-----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, Eyxg2oC4HuVDm9GFW9WLjCyuwdJEsy3o5WmMH12Z0PH0ekU6Nck/sjaYhAXf2YT6 HLq8c3Zn1pAklIJV2dzDLQ== 0000075491-97-000010.txt : 19970329 0000075491-97-000010.hdr.sgml : 19970329 ACCESSION NUMBER: 0000075491-97-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC GAS TRANSMISSION CO CENTRAL INDEX KEY: 0000075491 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 941512922 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25842 FILM NUMBER: 97567465 BUSINESS ADDRESS: STREET 1: 2100 SW RIVER PKWY CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5038334811 MAIL ADDRESS: STREET 1: 2100 SW RIVER PARKWAY CITY: PORTLAND STATE: OR ZIP: 97201 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 0-25842 Pacific Gas Transmission Company (Exact name of registrant as specified in its charter) California 94-1512922 (State or other jurisdiction of incorporation or organization) (I.R.S. employer Identification No.) 2100 SW River Parkway, Portland, OR 97201 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (503) 833-4000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered 7.10% Senior Notes Due 2005 New York Stock Exchange 7.80% Senior Debentures Due 2025 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value 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 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X State the aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 28, 1997. $0 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 28, 1997. 1,000 shares of common stock, no par value. (All shares are owned by PG&E Gas Holdings.) Documents Incorporated by Reference: None Registrant meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format. TABLE OF CONTENTS ----------------- PART I ------ Item 1. Business General Foreign and Domestic Operations Certain Defined Terms Pacific Gas Transmission Company's Transmission System PGT Queensland Gas Pipeline Future Expansions and Business Development Customers and Services Rates and Regulation Environmental Matters Item 2. Properties Pacific Gas Transmission Company Pipeline PGT Queensland Gas Pipeline Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders (omitted) PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data (omitted) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Report of Independent Public Accountants Statements of Consolidated Income Consolidated Balance Sheets - Assets Consolidated Balance Sheets - Capitalization and Liabilities Statements of Consolidated Common Stock Equity Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III -------- Item 10.Directors and Executive Officers of the Registrant (omitted) Item 11.Executive Compensation (omitted) Item 12.Security Ownership of Certain Beneficial Owners and Management (omitted) Item 13.Certain Relationships and Related Transactions (omitted) PART IV ------- Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K Signatures PART I ------ ITEM 1. BUSINESS -------- GENERAL ------- Pacific Gas Transmission Company ("PGT"), incorporated in 1957 as a California corporation, is an interstate natural gas pipeline company and an indirect wholly owned subsidiary of PG&E Corporation. Effective January 1, 1997, PG&E Corporation, incorporated in California in 1995, became the holding company for PGT's former parent company, Pacific Gas and Electric Company ("PG&E"). PG&E's ownership interest in PGT and PG&E Enterprises has been transferred to PG&E Corporation. PGT's debt securities were unaffected and remain securities of PGT. PGT and its subsidiaries are referred to collectively as the "Company." The following discussion of the Company's business includes forward-looking statements that involve risks and uncertainties. Words such as "estimates," " expects," " plans," and similar expressions identify forward-looking statements involving risks and uncertainties. Those risks and uncertainties include, but are not limited to, the ongoing restructuring of the gas industry and the future results of new acquisitions. The outcomes of these and other matters discussed below, including the outcome of certain litigation with a firm shipper of PGT, may cause future results to differ materially from historical results, or from results or outcomes currently expected or sought by the Company. PGT was formed to construct, own and operate the interstate segment of an Alberta-California pipeline system, which was originally built between 1960 and 1961 and expanded in 1981 and 1993. PGT's mainline system extends from the British Columbia-Idaho border to the Oregon- California border, traversing Idaho, Washington and Oregon. Extensions from the mainline to Coyote Springs in northern Oregon and to Medford in southern Oregon were constructed in 1995. PG&E owns and operates the portion of the Alberta- California pipeline system within California. PGT's gas pipeline facilities interconnect with PG&E at the Oregon-California border, with Northwest Pipeline Corporation ("Northwest Pipeline" or "Northwest") in northern Oregon and in eastern Washington, and with Tuscarora Gas Transmission Company ("Tuscarora") in southern Oregon. (See "Pacific Gas Transmission Company's Transmission System," below.) PGT's principal business is the transportation of natural gas, primarily from supplies in Canada, for customers located in the Pacific Northwest, Nevada, and California. PGT's customers are principally local retail gas distribution utilities, electric utilities that utilize natural gas to generate electricity, natural gas marketing companies that purchase and resell natural gas to end-use customers and utilities, natural gas producers, and industrial companies. PGT's customers are responsible for securing their own gas supplies and delivering them to PGT's system. PGT transports such supplies either to downstream pipelines, which then transport such supplies to customers, or directly to customers themselves. (See "Customers and Services," below.) PGT's natural gas transportation business is subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Act of 1938 ("Natural Gas Act") and the Natural Gas Policy Act of 1978 ("NGPA"). (See "Rates and Regulation," below.) PGT is also subject to the jurisdiction of the U.S. Department of Transportation with respect to safety matters concerning the operation of the pipeline, and the U.S. Department of Energy, with respect to the authorization to import natural gas for its own use or for resale. Building upon its expertise in the natural gas industry, PGT is expanding its core pipeline business by pursuing domestic and international business development opportunities that focus on the midstream segment of the natural gas industry. The midstream segment involves the gathering, processing, storing, transporting, and marketing of natural gas. It excludes exploration and production of natural gas and local distribution to customers. Consistent with this strategy, during 1996, PGT established the PGT Queensland Unit Trust ("PGT Trust"), created under the laws of Australia, to hold all of the assets comprising the Queensland State Gas Pipeline acquired from the Government of the State of Queensland, Australia. The pipeline is referred to as the PGT Queensland Gas Pipeline ("PGTQ Pipeline"). The PGT Trust is owned by two wholly owned subsidiaries of PGT - Pacific Gas Transmission International, Inc. ("PGT International"), a California corporation, and PGT Queensland Pty Limited ("PGT Queensland"), an Australian corporation. PGT Queensland operates the pipeline. In addition, PGT also established another wholly owned subsidiary, PGT Australia Pty Limited ("PGT Australia"), an Australian corporation, to pursue new business development opportunities in Australia and to serve as trustee of the PGT Trust. The Australian pipeline, which began operations in June 1990, extends 389-miles from Wallumbilla to Gladstone and Rockhampton in Queensland, Australia. The pipeline serves customers in its vicinity. During 1996, PGT also acquired the gas marketing operations of Edisto Resources Corporation in the United States and Canada, known jointly as "Energy Source, Inc." ("ESI"). ESI has offices in Houston, Calgary, Tulsa, Pittsburgh and New York with a customer base in the Northeast and Midwest regions of the United States. ESI is engaged in the purchase and resale of natural gas to a diversified customer base, primarily industrial/commercial companies, local distribution companies, and industry partners. ESI aggregates natural gas supplies from producing basins in the United States and Canada, arranges transportation through pipelines from points of purchase to points of sale, and resells natural gas to customers under a variety of standard and customized arrangements. These arrangements include a variety of short- term and long-term market sensitive and fixed price contracts and financial instruments. EMPLOYEES --------- As of December 31, 1996, PGT had 329 employees, of which approximately 124 were members of the International Brotherhood of Electrical Workers, Local 1245. The Company renegotiated and ratified a two year contract with that union effective January 1, 1997. As of December 31, 1996, PGT Australia/PGT Queensland had 30 employees and ESI had 71 employees. PGT's corporate headquarters are located at 2100 SW River Parkway, Portland, Oregon 97201, telephone (503) 833-4000. FOREIGN AND DOMESTIC OPERATIONS ------------------------------- The following table shows the Company's operating results and assets by geographic region for 1996. Australian operations commenced on July 1, 1996, and Canadian operations began on December 1, 1996. (Dollars in Millions) United States Australia Canada --------------------- ------------- ---------- ------- Sales $ 499.7 $ 5.7 $ 41.4 Net income(loss) $ 47.4 $ (3.9) $ (0.4) Total assets $ 1,565.1 $ 139.2 $ 71.0 CERTAIN DEFINED TERMS --------------------- The following terms which are commonly used in the natural gas industry and which are used herein are defined as follows: "demand" or "reservation charge": The amount paid by firm transportation service customers to reserve pipeline service. The reservation charge is payable regardless of the volumes of gas transported by such customers. "firm transportation service": The right to ship a quantity of gas between two points for the term of the applicable contract. "gas supply restructuring ("GSR") costs": Costs incurred as a result of a pipeline's transition to unbundled transportation service under FERC Order 636. The cost of terminating natural gas supply and transportation contracts tied to the former merchant sales function comprises the majority of such costs for PGT. "incremental rates": Rates charged to shippers based primarily upon the incremental capital and operating costs incurred by the pipeline in constructing the additional facilities necessary to meet increased system requirements. Under incremental rates, a pipeline would generally charge higher rates to shippers contracting for capacity on newly added pipeline or expansion facilities as compared to shippers having firm transportation service rights on depreciated pre-expansion facilities. "interruptible transportation service": Transportation of shippers' gas on an as-available basis. "merchant sales" or "bundled service": Natural gas aggregated by pipelines, under purchase contracts with natural gas producers, that is transported and resold to local distribution gas utility companies or end users at FERC- approved rates that reflect a combination of sales and transportation service. "open access": Transportation service provided on a nondiscriminatory basis pursuant to applicable FERC rules and regulations. "Order 636": The FERC pipeline service restructuring rule that guided the industry's transition to unbundled, open-access pipeline service. Order 636 was issued in 1992 and most pipelines restructured their services from merchant service to transportation-only service during 1993. PGT implemented Order 636 on November 1, 1993. "rolled-in rates": Rates charged to shippers based upon the average cost of all of the pipeline's mainline facilities and related operating costs without regard to the vintage of specific facilities. Costs related to facilities specifically added to serve individual customers, such as laterals or extensions, are generally excluded from the rolled-in system costs. "shippers": Customers of a pipeline contracting to ship natural gas over the pipeline's transportation facilities. "straight fixed-variable" ("SFV"): A cost recovery method for firm service under Order 636, which assigns all fixed costs, including return on equity and related taxes, to the demand or reservation component of rates. "units of measure": Mcf: One thousand cubic feet MMcf: One million cubic feet MMcf/d: One million cubic feet per day Bcf: One billion cubic feet Btu: One MMBtu equals one million Btus or 10 therms Dt: Decatherm or one MMBtu Therm: One hundred thousand Btus; the amount of heat energy in approximately 100 cubic feet of natural gas PACIFIC GAS TRANSMISSION COMPANY'S TRANSMISSION SYSTEM ------------------------------------------------------ PRESENT SYSTEM -------------- PGT's mainline system extends for approximately 612 miles from the vicinity of Kingsgate, British Columbia, where it interconnects with the pipeline system of Alberta Natural Gas Company, Ltd. ("ANG") and Foothills Pipe Lines (South B.C.) Ltd. ("Foothills"), to the vicinity of Malin, Oregon, where it interconnects with the pipeline facilities of PG&E and Tuscarora. PGT's mainline system is comprised of two parallel pipelines, one 36-inch diameter and one 42-inch diameter, together with 12 compressor stations, capable of transporting, on a firm basis, 2.4 Bcf of natural gas per day. PGT's mainline system reached its present capacity on November 1, 1993, when PGT placed into service a major expansion of its transmission system (the "1993 expansion"). The 1993 expansion consisted of the addition of approximately 430 miles of 42-inch diameter pipeline (to the original 36-inch diameter pipeline and the approximately 160 miles of 42-inch diameter pipeline that was installed by PGT in 1981), and certain upgrades and improvements to PGT's compressor stations. The 1993 expansion was, for the most part, constructed within PGT's existing right-of-way parallel to the existing 36-inch diameter pipeline. The expansion increased PGT's firm transportation capacity by 755 MMcf/d to California and 148 MMcf/d to Idaho, Oregon and Washington. PGT's total cost of the 1993 expansion is estimated to be $852 million. In conjunction with PGT's expansion of its system, PG&E and upstream Canadian pipeline companies also constructed new capacity. (See Note 9, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below, for a discussion of a rate controversy which arose in connection with the 1993 Expansion, and which ultimately was resolved in PGT's favor in an August 1996 decision by the U.S. Court of Appeals for the District of Columbia Circuit.) INTERCONNECTION WITH OTHER PIPELINES ------------------------------------ Pacific Gas and Electric Company's Pipeline Facilities ------------------------------------------------------ PG&E's intrastate gas pipeline system, which interconnects with PGT's facilities at the Oregon-California border, includes 36-inch and 42-inch diameter parallel pipelines which extend approximately 300 miles south to near Antioch, California, just east of the San Francisco Bay Area. There, the system becomes a twin 36-inch and 26-inch diameter gas pipeline system to Fresno County in central California, where it becomes a twin 34-inch diameter pipeline system extending to the California-Arizona border near Topock, Arizona. Northwest Pipeline ------------------ PGT's pipeline facilities are interconnected with the facilities of Northwest Pipeline ("Northwest") near Spokane, Washington and Stanfield, Oregon. Northwest is an interstate natural gas pipeline with which PGT both competes and cooperates for the delivery of natural gas in the Pacific Northwest and California. Tuscarora --------- PGT's pipeline facilities are interconnected with the facilities of Tuscarora near Malin, Oregon. Tuscarora is an interstate natural gas pipeline which transports gas from the interconnection with PGT to primarily the Reno, Nevada area. The pipeline was placed in service in November, 1995. ANG, Foothills and NOVA Systems ------------------------------- ANG and Foothills currently own pipelines that extend through southeastern British Columbia and connect with the pipeline system of NOVA Gas Transmission Ltd. ("NOVA") at the Alberta-British Columbia border near Coleman, British Columbia and with the PGT pipeline system at the British Columbia-Idaho border near Kingsgate, British Columbia. ANG's and Foothills' pipeline facilities are operated by ANG as an integrated system. NOVA owns and operates the intra-provincial pipeline transmission system in Alberta. NOVA delivers gas from Alberta production areas to Alberta gas distribution utilities, to some end-use customers and to all provincial export points, including the Alberta-British Columbia border where NOVA's facilities interconnect with those of ANG and Foothills for delivery south into the PGT system. Through the ANG, Foothills, and NOVA systems, PGT's customers have access to the western Canadian gas production basin. OREGON EXTENSIONS ----------------- In 1995, PGT constructed two pipeline extensions, the Coyote Springs Extension to serve Portland General Electric Company ("Portland General") and the Medford Extension to serve WP Natural Gas ("WP Natural"), a division of the Washington Water Power Company (collectively, the "Oregon Extensions"). Both extensions and related facilities were completed and fully operational in November 1995, at a total cost estimated to be $50.1 million. The Coyote Springs Extension is comprised of approximately 18 miles of 12-inch pipeline, originating at a point on PGT's system 27 miles south of Stanfield, Oregon, connecting to Portland General's electric generation facility near Boardman, Oregon. The Medford Extension consists of 22 miles of 16-inch diameter and 66 miles of 12-inch diameter pipeline and extends from a point on PGT's system near Bonanza, in southern Oregon, to interconnection points with WP Natural at Klamath Falls and Medford, Oregon. The larger 16-inch diameter pipeline of the Medford Extension was installed to provide capacity for additional firm transportation service to a proposed electric generating facility at Klamath Falls commencing no earlier than 1999. (See "Rates and Regulations - Oregon Extensions," below.) PGT QUEENSLAND GAS PIPELINE --------------------------- The PGT Queensland Gas Pipeline in Australia consists of a 329-mile 12-inch pipeline completed in June, 1990 from Wallumbilla to Gladstone and a 60-mile 8-inch extension to Rockhampton completed in May, 1991. FUTURE EXPANSIONS AND BUSINESS DEVELOPMENT ------------------------------------------ PGT has received preliminary expressions of interest in providing firm transportation service to parties who cannot be accommodated with PGT's existing available firm transportation service capacity and whose needs may not be able to be met through the release of capacity by PGT's current firm transportation service customers. PGT intends to continue to solicit such expressions of interest, and will consider adding additional firm transportation service capacity to its mainline system in the future if sufficient demand exists. In addition to mainline expansions and extensions off of its mainline system, PGT is considering growth opportunities to expand its core pipeline business through its midstream gas growth strategy. This strategy focuses on investing in pipelines, storage, gathering and processing, and marketing and trading capabilities in targeted geographic markets both within and outside the United States. The recent acquisition of the Australian pipeline facilities is consistent with this strategy. The Company also established PGT Australia in 1996 to pursue new business development opportunities in connection with its strategy to expand its core pipeline business. PGT Australia and the PGTQ Pipeline are pursuing new business development opportunities in Australia including an extension of the current mainline pipeline as well as the construction of new pipelines. In addition, effective November 30, 1996, PGT acquired Edisto Resources Corporation's gas marketing operations in the United States and Canada, known jointly as "Energy Source, Inc." CUSTOMERS AND SERVICES ---------------------- PACIFIC GAS TRANSMISSION COMPANY -------------------------------- Customers --------- PGT operates an open-access transportation system whereby gas is transported for third-party shippers on a nondiscriminatory basis. Transportation services represented 100 percent of PGT's total volumes transported in 1996, 1995 and 1994; PGT's merchant sales service to PG&E was terminated effective November 1, 1993 with the implementation of Order 636. All but three percent of PGT's transportation service capacity is subscribed by customers under long-term firm transportation service agreements. These agreements have remaining terms ranging between 9 and 28 years. Additionally, PGT offers interruptible transportation service. Shippers are given rights to interruptible transportation service based on the percentage of the full tariff rate that the shipper agrees to pay. Among interruptible transportation shippers who pay the full tariff rate, rights to as-available transportation are allocated in order of their respective positions on a service queue. During 1996, PGT provided transportation services for 91 customers; 49 of these customers have long-term firm service transportation agreements with PGT while the remaining customers shipped under interruptible service or capacity release contracts. PGT's customers are principally local retail gas distribution utilities, electric utilities that utilize natural gas to generate electricity, natural gas marketing companies that purchase and resell natural gas to end-use customers and utilities, natural gas producers, and industrial companies. The two largest customers of PGT in 1996 were PG&E and Southern California Edison Company ("SCE"), accounting for approximately $55 million, or 21 percent, and $29 million, or 11 percent, respectively, of PGT's transportation revenues. The firm service transportation agreements with PG&E and SCE expire in the years 2005 and 2023, respectively. No other customer accounted for 10 percent or more of PGT's total revenues during 1996. In 1996, approximately five percent of PGT's transportation volumes and three percent of transportation revenues were attributable to interruptible transportation service. In 1995, PGT constructed two pipeline extensions. The Coyote Springs Extension serves Portland General's electric generation facility near Boardman, Oregon. Portland General is an investor-owned electric utility serving customers in western Oregon, including the Portland metropolitan area. PGT provides firm transportation service over this extension for Portland General under a 20-year firm transportation agreement. PGT's Medford Extension interconnects with WP Natural at Klamath Falls and Medford, Oregon. WP Natural is engaged in the purchase, resale, and transportation of natural gas and serves natural gas end-use customers in southwestern and northeastern Oregon and South Lake Tahoe, California. PGT provides firm transportation service for WP Natural under a 30- year firm transportation agreement. PGT's total transportation and sales quantities for each of the years 1992 through 1996 are set forth in the following table. Quantities (MDt) --------------------------------------- Year Total Transportation Sales ----- ----- ------------ ----- 1992 512,477 202,640 309,837 1993 555,668 286,424 269,244 1994 815,627 815,627 0 1995 885,186 885,186 0 1996 934,029 934,029 0 FERC Order 636 -------------- In 1992, the FERC issued Order 636, which required open-access pipelines to provide firm and interruptible transportation services on a nondiscriminatory basis for all gas supplies, whether purchased from the pipeline or from another gas supplier, and required the termination of all merchant or bundled sales service. As a result of Order 636, PGT now operates only as a transporter of natural gas. In July 1996, the United States Court of Appeals for the District of Columbia Circuit generally affirmed Order 636, but remanded a few issues to FERC for further explanation. On February 27, 1997, the FERC issued an order on remand (Order 636C), largely affirming its 636 policies. Order 636C, which is subject to rehearing, changes the policy under which a firm shipper may renew its contract at the expiration of the original contract term. Under this new policy, existing shippers may renew their contracts if they pay the maximum reservation fee or if they pay the highest rate offered by other shippers for that capacity based upon a contract term of five years. PGT implemented the provisions of Order 636 effective November 1, 1993, pursuant to FERC orders dated July 12, 1993 and October 1, 1993. These orders provide for: 1) the unbundling of the sales service to PG&E into separate sales and transportation components; 2) the termination of the Purchased Gas Adjustment ("PGA") mechanism by which PGT recovered the cost of gas sold to PG&E; 3) the adoption of SFV rate design; 4) a mechanism by which certain of the firm transportation service customers can assign their service rights to others (generally referred to as "capacity release," see below); and 5) a transition cost recovery mechanism ("TCRM") to recover certain gas supply restructuring costs incurred by PGT in connection with the unbundling of its sales service to PG&E. Pursuant to the FERC orders, effective November 1, 1993, PG&E terminated its gas purchases from PGT and began receiving an equivalent amount of firm transportation service from PGT under a long-term contract. As required by Order 636, PGT has also implemented a capacity release program. As a result, almost all of PGT's firm transportation service customers have elected to execute new contracts which enable them to release their capacity to replacement shippers on a temporary or permanent basis. In the case of a capacity release for a term less than the remaining contract term, a releasing shipper remains responsible to PGT for the reservation charges associated with the released capacity. With respect to a release for the full remaining term of the contract, the releasing shipper is no longer responsible for the reservation charges associated with the released capacity if the replacement shipper meets the credit-worthiness provisions of PGT's tariff and agrees to pay the full reservation fee. The capacity release program has affected the number and types of customers using PGT's system, but has not impacted PGT's financial results. Capacity release also provides customers seeking service from PGT with a potential alternative to the construction of new facilities by PGT. Order 636 authorized all interstate pipelines to adopt the "straight fixed-variable" ("SFV") rate design method for all transportation services, which PGT has implemented. Under this rate design, all fixed costs including return on equity and related taxes associated with firm transportation service are collected through the reservation charge component of the pipeline company's firm transportation service rates. In the past, the FERC has utilized various rate designs that allocated varying percentages of fixed costs to the commodity or delivery component of rates, thereby making a pipeline company's cost recovery dependent upon the level of throughput or use of the pipeline system. On July 16, 1996, the United States Court of Appeals for the District of Columbia Circuit affirmed the FERC's adoption of the SFV rate design for all natural gas pipelines under the FERC's jurisdiction. In light of the Court's decision, it appears unlikely that the FERC will mandate any industry-wide departure from the SFV rate design in the near future. If the FERC were to depart from SFV, that departure could once again subject the level of PGT's cost recovery to variations in throughput volumes. As a result of the SFV rate design, and based upon