprises ("Enterprises"), a wholly owned subsidiary of Pipeline. (3) Long-Term Debt and Banking Arrangements Pipeline is a participant in a $1 billion Revolving Credit Facility with Williams and certain 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 June 30, 1999. 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 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 that were unused by Pipeline at June 30, 1999. Pipeline's credit facilities are subject to Pipeline's continued credit worthiness. (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 5 8 NORTHWEST PIPELINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ================================================================================ 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, reflecting the FERC's resolution of all disputed matters in this case. Pipeline and other parties sought judicial review of the FERC's decision concerning rate of return on equity. One party is seeking judicial review of the inclusion of unpaid accruals in rate base. 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. In April 1999, the Court of Appeals for the D.C. Circuit remanded the 1993 Rate Case to the FERC for application of its revised rate of return on equity policy. On July 14, 1999, FERC issued an order requiring Pipeline to: (a) submit a surcharge plan to the FERC, (b) recalculate rates consistent with the new weighting formula favoring short term growth, and (c) address in a remand hearing the appropriate source for GDP growth data. Pipeline anticipates that the further proceedings in this case concerning long term growth will raise the previously authorized rate of return on equity. 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 and allowed a return on equity of 11.2 percent. On June 1, 1999, FERC issued its order affirming many aspects of the ALJ's initial decision, but finding that the return on equity issue should be resolved by using the FERC's new policy concerning rate of return determinations. Pipeline has reduced its rate refund liabilities $9.9 million to reflect FERC's recent 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 certain aspects of the FERC's decisions. Pipeline made refunds to customers in August 1998 totaling $16.7 million, including interest, in this rate case. Significant 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 Pipeline. Mr. Grynberg had also filed claims against approximately 300 other energy companies and alleged 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. 6 9 NORTHWEST PIPELINE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ================================================================================ 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 cash flow requirements. Other Matters Enterprises participates in an 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 June 30, 1999. 7 10 Item 2. Management's Narrative Analysis of the Results of Operations This analysis discusses financial results of Pipeline's operations for the six-month periods ended June 30, 1999 and 1998. Variances due to changes in price and volume have little impact on revenues, because under Pipeline's rate design methodology, the majority of overall cost of service is recovered through firm capacity reservation charges in its transportation rates. This analysis should be read in conjunction with the consolidated financial statements, notes and management's narrative analysis of the results of operations contained in Items 7 and 8 of Pipeline's 1998 Annual Report on Form 10-K and in Pipeline's 1999 First Quarter Report on Form 10-Q and with the condensed consolidated financial statements and notes contained in this report. RESULTS OF OPERATIONS Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998 Operating revenues increased $5.9 million, or 4%, due primarily to the 1999 reduction to rate refund liabilities of $8.3 million associated with the 1995 rate case, partially offset by lower short-term firm and interruptible transportation revenues and the 1998 reduction to rate refund liabilities of $1.5 million associated with the 1993 rate case and gain of $.4 million on the sale of system balancing gas. Pipeline's transportation service accounted for 97% and 95% of operating revenues for the six-month periods ended June 30, 1999 and 1998, respectively. Additionally, 2% and 3% of operating revenues represented gas storage service for the six-month periods ended June 30, 1999 and 1998, respectively. Operating expenses increased $3.5 million, or 5%, due primarily to $2.3 million in accruals for damages associated with pipeline ruptures and higher general and administrative and operation and maintenance expenses, depreciation and taxes, other than income taxes, partially offset by a $2.1 million reduction to depreciation associated with the 1995 rate case. Operating income increased $2.4 million, or 3%, primarily due to the 1999 reversal of reserves and reduction to depreciation associated with the 1995 rate case, partially offset by accruals for damages associated with 1999 pipeline ruptures, lower short-term firm and interruptible transportation revenues, the 1998 reversal of reserves associated with the 1993 rate case, the 1998 gain on the sale of system balancing gas, and higher operating expenses. Interest on long-term debt decreased $1.6 million as a result of the early retirement of the 10.65% Debentures in November of 1998. Other interest expense decreased $3.7 million due to the reduction to accrued interest liabilities of $2.2 million associated with the 1995 rate case and lower revenues subject to refund as a result of rate case settlements in 1998. The following table summarizes volumes and capacity for the periods indicated:
Six Months Ended June 30, ------------------------ 1999 1998 ---- ---- Total Gas volumes throughput (TBtu) 366 383 Average Daily Transportation Volumes (TBtu) 2.0 2.1 Average Daily Firm Reserved Capacity (TBtu) 2.6 2.5