the settlement of its 1994 rate case, PGT currently recovers approximately 95 percent of its total costs and 97 percent of its fixed costs through reservation charges paid by firm transportation service customers. These customers pay a reservation charge for access to firm transportation service capacity on PGT's system, regardless of the volumes of gas transported. Consequently, the volume of gas transported by PGT for firm transportation service customers does not currently have a significant impact on PGT's operating results. As such, PGT's operating results are not significantly affected by fluctuating demand for gas based on the weather or changes in the price of natural gas. Approximately three percent of PGT's fixed costs are allocated to interruptible transportation service, and recovery of such costs is subject to continued demand for PGT's interruptible transportation service. Competition ----------- See "Competition," below, in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. PGT QUEENSLAND GAS PIPELINE --------------------------- Customers --------- The PGTQ Pipeline has three major industrial customers that account for approximately 99 percent of its deliveries. Queensland Alumina Limited's ("QAL") demand quantities account for almost 90 percent of the PGTQ Pipeline's annual delivered volumes. QAL's contract expires in June 2006. Under the contract, QAL pays a monthly reservation charge that is due to the PGTQ Pipeline regardless of the quantity transported. The PGTQ Pipeline also transports gas to Gas Corporation of Queensland Limited which has gas franchises to serve residential and commercial customers in the cities of Gladstone and Rockhampton. The third major industrial customer is Queensland Magnesia (Operations) Pty Ltd. The condition, operation, and ownership of gas transmission pipelines in Queensland are principally regulated by the Petroleum Act of 1923 which is administered by the Queensland Department of Minerals and Energy. The Petroleum Act of 1923, as amended, incorporates open access principles promoting a competitive gas market. Competition ----------- The PGTQ Pipeline is the only gas pipeline serving the Gladstone and Rockhampton areas. Presently, competition exists only in terms of more expensive alternative energy sources including distillate and diesel fuel. Prospectively, South Pacific Chevron Company has announced a proposal to construct a natural gas pipeline from Papua New Guinea to Queensland that would potentially be in service in 2001. The proposed pipeline may or may not extend as far as the Gladstone area. ENERGY SOURCE, INC. ------------------- Customers --------- The customer base for ESI's domestic and Canadian gas marketing operations primarily consists of trading partners who serve as marketing agents for other marketing or local distribution companies. No single customer accounted for more than 10 percent of sales. Competition ----------- ESI faces intense competition in marketing gas to end user customers and local distributors in both its domestic and Canadian markets. Its competitors include the major integrated oil and gas companies; other marketing companies affiliated with interstate pipelines and regional gas gatherers; and brokers and marketers of varying sizes, financial resources, and experience. This intense competition has placed downward pressure on the gross margins for gas sales. As gross margins have decreased, the market share necessary to compete effectively in the industry has grown. During 1996, ESI responded to this pressure by increasing its sales volumes. RATES AND REGULATION -------------------- PACIFIC GAS TRANSMISSION COMPANY -------------------------------- General ------- PGT is a "natural gas company" under the Natural Gas Act and the NGPA, and as such, is subject to the jurisdiction of the FERC. The Natural Gas Act grants authority to the FERC over the construction and operation of pipelines and related facilities utilized in the transportation and sale of natural gas in interstate commerce, including the extension, enlargement, or abandonment of such facilities, as well as the interstate transportation and wholesale sales of natural gas. PGT holds certificates of public convenience and necessity, issued by the FERC, authorizing it to construct and operate its pipelines and related facilities now in operation and to transport natural gas in interstate commerce. The FERC also has authority to regulate rates for natural gas transportation in interstate commerce. In addition, the National Energy Board of Canada ("NEB") and the various Canadian gas-exporting provinces issue various licenses and permits for the removal of gas from Canada. These requirements parallel the process employed by the U.S. Department of Energy for the importation of Canadian gas. Regulatory actions by the NEB or the U.S. Department of Energy can have an impact on the ability of PGT's customers to import Canadian gas for transportation over the PGT system. In addition, actions of the NEB and Northern Pipeline Agency ("NPA") can affect the ability of ANG and Foothills to construct any future facilities necessary for the transportation of gas to the interconnection with PGT's system at the United States-Canadian border. FERC Ratemaking --------------- Sections 4 and 5 of the Natural Gas Act provide the FERC with rate-setting authority over interstate natural gas pipeline companies. When PGT seeks a rate change, it must file an application with the FERC under Section 4 at least 30 days prior to the proposed effective date of the new rates. The FERC has the authority to suspend the effective date of the new rates for up to five months, and as a general matter does so, although from time to time the FERC will authorize a shorter suspension period. Section 4 also allows the FERC to require that any increase in rates collected during the pendency of a rate case (after the conclusion of the suspension period) be collected subject to refund, with interest. Refunds, if any, would be made upon conclusion of the rate case. The FERC routinely imposes such a refund condition on proposals to increase rates. Any major rate changes requested by PGT under Section 4 would be typically set for evidentiary hearings before an administrative law judge, whose initial decision is subject to review and a final decision by the FERC. Following a final decision by the FERC, PGT, or any other party to the proceeding, may seek judicial review of the decision by the United States Court of Appeals. Under Section 5 of the Natural Gas Act, the FERC may, on its own initiative or at the request of a third party, investigate PGT's rates to ascertain whether such rates are unjust or unreasonable. A Section 5 rate investigation proceeds in much the same fashion as a rate case under Section 4, except that there is no suspension period (since neither the FERC nor the company will have proposed new rates at the commencement of the rate case), and the FERC's determinations will be effective on a prospective basis only, so that the company is not required to make refunds. In a rate case, rates are set by dividing PGT's total cost of service by the total units of service, generally expressed as contract demand quantities and quantities of natural gas transported. Components of cost of service include operations and maintenance expenses, depreciation, return on investment and related taxes. The calculation of the allowed return on investment is made with reference to PGT's rate base, which is the total net value of its tangible and intangible assets. The net value of PGT's largest rate base component, utility plant in service, is determined on an original cost basis, less depreciation. The overall allowed rate of return on investment is a function of: (i) PGT's debt cost; (ii) the return on PGT's preferred stock, if any is outstanding; and (iii) the allowed return on PGT's common stock. The FERC is required to set the allowed return on common stock at a level sufficient to enable PGT to attract the equity capital necessary for its business and to be commensurate with the equity return realized by businesses having similar risk profiles. To establish rates for services, costs are separated into various functional aspects of a pipeline company's business, such as gas transportation, gas gathering, and gas storage, since different rates apply to the different services associated with those functions. The costs for each function are classified as either fixed or variable, and rates are calculated. PGT currently provides only gas transportation service. Therefore, the "functional" allocation of costs does not presently apply to PGT in the ratemaking context. However, for ratemaking purposes, PGT's plant and related costs for the existing Oregon Extensions are segregated from PGT's mainline pipeline. Under the FERC's current policies, transportation services are classified as either firm or interruptible, and PGT's fixed and variable costs are allocated between these types of service for ratemaking purposes. Firm transportation service customers pay both a reservation or demand charge and a commodity or delivery charge. The reservation charge is assessed for the customer's right to transport a specified quantity of gas over the term of the customer's contract, and is payable regardless of the actual volume of gas transported by the customer. The commodity or delivery charge is payable only with respect to the actual volume of gas transported by the customer. Interruptible transportation service customers pay only a commodity or delivery charge with respect to the actual volume of gas transported by the customer. Under the SFV rate design, the reservation charge assessed for firm transportation service is based on PGT's fixed costs, while the commodity or delivery charge component of PGT's firm transportation service rates is based only on PGT's variable costs. The commodity or delivery charge payable by PGT's interruptible transportation service customers is based upon both fixed and variable costs allocated to interruptible transportation service for ratemaking purposes. Approximately three percent of PGT's fixed costs are currently allocated to interruptible transportation service for ratemaking purposes. (See "Customers and Services - FERC Order 636," above.) Both firm and interruptible transportation service rates are established with a ceiling equal to PGT's total costs (fixed and variable) allocated to the service and a floor equal to the variable costs related thereto. PGT is allowed to vary or discount rates between the ceiling and the floor amounts on a non-discriminatory basis. PGT has not discounted firm transportation service rates, but PGT sometimes discounts interruptible transportation service rates in order to maximize throughput. 1993 Expansion -------------- On November 1, 1993, PGT placed in service a major expansion of the mainline system. The new facilities were authorized by the FERC on August 1, 1991. See Note 9, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below, for a discussion of a rate controversy which arose in connection with the 1993 expansion, and which ultimately was resolved in PGT's favor in an August 1996 decision by the U.S. Court of Appeals for the District of Columbia Circuit. Oregon Extensions ----------------- In 1995, PGT completed the Coyote Springs and the Medford Extensions of its pipeline facilities in Oregon. Portland General, PGT's customer on the Coyote Springs Extension, pays an incremental rate for service over the Coyote Springs Extension based on costs associated with such facilities. Most of the capacity on the Medford Extension was subscribed under a firm transportation service agreement with WP Natural, which was effective November 1, 1995. Under this contract, WP Natural paid a negotiated first year transportation rate which subsequently increases or decreases each year by the percentage change in competing residential electric rates in the region served by WP Natural, but not below $3.7 million. During the first year of the contract, WP Natural paid rates based on the negotiated $3.9 million cost of service. Effective November 1, 1996, the rate increased $0.1 million to $4.0 million. The revenue shortfall resulting from the difference between the annually adjusted rate and the rate which would otherwise apply with respect to the total incremental cost of service of this extension, will be offset by the revenue generated under the transportation agreement in later years. The full cost of service is expected to be recovered over the life of the 30-year firm transportation agreement. The first year deficiency, which is expected to decline each year, was approximately $3.6 million. The larger diameter pipeline for the initial 22 miles of the Medford Extension was installed to provide additional firm transportation service to a proposed electric generating facility to be owned by Diamond Energy, Inc. ("Diamond"), a subsidiary of Mitsubishi Corp., commencing no earlier than 1999. Diamond agreed to reimburse PGT for the incremental cost of the 16-inch pipe if it did not sign a firm transportation agreement with PGT. Diamond has subsequently assigned its interest to the City of Klamath Falls in anticipation of a third party acquiring its facility certificate, and it has established an escrow account in favor of PGT for the incremental costs should the generating facility not be constructed. Pacific Gas Transmission Company Rate Proceedings ------------------------------------------------- 1994 Rate Case -------------- On February 28, 1994, PGT filed an application to increase its rates for transportation services. These rates were based on an overall cost of service of approximately $217 million, including a cost of equity of 13 percent. The proposed rate of return on equity applied to all facilities and assumed the discontinuance of the penalty rate of return on equity of 10.13 percent, which the FERC had earlier required to be used to develop initial rates for PGT's 1993 expansion facilities. On September 11, 1996, the FERC approved, without modification, a proposed multi-party settlement of PGT's rate case, which was filed with the FERC on March 21, 1996. See "Settlement of Rate Case" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, below, for a discussion of the settlement of this 1994 rate case. Gas Supply Restructuring ("GSR") Costs ---------------------------------------- Until November 1993, when Order 636 was implemented, PGT purchased all of its Canadian natural gas supply for resale to PG&E from Alberta and Southern Gas Co. Ltd. ("A&S"), a wholly owned Canadian gas purchasing subsidiary of PG&E, pursuant to a gas sales agreement between A&S and PGT and a sales service agreement between PGT and PG&E, both of which extended through the year 2005. A&S had commitments to purchase minimum quantities of natural gas from over 200 Canadian gas producers under various long-term contracts, most of which extended through 2005. As a result of the regulatory restructuring pursuant to Order 636, PGT, PG&E, A&S and various Canadian gas producers selling gas to A&S entered into agreements (collectively, the "Decontracting Plan") under which PGT terminated its gas sales agreement with A&S, its sales service agreement with PG&E, and A&S terminated its contracts with the gas producers. Under the Decontracting Plan, in return for settlement payments of $210.1 million, the producers released A&S, PGT, and PG&E from any claims they may have had that resulted from the termination of the former arrangements, as well as any claims for losses arising from alleged historical shortfalls in gas taken by A&S. In addition to the producers' settlement payments, PGT paid A&S $29.6 million for costs incurred by A&S related to both the termination of the sales agreement between A&S and PGT, and the implementation of the Decontracting Plan. The FERC approved the recovery of $168.5 million of the total $239.7 million of gas supply restructuring costs incurred by PGT through a transition cost recovery mechanism ("TCRM"). The difference of $71.2 million was reflected as a net charge to expense from 1992 through 1995. Recovery of approved GSR costs began in 1993, with PGT completing recovery of such costs in 1996 with the collection of the remaining $30.5 million. Also, in 1996, the CPUC sought judicial review of the FERC's orders in Public Utilities Commission of the State of California v. FERC, D.C. Circuit Case No. 96-1022. However, in the settlement of the 1994 rate case, the CPUC agreed to withdraw its petition for judicial review in consideration for PGT's agreement to reduce PG&E's direct bill by $3.18 million and refund this amount to PG&E. The CPUC moved to withdraw its petition and, on October 28, 1996, the Court granted the withdrawal. On November 7, 1996, PGT refunded the $3.18 million to PG&E. This aspect of the settlement is the subject of one of the pending rehearing applications discussed above. PGT does not expect the FERC to modify its settlement as a result of this issue. Regulatory Developments ----------------------- On January 31, 1996, the FERC issued a policy statement on alternative methods for setting rates. The policy statement provides guidelines the FERC will use in evaluating market-based, incentive rate and negotiated rate proposals by pipeline companies. Of particular note is the negotiated/recourse rate program which provides a framework to allow negotiated terms and/or conditions for individual shippers, with the traditional cost of service rates and tariffs made available to all shippers as a default or recourse. On July 17, 1996, the FERC adopted a new rule which standardizes technology and operating procedures for pipelines in order to promote greater integration of the national gas grid. On July 31, 1996, the FERC issued a Notice of Proposed Rulemaking ("NOPR") to improve the efficiency of capacity release procedures and to allow rates above the cost-based rate cap in markets where pipelines can demonstrate they lack market power. These regulatory initiatives are not expected to have a material impact on PGT's financial position, liquidity or results of operations in the foreseeable future. PGT QUEENSLAND GAS PIPELINE --------------------------- The condition, operation, and ownership of gas transmission pipelines in Queensland, Australia is principally regulated by the Petroleum Act of 1923 (the "Act") and is administered by the Queensland Department of Minerals and Energy. The State of Queensland has recently amended the Act to incorporate "open access" principles which facilitate a competitive gas market. The Act identifies access objectives and provides factors that the Minister of Minerals and Energy must consider in approving a pipeline's tariffs. The objectives of the access principles include: facilitation of competitive markets for the benefit of the public and industry; promotion of efficiency; and provision of access on fair commercial terms. The access principles provide the PGTQ Pipeline flexibility in formulating its tariffs. ENERGY SOURCE, INC. ------------------- Although ESI's operations are not regulated, its marketing activities are affected by regulatory events and competitive forces in gas markets. In recent years, the FERC has increased competition in natural gas markets by eliminating or changing many of the procedures associated with interstate pipelines' traditional role as wholesale merchants of gas so that all gas suppliers will have a full and fair opportunity to compete in these markets. As a result of these recent orders, wholesale gas marketing has become a non-utility activity. ENVIRONMENTAL MATTERS --------------------- GENERAL ------- The following discussion includes certain forward looking information relating to the possible future impact of environmental compliance. It is subject to a number of assumptions and uncertainties, including changing laws and regulations, evolving technologies, and the selection of compliance alternatives. PACIFIC GAS TRANSMISSION COMPANY -------------------------------- See "Environmental Matters" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, below, for a general description of PGT's environmental compliance. PGT owns and operates the 4C Solar Mars compressor unit near Sandpoint, Idaho ("Unit 4C"). In 1986, in connection with an upgrade of Unit 4C, PGT applied for and received a construction permit from the State of Idaho Department of Environmental Quality. At the time PGT received the construction permit, it was determined that no permit for the modification was needed under the Federal Prevention of Significant Deterioration ("PSD") program, then being administered by the State of Idaho. In the process of applying for a permit under the 1990 Clean Air Act, PGT conducted a review of its environmental permits and discovered information which now causes it to question whether a construction permit application incorporating PSD requirements may have been required prior to the 1986 upgrade. If it is finally determined that PSD program requirements did apply to the project, then PGT may be required to apply for and obtain a PSD permit for Unit 4C and may be required to retrofit Unit 4C. At this time, PGT believes that it is remote that any fines or penalties will be imposed in connection with this matter. The Company believes that the resolution of this matter would not materially affect its ability to operate Unit 4C or have a material adverse impact on its financial position, liquidity or results of operations. PGT QUEENSLAND GAS PIPELINE --------------------------- The PGTQ Pipeline is subject to the environmental protection policies imposed by the Australian Environmental Protection Act of 1994, and the environmental requirements of the Environmental Impact Statement and the Workplace and Safety Act for activities along the pipeline right of way. The Company believes that compliance with applicable environmental requirements is not likely to have a material effect upon its financial position, liquidity or results of operations. ITEM 2. PROPERTIES ----------- PACIFIC GAS TRANSMISSION COMPANY PIPELINE ----------------------------------------- PGT's pipeline system consists of approximately 639 miles of 36-inch diameter gas transmission line (612 miles of single 36-inch pipeline and 27 miles of 36-inch pipeline looping), approximately 590 miles of 42-inch diameter pipeline, approximately 84 miles of 12-inch diameter pipeline, and 22 miles of 16-inch diameter pipeline, twelve compressor stations with a total of approximately 345,200 National Electrical Manufacturer's Association ("NEMA") installed horsepower, and facilities for the operation and maintenance of the system, including metering and regulating facilities, and a communications system. (For further information on PGT's pipeline system, see the discussion under "Pacific Gas Transmission Company's Transmission System" in Item 1, Business, above.) PGT leases its corporate headquarters office building in Portland, Oregon under a 20-year lease terminating in 2015. Payments under the lease approximate the debt service payments on the debt issued to finance the building, plus operating costs, taxes and insurance. See Note 5, "Long-term Debt," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below. PGT QUEENSLAND GAS PIPELINE --------------------------- The PGTQ Pipeline in Australia consists of a 329-mile 12-inch pipeline completed in June, 1990 from Wallumbilla to Gladstone and a 60- mile 8-inch extension to Rockhampton completed in May, 1991. The transportation capacity of the PGTQ Pipeline is approximately 26 Bcf annually, which can be expanded to approximately 50 Bcf with the addition of compression facilities. ITEM 3. LEGAL PROCEEDINGS ----------------- See Item 1, Business, above, for a discussion of certain regulatory proceedings and environmental matters affecting the Company. For information concerning material legal proceedings, see Note 9, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- Since PGT meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted. PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ------------------------------------------------- PGT is an indirect wholly owned subsidiary of PG&E Corporation. Effective January 1, 1997, PG&E Corporation, incorporated in California in 1995, became the holding company for PGT's former parent company, Pacific Gas and Electric Company ("PG&E"). PG&E's ownership interest in PGT and PG&E Enterprises has been transferred to PG&E Corporation. The payment of dividends by PGT on its common stock is restricted under the terms of a Credit Agreement dated May 31, 1995. (See "1995 Refinancing" in Note 5, "Long-term Debt," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below.) Under the most restrictive provisions, approximately $162.1 million of PGT's retained earnings was available for dividends on its common stock as of December 31, 1996. In 1996 and 1995, PGT paid cash dividends on its common stock of $10 million and $40 million, respectively. ITEM 6. SELECTED FINANCIAL DATA ----------------------- Since PGT meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(1) ------------------------------------------------- The Consolidated Financial Statements include: Pacific Gas Transmission Company Pacific Gas Transmission Company's wholly owned businesses: PGT Australia Pty Limited Pacific Gas Transmission International, Inc. PGT Queensland Pty Limited Energy Source, Inc. Pacific Gas Transmission Company ("PGT") and its subsidiaries collectively are referred to as the "Company." The following discussion includes forward-looking statements that involve a number of risks and uncertainties. Those risks and uncertainties include, but are not limited to, the ongoing restructuring of the gas industry and the future results of new acquisitions. The outcomes of these and other matters discussed below, including the outcome of certain litigation with a firm shipper of PGT, may cause future results to differ materially from historical results or from results or outcomes currently expected or sought by the Company. [FN] (1) See "Certain Defined Terms" in Item 1, Business, for a definition of terms commonly used in the natural gas industry and herein. The information in this section should be read in conjunction with the information set forth under Item 1, Business, above, and the Consolidated Financial Statements and accompanying Notes to Consolidated Financial Statements in Item 8, Financial Statements and Supplementary Data, below. GENERAL ------- PGT is an indirect wholly owned subsidiary of PG&E Corporation. Effective January 1, 1997, PG&E Corporation, incorporated in California in 1995, became the holding company for PGT's former parent company, Pacific Gas and Electric Company ("PG&E"). PG&E's ownership interest in PGT and PG&E Enterprises has been transferred to PG&E Corporation. Building upon its expertise in the natural gas industry, PGT is expanding its core pipeline business by pursuing domestic and international business development opportunities which focus on the midstream segment of the natural gas industry. The midstream segment includes the gathering, processing, storing, transporting, and marketing of natural gas. It excludes exploration and production of natural gas and local distribution to customers. Consistent with this strategy, during 1996, PGT established the PGT Queensland Unit Trust ("PGT Trust"), created under the laws of Australia, to hold all of the assets comprising the Queensland State Gas Pipeline which were purchased from the Government of the State of Queensland, Australia. The pipeline is referred to as the PGT Queensland Gas Pipeline ("PGTQ Pipeline"). The PGT Trust is owned by two wholly owned subsidiaries of PGT - Pacific Gas Transmission International, Inc. ("PGT International"), a California corporation, and PGT Queensland Pty Limited ("PGT Queensland"), an Australian corporation. PGT Queensland operates the pipeline. In addition, PGT also established another wholly owned subsidiary, PGT Australia Pty Limited ("PGT Australia"), an Australian corporation, to pursue new business development opportunities in Australia and to serve as trustee of the PGT Trust. During 1996, PGT also acquired the gas marketing operations of Edisto Resources Corporation in the United States and Canada, known jointly as "Energy Source, Inc." ("ESI"). ESI has offices in Houston, Calgary, Tulsa, Pittsburgh and New York with a customer base in the Northeast and Midwest regions of the United States. ESI is engaged in the purchase and resale of natural gas to a diversified customer base, primarily industrial/commercial companies, local distribution companies, and industry partners. ESI aggregates natural gas supplies from producing basins in the United States and Canada, arranges transportation through pipelines from points of purchase to points of sale, and resells natural gas volumes to customers under a variety of standard and customized arrangements. These arrangements include a variety of short-term and long-term market sensitive and fixed price contracts and financial instruments. PGT's transportation system provides access to natural gas from producing fields in western Canada and extends from the British Columbia-Idaho border to the Oregon-California border. PGT's transportation system also provides service to various delivery points in Idaho, Washington, and Oregon. PGT's natural gas transportation services are regulated by the Federal Energy Regulatory Commission ("FERC"), and various safety issues are subject to the jurisdiction of the United States Department of Transportation. A major expansion of PGT's system was placed into service on November 1, 1993, increasing PGT's net utility plant in service from approximately $150 million to nearly $1 billion. On November 1, 1993, PGT also implemented the restructuring of its services as required by the FERC's Order 636 (see "Changing Regulatory Environment," below) and now operates as a transportation-only pipeline system serving a range of new customers in addition to its principal historical customer, PG&E. During 1996, PGT provided transportation services for 91 customers. Forty-nine of these customers have long-term firm transportation service agreements with PGT. The two largest customers of PGT in 1996 were PG&E and Southern California Edison Company, accounting for approximately 21 percent and 11 percent, respectively, of PGT's transportation revenues. No other customer accounted for more than 10 percent of PGT's total revenues. PGT's firm transportation service agreements are generally long-term agreements and accounted for approximately 97 percent of total transportation revenues in 1996. These agreements have remaining terms that range between 9 and 28 years. See "Legal Matters - Norcen Litigation" in Note 9, "Commitments and Contingencies," in Item 8, Financial Statements and Supplementary Data, below, for a discussion of litigation filed against PGT by one of its long-term firm transportation service customers challenging the validity of its contract. PGT incurred significant costs to terminate gas purchase commitments as a result of the implementation of Order 636. Such costs were either charged to operations primarily in 1992 and 1993, or were recovered in rates under a transition cost recovery mechanism approved by the FERC. PGT completed the recovery of these termination costs during 1996. (See "Rates and Regulation - Gas Supply Restructuring ("GSR") Costs" in Item 1, Business, above.) CHANGING REGULATORY ENVIRONMENT ------------------------------- Prior to November 1, 1993, PGT's business was primarily to provide bundled natural gas sales and transportation services to PG&E, firm transportation service to Pacific Interstate Transmission Company and to Northwest Pipeline, and open access interruptible transportation service to various other customers. In 1992, the FERC issued Order 636, which required open access pipelines to provide firm and interruptible transportation services on an equal basis for all gas supplies, whether purchased from the pipeline or from another gas supplier, and required the termination of all pipeline bundled sales and transportation service. PGT implemented the provisions of Order 636 effective November 1, 1993 (see "Customers and Services - Pacific Gas Transmission Company - FERC Order 636" in Item 1, Business, above, for a description of Order 636). At that time, PG&E terminated its gas purchases from PGT and PG&E began receiving an equivalent amount of firm transportation service from PGT under a long-term contract; PGT began recovering restructuring costs through the transition cost recovery mechanism ("TCRM") (see Note 3, "Natural Gas Matters," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below, for a discussion of the TCRM) and PGT implemented a capacity release program. Order 636 also authorized PGT to adopt the straight- fixed variable ("SFV") rate design method for all firm rate schedules, which it did effective November 1, 1993. Under the SFV rate design, a pipeline company's fixed costs, including return on equity and related taxes, associated with firm transportation service are collected through the reservation charge component of the pipeline company's firm transportation service rates. As a result of the SFV rate design and based upon the settlement of its 1994 rate case, PGT currently recovers approximately 95 percent of its total costs and 97 percent of its fixed costs through reservation charges paid by firm transportation service customers. These customers pay a reservation charge for access to firm transportation service capacity on PGT's system, regardless of the volumes of gas transported. Consequently, the volume of gas transported by PGT for firm transportation service customers does not currently have a significant impact on PGT's operating results. As such, PGT's operating results are not significantly affected by fluctuating demand for gas based on the weather or changes in the price of natural gas. On July 16, 1996, the United States Court of Appeals for the District of Columbia Circuit affirmed the FERC's adoption of the SFV rate design for all natural gas pipelines under FERC's jurisdiction. In light of the Court's decision, it appears unlikely that the FERC will mandate any industry-wide departure from the SFV rate design in the near future. While PGT believes that SFV rate design is likely to continue over the near term, a departure from SFV rate design (whereby a portion of fixed costs would be assigned to the commodity or delivery component of rates) could cause PGT's operating results to be affected by fluctuations in the volumes of gas transported on its system. Similarly, the extent to which PGT's cost of service is recovered under long-term contracts also affects the impact that variations in PGT's throughput would have on its operating results. On January 31, 1996, the FERC issued a policy statement on alternative methods for setting rates. The policy statement provides guidelines the FERC will use in evaluating market-based, incentive rate proposals and negotiated rate proposals by pipeline companies. Of particular note is the negotiated/recourse rate program which provides a framework to allow negotiated terms and/or conditions for individual shippers, with the traditional cost of service rates and tariffs made available to all shippers as a default or recourse. On July 17, 1996, the FERC adopted a new rule which standardizes technology and operating procedures for pipelines in order to promote greater integration of the national gas grid. On July 31, 1996, the FERC issued a Notice of Proposed Rulemaking ("NOPR") to improve the efficiency of capacity release procedures and to allow rates above the cost-based rate cap in markets where pipelines can demonstrate they lack market power. These regulatory initiatives are not expected to have a significant effect on PGT's financial position, liquidity or results of operations in the foreseeable future. SETTLEMENT OF RATE CASE ----------------------- On February 28, 1994, PGT filed an application to increase its rates for transportation services. These rates were based on an overall cost of service of approximately $217 million, including a cost of equity of 13 percent. The proposed rate of return on equity applied to all facilities and assumed the discontinuance of the penalty rate of return on equity of 10.13 percent, which the FERC had earlier required to be used to develop initial rates for PGT's 1993 expansion facilities. A major issue in this proceeding was whether PGT's mainline transportation rates should be equalized through the use of rolled-in cost allocation, or whether they should continue to reflect the current use of incremental costs to determine the rates paid by shippers. PGT proposed that mainline rates reflect the rolled-in approach on a prospective basis. On March 31, 1994, the FERC issued an order that accepted PGT's interim incremental rates, and authorized PGT to place these rates into effect on September 1, 1994, subject to refund. Although the FERC rejected the proposal to place rolled-in rates into effect September 1, 1994, the FERC indicated that PGT would be afforded the opportunity at the hearing to support and justify a rolled-in rate proposal. On September 11, 1996, the FERC approved, without modification, the proposed settlement of PGT's rate case, which was filed with the FERC on March 21, 1996. The settlement provided for rolled-in rates effective on November 1, 1996. To mitigate the impact of the higher rolled-in rates on shippers who were paying lower rates under contracts executed prior to PGT's 1993 expansion (pre-1993 expansion shippers), most of the firm shippers who took service prior to the 1993 expansion are receiving a reduction from the rolled-in rates for a six year period, while the 1993 expansion shippers are paying a surcharge in addition to the rolled-in rates to offset the effect of the mitigation. Although the implementation of rolled-in rates by itself does not change PGT's total revenue requirement, the settlement does provide for, among other things, a lower total cost of service of $206 million, lower depreciation rates, and a return on equity of 12.2 percent from September 1, 1994, the effective date of the rates in this case. In addition, under the settlement, approximately three percent of PGT's firm transportation service capacity was relinquished effective November 1, 1996, for subscription to other shippers who may desire the capacity. Approximately $7.5 million of costs were also allocated to short-term firm and interruptible services. The overall effect of the settlement on rates, including mitigation measures and the agreed upon lower cost of service, was to decrease PGT's current 100 percent load factor transportation rates for the full distance of the pipeline (from the Canadian-U.S. border to the Oregon-California border) from $0.48 to $0.33 per Decatherm(Dt) for the 1993 expansion shippers, and to increase the transportation rate for most of the pre-1993 expansion shippers from $0.16 to either $0.20 or $0.24 per Dt, depending upon the level of mitigation applicable to each shipper. The rolled-in rate for the full distance is $0.26 per Dt. In November 1996, PGT refunded the difference between the amounts based on its as-filed cost of service of $217 million and the amounts that would have been collected at the settlement cost of service of $206 million. PGT had established a reserve adequate for its refund obligation under the settlement. Although the FERC approved the settlement without modification, several shippers have sought rehearing of the FERC's order. PGT does not expect the FERC to modify the settlement as a result of these requests. Parties that have sought rehearing may petition the Court of Appeals if the FERC does not grant their rehearing requests. In the event the FERC does modify the settlement, however, the settlement permits PGT to terminate the settlement and reinstate the rates contained in its rate case proposal and proceed to a FERC decision based upon the evidence in the case. COMPETITION ----------- Competition to provide natural gas transportation services has intensified in recent years. Regulatory changes, such as Order 636, have significantly increased customers' flexibility, choices and responsibility to directly manage their gas supplies. PGT has in the past, and will in the future, actively compete with other pipeline companies for transportation customers on the basis of transportation rates, access to competitively priced gas supply basins, and quality and reliability of transportation services. In addition, in providing interruptible transportation service, PGT competes with released capacity offered by shippers holding firm PGT capacity. PGT's principal competitor in providing transportation services to the Pacific Northwest is Northwest Pipeline Corporation. In California, four major interstate pipeline companies provide transportation services which compete with the services offered by PGT. Those companies are El Paso Natural Gas Company, Transwestern Pipeline Company, Mojave Pipeline Company and Kern River Gas Transmission Company. In the current open access environment, the competitiveness of a pipeline company's transportation services in the market it serves is determined generally on the basis of delivered natural gas prices, of which transportation cost is a portion of the total delivered price, but also to some extent on the quality and reliability of transportation services. PGT's system delivers gas primarily from western Canada. Gas from this region has been competitively priced in relation to gas from other supply basins serving PGT's market areas. The competitive strength of Canadian gas supplies in western U.S. markets has been evidenced by consistently high throughput on the PGT system since Canadian gas prices were deregulated in the mid-1980's. PGT's transportation volumes are affected by market conditions in all markets it serves. A significant factor is the level of available hydroelectric generation which in turn causes the demand for natural gas as a fuel for electric generation to fluctuate. In addition, PGT's services face modest competition from fuel oil. Fluctuating levels of throughput caused by these market conditions only have a minor financial effect on PGT because 97 percent of PGT's firm transportation service capacity is currently subscribed under long-term contracts with service billed under the SFV rate design. The PGTQ Pipeline is the only gas pipeline serving the Gladstone and Rockhampton areas of Australia. Presently, competition exists only in terms of more expensive alternative energy sources including distillate and diesel fuel. Prospectively, South Pacific Chevron Company has announced a proposal to construct a natural gas pipeline from Papua New Guinea to Queensland that would potentially be in service in 2001. The proposed pipeline may or may not extend as far as the Gladstone area. ESI faces intense competition in marketing gas to end user customers and local distributors in both its domestic and Canadian markets. Its competitors include the major integrated oil and gas companies, other marketing companies affiliated with interstate pipelines and regional gas gatherers, and brokers and marketers of varying sizes, financial resources, and experience. This intense competition has placed downward pressure on the gross margins for gas sales. As gross margins have decreased, the market share necessary to compete effectively in the industry has grown. During 1996, ESI responded to this pressure by increasing its sales volumes. FUTURE EXPANSIONS AND BUSINESS DEVELOPMENT ------------------------------------------ PGT has received preliminary expressions of interest in providing firm transportation service to parties who cannot be accommodated with PGT's existing available firm transportation service capacity and whose needs may not be met through the release of capacity by PGT's current firm transportation service customers. PGT intends to continue to solicit such expressions of interest, and will consider adding additional firm transportation service capacity to its mainline system in the future if sufficient demand develops. In addition to mainline expansions and extensions off of its mainline system, PGT is considering opportunities to expand its core pipeline business through its midstream gas growth strategy. This strategy focuses on investing in pipelines, storage, gathering and processing, and marketing/trading capabilities in targeted geographic markets both within and outside the United States. The recent acquisition of the Australian pipeline facilities is consistent with this strategy. The Company also established PGT Australia in 1996 to pursue new business development opportunities in connection with its strategy to expand its core pipeline business. PGT Australia and the PGTQ Pipeline are pursuing new business development opportunities in Australia including an extension of the current mainline pipeline as well as the construction of new pipelines. In addition, effective November 30, 1996, PGT acquired Edisto Resources Corporation's gas marketing operations in the United States and Canada, known jointly as "Energy Source, Inc." ACCOUNTING FOR THE EFFECTS OF REGULATION ---------------------------------------- PGT currently accounts for the economic effects of regulation in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a result of applying the provisions of SFAS No. 71, PGT has accumulated approximately $62.5 million of regulatory assets as of December 31, 1996. Management recorded a reserve of $8.4 million ($5.2 million after tax) in 1996 against deferred relocation costs associated with the transfer of PGT's headquarters from San Francisco to Portland, Oregon in 1995. Management expects to seek recovery of these relocation costs. FISCAL YEARS 1996, 1995 AND 1994 -------------------------------- RESULTS OF OPERATIONS --------------------- Selected operating results and other data are as follows:
1996 1995 1994 ------ ----- ----- (In Millions) Operating revenues (a) $546.8 $269.2 $251.1 Operating expenses (a) 424.2 147.3 136.7 ----- ----- ----- Operating income (loss) 122.6 121.9 114.4 Other income and (income deductions) (4.9) 7.3 8.9 Net interest expense 45.7 46.3 45.6 ----- ------ ----- Income before income tax expense 72.0 82.9 77.7 Income tax expense 28.9 31.3 30.0 ----- ----- ----- Net income $ 43.1 $ 51.6 $ 47.7 ===== ===== ===== Ratio of earnings to fixed charges (b) 2.6 2.7 2.6 ===== ===== ====== ---------- (a) 1996 results reflect: (i) ESI's operations since December 1, 1996, including $281.3 million in operating revenues and $281.6 million in operating expenses; and (ii) the results of the PGTQ Pipeline since July 1, 1996, including $5.7 million in operating revenues and $3.7 million in operating expenses. (b) For purposes of computing the ratio of earnings to fixed charges, earnings are computed by adding to income from continuing operations, the provision (benefit) for income taxes and fixed charges. Fixed charges consist of interest, the amortization of debt issuance costs and a portion of rents deemed to be representative of interest. Fixed charges are not reduced by the allowance for borrowed funds used during construction but such allowance is included in the determination of earnings.
NET INCOME - Net income was $43.1 million in 1996, compared with $51.6 million in 1995 and $47.7 million in 1994. Despite higher transportation revenues and lower interest on long term debt in 1996 compared with 1995, net income declined $8.5 million, or 16 percent. This primarily resulted from the combination of three non-recurring adjustments. First, during 1996, a reserve of $8.4 million ($5.2 million after tax) was recorded against deferred relocation costs associated with the transfer of PGT's headquarters from San Francisco to Portland, Oregon. Second, and partially offsetting the relocation cost reserve, was the reversal of a $4.2 million reserve ($2.6 million after tax) for use tax on compressor fuel and related interest. Third, the results for 1995 included the benefit of reversing a $7.6 million ($4.7 million after tax) reserve for gas supply restructuring ("GSR") costs. The $3.9 million increase in 1995 compared with 1994 was primarily the result of the benefit of the GSR reversal and higher transportation revenues offset, in part, by higher operations expenses, lower interest income and higher interest expense. OPERATING REVENUES - The components of total operating revenues are as follows:
1996 1995 1994 ---- ---- ---- (In Millions) Gas marketing sales $281.3 $ - $ - Gas transportation 232.6 216.3 212.4 Gas supply restructuring (GSR) cost recovery 32.1 51.9 38.1 Other 0.8 1.0 0.6 ----- ----- ----- Total operating revenues $546.8 $269.2 $251.1 ===== ===== =====
The $281.3 million in gas marketing sales in 1996 represents one month's activity for ESI, a natural gas marketing company which PGT acquired effective November 30, 1996. ESI had a related cost of sales of $280.5 million, resulting in a gross margin of $0.8 million. Gas transportation revenues increased by $16.3 million, or eight percent, in 1996 compared with 1995 as a result of increased firm and interruptible volumes on PGT's system. In addition, the increase reflects a full year of revenue from the Oregon Extensions and six months of revenues from the PGTQ Pipeline. The increase in natural gas transportation revenues of $3.9 million, or two percent, from 1994 to 1995 was primarily due to higher transport rates which were effective September 1, 1994, subject to refund, pursuant to the 1994 rate case. In addition, 1995 revenues increased due to revenues from the Oregon Extensions which were placed in service November 1, 1995. The impact of these factors was partially offset by recognition in 1994 of additional revenues related to the favorable settlement of PGT's 1990 rate case. GSR cost recovery revenues reflect the collection from customers through volumetric surcharges and direct bills of deferred GSR costs effective November 15, 1993, over a three year period, as permitted by the TCRM approved by the FERC. The FERC approved a total of $168.5 million of GSR costs plus interest for recovery through the TCRM. Through December 31, 1995, $138.0 million, excluding interest, was collected from customers and during 1996, PGT completed the collection of the remaining balance of $30.5 million. These revenues have no effect on income as they are fully offset by the amortization of like amounts of deferred GSR costs. OPERATING EXPENSES - The components of total operating expenses are as follows:
1996 1995 1994 ----- ----- ----- (In Millions) Cost of sales $280.5 $ - $ 0.3 Gas supply restructuring (GSR) costs 32.1 43.5 32.4 Operations and maintenance 63.6 58.3 53.0 Depreciation and amortization 39.1 33.1 38.9 Property and other taxes 8.9 12.4 12.1 ----- ----- ----- Total operating expenses $424.2 $147.3 $136.7 ===== ===== =====
The $280.5 million in cost of sales for 1996 represents one month's activity for ESI. As discussed above in "Customers and Services - FERC Order 636" under Item 1, Business, PGT's gas sales service was eliminated effective November 1, 1993 with the implementation of Order 636. PGT's expense for 1994 relates to the sale of line pack gas. The 1996 GSR costs include the amortization of the December 31, 1995, uncollected balance of $30.5 million and related interest collected through revenue. The 1995 GSR costs include the amortization of $55.1 million of deferred costs which were billed to customers in 1995, less an adjustment for $11.6 million primarily to adjust previously estimated non- recoverable GSR costs to actual. The 1994 GSR costs include the amortization of $38.1 million of deferred costs which were billed to customers in 1994, less a $5.7 million adjustment recorded as actual GSR costs were less than the estimates previously recorded. Operations and maintenance expenses increased by $5.3 million from 1995 to 1996 primarily as a result of the recognition of an $8.4 million reserve for the cost to relocate PGT's headquarters, offset, in part, by reduced pension, legal, and rent expenses. In connection with its relocation to Portland, Oregon, PGT entered into a capital lease on its new office building which resulted in a decline in rent expense which was offset by the combination of additional depreciation expense and interest expense associated with the lease. Operations and maintenance expenses increased by $5.3 million from 1994 to 1995. The increase in 1995 was primarily due to additional expenses related to the legal support for the 1994 rate case and relocation of the corporate headquarters to Portland, Oregon. The increase in depreciation and amortization from 1995 to 1996 resulted from increased plant in service and an adjustment recorded in 1995 to adjust depreciation expense from September through December 1994 to reflect the lower rates contained in the settlement of PGT's 1994 rate case. The decrease in depreciation and amortization from 1994 to 1995 was due to applying the lower depreciation rates retroactive to September 1, 1994, pursuant to the settlement of PGT's 1994 rate case. The decrease in other taxes in 1996 compared to both 1995 and 1994 primarily resulted from a $2.9 million reversal of a reserve for use tax on compressor fuel for prior years. OTHER INCOME AND (INCOME DEDUCTIONS) - Other income decreased $12.2 million from 1995 to 1996 principally due to: increased investment development expenses of $5.4 million in support of the Company's midstream gas growth strategy; reduced interest income of $4.1 million as a result of the combination of lower invested cash balances and reduced unrecovered GSR balances, which earn interest; and decreased equity allowance for funds used during construction ("AFUDC") reflecting the completion of extensions in Oregon on November 1, 1995. Other income decreased $1.6 million from 1994 to 1995, due to a number of mainly offsetting items. INTEREST EXPENSE - The Company's interest expense, excluding AFUDC, decreased $1.6 million from 1995 to 1996, primarily due to the combination of a reduction in average debt from $582 million in 1995 to $550 million in 1996 and a decline in the average interest rate from 7.7 percent in 1995 to 7.4 percent in 1996. In addition, 1996 reflects the reversal of interest accrued on a use tax liability. These factors were offset, in part, by an increase in interest associated with the capital lease of PGT's corporate office, which was effective July 1995, and interest expense related to the PGTQ Pipeline's operations of $3.4 million. The average effective interest rate for the PGTQ Pipeline since July 1, 1996, the date of acquisition, was 7.5 percent, based upon an average long-term debt balance of $91.7 million. PGT's interest expense excluding the interest portion of AFUDC increased $1.0 million from 1994 to 1995, primarily due to interest associated with prior year tax issues. Interest on long-term debt increased only slightly from 1994 to 1995 because the increase in the average interest rate from 6.7 percent to 7.7 percent in 1995 was mitigated by a reduction in the average debt outstanding from $669 million to $582 million in 1995. AFUDC decreased $0.9 million in 1996 from 1995 because of higher capital expenditures qualifying for AFUDC during 1995 for the Oregon Extensions, which were placed in service on November 1, 1995. AFUDC increased $0.3 million in 1995 from 1994 because of higher average construction work in progress balances during 1995 than during 1994. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- During 1996, the balance of cash and cash equivalents increased $27.3 million compared with 1995. The increase includes $25.2 million in cash balances to support ESI's marketing operations. A detailed discussion of the Company's operating, investing and financing activities follows below. SOURCES OF CAPITAL - The Company's capital requirements are funded from cash provided by operations and, to the extent necessary, external financing and capital contributions from its parent company. PGT pays dividends in return as part of a balanced approach to managing its capital structure, funding its operations and capital expenditures and maintaining appropriate cash balances. In connection with the acquisitions of State Gas Pipeline and ESI during 1996, PG&E made capital contributions of $10.0 million and $50.0 million, respectively. CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES - For the year ended December 31, 1996, net cash provided by operating activities was $96.3 million, as compared with net cash provided by operating activities of $137.5 million in 1995. The $41.2 million decrease was due primarily to PGT's refund of $31.4 million to customers in 1996 as a result of settlement of its 1994 rate case. For the year ended December 31, 1995, net cash provided by operating activities decreased $27.3 million as compared with net cash provided by operating activities of $164.8 million during 1994. During 1995, PGT recovered from customers approximately $50.5 million in GSR costs, excluding carrying charges, which was $18.0 million more than in 1994. The increase in collection of GSR costs in 1995 primarily resulted from the recovery approved by the FERC of certain costs incurred to terminate PGT's gas sales agreement with A&S, a wholly owned Canadian gas purchasing subsidiary of PG&E. During 1994, PGT refunded $30.3 million to customers as a result of settlement of its 1990 rate case and paid $17.1 million to A&S relating to the termination of PGT's gas sales agreement. Offsetting these charges was $62.5 million which PGT received from PG&E in 1994, primarily for the tax effects of the $210.1 million in GSR costs which PGT paid in 1993, and a $29.7 million decrease in the provision for deferred income taxes. CASH USED IN INVESTING ACTIVITIES - The Company's expenditures for new acquisitions, property, plant and equipment (including AFUDC debt ) amounted to $194.5 million, $77.3 million, and $52.4 million for 1996, 1995 and 1994, respectively. The $117.2 million increase in 1996 compared to 1995 was primarily the result of expending $136.3 million for the acquisition of the State Gas Pipeline and $23.2 million for the acquisition of ESI, offset by $41.9 million in lower construction expenditures during 1996. The increase in expenditures from 1994 to 1995 related primarily to construction of the Oregon Extensions. CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - For the year ended December 31, 1996, cash provided by financing activities amounted to $125.5 million, which primarily consisted of financing related to the acquisitions of the State Gas Pipeline and ESI. The Company borrowed $91.7 million in long-term debt for the acquisition of the State Gas Pipeline and $10.0 million for the acquisition of ESI. In addition, PG&E contributed $60.0 million in equity to PGT during 1996. For the year ended December 31, 1995, cash used in financing activities amounted to $125.1 million and included a net $75.9 million reduction in long-term debt and construction financing, and a $40.0 million dividend paid to PG&E. For the year ended December 31, 1994, cash used in financing activities amounted to $48.5 million and included a net $26.3 million reduction in long-term debt and construction financing, and a $22.0 million dividend paid to PG&E. For both years, the cash used in financing activities was provided by cash from operating activities. CAPITAL REQUIREMENTS -------------------- The Company's estimated capital requirements for each of the next five years are as follows: 1997 1998 1999 2000 2001 ----- ----- ----- ----- ----- (In Millions) Capital requirements, including AFUDC $91.5 $59.8 $60.1 $57.5 $52.0 ====== ===== ===== ====== ====== The above amounts are forward looking and involve a number of assumptions and uncertainties. These estimates are subject to revision and actual amounts may vary based upon changes in assumptions as to pipeline capacity growth, rates of inflation, receipt of adequate and timely rate relief, availability and timing of regulatory approvals, total cost of major projects, availability and cost of suitable non-regulated investments, and availability and cost of external sources of capital, as well as the outcome of the ongoing restructuring in the gas industry. Most of PGT's capital expenditures are associated with projects aimed at the replacement and enhancement of existing transmission facilities to enhance their efficiency and reliability and to comply with environmental laws and regulations. The 1997 projected capital expenditures include $30.0 million for pipeline projects in Australia. The PGTQ Pipeline's capital expenditures are targeted towards growth in new markets, which is consistent with the Company's midstream gas growth strategy. These estimated capital requirements do not include costs to construct proposed new pipelines in Australia. In addition to these capital requirements, the Company has other commitments as discussed in Note 9, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below. RISK MANAGEMENT --------------- Due to the changing business environment, the Company's exposure to risks associated with natural gas commodity prices, interest rates, and foreign currencies is increasing. To manage these risks, PG&E Corporation has adopted a price risk management policy which is also applicable to PGT and its subsidiaries and established an officer-level price risk management committee. PG&E Corporation's price risk management committee oversees implementation of the policy, approves each price risk management program, and monitors compliance with the policy. PG&E Corporation's price risk management policy and procedures adopted by the committee establish guidelines for implementation of price risk management programs. Such programs may include the use of natural gas and financial derivatives. (A derivative is a contract whose value is dependent on or derived from the value of some underlying asset.) Additionally, this policy allows derivatives to be used for hedging and non-hedging purposes. (Hedging is the process of protecting one transaction by means of another to reduce price risk.) Both hedging and non-hedging activities are limited to those specifically approved by the committee only after appropriate controls and procedures are put in place to measure, monitor, and control the risk of such activities. In 1996, PG&E Corporation approved and implemented interest rate and foreign exchange risk management programs. In addition, PGT acquired ESI which has natural gas marketing operations and engages in hedging transactions. Gains and losses associated with price risk management activities during 1996 were immaterial. The Company also uses a number of techniques to mitigate its financial risk, including the purchase of commercial insurance and the maintenance of systems of internal control. The extent to which these techniques are used depends on the risk of loss and the cost to employ such techniques. These techniques do not eliminate financial risk to the Company. During 1996, PGT Australia entered into derivative contracts to manage its interest rate risk. (See Note 5, "Long-term Debt" and Note 6, "Financial Instruments," in the Notes to Consolidated Financial Statement in Item 8, Financial Statements and Supplementary Data, below.) ENVIRONMENTAL MATTERS --------------------- The following discussion includes certain forward looking information relating to the possible future impact of environmental compliance. It is subject to a number of uncertainties, including regulations and the selection of compliance alternatives. PGT is subject to regulation by the FERC in accordance with the National Environmental Policy Act and other federal and state laws and regulations governing environmental quality and pollution control. These laws and regulations require PGT to take measures to mitigate the effect of its operations on the environment. The Company's expenditures for environmental protection are subject to periodic review and revision to reflect changing technology and evolving regulatory requirements. For 1997, capital requirements for environmental protection and safety compliance are estimated to be approximately $1.4 million. For 1998 and 1999, such capital requirements are estimated to be approximately $1 million per year. These amounts are included above in "Capital Requirements." On an ongoing basis, the Company assesses measures that may need to be taken to comply with environmental laws and regulations related to its operations. Management believes that it is in substantial compliance with applicable existing environmental requirements and that the ultimate amount of costs that will be incurred by the Company in connection with its compliance and remediation activities will not be material to its financial position, liquidity or results of operations. (See "Environmental Matters" in Item 1, Business, above.) LEGAL MATTERS AND CONTINGENCIES ------------------------------- In the normal course of business, the Company is named as a party in a number of claims and lawsuits. In the past, substantially all of these have been litigated or settled with no significant impact on either the Company's results of operations or financial position. See Note 9, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements contained in Item 8, Financial Statements and Supplementary Data, below, for a discussion of a lawsuit against the Company involving antitrust and state law contract claims related to a 30- year contract with a transportation customer of the Company. NEW ACCOUNTING STANDARD ----------------------- Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 prescribes general standards for the recognition and measurement of impairment losses. In addition, it requires that regulatory assets continue to be probable of recovery in rates, rather than only at the time the regulatory asset is recorded. Regulatory assets currently recorded would be written off if recovery is no longer probable. During 1996, in compliance with the adoption of this standard, PGT recorded a reserve (net of income tax) of $5.2 million against deferred relocation costs associated with the transfer of its corporate headquarters from San Francisco to Portland, Oregon. Effective January 1, 1997, the Company will adopt the provisions of the American Institute of Certified Public Accountants' Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." This SOP provides authoritative guidance for recognition, measurement, display, and disclosure of environmental remediation liabilities in financial statements. The adoption of SOP 96-1 is not expected to have a material adverse impact on the Company's financial position, liquidity, or results of operations. EFFECT OF INFLATION ------------------- The Company generally has experienced increased costs due to the effect of inflation on the cost of labor, material and supplies, and plant and equipment. A portion of the increased labor and material and supply costs can directly affect income through increased operations and maintenance expenses. The cumulative impact of inflation over a number of years has resulted in increased costs for current replacement of PGT's plant and equipment. However, PGT's utility plant is subject to ratemaking treatment, and the increased cost of replacement plant is generally recoverable through rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- Financial statements of Pacific Gas Transmission Company and its subsidiaries: Report of Independent Public Accountants Statements of Consolidated Income - for each of the three years ended December 31, 1996, 1995, and 1994 Consolidated Balance Sheets - as of December 31, 1996 and 1995 Statements of Consolidated Common Stock Equity - for each of the three years ended December 31, 1996, 1995, and 1994 Statements of Consolidated Cash Flows - for each of the three years ended December 31, 1996, 1995, and 1994 Report of Independent Public Accountants To the Shareholder and the Board of Directors of Pacific Gas Transmission Company: We have audited the accompanying Consolidated Balance Sheets of Pacific Gas Transmission Company (a California corporation) and subsidiaries as of December 31, 1996 and 1995, and the related Statements of Consolidated Income, Common Stock Equity and Cash Flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Gas Transmission Company and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon February 10, 1997 Statements of Consolidated Income --------------------------------------------------------------------
In Thousands ----------------------------------------------------------------------------- Years Ended December 31, 1996 1995 1994 ----------------------------------------------------------------------------- OPERATING REVENUES: Gas marketing $281,292 $ - $ - Gas transportation 194,881 174,879 165,831 Gas transportation for PG&E 37,726 41,456 46,557 Gas supply restructuring cost recovery from PG&E 17,847 33,942 27,445 Gas supply restructuring cost recovery 14,273 17,962 10,649 Other 766 979 616 ------------------------------------------------------------------------------ Total operating revenues 546,785 269,218 251,098 ------------------------------------------------------------------------------ OPERATING EXPENSES: Gas marketing cost of sales 280,483 - - Gas supply restructuring costs 32,120 43,553 32,414 Natural gas purchased - - 311 Operations 59,593 53,263 47,438 Maintenance 4,095 5,019 5,474 Depreciation and amortization 39,077 33,046 38,916 Property and other taxes 8,867 12,374 12,130 ---------------------------------------------------------------------------- Total operating expenses 424,235 147,255 136,683 ---------------------------------------------------------------------------- OPERATING INCOME 122,550 121,963 114,415 ---------------------------------------------------------------------------- OTHER INCOME AND (INCOME DEDUCTIONS): Allowance for equity funds used during construction 241 1,399 1,016 Interest income 2,272 6,328 8,763 Other - net (7,367) (404) (840) ----------------------------------------------------------------------------- Total other income and (income deductions) (4,854) 7,323 8,939 ------------------------------------------------------------------------------ INTEREST EXPENSE: Interest on long-term debt 44,072 44,777 44,360 Allowance for borrowed funds used during construction (256) (1,167) (878) Other interest charges 1,846 2,731 2,148 ------------------------------------------------------------------------------ Net interest expense 45,662 46,341 45,630 ------------------------------------------------------------------------------ INCOME BEFORE INCOME TAX EXPENSE 72,034 82,945 77,724 INCOME TAX EXPENSE 28,889 31,338 29,982 ------------------------------------------------------------------------------ NET INCOME $ 43,145 $ 51,607 $ 47,742 ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Balance Sheets --------------------------------------------------------------------------
ASSETS In Thousands -------------------------------------------------------------------------- December 31, 1996 1995 --------------------------------------------------------------------------- PROPERTY, PLANT & EQUIPMENT: Property, plant and equipment in service $1,589,940 $1,418,044 Accumulated depreciation (418,296) (380,585) --------------------------------------------------------------------------- Net plant in service 1,171,644 1,037,459 Construction work in progress 17,529 14,515 --------------------------------------------------------------------------- Total property, plant & equipment - net 1,189,173 1,051,974 --------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 37,124 9,839 Restricted cash 5,800 - Assets from risk management activities 16,595 - Accounts receivable from gas marketing 388,737 - Accounts receivable from PG&E 5,859 7,021 Accounts receivable - gas transportation 22,241 27,697 Allowance for uncollectible accounts (1,836) - Gas supply restructuring costs recoverable - 30,531 Deferred income taxes 2,478 - Inventories (at average cost) 8,968 7,687 Prepayments and other current assets 12,842 10,216 --------------------------------------------------------------------------- Total current assets 498,808 92,991 --------------------------------------------------------------------------- DEFERRED CHARGES: Income tax related 26,016 26,740 Goodwill, net of amortization 23,366 - Deferred charge on reacquired debt 14,859 16,064 Unamortized debt expense 5,229 4,754 Regulatory assets 15,687 10,338 Other 2,156 3,344 --------------------------------------------------------------------------- Total deferred charges 87,313 61,240 --------------------------------------------------------------------------- TOTAL ASSETS $1,775,294 $1,206,205 ---------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Consolidated Balance Sheets -------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES In Thousands -------------------------------------------------------------------- December 31, 1996 1995 -------------------------------------------------------------------- CAPITALIZATION: Common stock - no par value; 1,000 shares authorized, issued and outstanding $ 85,474 $ 85,474 Additional paid-in capital 242,000 182,000 Foreign currency translation adjustment (183) - Reinvested earnings 183,211 150,066 -------------------------------------------------------------------- Total common stock equity 510,502 417,540 Long-term debt 683,049 592,471 -------------------------------------------------------------------- Total capitalization 1,193,551 1,010,011 -------------------------------------------------------------------- CURRENT LIABILITIES: Long-term debt - current portion 384 355 Payable to PG&E 9,483 8,003 Accounts payable from gas marketing 386,552 - Accrued liabilities and other accounts payable 28,377 27,527 Accrued taxes 2,646 8,646 Deferred income taxes - 1,716 Reserve for pending regulatory issues - 23,201 Deferred revenue 861 - -------------------------------------------------------------------- Total current liabilities 428,303 69,448 -------------------------------------------------------------------- DEFERRED CREDITS: Deferred income taxes 134,635 117,353 Other 18,805 9,393 Commitments and contingencies (Note 9) - - -------------------------------------------------------------------- Total deferred credits 153,440 126,746 -------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $1,775,294 $1,206,205 --------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Statements of Consolidated Common Stock Equity ------------------------------------------------------------------------ In Thousands ------------------------------------------------------------------------
Reinvested Total Additional Earnings and Common Common Paid-in Foreign Stock Stock Capital Currency Equity -------- --------- ------------ ---------- Balance December 31, 1993 $ 85,474 $132,000 $112,717 $330,191 Net income - 1994 - - 47,742 47,742 Capital contribution from PG&E - 50,000 - 50,000 Dividend paid to PG&E - - (22,000) (22,000) ----------------------------------------------------------------------------- Balance December 31, 1994 85,474 182,000 138,459 405,933 Net income - 1995 - - 51,607 51,607 Dividend paid to PG&E - - (40,000) (40,000) ------------------------------------------------------------------------------ Balance December 31, 1995 85,474 182,000 150,066 417,540 Net income - 1996 - - 43,145 43,145 Capital contribution from PG&E - 60,000 - 60,000 Dividend paid to PG&E - - (10,000) (10,000) Foreign Currency Translation - - (183) (183) ------------------------------------------------------------------------------ Balance December 31, 1996 $ 85,474 $242,000 $183,028 $510,502 ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Statements of Consolidated Cash Flows ------------------------------------------------------------------------ In Thousands ------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994 ------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 43,145 $ 51,607 $ 47,742 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 42,602 35,058 40,606 Deferred income taxes 13,812 9,127 38,816 Gas supply restructuring costs 30,531 39,580 30,770 Allowance for equity funds used during construction (241) (1,399) (1,016) Changes in operating assets and liabilities (net of assets and liabilities acquired): Accounts receivable (144,379) (1,206) (4,824) Accounts payable and accrued liabilities 138,292 (2,021) (18,889) Income tax receivable from PG&E - - 62,537 Payable to PG&E 1,740 (7,487) 6,630 Accrued taxes (6,164) 1,269 413 Regulatory accruals (23,201) 20,109 (36,137) Other working capital (1,382) (1,917) (1,802) Other - net 1,546 (5,177) (40) -------------------------------------------------------------------------- Net cash provided by operating activities 96,301 137,543 164,806 -------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of State Gas Pipeline (136,227) - - Acquisition of Energy Source, Inc. (23,151) - - Construction expenditures (34,204) (76,143) (51,556) Purchase of risk management assets (646) - - Allowance for borrowed funds used during construction (256) (1,167) (878) -------------------------------------------------------------------------- Net cash used in investment activities(194,484) (77,310) (52,434) -------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of PG&E notes, net - - (47,000) Repayment of long-term debt (65,555) (801,611) (11,219) Long-term debt issued 141,850 715,662 25,000 Long-term debt issuance costs (827) (5,241) (281) Construction financing - 10,030 6,964 Payments for swap termination - (3,898) - Equity contribution from PG&E 60,000 - - Dividend paid to PG&E (10,000) (40,000) (22,000) -------------------------------------------------------------------------
Net cash provided by (used in) financing activities 125,468 (125,058) (48,536) --------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 27,285 (64,825) 63,836 CASH AND CASH EQUIVALENTS AT JANUARY 1 9,839 74,664 10,828 --------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT DECEMBER 31 $ 37,124 $ 9,839 $ 74,664 ----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Note 1: Summary of Business and Significant Accounting Policies Corporate Restructuring - Effective January 1, 1997, Pacific Gas Transmission Company ("PGT") became an indirect wholly owned subsidiary of PG&E Corporation. PG&E Corporation, incorporated in California in 1995, became the holding company for PGT's former parent company, Pacific Gas & Electric Company ("PG&E"). PG&E's ownership interest in PGT and PG&E Enterprises has been transferred to PG&E Corporation. PGT's debt securities were unaffected and remain securities of PGT. Basis of Presentation - The Consolidated Financial Statements include: Pacific Gas Transmission Company Pacific Gas Transmission Company's wholly owned businesses: PGT Australia Pty Limited Pacific Gas Transmission International, Inc. PGT Queensland Pty Limited Energy Source, Inc. Pacific Gas Transmission Company and its subsidiaries are referred to herein as the "Company." The consolidated financial statements include the accounts of PGT and its wholly owned and controlled subsidiaries. All significant intercompany transactions have been eliminated. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of revenues, expenses, assets, and liabilities and disclosure of contingencies. Actual results could differ from these estimates. Business - The Company and its subsidiaries provide natural gas transmission and marketing services. Pacific Gas Transmission Company is an interstate natural gas pipeline company which constructed, owns and operates an interstate pipeline system which extends from the British Columbia - Idaho border to the Oregon - California border, traversing Idaho, Washington and Oregon. PGT's principal business is the transportation of natural gas, primarily from supplies in Canada for customers located in the Pacific Northwest, Nevada and California. PGT's customers are principally local retail gas distribution utilities, electric utilities that utilize natural gas to generate electricity, natural gas marketing companies that purchase and resell natural gas to end-use customers and utilities, natural gas producers, and industrial companies. PGT's customers are responsible for securing their own gas supplies which are delivered to PGT's system. PGT transports such supplies either to downstream pipelines, which then transport such supplies to the customers, or directly to the customers themselves. In addition, during 1996 PGT expanded its core pipeline business by purchasing a 389-mile pipeline in Australia (referred to as the PGT Queensland Gas Pipeline or the "PGTQ Pipeline") and Energy Source, Inc. ("ESI"), a natural gas marketing company headquartered in Houston, Texas with offices in the United States and Canada. (See Note 2, "Acquisitions," below, for further information.) Risk Management - Due to the changing business environment, the Company's exposure to risks associated with changes in natural gas commodity prices, interest rates, and foreign currencies is increasing. To manage these risks, PG&E Corporation has adopted a price risk management policy which is also applicable to PGT and its subsidiaries and established an officer- level price risk management committee. PG&E Corporation's price risk management committee oversees implementation of the policy, approves each price risk management program, and monitors compliance with the policy. These price risk management activities include the use of derivatives. Gains and losses on derivatives used for hedging purposes are intended to offset losses and gains on the underlying hedged item. Under hedge accounting, changes in the market value of these transactions are deferred and recognized as an addition to the income or expense of the underlying instrument upon completion of the underlying transaction. All 1996 transactions were accounted for using hedge accounting. (See Note 6, "Financial Instruments," below, for further information.) Assets from risk management activities are primarily cash on deposit with established brokerage firms and counterparties. The Company had $16.6 million in assets from risk management at December 31, 1996. The majority of the Company's financing is done on a fixed-rate basis, thereby substantially reducing the financial risk associated with variable interest rate borrowings. The Company has used financial instruments to minimize the effects of fluctuations in interest rates on certain of its debt. (See Note 5, "Long-term Debt" and Note 6, "Financial Instruments," below.) The Company also uses a number of other techniques to mitigate its financial risk, including the purchase of commercial insurance, and the maintenance of systems of internal control. The extent to which these techniques are used depends on the risk of loss and the cost to employ such techniques. These techniques do not eliminate financial risk to the Company. Regulation - PGT's rates and charges for its natural gas transportation business are regulated by the Federal Energy Regulatory Commission ("FERC" or "Commission"). PGT's consolidated financial statements reflect the ratemaking policies of the Commission in conformity with generally accepted accounting principles for rate-regulated enterprises in accordance with Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." This statement allows PGT to record certain regulatory assets and liabilities which would be included in future rates and would not be recorded under generally accepted accounting principles for nonregulated entities. Regulatory assets and liabilities represent future probable increases or decreases, respectively, in revenues to be recorded by PGT associated with certain costs to be collected from customers or amounts to be refunded to customers, respectively, as a result of the ratemaking process. Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 prescribes general standards for the recognition and measurement of impairment losses. In addition, it requires that regulatory assets continue to be probable of recovery in rates, rather than only at the time the regulatory asset is recorded. Regulatory assets currently recorded would be written off or reserved against if recovery is no longer probable. During 1996, in compliance with the adoption of this standard, PGT recorded a reserve of $8.4 million ($5.2 million net of tax) against deferred relocation costs associated with the transfer of its corporate headquarters from San Francisco to Portland, Oregon. Management expects to pursue recovery of these costs in future rate proceedings. The following regulatory assets and liabilities were reflected in PGT's Consolidated Balance Sheets:
In Thousands ------------------------------------------------------------------ December 31, 1996 1995 ------------------------------------------------------------------ Regulatory Assets: Gas supply restructuring costs recoverable $ - $30,531 Deferred charge on reacquired debt 14,859 16,064 Income taxes recoverable 26,016 26,740 Deferred corporate relocation costs 8,377 7,403 Fuel tracker 5,977 1,467 Pension costs 4,560 - Postretirement benefit costs 2,750 2,912 Other - 23 ------------------------------------------------------------------ Total $62,539 $85,140 ------------------------------------------------------------------ Regulatory Liabilities: Revenues subject to refund $ - $23,201 Other 1,010 415 ------------------------------------------------------------------ Total $ 1,010 $23,616 ------------------------------------------------------------------
Excluding the deferred corporate relocation costs, for which a reserve has been established, substantially all of PGT's net regulatory assets are included in rates charged to customers and are being amortized over future periods. Cash Equivalents - Cash equivalents (stated at cost, which approximates market) include working funds and short-term investments with original maturities of three months or less. At December 31, 1996, restricted cash of $5.8 million consisted of certificates of deposit held in escrow as collateral for ESI's outstanding letters of credit. Restricted cash is not included as a cash equivalent in the accompanying consolidated statements of cash flows. Property, Plant and Equipment - The costs of utility plant additions for PGT, including replacements of plant retired, are capitalized. Costs include labor, materials, construction overhead, and an allowance for funds used during construction ("AFUDC"). AFUDC is the estimated cost of debt and equity funds used to finance regulated plant additions. AFUDC rates, calculated in accordance with FERC authorizations, are based upon the last approved equity rate and an imbedded rate for borrowed funds. The equity component of AFUDC is included in other income and the borrowed funds component is recorded as a reduction of interest expense. Costs of repairing property and replacing minor items of property are charged to maintenance expense. The original cost of plant retired plus removal costs, less salvage, is charged to accumulated depreciation upon retirement of plant in service. For financial reporting purposes, PGT's utility plant in service is depreciated using a straight-line remaining-life method as approved by the FERC. Upon acquisition, the assets of the PGTQ Pipeline were recorded at their fair value. Subsequent asset additions are recorded at cost. For financial reporting purposes, these assets are depreciated over their estimated useful lives using a straight-line method. Goodwill - Goodwill consists of the cost in excess of net assets acquired for ESI which is being amortized on a straight-line basis over 15 years. Unamortized Debt Expense and Gains or Losses on Reacquired Debt - PGT's debt issuance costs are amortized over the lives of the issues to which they pertain. Unamortized debt cost and gains or losses associated with refinanced debt are amortized over the life of the new debt consistent with PGT's ratemaking treatment. Revenues - PGT's operating revenues are recorded as services are provided based on rate schedules approved by the FERC (see Note 3, "Natural Gas Matters," and Note 9, "Commitments and Contingencies," below). Pursuant to FERC policy, PGT is allowed to place into effect rates related to rate proceedings, subject to refund. Management estimates amounts subject to refund to customers and defers these amounts in a Reserve for Pending Regulatory Issues on the Consolidated Balance Sheet. Income Taxes - The Company is included in the consolidated federal income tax return filed by PG&E. For financial reporting purposes, income taxes are allocated to PGT and its subsidiaries on a modified separate return basis, to the extent such taxes or tax benefits can be utilized by PG&E in the consolidated return. Foreign Currency Translation - Financial statements for foreign subsidiaries are translated into United States dollars at year-end exchange rates for assets and liabilities and weighted average exchange rates for revenues and expenses. Any resulting translation adjustment is recorded as a component of common stock equity. Statements of Consolidated Cash Flows - Cash paid for interest, net of amounts capitalized, totaled $40.9 million in 1996, $49.9 million in 1995, and $38.6 million in 1994. Payments to PG&E for income taxes totaled $25.6 and $29.8 million in 1996 and 1995, respectively. Cash received from PG&E for income taxes totaled $79.2 million in 1994. In 1994, PG&E converted $50 million of its Gas Supply Restructuring (GSR) Notes to additional paid-in capital of the Company. For purposes of the Statements of Consolidated Cash Flows, this has been treated as a noncash transaction. Note 2: Acquisitions Building upon its expertise in the natural gas industry, PGT is expanding its core pipeline business by pursuing domestic and international business development opportunities which focus on the midstream segment of the natural gas industry. The midstream segment includes the gathering, processing, storing, transporting, and marketing of natural gas. It excludes exploration and production of natural gas and local distribution to customers. Consistent with this strategy, during 1996, PGT established the PGT Queensland Unit Trust ("PGT Trust"), created under the laws of Australia, to hold all of the assets comprising the Queensland State Gas Pipeline from the Government of the State of Queensland, Australia. The pipeline is referred to as the PGT Queensland Gas Pipeline ("PGTQ Pipeline"). The PGT Trust is owned by two wholly owned subsidiaries of PGT - Pacific Gas Transmission International, Inc.("PGT International"), a California corporation, and PGT Queensland Pty Limited ("PGT Queensland"), an Australian corporation. PGT Queensland operates the pipeline. In addition, PGT also established another wholly owned subsidiary, PGT Australia Pty Limited ("PGT Australia"), an Australian corporation, to pursue new business development opportunities in Australia and to serve as trustee of the PGT Trust. The pipeline, which began operations in 1990, extends 389-miles from Wallumbilla to Gladstone and Rockhampton in Queensland, Australia. The pipeline was operated by the Government of the State of Queensland to provide natural gas transportation service to customers in its vicinity. PGT Queensland intends to continue such operations. The purchase price, including related stamp duty taxes and acquisition costs, for the PGTQ Pipeline was approximately $136 million. The acquisition of the PGTQ Pipeline by the PGT Trust was financed through a combination of equity contributions from PGT and aggregate loan proceeds of $92 million drawn under recourse and non-recourse loan agreements (see Note 5, "Long-term Debt," and Note 6, "Financial Instruments," below). The PGTQ Pipeline had assets of approximately $138 million at December 31, 1996 and revenues of approximately $6 million for the six months ended December 31, 1996. During 1996, PGT also acquired ESI's gas marketing operations in the United States and Canada. ESI has offices in Houston, Calgary, Tulsa, Pittsburgh and New York with a customer base in the Northeast and Midwest regions of the United States. The purchase price, paid in cash, was approximately $23 million plus working capital. PGT plans on continuing the marketing operations of ESI. ESI had assets of approximately $463 million at December 31, 1996 and revenues of approximately $281 million for the one month ended December 31, 1996. The acquisitions of the PGTQ Pipeline and ESI were accounted for by the purchase method. The PGTQ Pipeline's results of operations have been included in the consolidated results of operations beginning July 1, 1996, and ESI's results have been included in the Company's results of operations beginning December 1, 1996. The following unaudited pro forma summary combines the consolidated results of operations of PGT with the PGTQ Pipeline and ESI as if their acquisitions had occurred at the beginning of 1995. This information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the beginning of 1995, nor are they necessarily indicative of future operating results. (Dollars in Millions)(unaudited) 1996 1995 --------------------------------- ------- ------ Total operating revenues $ 1,403 $ 449 Operating income $ 127 $ 130 Net income $ 46 $ 51 The significant pro forma increase in operating revenues reflects the impact of ESI's gas marketing activities; these activities were significantly higher in 1996 than in 1995 due to ESI's efforts to increase sales volumes. Note 3: Natural Gas Matters Until November 1993, when Order 636 was implemented, PGT purchased all of its Canadian natural gas supply for resale to PG&E from A&S, pursuant to a gas sales agreement between A&S and PGT and a sales service agreement between PGT and PG&E, both of which extended through the year 2005. A&S had commitments to purchase minimum quantities of natural gas from over 200 Canadian gas producers under various long-term contracts, most of which extended through 2005. As a result of the regulatory restructuring pursuant to Order 636, PGT, PG&E, A&S and various Canadian gas producers selling gas to A&S entered into agreements (collectively, the "Decontracting Plan") under which PGT terminated its gas sales agreement with A&S, its sales service agreement with PG&E, and A&S terminated its contracts with the gas producers. Under the Decontracting Plan, in return for settlement payments of $210.1 million, the producers released A&S, PGT, and PG&E from any claims they may have had that resulted from the termination of the former arrangements, as well as any claims for losses arising from alleged historical shortfalls in gas taken by A&S. In addition to the producers' settlement payments, PGT paid A&S $29.6 million for costs incurred by A&S related to both the termination of the sales agreement between A&S and PGT, and the implementation of the Decontracting Plan. The FERC approved the recovery of $168.5 million of the total $239.7 million of gas supply restructuring costs ("GSR") incurred by PGT through a transition cost recovery mechanism ("TCRM"). The difference of $71.2 million was reflected as a net charge to expense from 1992 through 1995. Recovery of approved GSR costs began in 1993, with PGT completing recovery of such costs in 1996 with the collection of the remaining $30.5 million. Also, in 1996, the CPUC sought judicial review of the FERC's orders in Public Utilities Commission of the State of California v. FERC, D.C. Circuit Case No. 96-1022. However, in the settlement of the 1994 rate case, discussed in Note 9, "Commitments and Contingencies," below, the CPUC agreed to withdraw its petition for judicial review in consideration for PGT's agreement to reduce PG&E's direct bill by $3.18 million and refund this amount to PG&E. The CPUC moved to withdraw its petition and, on October 28, 1996, the Court granted the withdrawal. On November 7, 1996, PGT refunded the $3.18 million to PG&E. This aspect of the settlement is the subject of one of the pending rehearing applications discussed above. PGT does not expect the FERC to modify its settlement as a result of this issue. Note 4: Related Party Transactions The Company invests its available cash balances with, or borrows from, PG&E on an interim basis pursuant to a pooled cash management arrangement. The principal amount of this investment is payable upon demand. The balance invested with PG&E at December 31, 1996 and 1995 was $9.2 million and $9.6 million, respectively (included in "Cash and Cash Equivalents" on the Consolidated Balance Sheets), at an interest rate of 5.4 percent and 5.8 percent, respectively. The interest rate on these cash investments or borrowings averaged 5.4 percent in 1996, 6.6 percent in 1995, and 5.0 percent in 1994. The related interest income was $0.3 million in 1996, $0.9 million (net of $0.6 million interest expense) in 1995, and $3.1 million in 1994. PG&E performs certain administrative services on behalf of PGT for which it has charged PGT approximately $0.2 million in 1996, $0.3 million in 1995, and $0.5 million in 1994. Such amounts are included in PGT's operating expenses. Note 5: Long-term Debt
In Thousands ------------------------------------------------------------------------ December 31, 1996 1995 ------------------------------------------------------------------------ PGT 1995 Refinancing Senior Unsecured Notes, due 2005 $249,792 $249,767 Senior Unsecured Debentures, due 2025 147,545 147,458 Medium Term Notes, due 2000 to 2003 70,000 70,000 Commercial Paper 108,087 108,607 ------------------------------------------------------------------------ Subtotal 575,424 575,832 PGT Australia, due 2001 90,850 - PGT Capital Lease Obligation 17,159 16,994 Current Portion of PGT Capital Lease Obligation (384) (355) ------------------------------------------------------------------------ Long-term debt included in capitalization $683,049 $592,471 ------------------------------------------------------------------------
The following summarizes the annual maturities of long- term debt for the next five years: Year ending December 31, In Thousands ---------------------------------------- 1997 $ 384 1998 $ 419 1999 $ 457 2000 $ 139,893 2001 $ 91,393 1995 Refinancing - On May 31, 1995, PGT completed the sale of $400 million of debt securities through a $700 million shelf registration under the Securities Act of 1933. PGT issued $250 million of 7.10 percent 10-year senior unsecured notes due June 1, 2005, and $150 million of 7.80 percent 30-year senior unsecured debentures due June 1, 2025. The 10-year notes were issued at a discount to yield 7.11 percent and the 30-year debentures were issued at a discount to yield 7.95 percent. The 30-year debentures are callable after June 1, 2005, at the option of PGT. On May 31, 1995, PGT also issued $200 million of commercial paper, of which $108 million was outstanding as of December 31, 1996, at an average rate of 5.64 percent. The average balance during 1996 was $78.3 million at an average rate of 5.8 percent. The commercial paper is backed by a $200 million revolving bank credit agreement which expires May 30, 2000. This agreement was amended during 1996 to allow for a total of $70 million in letters of credit for PGT or its subsidiaries out of the $200 million. The annual fee for this facility is $200,000 plus a fee based on the amount of outstanding letters of credit. In accordance with the credit agreement, PGT must not permit the ratio of total debt to total capitalization to exceed 70 percent and must not permit its tangible net worth to be less than $325 million. There were no letters of credit outstanding under this agreement at December 31, 1996. The commercial paper is classified as long-term debt based upon the availability of committed credit facilities expiring in the year 2000 and management's intent to maintain such amounts in excess of one year. At December 31, 1996, PGT was in compliance with all terms and conditions of the credit agreement and the bond indentures. Proceeds from the issuance of the notes, debentures and commercial paper in May 1995, were used to retire $600 million of long-term debt which was then outstanding. On July 5, 1995, PGT completed the sale of $70 million of medium-term notes under the shelf registration. The notes were issued at an average maturity of 6.2 years at an average yield of 6.76 percent. Proceeds from the issuance of the notes were used to repay $70 million of outstanding commercial paper. 1993 Bank Financing - PGT secured long-term debt financing from a consortium of banks pursuant to a loan agreement dated April 30, 1993. Under the loan agreement, PGT borrowed $673 million to finance the pipeline expansion and the existing system. The debt was guaranteed by PG&E. The weighted average rate of interest on this loan during 1995, 1994 and 1993 was 8 percent, 6.7 percent and 4.1 percent, respectively. The interest rate on the debt (which ranged from 4 percent to 8.4 percent in 1994 and 1995) was at a floating rate subject to periodic determination in accordance with the terms of the loan agreement and varied depending on the nature and the length of the borrowings, but was generally tied to the bank's base rate, domestic certificate of deposit rates, or the applicable London Interbank Offered Rates (LIBOR) for maturities ranging from one to twelve months. From March through July 1994, PGT executed a series of interest rate swap transactions which effectively converted $639 million of the floating rate debt to a fixed rate. The remaining debt outstanding at December 31, 1994, which represented the principal payments due in 1995, was fixed by utilizing options available to PGT under the loan agreement. The swap agreements were terminated in 1995, concurrent with the refinancing of the bank debt described above. As a result of decreases in interest rates in 1995, PGT incurred a $3.9 million net loss from the early termination of the swap agreements, which was deferred and is being amortized over the average life of the new debt. Capital Lease Obligation - PGT leases its corporate office building in Portland, Oregon under a 20-year lease terminating in the year 2015. Payments under the lease total $1.9 million per year and approximate the debt service payments on the debt issued to finance the $17 million cost of the building. In addition, PGT is obligated to pay operating costs, taxes and insurance for the building. PGT does not have the option to extend the lease beyond twenty years, but may at any time purchase the building for approximately the balance of the debt outstanding used to finance the building. PGT must purchase the building at the end of the lease term. Based on the provisions of the lease agreement, PGT accounts for the obligation as a capital lease. The total future commitments are $35.3 million with a principal portion of $17.2 million. The effective interest rate inherent in the lease is 8.8 percent. PGT Australia - The non-recourse loan agreement between PGT Australia, in its capacity as trustee of the PGT Trust, and a group of lenders, provided for loans denominated in both United States and Australian dollars totaling approximately $60 million. Repayment of amounts outstanding under the non-recourse agreement is secured by a first mortgage and first security interest in substantially all of the assets held by the PGT Trust (with certain limited exceptions), but is otherwise non-recourse to PGT Australia, PGT International, PGT Queensland, and PGT. PGT Australia, in its trustee capacity, also entered into a recourse loan agreement with a group of lenders providing for loans in U.S. dollars in the amount of $40 million. Repayments of amounts outstanding under the recourse agreement are not secured by mortgage or security interests in the assets of the PGT Trust. In connection with this financing, PG&E, the parent of PGT at that time, entered into a Capital Infusion Agreement with PGT under which PG&E has agreed to make additional capital contributions to PGT, under certain circumstances, in an aggregate amount not exceeding $40 million. PGT has assigned its rights under the Capital Infusion Agreement to the facility agent for the lenders under the Recourse Facility Agreement. Equity contributions made by PG&E during 1996 were made independent of the Capital Infusion Agreement. In the event of a default by PGT Australia on its obligations under the Recourse Facility Agreement, the facility agent may cause PG&E to pay directly to the Facility Agent, as agent for and on behalf of the lenders under the Recourse Facility Agreement, all amounts due thereunder up to PG&E's maximum obligation under the Capital Infusion Agreement. In certain circumstances, an unconditional guaranty by PGT may be substituted for the Capital Infusion Agreement as credit support for the PGT Trust's obligations under the recourse agreement. In addition, PGT has issued a guarantee in favor of the Facility Agent with respect to all interest, fees, expenses, and other obligations under the recourse agreement, other than principal, in an aggregate amount not to exceed $2 million. PGT International has guaranteed the repayment in full by the PGT Trust of all amounts payable under the recourse agreement. ESI - During 1996, ESI established a $35 million line of credit which also supports its letters of credit with vendors. During 1996, there were no draws on this line of credit. At December 31, 1996, total outstanding letters of credit were $19.0 million with maturities ranging from one to four months. These letters of credit were issued under ESI's separate credit agreements which have been subsequently terminated. The Company has amended its bank credit agreement to allow for a total of $70 million in letters of credit to be issued for PGT or its subsidiaries. Fair Value - At December 31, 1996, the Company's primarily fixed rate long-term debt had a carrying value of $683.4 million and had an estimated fair market value of $691.9 million. At December 31, 1995, the Company's primarily fixed rate long-term debt had a carrying value of $592.8 million and had an estimated fair market value of $630.2 million. The estimated fair value of long-term debt was based upon quoted market prices. Note 6: Financial Instruments General - The Company uses certain financial derivative instruments in its risk management activities. Derivative instruments used in hedging activities are matched to existing assets, liabilities, or transactions with the objective of mitigating financial exposure to changes in the price of energy commodities and interest rates. Gains and losses on derivative instruments offset losses and gains on the hedged item. Financial derivatives involve, to varying degrees, credit and market risk. With regard to credit risk, the Company may be exposed to loss in the event of non-performance by a counterparty. The credit risk of futures contracts, which are traded on the NYMEX, is limited due to the daily cash settlement of the net change in the value of open contracts and because of NYMEX procedures. The potential credit risk for swap agreements is substantially higher, as it depends on the type of counterparties involved, since daily cash settlements are not required. The Company maintains credit policies with regard to its counterparties that management believes significantly minimize overall credit risk. These policies include a thorough review of the financial statements of counterparties on a regular basis and, when necessary, require that collateral such as letters of credit be maintained. In addition, the Company sets limits as to the level of exposure with each counterparty. With regard to market risk, the possibility of a change in commodity prices, interest rates, and foreign exchange rates will cause the value of a financial instrument to decrease or its obligations to become more costly to settle. In hedging activities, when derivatives are used for the purpose of risk management, the Company's exposure to market risk is limited because the gains and losses on the derivatives offset the losses and gains on the asset, liability, or transaction being hedged. Commodity Price Contracts - ESI generally attempts to balance its fixed-price physical and financial purchase and sales contracts in terms of contract volumes and the timing of performance and delivery obligations. However, net open positions often exist or are established due to the origination of new transactions and ESI's assessment of, and response to, changing market conditions. Additionally, ESI will at times create a net open position or allow a net open position to continue when it believes, based upon competitive information gained from its energy marketing activities, that future price movements will be consistent with its net open position. To the extent ESI has a net open position, it is exposed to the risk that fluctuating market prices may adversely impact its financial position or results of operations. The Company closely monitors and manages its exposure to market risk. Policies are in place that are designed to limit the Company's exposure. Procedures exist which allow senior management to monitor ESI's commitments and positions on a daily basis. The following table sets forth ESI's contract amount and term for all instruments held for price risk management purposes at December 31, 1996:
(Dollars in Notional Estimated Fixed Price Deferred Thousands) Amounts Fair Maximum ---------------- Gain Description (MMcf) Value Term Payor Receiver (Loss) ----------- -------- --------- ------- ----- -------- -------- Fixed-price swaps: 89,920 $ (565) 12 mos. 25,720 64,200 - Basis Swaps: 59,728 $ (99) 21 mos. 15,613 44,115 - Options: 37,810 $(2,061) 12 mos. 18,740 19,070 $ 4,429 Futures: 26,730 $ 4,040 17 mos. 18,790 7,940 $(3,781)
The market price used to value these transactions reflects management's best estimate of market prices considering various factors underlying the commitments. Interest Rate Swap Agreements - In connection with the financing of the acquisition of State Gas Pipeline's assets, PGT Australia, in its capacity as trustee of the PGT Queensland Unit Trust, entered into interest rate swap agreements with domestic and international banks, under which the underlying LIBOR or Australian Bank Bill ("BBSW") components of the floating rate interest payment obligations were swapped for fixed rate interest payment obligations as described below:
(Dollars in Millions) December 31, 1996 ----------------------------------------------------------------------------- Deferred Notional Effective Maturity Fixed Floating Gain Type Amounts Date Date Rate Index (Loss) ---------- -------- --------- -------- ----- -------- -------- Fixed for Float US$22 7/1/96 7/3/01 6.684% 6mLIBOR $(0.4) Fixed for Float US$45 7/1/96 7/3/01 6.700% 6mLIBOR $(0.9) Fixed for Float A$13 7/2/96 7/2/01 8.718% 6mBBSW $(0.9)
PGT Australia's payment obligations for the swap agreements related to the recourse debt are guaranteed by PGT up to an amount not exceeding US$9 million. Note 7: Income Taxes The significant components of income tax expense were:
In Thousands -------------------------------------------------------------------------- Years ended December 31, 1996 1995 1994 -------------------------------------------------------------------------- Current - Federal $13,821 $18,832 $(3,792) - State 1,282 3,404 (5,017) -------------------------------------------------------------------------- Total current 15,103 22,236 (8,809) -------------------------------------------------------------------------- Deferred - Federal 12,314 9,152 29,569 - State 1,497 (25) 9,247 -------------------------------------------------------------------------- Total deferred 13,811 9,127 38,816 --------------------------------------------------------------------- Investment tax credit amortization (25) (25) (25) -------------------------------------------------------------------------- Total income tax expense $28,889 $31,338 $29,982 --------------------------------------------------------------------------
The differences between reported income taxes and tax amounts determined by applying the federal statutory rate of 35 percent to income before income tax expense were:
In Thousands ---------------------------------------------------------------- Years ended December 31, 1996 1995 1994 ---------------------------------------------------------------- Expected federal income tax expense $25,212 $29,031 $27,203 Increase (decrease) in income tax expense resulting from: State income taxes, net of federal benefit 2,436 2,198 2,749 Non-deductible foreign losses 745 - - Allowance for equity funds used during construction 364 22 (113) Other 132 87 143 ---------------------------------------------------------------- Total income tax expense $28,889 $31,338 $29,982 ----------------------------------------------------------------
The significant components of net deferred income tax liabilities were as follows:
In Thousands --------------------------------------------------------------- December 31, 1996 1995 --------------------------------------------------------------- Deferred income tax assets: Deferred income taxes - current reserve for regulatory issues $ 2,478 $ 10,042 --------------------------------------------------------------- Deferred income tax liabilities: Deferred income taxes - current Gas supply restructuring costs $ - $ (11,758) --------------------------------------------------------------- Total deferred income taxes - current 2,478 (1,716) --------------------------------------------------------------- Deferred income taxes - noncurrent Plant in service (126,601) (109,242) Debt financing costs (5,725) (6,187) Other (2,309) (1,924) ---------------------------------------------------------------- Total deferred income taxes - noncurrent (134,635) (117,353) ---------------------------------------------------------------- Total deferred income tax liabilities (134,635) (129,111) ----------------------------------------------------------------- Net deferred income taxes $(132,157) $(119,069) ----------------------------------------------------------------- Classification of net deferred income taxes: Included in current assets $ 2,478 $ - Included in current liabilities - (1,716) Included in deferred credits (134,635) (117,353) ----------------------------------------------------------------- Net deferred income taxes $(132,157) $(119,069) -----------------------------------------------------------------
Note 8: Employee Benefit Plans Retirement Plan - Until January 1, 1996, through participation in PG&E's multiple-employer defined benefit pension plan, PGT provided a noncontributory defined benefit pension plan covering substantially all employees. The retirement benefits under this plan were based on years of service and the employee's base salary. Effective as of January 1, 1996, plan assets and liabilities attributable to PGT were allocated to a new separate PGT defined benefit pension plan. The benefits under the new PGT plan are substantially the same as those provided under the PG&E plan. PGT realized a liability of $3.9 million as a result of the allocation of plan assets and liabilities from the PG&E combined plan to the PGT plan. In conformity with accounting for rate-regulated enterprises, regulatory adjustments have been recorded for the difference between utility pension cost determined for accounting purposes and that for ratemaking, which is based on a funding approach. PGT's policy is to fund each year not more than the maximum amount deductible for federal income tax purposes and not less than the minimum legal funding requirement. Plan assets consist primarily of common stock, fixed-income securities, and cash equivalents. Prior to 1996, the actuarial determination of net pension expense for the retirement plan was performed on the PG&E consolidated parent company level. As such, PGT does not have requisite information necessary to present the 1995 and 1994 disclosures for pension expense as required by SFAS NO. 87, "Employers' Accounting for Pensions." Using the projected unit credit actuarial cost method, net pension expense consisted of the following components:
In Thousands ------------------------------------------------------ Years ended December 31, 1996 1995 1994 ----------------------------- ------ ------- ------ Service cost $ 1,583 N/A N/A Interest cost 1,827 N/A N/A Return on plan assets (4,492) N/A N/A Net amortization and deferral 1,735 N/A N/A ------------------------------------------------------ SFAS No. 87 pension cost 653 N/A N/A Deferral of costs (653) N/A N/A Amortization of regulatory asset - N/A N/A ------------------------------------------------------ Net pension cost $ - N/A N/A ------------------------------------------------------
The following table reconciles the plan's funded status to the pension liability recorded on the Consolidated Balance Sheet: In Thousands -------------------------------------------------------------- Years ended December 31, 1996 1995 ------------------------------- ------- ------- Vested benefit obligation $19,398 $16,883 --------------------------------------------------------------- Accumulated benefit obligation $21,020 $19,159 --------------------------------------------------------------- Funded status as of December 31: Plan assets at fair value $32,379 $28,239 Projected benefit obligation for service rendered to date 27,259 26,017 --------------------------------------------------------------- Funded status 5,120 2,222 Unrecognized net gain (10,489) (6,816) Unrecognized net liability at transition 534 605 Unrecognized prior service costs 286 81 --------------------------------------------------------------- Total deferred pension liability $(4,549) $(3,908) --------------------------------------------------------------- Total deferred regulatory asset $ 4,560 $ - --------------------------------------------------------------- Discount rate 7.50% 7.25% -------------------------------------------------------------- Expected long-term return on plan assets 9.00% 9.00% -------------------------------------------------------------- Rate for compensation increases 5.00% 5.00% --------------------------------------------------------------
Savings Fund Plan - PGT provides a defined contribution pension plan to which employees with at least six months to one year of service may make contributions of up to 15 percent of their covered compensation on a pretax or after-tax basis. These contributions, up to a maximum of 6 percent of covered compensation, are eligible for matching PGT contributions at specified rates. These benefits were provided in conjunction with PG&E through December 31, 1994, and through PGT's separate stand-alone plans effective January 1, 1995. The cost of PGT's contributions was charged to expense and to plant in service, and totaled $0.6 million, $0.6 million and $0.5 million for 1996, 1995 and 1994, respectively. Postretirement Benefits Other Than Pensions - PGT provides a contributory defined benefit medical plan for retired employees and their eligible dependents and a noncontributory defined benefit life insurance plan for retired employees. Substantially all employees retiring at or after age 55 who began employment with PGT prior to January 1, 1994, are eligible for these benefits. The medical benefits are provided through plans administered by an insurance carrier or a health maintenance organization. Certain retirees are responsible for a portion of the cost based on the past claims experience of PGT's retirees. Effective January 1, 1993, PGT adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual of the expected cost of these benefits during the employees' years of service. The assumptions and calculations involved in determining the accrual closely parallel pension accounting requirements. These costs are charged to expense and to plant in service. PGT previously recognized these benefit costs when paid and funded, which was consistent with ratemaking. In December 1992, the FERC issued a "Statement of Policy on Post-Employment Benefits Other Than Pensions" which addresses the Commission's general policy regarding the recovery of the costs of these benefits through rates. The Commission's policy provides for the recognition, as a component of cost-based rates, of allowances for prudently incurred costs of such benefits when determined on an accrual basis that is consistent with the accounting principles set forth in SFAS No. 106, subject to certain funding conditions. Additionally, the difference between the costs determined pursuant to accounting practices previously followed and SFAS No. 106 accruals may be deferred from the time SFAS No. 106 is adopted until a general rate case is filed and new rates are placed into effect that include the SFAS No. 106 cost on a full accrual basis. The regulatory asset created from the deferral of costs is to be amortized over a period not to exceed 20 years beyond the SFAS No. 106 adoption date. Amortization of the regulatory asset will be eligible for recovery in future rates. In accordance with the Commission's policy, PGT deferred $1.3 million in 1994, and $1.8 million in 1993, representing the difference between the amount accrued pursuant to SFAS No. 106 and the previous method, from January 1, 1993, when SFAS No. 106 was adopted until September 1, 1994, when such costs were reflected in rates. PGT began amortizing deferred postretirement benefit costs in September 1994. Due to regulatory treatment, adoption of SFAS No. 106 did not have a material effect on PGT's financial position, liquidity or results of operations. As required by the Commission's policy, in 1995, PGT began funding, in an interest-bearing escrow account, the SFAS No. 106 revenues collected in rates. The amount funded in 1995, net of benefit payments, totaled $2.2 million and was invested in three-month U.S. Treasury bills. Once PGT's rates in the 1994 rate case became final, PGT established an irrevocable trust for funding all benefit payments. The total contribution to the trust was $4.1 million in 1996, which included the transfer of funds from the escrow account related to 1995 funding. Using the projected unit credit actuarial cost method, PGT's net postretirement medical and life insurance cost, pursuant to SFAS No. 106, consisted of:
In Thousands ---------------------------------------------------------- Years ended December 31, 1996 1995 1994 ---------------------------------------------------------- Service cost $ 346 $ 432 $ 579 Interest cost 691 770 843 Return on plan assets (1) (9) (7) Amortization of transition obligation 461 461 561 Net amortization and deferral (168) (94) - ---------------------------------------------------------- Actuarial postretirement benefit cost 1,329 1,560 1,976 Deferral of costs - - (1,315) Amortization of regulatory asset 162 162 54 ---------------------------------------------------------- Net postretirement benefit cost $1,491 $1,722 $ 715 ---------------------------------------------------------
The following table reconciles the medical and life insurance plans' funded status to the postretirement benefit liability recorded on the Consolidated Balance Sheet: In Thousands ----------------------------------------------------------- December 31, 1996 1995 ------- ------- Accumulated postretirement benefit obligation: Retirees $(4,381) $(4,313) Other fully eligible participants (2,065) (2,018) Other active plan participants (3,594) (3,730) ----------------------------------------------------------- Total accumulated postretirement benefit obligation (10,040) (10,061) Plan assets at market value 4,123 115 ----------------------------------------------------------- Accumulated postretirement benefit obligation in excess of plan assets (5,917) (9,946) Unrecognized transition obligation 7,383 7,844 Unrecognized net gain (3,467) (2,871) ----------------------------------------------------------- Accrued postretirement liability $(2,001) $(4,973) -----------------------------------------------------------
In accordance with SFAS No. 106, PGT elected to amortize the estimated transition obligation at January 1, 1993, of approximately $11.2 million over 20 years beginning in 1993. The amortization in 1996 and 1995 was based upon a revised estimated transition obligation of $8.3 million. The actuarial assumptions used in 1996 and 1995 to determine the benefit obligations and costs for postretirement benefits other than pensions include a weighted average discount rate of 7.25 percent and 7.00 percent, respectively; and for both years, a weighted average expected long-term rate of return on plan assets of 8.00 percent and a rate of increase in future compensation levels of 4.00 percent. The assumed health care cost trend rate in 1996 is approximately 10 percent, trending down to an ultimate rate in 2005 of approximately 6 percent. The effect of a one-percentage-point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation at December 31, 1996, by approximately $1.3 million and the 1996 annual aggregate service and interest costs by approximately $0.2 million. Note 9: Commitments and Contingencies Capital Requirements - PGT continues to require capital for additions to its facilities and to maintain and enhance the efficiency and reliability of existing transmission facilities. Requirements for these purposes, including AFUDC debt and equity, were $34.6 million for 1996. PGT's capital requirements for 1997 are estimated to be $57.6 million. The $23.0 million increase in projected capital expenditures in 1997 compared with actual expenditures in 1996 is primarily due to carryover items and the cost to replace existing turbines with high efficiency gas turbine units. In addition, capital expenditures related to system expansions, maintenance and new projects for PGT Queensland/PGT Australia and ESI are estimated to be $33.9 million during 1997. Operating Lease Commitments - Operating lease expense amounted to $0.8 million in 1996, $1.6 million in 1995, and $2.2 million in 1994. Future minimum payments for operating leases are: Years ending December 31, In Thousands -------------------------------------------- 1997 $ 1,024 1998 637 1999 582 2000 506 2001 341 Thereafter 857 -------------------------------------------- Total future commitments $ 3,947 -------------------------------------------- 1993 Expansion - On November 1, 1993, PGT placed in service a major expansion of its natural gas transmission system in Idaho, Washington and Oregon. The new facilities, which were authorized by the FERC on August 1, 1991, run parallel to and connect with the existing system and provide additional firm transportation service capacity of 150,000 Decatherms per day ("Dt/d") to the Pacific Northwest and 766,000 Dt/d to California. Similarly, the California Public Utilities Commission ("CPUC") authorized PG&E to expand its gas pipeline facilities in California to connect with the PGT expansion at the California-Oregon border. PGT's total cost of the 1993 expansion is estimated to be $852 million. In the August 1, 1991 order, the FERC found that transportation arrangements for PG&E's facilities were discriminatory and initially declined to authorize the start of construction. In particular, the FERC found that a CPUC-imposed rate structure applicable to PGT's 1993 expansion shippers for transportation service on the downstream PG&E system was discriminatory. On October 24, 1991, the FERC permitted PGT to commence construction, while the CPUC reexamined the features of its rate design for PG&E. However, the FERC imposed on PGT a lower penalty return on equity, 10.13 percent, instead of the previously prescribed 12.5 percent for the 1993 expansion, until such time that PGT demonstrated that neither its rates nor its transportation policies nor PG&E's CPUC-approved rates and policies resulted in unduly discriminatory restraints. PGT requested a rehearing of this feature of the FERC's certificate. In October 1992, the CPUC reaffirmed its policies which resulted in renewed petitions to the FERC requesting, among other things, revocation of PGT's authorization to operate the 1993 expansion facilities. On March 16, 1993, the FERC issued an order addressing the various petitions for rehearing of its prior decisions related to the interstate portion of the 1993 expansion. In the order, the FERC upheld its decision to authorize the construction and operation of the 1993 expansion and raised PGT's authorized return to 12.75 percent, but reaffirmed the 10.13 percent penalty return on equity for PGT's 1993 expansion facilities. PGT appealed the 10.13 percent penalty return to the United States Court of Appeals. In addition to PGT's appeal to the United States Court of Appeals, a number of parties also sought rehearing of all of these FERC orders. On June 4, 1993, the Court of Appeals consolidated the cases for processing. The consolidated cases were argued on November 14, 1995, with a group of petitioners requesting the Court to direct the FERC to provide for compensation to shippers for alleged damages they suffered as a result of the discriminatory conditions discussed above. On August 23, 1996, the Court of Appeals found that the FERC had exceeded its jurisdiction in imposing the penalty return and therefore granted PGT's appeal and denied the appeals of the adverse petitioners. The effect of the Court's decision is that PGT was entitled to apply the 12.75 percent rate of return, that questions concerning the FERC's certification of the expansion were removed, and that the FERC is not required to consider questions of compensation to shippers. With respect to the application of the 12.75 percent rate of return, it should be noted that in the settlement of the 1994 rate case (see "1994 Rate Case," below), PGT agreed not to retroactively bill its customers for the period from November 1, 1993 through August 31, 1994, for a rate higher than the 10.13 percent penalty return previously approved by the FERC. The settlement rates related to the 1994 rate case were effective starting on September 1, 1994. On October 24, 1996, the Court denied a petition for rehearing and the suggestion for rehearing en banc filed by a group of shippers. On January 22, 1997, the shippers filed a petition for a writ of certiorari with the U.S. Supreme Court based on the same issues as raised at the U.S. Court of Appeals. The petition was placed on the U.S. Supreme Court's docket on January 29, 1997. The U.S. Supreme Court is expected to act on that petition prior to the expiration of its term in July 1997. 1994 Rate Case - On February 28, 1994, PGT filed an application to increase its rates for transportation services. These rates were based on an overall cost of service of approximately $217 million, including a cost of equity of 13 percent. The proposed rate of return on equity applied to all facilities and assumed the discontinuance of the penalty rate of return on equity of 10.13 percent, which the FERC had earlier required to be used to develop initial rates for PGT's 1993 expansion facilities. (See "1993 Expansion," above.) A major issue in this proceeding was whether PGT's mainline transportation rates should be equalized through the use of rolled-in cost allocation, or whether they should continue to reflect the current use of incremental costs to determine the rates paid by shippers. PGT proposed that mainline rates reflect the rolled-in approach on a prospective basis. On March 31, 1994, the FERC issued an order that accepted PGT's interim incremental rates, and authorized PGT to place these rates into effect on September 1, 1994, subject to refund. Although the FERC rejected the proposal to place rolled-in rates into effect September 1, 1994, the FERC indicated that PGT would be afforded the opportunity at the hearing to support and justify a rolled-in rate proposal. On September 11, 1996, the FERC approved, without modification, a proposed multi-party settlement of PGT's rate case, which was filed with the FERC on March 21, 1996. The settlement provided for rolled-in rates effective on November 1, 1996. To mitigate the impact of the higher rolled-in rates on shippers who were paying lower rates under contracts executed prior to PGT's 1993 expansion (pre-1993 expansion shippers), most of the firm shippers who took service prior to the 1993 expansion are receiving a reduction from the rolled-in rates for a six-year period, while the 1993 expansion shippers are paying a surcharge in addition to the rolled-in rates to offset the effect of the mitigation. Although the implementation of rolled-in rates by itself does not change PGT's total revenue requirement, the settlement does provide for, among other things, a lower total cost of service of $206 million, lower depreciation rates, and a return on equity of 12.2 percent from September 1, 1994, the effective date of the rates in this case. In addition, under the settlement, approximately three percent of PGT's firm transportation service capacity was relinquished effective November 1, 1996, for subscription to other shippers who may desire the capacity. Approximately $7.5 million of costs were also allocated to short-term firm and interruptible services. The overall effect of the settlement on rates, including mitigation measures and the agreed upon lower cost of service, was to decrease PGT's current 100 percent load factor transportation rates for the full distance of the pipeline (from the Canadian-U.S. border to the Oregon-California border) from $0.48 to $0.33 per Decatherm (Dt) for the 1993 expansion shippers, and to increase the transportation rate for most of the pre-1993 expansion shippers from $0.16 to either $0.20 or $0.24 per Dt, depending upon the level of mitigation applicable to each shipper. The rolled-in rate for the full distance is $0.26 per Dt. In November 1996, PGT refunded the difference between the amounts based on its as-filed cost of service of $217 million and the amounts that would have been collected at the settlement cost of service of $206 million. PGT had established a reserve adequate for its refund obligation under the settlement. Although the FERC approved the settlement without modification, several shippers have sought rehearing of the FERC's order. PGT does not expect the FERC to modify the settlement as a result of these requests. Parties that have sought rehearing may petition the Court of Appeals if the FERC does not grant their rehearing requests. In the event the FERC does modify the settlement, however, the settlement permits PGT to terminate the settlement and reinstate the rates contained in its rate case proposal and proceed to a FERC decision based upon the evidence in the case. Legal Matters - Norcen Litigation: On March 17, 1994, Norcen Energy Resources Limited ("Norcen Energy") and Norcen Marketing Incorporated ("Norcen Marketing") filed a complaint in the U.S. District Court, Northern District of California, against PG&E and PGT. Norcen Marketing signed a 30-year firm service agreement with PGT for transportation of approximately 47,000 MMBtu/day on the interstate portion of the 1993 expansion project. The annual demand charges under the contract were approximately $7.8 million, and decreased to $5.5 million effective November 1996 pursuant to the settlement of the 1994 rate case discussed above. Norcen Energy is a guarantor of the 30-year transportation contract between PGT and Norcen Marketing. Since January 1, 1995, Norcen Marketing has been utilizing most of the interstate expansion capacity for which it contracted with PGT, whereas prior to that date, Norcen Marketing used none of it. The complaint alleged that PGT and PG&E wrongfully induced Norcen Energy and Norcen Marketing to enter into the 30-year contract with PGT by concealing legal action taken by PG&E before the CPUC (requesting clarification that gas shipped on the PGT expansion should pay PG&E's incremental expansion rates for intrastate service) two days before Norcen Marketing's contract became binding. The complaint further alleged breach of representations to plaintiffs that PG&E would not "unreasonably" build its expansion with less than "sufficient" firm subscription. The complaint also alleged breach of an agreement between PGT and a Norcen predecessor relating to the installation of additional capacity. The complaint also alleged various federal and state antitrust, contractual and other claims against the defendants and seeks rescission, restitution and recovery of unspecified damages. In a pleading filed in June 1994, the plaintiffs indicated a claim for $140 million (before trebling) based on defendants' allegedly exclusionary business behavior, as well as an unspecified amount of contract damages. On September 19, 1994, the U.S. District Court, Northern District of California, granted PGT's and PG&E's motions to dismiss all federal antitrust claims in the complaint originally filed in this case, and dismissed the remaining state law claims for lack of jurisdiction. On October 18, 1994, plaintiffs filed an amended complaint. The amended complaint reasserted part of the original complaint's antitrust claims, asserted new antitrust claims based upon the same facts, and specifically alleged diversity jurisdiction for the state law contract claims. On July 27, 1995, the District Court issued an order on PGT's and PG&E's motions to dismiss the amended complaint. The order dismissed all of plaintiffs' federal and state antitrust claims with prejudice, but did not dismiss various state law contract claims, including claims based on fraudulent inducement and breach of contract. Plaintiffs have the right to appeal the dismissal of the antitrust claims to the U.S. Court of Appeals. Plaintiffs still seek rescission of the above-mentioned gas transportation contract and compensatory and punitive damages in connection with their remaining state law claims. It is believed that the plaintiffs might seek contract damages of approximately $100 million in this case. At this stage of litigation, the Company is unable to estimate the outcome of this matter, but such outcome could have a material adverse impact on the Company's results of operations in a future reporting period. The Company believes that the ultimate outcome of this matter will not have a material adverse impact on its financial position or liquidity. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------------------------------ None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- Since PGT meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted. ITEM 11. EXECUTIVE COMPENSATION ---------------------- Since PGT meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------- Since PGT meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- Since PGT meets the conditions set forth in General Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ------------------------------------------------------ (a) Financial Statements 1. The following Financial Statements are filed herewith as part of Item 8, Financial Statements and Supplementary Data: Statements of Consolidated Income for each of the three years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheets as of December 31, 1996 and 1995 Statements of Consolidated Common Stock Equity each of the three years ended December 31, 1996, 1995 and 1994 Statements of Consolidated Cash Flows for each of three years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2. Report of Independent Public Accountants (b) Exhibits required to be filed by Item 601 of Regulation S-K: No. Description ---- --------------------------------------------- 2.1 State Gas Pipeline Sale Agreement dated as of April 29, 1996, between the Secretary for Mines of the State of Queensland, Australia and PGT Australia Pty Limited, as Trustee of the PGT Queensland Unit Trust (incorporated by reference to PGT's Current Report on Form 8-K dated July 15, 1996 (File No. 0- 25842), Exhibit 2). 3.1 Restated Articles of Incorporation of Pacific Gas Transmission Company effective as of March 6, 1997 (filed herewith). 3.2 By-Laws of Pacific Gas Transmission Company as of January 24, 1997 (filed herewith). 4.1 Senior Trust Indenture Between PGT and The First National Bank of Chicago, as Trustee (Senior Debt), dated as of May 22, 1995, (incorporated by reference to PGT's Current Report on Form 8-K dated June 21, 1995 (File No. 0-25842), Exhibit 4.2). 4.2 First Supplemental Indenture Between PGT and The First National Bank of Chicago, as Trustee (Senior Debt), dated as of May 30, 1995, (incorporated by reference to PGT's Current Report on Form 8-K dated June 21, 1995 (File No. 0-25842), Exhibit 4.3). 4.3 Second Supplemental Indenture Between PGT and The First National Bank of Chicago as Trustee (Senior Debt), dated as of June 23, 1995 (incorporated by reference to PGT's Current Report on Form 8-K dated July 6, 1995 (File No. 0-25842), Exhibit 4.2). 10.1 Firm Transportation Service Agreement between PGT and Pacific Gas and Electric Company dated October 26, 1993, Rate Schedule FTS-1, and general terms and conditions (incorporated by reference to Pacific Gas and Electric Company (PG&E) Form 10-K for fiscal year 1993 (File No. 1-2348), Exhibit 10.4). 10.2 Firm Transportation Service Agreements between PGT and Southern California Edison Company dated December 20, 1993, and March 2, 1994, Rate Schedule FTS-1 (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.2). 