FINANCIAL CONDITION AND LIQUIDITY Pipeline anticipates 1999 capital expenditures will total approximately $90.4 million, of which $25.3 million has been expended through June 30, 1999. 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. 8 11 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 is a participant in a $1 billion Revolving Credit Facility with Williams and certain 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 June 30, 1999. 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 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 Pipeline believes that strong economies in the Pacific Northwest and the growing preference for natural gas in response to environmental concerns support future expansions of its mainline capacity. Reference is made to Note 4 of Notes to 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. This 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 through 3 were designated as critical and are the major focus of this project. Some non-critical systems may not be compliant by January 1, 2000. Renovation/replacement and testing/validation of critical systems has been completed except for replacement of certain critical systems scheduled for completion later in 1999. Testing and validation activities will continue throughout the process as replacement systems come online and as remediation of systems pursuant to an implemented contingency plan are completed. As of June 30, 1999, all traditional information technology and nontraditional areas have been fully tested or otherwise validated as compliant. Pipeline initiated a formal communications process with other companies in 1998 to determine the extent to which those companies are addressing year 2000 compliance. In connection with this process, Pipeline has sent approximately 530 letters and questionnaires to third parties including customers, vendors and service providers. Pipeline is evaluating responses as they are received or otherwise investigating the status of these companies' year 2000 compliance efforts. As of June 30, 1999, approximately 54% of the companies contacted have responded and virtually all of these have indicated that they are already compliant or will be compliant on a timely basis. 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. Pipeline has a core group of 30 people involved in this enterprise-wide project. This includes 1 individual responsible for coordinating, organizing, managing, communicating, and monitoring the project and another 29 staff members 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 20 to 25 employees who are also contributing a portion of their time to the completion of this project. Several previously planned system implementations have been or are scheduled for completion during 1999, which will lessen possible year 2000 impacts. For example, a new year 2000 compliant payroll/human 9 12 resources system was implemented January 1, 1999. It replaced multiple human resources administration and payroll processing systems previously in place. WGP completed implementation of a new telephone system in 1998, and an upgrade to the financial system is scheduled for completion September 30, 1999. Although all critical systems over which Pipeline has control are planned to be compliant and tested before the year 2000, Pipeline has identified two areas that would equate to a most reasonably likely worst case scenario. First is the possibility of service interruptions due to non-compliance by third parties. For example, power failures along the transportation system would 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. 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. In situations where planned system implementations will not be in service timely or are delayed past an implementation date of September 1, 1999, alternative steps are being taken to make existing systems compliant. 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 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. The following is a discussion of contingency plans that have been developed to date. Pipeline'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 Pipeline'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. Costs incurred for new software and hardware purchases are being capitalized and other costs are being expensed as incurred. Pipeline currently estimates the total cost of the project, including any accelerated system replacements, to be approximately $1.6 million. Prior to 1998 and during the first quarter of 1998, Pipeline was conducting the project awareness and inventory/assessment phases of the project. The second quarter of 1998 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. During the first quarter 1999, renovation/replacement and testing/validation continued and contingency planning began. During the second quarter of 1999 the primary focus shifted to testing/validation and contingency planning. The third and fourth quarters of 1999 will focus mainly on contingency planning and final testing. The first two quarters of 2000 will focus on monitoring and problem resolution. Of the $1.2 million incurred to date, approximately $.3 million has been expensed, and approximately $.9 million has been capitalized. Of the $.4 million of future costs necessary to complete the project within the schedule described, approximately $.2 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. 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 Pipeline'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 Pipeline 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, Pipeline 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/ Jeffrey R. Valentine --------------------------------- Jeffrey R. Valentine Controller (Duly Authorized Officer and Chief Accounting Officer) Date: August 12, 1999 12 15 EXHIBIT INDEX
Exhibit - ------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1999 JUN-30-1999 369 0 14,268 0 10,566 79,142 1,609,632 680,888 1,062,587 88,444 370,783 0 0 1 454,545 1,062,587 0 147,417 0 74,966 0 0 14,095 59,653 22,460 37,193 0 0 0 37,193 0 0
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