10.3 Lease Agreement dated as of April 15, 1994, between PGT and GIC Development 94-I, L.L.C. (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.3). 10.4 Savings Fund Plan for Employees of Pacific Gas Transmission Company applicable to management employees, effective January 1, 1995 (incorporated by reference to PGT's Form 10-K for fiscal year 1995 (File No. 0-25842), Exhibit 10.4). 10.5 Performance Incentive Plan of Pacific Gas Transmission Company (incorporated by reference to PGT's Form 10-K for fiscal year 1995 (File No. 0-25842), Exhibit 10.5). 10.6 The Pacific Gas and Electric Company Retirement Plan applicable to non-union employees, as amended October 18, 1995, effective January 1, 1996 (incorporated by reference to PG&E Form 10-K for fiscal year 1995 (File No. 1-2348), Exhibit 10.8). 10.7 Pacific Gas and Electric Company Supplemental Executive Retirement Plan, as amended through October 16, 1991 (incorporated by reference to PG&E Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit 10.11). 10.8 Pacific Gas and Electric Company Stock Option Plan, as amended effective as of September 16, 1992 (incorporated by reference to PG&E Form 10-K for fiscal year 1994 (File No. 1-2348), Exhibit 10.13). 10.9 Pacific Gas and Electric Company Performance Unit Plan (incorporated by reference to PG&E Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit 10.13). 10.10 Pacific Gas and Electric Company Executive Flexible Perquisites Program (incorporated by reference to PG&E Form 10-K for fiscal year 1993 (File No. 1-2348), Exhibit 10.16). 10.11 Pacific Gas Transmission Company Retirement Plan for Non- Employee Directors (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.13). 10.12 Deferred Compensation Plan of Pacific Gas Transmission Company (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.14). 10.13 Phantom Stock Plan of Pacific Gas Transmission Company (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.15). 10.14 Employment Agreement between Pacific Gas Transmission Company and Stephen P. Reynolds (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.16). 10.15 Employment Agreement between Pacific Gas Transmission Company and Gary L. Walker (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.17). 10.16 Employment Agreement between Pacific Gas Transmission Company and Stanley C. Karczewski (incorporated by reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.18). 10.17 Credit Agreement among PGT and the Banks, Co-Agents and Agent named therein, dated as of May 31, 1995 (incorporated by reference to PGT's Current Report on Form 8-K dated June 21, 1995 (File No. 0-25842), Exhibit 4.4). 10.18 First Amendment to Credit Agreement among PGT and the Banks, Co-Agents and Agent named therein, dated as of September 14, 1995 (incorporated by reference to PGT's 10-K for fiscal year 1995 (File No. 0-25842), Exhibit 10.19). 10.19 Second Amendment to Credit Agreement among PGT and the Banks, Co-Agents and Agent named therein, dated as of December 24, 1996 (filed herewith). 10.20 Pacific Gas Transmission Company Retirement Plan applicable to management employees, effective July 1, 1995 (incorporated by reference to PGT's 10-K for fiscal year 1995 (File No. 0-25842), Exhibit 10.20). 12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith). 21 List of Subsidiaries (filed herewith). 23.1 Consent of Arthur Andersen LLP (filed herewith). 23.2 Consent of Independent Public Accountants provided by the office of the Auditor General of Queensland (incorporated by reference to the Company's Form 8-K/A No. 1 (File No. 0-25842), Exhibit 23). 24.1 Resolution and Powers of Attorney of the Board of Directors of Pacific Gas Transmission Company authorizing the execution of the Form 10-K (filed herewith). 27 Financial Data Schedule (filed herewith). The exhibits filed herewith are attached hereto (except as noted) and those indicated above which are not filed herewith were previously filed with the Commission as indicated and are hereby incorporated by reference. Exhibits will be furnished to security holders of the Company upon written request and payment of a fee of $0.30 per page, which fee covers only the Company's reasonable expenses in furnishing such exhibits. The Company agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument defining the rights of long-term debt holders not otherwise required to be filed hereunder. (c) Reports on Form 8-K Reports on Form 8-K during the quarter ended December 31, 1996 and through the date hereof: 1. January 10, 1997 Item 5. Other Events - Acquisition of Energy Source Assets - Holding Company Formation SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Portland, County of Multnomah, Oregon, on the 28th day of March, 1997. PACIFIC GAS TRANSMISSION COMPANY (Registrant) By: /s/ FRANK R. LINDH ------------------------- (Frank R. Lindh, Attorney-in-Fact) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Principal Executive Officer STEPHEN P. REYNOLDS President, Chief Executive Officer and Director March 28, 1997 Principal Financial and Accounting Officer STANLEY C. KARCZEWSKI Vice President of Finance and Controller and Chief Financial Officer March 28, 1997 Directors JACK F. JENKINS-STARK Chairman of the Board March 28, 1997 TONY F. DISTEFANO Director March 28, 1997 ROBERT D. GLYNN, JR. Director March 28, 1997 GORDON R. SMITH Director March 28, 1997 By: /s/ FRANK R. LINDH --------------------------------------- (Frank R. Lindh, Attorney-in-Fact) EX-3 2 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF PACIFIC GAS TRANSMISSION COMPANY Dated March 6, 1997 JACK F. JENKINS-STARK and FRANK R. LINDH certify that: 1. They are the Chairman of the Board and the Secretary, respectively, of Pacific Gas Transmission Company, a California Corporation. 2. The Articles of Incorporation of the corporation are amended and restated to read as follows: First: That the name of this corporation is PACIFIC GAS TRANSMISSION COMPANY. Second: The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. Third: The corporation elects to be governed by all of the provisions of the General Corporation Law (as added to the California Corporations Code effective January 1, 1977, and as subsequently amended) not otherwise applicable to this corporation under Chapter 23 of said General Corporation Law. Fourth: The corporation is authorized to issue two classes of shares designated respectively "Common Stock" and "Preferred Stock." The total numbers of shares of Common Stock is 1,000, and the total number of shares of Preferred Stock which the corporation is authorized to issue 5,000,000. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is authorized to fix the number of shares of any series of Preferred Stock and to determine the designation of any such series. The Board of Directors is also authorized, except as to matters fixed as to Preferred Stock in this Article Fourth, to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. Except as otherwise provided by law, the holders of Common Stock shall have and possess the exclusive right to notice of shareholders' meetings and the exclusive voting rights and powers, and the holders of Preferred Stock shall not be entitled to notice of any shareholders' meetings or to vote on the election of directors or on any other matter. Fifth: The shares of stock may be offered for sale for money or in exchange for property, from time to time upon such terms and conditions as the Board of Directors may prescribe. Sixth: The number of directors of this corporation shall be not less than five (5) nor more than seven (7) as prescribed in the Bylaws. Seventh: The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Eighth: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through Bylaws, resolutions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code. 3. The foregoing amendment and the restatement of the Articles of Incorporation of the corporation have been duly approved by the Board of Directors. 4. The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of the shareholders in accordance with Section 902 of the California Corporation Code. The corporation has only one class of shares outstanding. The total number of outstanding shares of the corporation entitled to vote on the amendment is 1,000. The number of shares voting in favor of the amendment exceeded the vote required. The percentage vote required was more than 50%. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Dated March 6, 1997. /s/ JACK F. JENKINS-STARK ------------------------- Jack F. Jenkins-Stark Chairman of the Board /s/ FRANK R. LINDH ------------------------- Frank R. Lindh Secretary EX-3 3 EXHIBIT 3.2 BYLAWS OF Pacific Gas Transmission Company As amended January 24, 1997 ARTICLE 1. SHAREHOLDERS 1. Place of Meeting. All meetings of the shareholders shall be held at the office of the Corporation in the City and County of San Francisco, State of California, or at such other place within the State of California as may be designated by the Board of Directors. 2. Annual Meetings. The annual meeting of shareholders shall be held each year at 11:00 a.m. on the first Thursday after the first Monday in April, if not a legal holiday, or if a legal holiday, then on the next business day following. Any proper business pertaining to the affairs of the Corporation may be transacted at the annual meeting. Written notice of the annual meeting shall be given not less than ten or more than sixty days prior to the date of the meeting to each shareholder entitled to vote thereat. The notice shall state the place, day and hour of such meeting, and those matters which the Board, at the time of mailing, intends to present for action by the shareholders. Notice of any meeting of the shareholders shall be given either personally or by mail or telegraphic or other written communication, postage prepaid, to each holder of record of the stock entitled to vote thereat, at his address, as it appears on the books of the Corporation. 3. Special Meetings. Special meetings of the shareholders shall be called by the Secretary or an Assistant Secretary at any time on order of the Board of Directors, the Chairman of the Board, the Chairman of the Executive Committee, or the President. Special meetings of the shareholders shall also be called by the Secretary or an Assistant Secretary upon the written request of holders of shares entitled to cast not less than ten percent of the votes at the meeting. Such request shall state the purposes of the meeting, and shall be delivered to the Chairman of the Board, the Chairman of the Executive Committee, the President, or the Secretary. A special meeting so requested shall be held on the date requested, but not less than thirty-five nor more than sixty days after the date of receipt of the original request. Written notice of each special meeting of shareholders, stating the place, day and hour of such meeting and the business proposed to be transacted thereat, shall be given in the manner stipulated in Article I, Section 2, Paragraph 3 of these Bylaws within twenty days after receipt of the written request. 4. Attendance at meetings. At any meeting of the shareholders, each holder of record of stock entitled to vote thereat may attend in person or may designate an agent or a reasonable number of agents, not to exceed three, to attend the meeting and cast votes for his shares. The authority of agents must be evidenced by a written proxy signed by the shareholder designating the agents authorized to attend the meeting and be delivered to the Secretary of the Corporation prior to the commencement of the meeting. ARTICLE II. DIRECTORS 1. Number. The Board of Directors shall consist of five (5) directors. 2. Powers. The Board of Directors shall exercise all the powers of the Corporation except those which are by law, or by the Articles of Incorporation of this Corporation, or by the Bylaws conferred upon or reserved to the shareholders. 3. Executive Committee. The Board of Directors, by a two- thirds vote of the whole Board, shall elect from their number an Executive Committee. Such Executive Committee shall consist of the Chairman of the Committee, if that office be filled, the Chairman of the Board, the President, and two other Directors. The members of the Executive Committee shall hold office at the pleasure of the Board of Directors, and may be removed at any time by an affirmative vote of two-thirds of the whole Board. The Executive Committee, subject to the provisions of law, may exercise any of the powers and perform any of the duties of the Board of Directors; but the Board may by an affirmative vote of a majority of its members withdraw or limit any of the powers of the Executive Committee. The Executive Committee, by a vote of a majority of its members, shall fix its own time and place of meeting and shall prescribe its own rules of procedure. A quorum of the Committee for the transaction of business shall consist of two members. 4. Time and Place of Directors' Meetings. Regular meetings of the Board of Directors shall be held on such days and at such times and at such locations as shall be fixed by resolution of the Board, or designated by the Chairman of the Board or, in his absence, the President of the Corporation and contained in the notice of any such meeting. Notice of meetings shall be delivered personally or sent by mail or telegram at least seven days in advance. A meeting of the Board of Directors shall also be held immediately after each annual meeting of the shareholders. 5. Special Meetings. The Chairman of the Board, the Chairman of the Executive Committee, the President, or any four Directors may call a special meeting of the Board of Directors at any time. Notice of the time and place of special meetings shall be given to each Director by the Secretary. Such notice shall be delivered personally or by telephone to each Director at least four hours in advance of such meeting, or sent by first-class mail or telegram, postage prepaid, at least two days in advance of such meeting. 6. Quorum. A quorum for the transaction of business at any meeting of the Board of Directors shall consist of three members. 7. Action by Consent. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all Directors individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board of Directors. 8. Method of Meeting. Any meeting, regular or special, of the Board of Directors or any committee of the Board, including the Executive Committee, may be held by conference telephone or similar communication equipment as long as all Directors participating in the meeting can hear one another. Directors participating in any meeting in this fashion shall be deemed to be present in person at such meeting. ARTICLE III. OFFICERS 1. Officers. The officers of the Corporation shall be a Chairman of the Board, a Chairman of the Executive Committee (whenever the Board of Directors in its discretion fills these offices), a President, one or more Vice Presidents, a Secretary and one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers, a General Counsel, and a Controller, all of whom shall be elected by the Board of Directors. The Chairman of the Board, the Chairman of the Executive Committee, and the President shall be members of the Board of Directors. Any two or more offices, except those of President and Secretary, may be held by the same person. 2. Chairman of the Board. The Chairman of the Board, if that office be filled, shall preside at all meetings of the shareholders, of the Directors, and of the Executive Committee in the absence of the Chairman of that Committee. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. He shall have such duties and responsibilities as may be prescribed by the Board of Directors or the Bylaws. The Chairman of the Board shall have authority to sign on behalf of the Corporation agreements and instruments of every character, and in the absence or disability of the President, shall exercise his duties and responsibilities. 3. Chairman of the Executive Committee. The Chairman of the Executive Committee, if that office be filled, shall preside at all meetings of the Executive Committee, and in the absence of the Chairman of the Board, shall preside at all meetings of the Board of Directors and of the shareholders. The Chairman of the Executive Committee, in the absence or disability of the Chairman of the Board and the President, shall exercise their duties and responsibilities. He shall aid and assist the other officers in the performance of their duties and shall have such other duties as may be prescribed by the Board of Directors or the Bylaws. 4. President. The President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board or the Bylaws. He shall be the chief executive officer of the Corporation if so designated by the Board of Directors. If there be no Chairman of the Board and no Chairman of the Executive Committee available and able to act, the President shall also exercise the duties and responsibilities of both those offices. The President shall have authority to sign on behalf of the Corporation agreements and instruments of every character. 5. Vice Presidents. Each Vice President shall have such duties and responsibilities as may be prescribed by the Board of Directors, the Chairman of the Board, the President or the Bylaws. Each Vice President's authority to sign agreements and instruments on behalf of the Corporation shall be as prescribed by the Board of Directors. The Board of Directors, the Chairman of the Board or the President may confer a special title upon any Vice President. 6. Secretary. The Secretary shall attend all meetings of the Board of Directors and the Executive Committee, and all meetings of the shareholders, and he shall record the minutes of all proceedings in books to be kept for that purpose. He shall be responsible for maintaining a proper share register and stock transfer books for all classes of shares issued by the Corporation. He shall give, or cause to be given, all notices required either by law or the Bylaws. He shall keep the seal of the Corporation in safe custody, and shall affix the seal of the Corporation to any instrument requiring it and shall attest the same by his signature. The Secretary shall have such other duties as may be prescribed by the Board of Directors, the Chairman of the Board, the President, or the Bylaws. The Assistant Secretaries shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the President, or the Secretary. In the absence or disability of the Secretary, his duties shall be performed by an Assistant Secretary. 7. Treasurer. The Treasurer shall have custody of all moneys and funds of the Corporation, and shall cause to be kept full and accurate records of receipts and disbursements of the Corporation. He shall deposit all moneys and other valuables of the Corporation in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall disburse such funds of the Corporation as have been duly approved for disbursement. The Treasurer shall perform such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the President, or the Bylaws. The Assistant Treasurers shall perform such duties as may be assigned from time to time by the Board of Directors, the Chairman of the Board, the President, or the Treasurer. In the absence or disability of the Treasurer, his duties shall be performed by an Assistant Treasurer. 8. General Counsel. The General Counsel shall be responsible for handling on behalf of the Corporation all proceedings and matters of a legal nature. He shall render advice and legal counsel to the Board of Directors, officers and employees of the Corporation, as necessary to the proper conduct of the business. He shall keep the management of the Corporation informed of all significant developments of a legal nature affecting the interests of the Corporation. The General Counsel shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the President, or the Bylaws. 9. Controller. The Controller shall be responsible for maintaining the accounting records of the Corporation and for preparing necessary financial reports and statements, and he shall properly account for all moneys and obligations due the Corporation and all properties, assets, and liabilities of the Corporation. He shall render to the Chairman of the Board, The Chairman of the Executive Committee, and the President such periodic reports covering the results of operations of the Corporation as may be required by them or any one of them. The Controller shall have such other duties as may from time to time be prescribed by the Board of Directors, the Chairman of the Board, the President, or the Bylaws. ARTICLE IV. GENERAL CORPORATE MATTERS 1. Record Date. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise rights in respect to any change, conversions or exchange of shares. The record date so fixed shall be not more than sixty nor less than ten days prior to the date of such meeting nor more than sixty days prior to any other action for the purposes for which it is fixed. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting, or entitled to receive any dividend or distribution, or allotment of rights, or to exercise the rights, as the case may be. 2. Transfer of Stock. Upon surrender to the Secretary or Transfer Agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, and payment of transfer taxes, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. Subject to the foregoing the Board of Directors shall have power and authority to make such rules and regulations as it shall deem necessary or appropriate concerning the issue, transfer and registration of certificates for shares of stock of the Corporation, and to appoint and remove Transfer Agents and Registrars of transfers. 3. Lost Certificates. Any person claiming a certificate of stock to be lost, stolen, mislaid or destroyed shall make an affidavit or affirmation of that fact and verify the same in such manner as the Board of Directors may require, and shall, if the Board of Directors so requires, give the Corporation, its Transfer Agents, Registrars and/or other agents a bond of indemnity in form approved by counsel, and in amount and with such sureties as may be satisfactory to the Secretary of the Corporation, before a new certificate may be issued of the same tenor and for the same number of shares as the one alleged to have been lost, stolen, mislaid or destroyed. 4. Annual Report to Shareholders. For so long as this Corporation has fewer than 100 shareholders, the annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly dispensed with, but nothing herein shall be interpreted as prohibiting the Board of Directors from issuing annual or other periodic reports to the shareholders of the corporation as they consider proper. 5. Corporate Contracts and Instruments. The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, and except as provided in these Bylaws, no officer, agent, or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 6. Construction and Definitions. Unless the contract requires otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these Bylaws. 7. Shares of Other Corporations: How Voted. Shares of other corporations standing in the name of this Corporation shall be voted by one of the following persons, listed in order of preference: (1) the Chairman of the Board, or person designated by the Chairman of the Board; (2) the President, or person designated by the President; (3) the Secretary, or person designated by the Secretary; (4) any other person designated by the Board of Directors. The authority to vote share granted by this section includes the authority to execute a proxy in the name of this Corporation for purposes of voting the shares. ARTICLE V. AMENDMENTS 1. Amendment by Shareholders. Except as otherwise provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by the affirmative vote of a majority of the outstanding shares entitled to vote at any regular or special meeting of the shareholders, provided, however, that the range for the authorized number of directors may be changed only by an amendment of the Articles of Incorporation. 2. Amendment by Directors. To the extent provided by law, these Bylaws, or any of them, may be amended or repealed or new Bylaws adopted by resolution adopted by a majority of the members of the Board of Directors, provided, however, that the Board of Directors may adopt a Bylaw or amendment of a Bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the Articles of Incorporation. EX-10 4 EXHIBIT 10.19 SECOND AMENDMENT TO CREDIT AGREEMENT among PACIFIC GAS TRANSMISSION COMPANY, as the Company, and CERTAIN COMMERCIAL LENDING INSTITUTIONS, as the Banks, and THE BANK OF NOVA SCOTIA, BARCLAYS BANK PLC, and THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agents for the Banks, and CANADIAN IMPERIAL BANK OF COMMERCE, as Agent for the Banks Dated as of December 24, 1996 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of December 24, 1996 (this "Amendment"), is entered into by and among PACIFIC GAS TRANSMISSION COMPANY, a corporation duly organized and validly existing under the laws of the State of California (the "Company"), the various financial institutions as are or may become parties hereto (collectively, the "Banks"), THE BANK OF NOVA SCOTIA, BARCLAYS BANK PLC and THE FIRST NATIONAL BANK OF CHICAGO, as co-agents for the Banks (the "Co-Agents"), and CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), acting through certain of its U.S. branches or agencies, as Agent (the "Agent") for the Banks. W I T N E S S E T H: WHEREAS, the Company, the Banks, the Co-Agents and the Agent have heretofore entered into a certain Credit Agreement, dated as of May 31, 1995, as previously amended (the "Credit Agreement"); and WHEREAS, the Company, the Banks, the Co-Agents and the Agent now intend to amend the Credit Agreement (i) to add a letter of credit subfacility and (ii) to address various other issues in connection therewith, NOW, THEREFORE, in consideration of the premises and of the mutual covenants herein contained, each of the Company, the Banks, the Co-Agents and the Agent agree as follows: SECTION 1. Amendments to Credit Agreement. --------------------------------------------- A. Section 1.1 of the Credit Agreement is amended by adding the following definitions in the appropriate alphabetical order: "Agreed Currency" is defined in Section 6.1.1. "Approved Account Party" shall mean, at any time, any Person listed on Schedule A attached hereto or designated in writing by the Company to the Agent. "Cash Collateral" is defined in Section 2.10.7. "Cash Equivalent Investments" shall mean, at any time: (a) any evidence of Indebtedness, maturing not more than one year after such time, issued or guaranteed by the United States Government; (b) commercial paper, maturing not more than nine months from the date of issue, which is issued by (i) a corporation (other Than an Affiliate of the Company) organized under the laws of any state of the United States or of the District of Columbia and rated A-l by Standard & Poor's Corporation or P-l by Moody's Investors Service, Inc., or (ii) any Bank (or its holding company); (c) any certificate of deposit or bankers acceptance, maturing not more than one year after such time, which is issued by either (i) a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000, or (ii) any Bank; or (d) any repurchase agreement entered into with any Bank (or other commercial banking institution of the stature referred to in clause (c)(i)) which (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c); and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Bank (or other commercial banking institution) thereunder. "Dollar Equivalent" shall mean, (i) with respect to Dollars or an amount denominated in Dollars, such amount, and (ii) with respect to any monetary amount in a currency other than Dollars, at any time for the determination thereof, the amount of Dollars obtained by converting such foreign currency involved in such computation into Dollars at the spot rate for the purchase of Dollars with the applicable foreign currency as quoted by the Issuer at approximately 11:00 a.m. on the date of determination thereof specified herein. "Issuance Request" shall mean an application for a Letter of Credit duly executed by an Authorized Signatory of the Company, substantially in the form of Exhibit L hereto or in such other form satisfactory to the Issuer, in its sole discretion. "Issuer" shall mean CIBC in its capacity as issuer of the Letters of Credit and each other Person as shall have been subsequently appointed as the successor Issuer pursuant to Section 13.8. "Judgment Currency" is defined in Section 6.1.2. "Letter of Credit" is defined in Section 2.10. "Letter of Credit Cash Collateral Account" is defined in Section 2.10.7. "Letter of Credit Commitment" shall mean the Issuer's obligation to issue Letters of Credit for the account of the Company pursuant to Section 2.10 and, with respect to each of the other Banks, the obligation of each such Bank to participate in such Letter of Credit pursuant to Section 2.10.1. "Letter of Credit Commitment Amount" shall mean, on any date, a maximum Dollar Equivalent amount equal to the lesser of (i) $70,000,000 or (ii) the Loan Commitment, as such amount may be reduced from time to time pursuant to Section 2.5. "Letter of Credit Outstandings" shall mean, on any date, an amount equal to the sum of (a) the then aggregate Dollar Equivalent amount which is undrawn and available under all issued and outstanding Letters of Credit, plus (b) the then aggregate amount of all Reimbursement Obligations then outstanding with respect to the amount of any drawing made under any Letters of Credit. "Loan Commitment" shall mean, as to each Bank, the obligation of such Bank to make Committed Advances in an aggregate amount at any one time outstanding equal to the amount set opposite such Bank's name on the signature pages hereof under the caption "Commitment" (as the same may be reduced pursuant to Section 2.5 hereof). "Other Currency" is defined in Section 6.1.1. "Permitted Currency" shall mean Dollars and Canadian Dollars, and such other currencies of major industrialized nations as shall be designated by the Company and acceptable to the Agent and the Issuer, each in their sole and absolute discretion. "Reimbursement Obligations" shall mean the obligation of the Company to reimburse the Issuer and the Banks, as applicable, for the Dollar Equivalent of the drawings made under the Letters of Credit, or any of the Letters of Credit. "Stated Amount" shall mean, with respect to any Letter of Credit, the Dollar equivalent amount available to be drawn under such Letter of Credit upon the issuance thereof. "Stated Expiry Date" of each Letter of Credit is defined in Section 2.10. B The subsection (b) of the definition of "Indebtedness" in Section 1.1 of the Credit Agreement is amended in its entirety as follows: " (b) all obligations relative to the Dollar Equivalent of the face amount of all letters of credit, including, without limitation, the Letters of Credit, and banker's acceptances issued for the account of such Person or other Approved Account Party;" C. The definition of "Applicable Margin" in Section 1.1 of the Credit Agreement is amended by inserting after the words "LIBOR Advance" in the first line thereof the phrase "or in connection with the issuance of a Letter of Credit". D. The definitions of "Adjusted Available Facility Amount", "Advance", "Advance Request", "Available Facility Amount", "Commitment", "Commitment Proportion", "Drawdown Date", "Facility", "Loan Document", "Majority Banks", "Obligations" and "Total Commitments" in Section 1.1 of the Credit Agreement are respectively amended in their entirety as follows: "Adjusted Available Facility Amount" shall mean, at any time and in respect of any proposed Advance, the Available Facility Amount at such time: (i) increased to take account of any Advances which shall become repayable on or before the Drawdown Date of the proposed Advance in question and to take into account any decrease in Letter of Credit Outstandings which shall become effective on or before such Drawdown Date; and (ii) reduced to take account of any Advance which is to be made on or before such Drawdown Date (but excluding the proposed Advance in question) and to take into account any increase in Letter of Credit Outstandings which shall become effective on or before such Drawdown Date and to take account of any reduction in the Total Commitments which shall become effective on or before such Drawdown Date. "Advance" shall mean, except as otherwise provided herein, any LIBOR Advance, Reference Rate Advance, Competitive Bid Advance and/or issuance of any Letter of Credit or the extension of the Stated Expiry Date of any Letter of Credit. "Advance Request" shall mean any LIBOR Advance Request, Reference Rate Advance Request, Competitive Bid Advance Request or Issuance Request. "Available Facility Amount" shall mean at any time the Total Commitments less the sum of (i) the Advance Outstandings at such time and (ii) the Letter of Credit Outstandings at such time. "Commitment" means, as the context may require, a Bank's or Issuer's Letter of Credit Commitment or Loan Commitment. "Commitment Proportion" shall mean, in relation to a Bank, at any time the proportion which its Loan Commitment bears to the Total Commitments at such time. "Drawdown Date" shall mean: (i) in relation to any LIBOR Advance, the Business Day for the making thereof as specified in the LIBOR Advance Request relating thereto; (ii) in relation to any Reference Rate Advance, the Business Day for the making thereof as specified in the Reference Rate Advance Request relating thereto; (iii) in relation to any Competitive Bid Advance, the Business Day for the making thereof as specified in the Competitive Bid Advance Request relating thereof or as agreed to between the Company and a Bank pursuant to Article 5, and(iv)in relation to any issuance of a Letter of Credit, the Business Day for the issuance thereof as specified in the Issuance Request relating thereto. "Facility" shall mean the committed advance facility which may be utilized subject to the other terms and provisions hereof for LIBOR Advances, Reference Rate Advances and the issuance of Letters of Credit which is evidenced by the Revolving Notes and Competitive Bid Advances which is evidenced by the Competitive Bid Notes. "Loan Document" means this Agreement, the Notes, each Advance Request, each Letter of Credit and any other agreement, document or instrument from time to time executed and delivered pursuant to and in connection with any of the foregoing. "Majority Banks" shall mean, at any time while Commitments are in effect, Banks having at least 51% of the aggregate amount of the Commitments and, at any time while no Commitments are in effect, Banks holding at least 51% of the outstanding aggregate principal amount of the Advances and the Letter of Credit Outstandings. "Obligations" means all obligations (monetary or otherwise) of the Company arising under or in connection with this Agreement, the Notes, any Letters of Credit and each other Loan Document. "Total Commitments" shall mean the aggregate from time to time of the Banks' Loan Commitments. E . Section 1.2 (i) of the Credit Agreement is amended in its entirety to read as follows: " (i) any of the "Company," the "Agent", the "Issuer" or the "Banks" shall be construed so as to include their respective successors, permitted assigns and, in the case of the Banks, transferees;". F. Section 2.1 of the Credit Agreement is amended by (x) deleting the "and" at the end of clause (ii), (y) replacing the period at the end of clause (iii) with "; and"; and (z) by inserting the following clause (iv) following clause (iii) thereof: " (iv) the Issuer agrees that it will issue Letters of Credit denominated in a Permitted Currency in accordance with Section 2.10, and each Bank severally agrees that it will purchase participation interests in such Letters of Credit in accordance with Section 2.10.4." G Section 2.2 of the Credit Agreement is amended in its entirety to read as follows: " Section 2.2 Maximum Outstandings. Subject to cancellation and reduction in accordance with the terms hereof, the maximum aggregate principal amount of the Facility which may be utilized at any time for Advances and the issuance of Letters of Credit is $200,000,000. In no event, however, shall (a) the sum of (i)aggregate Advance Outstandings at any time and (ii) aggregate Letter of Credit Outstandings at any time exceed the principal amount of $200,000,000 or such lesser amount as from time to time may result from any reduction pursuant to Section 2.5 hereof, or (b) the aggregate Letter of Credit Outstandings at any time exceed the Letter of Credit Commitment Amount." H . Section 2.5 of the Credit Agreement is amended in its entirety to read as follows: Section 2.5 Changes in Commitments Section 2.5 Changes in Commitments. The Company shall have the right in accordance with Section 7.1 hereof to terminate or reduce the amount of the Commitments at any time or from time to time to an amount not less than the sum of (i) Advance Outstandings, if any, and (ii) Letter of Credit Outstandings, if any, at the effective date of such termination or reduction, upon not less than three (3) Business Days' prior notice to the Agent (which shall promptly notify the Banks) of each such termination or reduction, which shall specify the effective date thereof and the amount of any such reduction (which shall not be less than $5,000,000 and, if more than $5,000,000, in integral multiples of $1,000,000) and shall be irrevocable and effective only upon receipt by the Agent. The Commitments once terminated or reduced may not be reinstated." I. Section 2.6 of the Credit Agreement is hereby amended by inserting the following subsection (c) following subsection (b): " (c) Letter of Credit Fees. The Company agrees to pay: (i) to the Agent for the account of each Bank a nonrefundable issuance fee equal to the rate per annum equal to the Applicable Margin on the Stated Amount of each such Letter of Credit, in each case multiplied by such Bank's Commitment Proportion, such fees being payable quarterly in arrears on each Quarterly Date and on the Final Repayment Date; and (ii) to the Agent for its own account a non refundable fronting fee equal to 0.0625% of the Stated Amount of each such Letter of Credit, such fee being payable quarterly in arrears on each Quarterly Date and on the Final Repayment Date, together with customary administrative, issuance, amendment, payment and negotiation charges incurred by the Issuer in connection with such Letter of Credit." J. . Subsection 2.8(b) of the Credit Agreement is hereby amended in its entirety to read as follows: " (b) If, at any time, the sum of (i) the outstanding aggregate principal amount of the Advances and (ii) the Letter of Credit Outstandings exceeds the aggregate amount of the Commitments as then in effect, the Company shall (i) pay or prepay the Advances and (ii) deposit Cash Collateral with the Agent in accordance with the provisions of Section 2.10.7 on such date in an aggregate principal amount equal to the excess, together with interest thereon accrued to the date of such payment or prepayment and any amounts payable pursuant to Section 8.11 hereof in connection therewith. If, at any time, the Letter of Credit Outstandings exceeds the Letter of Credit Commitment Amount as then in effect, the Company shall deposit Cash Collateral with the Agent in accordance with the provisions of Section 2.10.7 on such date in an aggregate principal amount equal to such excess." K. Article 2 of the Credit Agreement is hereby amended by inserting the following Section 2.10 following Section 2.9: "Section 2.10 Letters of Credit. The Issuer agrees to issue under the several obligations of the Banks in accordance with their respective Letter of Credit Commitments, or extend the Stated Expiry Date of, from time to time on any Business Day occurring prior to the Final Repayment Date, one or more standby letters of credit (herein individually referred to as a "Letter of Credit" and collectively referred to as "Letters of Credit") denominated in a Permitted Currency at the request of the Company and for the account and for the general purposes of the Company or an Approved Account Party. Each Letter of Credit shall be substantially upon such terms as the Company may specify in an Issuance Request therefor duly executed by an Authorized Signatory of the Company and delivered to the Issuer and the Agent on or before 11:00 a.m., New York time, on a Business Day, at least three (3) Business Days before the requested issuance of such proposed Letter of Credit. Each Letter of Credit must be in form and substance satisfactory to the Issuer, in its sole discretion, and shall have a fixed expiration date (with respect to each Letter of Credit, its "Stated Expiry Date") occurring not later than one year after the date of the issuance thereof (and in no event later than the Final Repayment Date, as in effect from time to time). Each Bank (other than the Issuer) severally agrees that it will hold participation interests in each Letter of Credit as provided to Section 2.10.1. The Issuer will make available to the beneficiary thereof the original of each Letter of Credit which it issues hereunder and will notify the beneficiary under any Letter of Credit of any extensions of the Stated Expiry Date thereof. In the event that any Letters of Credit remain outstanding after the Final Repayment Date, upon such Final Repayment Date, the Company (if it has not already done so) shall deposit with the Agent an amount in cash equal to the aggregate amount of Letter of Credit Outstandings attributable to such Letters of Credit, which cash amount shall be held as Cash Collateral in accordance with the provisions of Section 2.10.7. Section 2.10.1 Other Banks' Participation. Upon the issuance of each Letter of Credit, and without further action, each Bank (other than the Issuer) shall be deemed to have irrevocably and unconditionally purchased, to the extent of its Commitment Proportion, a participation interest in such Letter of Credit. Each Bank shall, to the extent of its Commitment Proportion, be responsible for reimbursing promptly (and in any event within one (1) Business Day), without setoff, deduction or counterclaim, the Issuer for Reimbursement Obligations which have not been reimbursed by the Company in accordance with Section 2.10.2. Without limiting the foregoing, the Issuer will promptly notify the Banks of the issuance of each Letter of Credit. Section 2.10.2 Company's Agreement to Repay Letter of Credit Drawings. The Company hereby irrevocably and unconditionally agrees to reimburse the Issuer, forthwith, for each payment or disbursement made by the Issuer to settle its obligations under any draft drawn under any Letter of Credit, with interest on the amount so paid or disbursed by the Issuer from and including the date of payment or disbursement to but not including the date the Issuer is reimbursed therefor, at a fluctuating rate per annum equal to (i) for each day in the period commencing on and including the day such payment or disbursement is made to and including the date three (3) Business Days after the Issuer gives notice of such payment or disbursement to the Company, the Reference Rate from time to time in effect or such other higher interest rate, if any, then applicable to Reference Rate Advances, and (ii) for any day thereafter to but not including the day of payment in full, the sum of the Reference Rate from time to time in effect plus two percent (2%). The Issuer shall promptly give notice to the Company by telephone, confirmed by telecopy to the Company's treasury department, of each receipt by the Issuer of a drawing under a Letter of Credit that appears on its face to conform to the requirements of such Letter of Credit. No later than 11:00 a.m., New York time, on the day which is three (3) Business Days after the date on which a payment to a beneficiary of a Letter of Credit occurs pursuant to a draw thereunder, the Company shall pay to the Issuer in immediately available funds for its account at the Payment Office the amount of such draw plus accrued interest at the rate set forth above. The foregoing notwithstanding, the obligation of the Company to reimburse the Issuer is not subject to demand thereof by the Issuer (or any Bank) and any failure by the Issuer (or any Bank)to notify the Company pursuant to the provisions of this Section shall in no way affect or impair the Reimbursement Obligations of the Company under the Letter of Credit, this Agreement, the Issuance Requests or any other Loan Document. Section 2.10.3 Absolute Duty to Reimburse for Letter of Credit Liabilities2.10.3 Absolute Duty to Reimburse for Letter of Credit Liabilities. Any provision in this Agreement or in any other Loan Document to the contrary notwithstanding, the Company's obligation to reimburse the Issuer and the Banks, as applicable, for any payment or disbursement under or in connection with a Letter of Credit shall be absolute and unconditional under any and all circumstances without and irrespective of any setoff, counterclaim or other defense to payment which the Company may have or have had against the Issuer or any Bank or any other Person. Without limiting the generality of the foregoing, the Company assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of the Letter of Credit and none of the Issuer, any Bank or any of their respective officers or directors shall be liable or responsible for (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith, (ii) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged (and each of the Issuer, any Bank, and any corresponding bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary), (iii) the enforceability of any instrument or document which is supported by a Letter of Credit, or (iv) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit other than as a result of the willful misconduct or gross negligence by the Issuer or such Bank. None of the foregoing shall affect, impair, or prevent the vesting of any of the rights or powers granted the Issuer or any Bank hereunder. In furtherance and extension, and not in limitation or derogation, of any of the foregoing, any action taken or omitted to be taken by the Issuer in good faith (and not constituting gross negligence or wilful misconduct) shall be binding upon the Company and each Bank and shall not put such Issuer under any resulting liability to the Company or any Bank, as the case may be. Section 2.10.4 Reimbursement Obligations of the Banks under the Letters of Credit. If the Company shall fail pursuant to the terms of Section 2.10.2 forthwith to reimburse the Issuer for each payment of disbursement made by the Issuer to settle its obligations under any draft drawn under any Letter of Credit, then upon demand by the Issuer each Bank shall forthwith make available to the Issuer at the Payment Office (or other office or branch of a financial institution which Issuer may designate from time to time by written notice to the Banks) immediately available funds in an amount equal to such Bank's pro rata share (according to its respective Commitment Proportion) of the amount so paid or disbursed by the Issuer. Each Bank shall indemnify and hold harmless the Issuer from and against any and all losses, liabilities (including, without limitation, liabilities for penalties, actions, suits, judgments, demands and damages) costs and expenses (including, without limitation, attorneys' fees and expenses) resulting from any failure on the part of such Bank to provide, or from any delay in providing, the Issuer with such Bank's share of the amount of any payment or disbursement made by the Issuer to settle its obligations under any draft drawn under any Letter of Credit in accordance with the provisions of the preceding sentence. The obligations of each Bank to provide the Issuer with such Bank's pro rata share of the amount of any payment or disbursement made by the Issuer to settle its obligations under any draft drawn under any Letter of Credit in accordance with the provisions of the preceding paragraph shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which such Bank may have or have had against the Issuer, including, without limitation, any defense based on the failure of the demand for payment under such Letter of Credit to conform to the terms of such Letter of Credit or the legality, validity, regularity or enforceability of such Letter of Credit AND INCLUDING BUT NOT LIMITED TO THOSE RESULTING FROM THE ISSUER'S OWN SIMPLE OR CONTRIBUTORY NEGLIGENCE; provided, however, that no Bank shall be obligated to reimburse the Issuer pursuant to the preceding provisions of this Section 2.10.4 for any wrongful payment or disbursement made by the Issuer under any Letter of Credit as a result of acts or omissions constituting gross negligence or willful misconduct on the part of the Issuer or any of its officers, employees or agents. Section 2.10.5 Letter of Credit Operations. The Issuer shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment by a beneficiary under a Letter of Credit to ascertain that the same appear on their face to be in conformity with the terms and conditions of such Letter of Credit. If, after examination, the Issuer shall have determined that a demand for payment under such Letter of Credit does not conform to the terms and conditions of such Letter of Credit, then the Issuer shall, as soon as reasonably practicable, give notice to such beneficiary to the effect that such demand for payment was not in accordance with the terms and conditions of such Letter of Credit, stating the reasons therefor. Thereupon, such beneficiary may attempt to correct any such non-conforming demand for payment under such Letter of Credit if, and to the extent that, such beneficiary is entitled (without regard to the provisions of this sentence) and able to do so. The Issuer hereby further agrees to notify the Company of any demand for payment by a beneficiary under a Letter of Credit which in the Issuer's determination does not conform to the terms and conditions of the relevant Letter of Credit; provided, however, that failure to give any such notification to the Company shall not affect or otherwise impair the Company's obligations hereunder or under the Issuance Request or any other Loan Documents nor subject the Issuer to any claim or liability. After determining that a demand for payment under such Letter of Credit conforms to the terms and conditions thereof, the Issuer shall make available to such beneficiary, in immediately available funds, the amount so demanded in accordance with the terms of such Letter of Credit. Section 2.10.6 Action With Respect to Letters of Credit Upon Occurrence of Default. Upon the occurrence of a Default under Sections (e) or (f) of Article 12, an amount equal to the amount of the then contingent liability of the Issuer (and the other Banks) under each outstanding Letter of Credit shall be, without demand upon or notice to the Banks, and, upon the occurrence of any other Event of Default, an amount equal to the amount of the then contingent liability of the Issuer (and the other Banks) under each outstanding Letter of Credit shall be, at the option of the Agent and without demand upon or notice to the Banks, deemed (as between the Company and the Issuer) to have been paid or disbursed by the Issuer under such Letters of Credit (notwithstanding that such amount may not in fact have been so paid or disbursed), and the Company shall be obligated (i) forthwith to reimburse the Issuer for the amount deemed to have been so paid or disbursed by the Issuer, and (ii) if the Issuer, in its discretion, so demands, to pay to the Issuer, forthwith on demand, such additional amounts as may be required so that the aggregate of all amounts previously paid by the Company to the Issuer under this Section 2.10.6, and not theretofore applied to the payment of amounts payable by the Company to the Issuer with respect to such Letter of Credit shall equal the amount of the then contingent liability of the Issuer (and the other Banks) under such Letter of Credit. Such amount shall be paid by depositing Cash Collateral with the Agent in accordance with the provisions of Section 2.10.7. Section 2.10.7 Procedures for Depositing, Investing and Returning of Cash Collateral. Any cash collateral amounts received by the Agent pursuant to the provisions of Section 2.8(b), Section 2.10 or Section 2.10.6 (such cash collateral amounts, the "Cash Collateral") shall be deposited in a cash collateral account (the "Letter of Credit Cash Collateral Account") maintained at the offices of the Agent or such other Bank or other Person acting as bailee for the Agent as the Agent shall designate but under the sole dominion and control of the Agent and shall be retained by the Agent for the pro rata benefit of the Issuer and the Banks in accordance with the Letter of Credit Outstandings owing to them as collateral security for, and the Company hereby grants to the Agent and its bailees or agents for the benefit of the Issuer, the Agent and the Banks a security interest in such Cash Collateral including all interest accruing thereon and the proceeds thereof. The Company further agrees that the Agent shall have all of the rights and remedies of a secured party under the Uniform Commercial Code as adopted in the State of New York with respect to such security interest and that an Event of Default under this Agreement shall constitute a default for purposes of such security interest. Any amounts so received by the Agent pursuant to the provisions of the preceding sentence shall be held as collateral security for, first, the repayment of the Company's Obligations in connection with the Letters of Credit and then the other Obligations of the Company under or in connection with this Agreement and any other Loan Documents. If and to the extent that (a) all Obligations of the Company in connection with the Letters of Credit have been fully paid and satisfied, and (b) the commitments and obligations of the Issuer (and the other Banks) under the Letters of Credit and related documents have terminated, the Agent shall pay to the Company, upon the Company's request therefor, all amounts previously paid to the Agent by the Company pursuant to this Section 2.10.7 and accrued interest thereon to the extent but only to the extent such amounts or accrued interest were not theretofore applied by the Agent to reduce amounts payable by the Company to the Issuer or the Banks under such Letters of Credit or include any other Obligation; provided, however, that if any Advances are outstanding as of such date, the Bank may continue to hold such amounts and accrued interest as security for the Loans and may thereafter apply such amounts and accrued interest to the payment of the Loans and/or any other Indebtedness secured thereby. All amounts on deposit in the Letter of Credit Cash Collateral Account may, until their application to any Obligation or their return to the Company, as the case may be, at the Company's written request, be invested in Cash Equivalent Investments designated by the Company, which Cash Equivalent Investments shall be held by the Agent as additional collateral security for the repayment of the Company's Obligations under and in connection with the Letters of Credit and all other Obligations. Any losses, net of earnings, and reasonable fees and expenses of such Cash Equivalent Investments shall be charged against the principal amount invested. The Agent, the Issuer and the Banks shall not be liable for any loss resulting from any Cash Equivalent Investment made at the Company's request. The Agent is not obligated hereby, or by any other Loan Document, to make or maintain any Cash Equivalent Investment, except upon written request by the Company." L. Section 6.1 of the Credit Agreement is amended in its entirety to read as follows: " Section 6.1 Currency Conversion and Currency Indemnity. Section 6.1.1 Payments in Agreed Currency The Company shall make payment relative to each Advance or Reimbursement Obligation in Dollars (the "Agreed Currency"). If any payment is received on account of any Advance in any currency (the "Other Currency") other than the Agreed Currency (whether voluntarily or pursuant to an order or judgment or the enforcement thereof or the realization of any security or the liquidation of the Company or otherwise howsoever), such payment shall constitute a discharge of the liability of the Company hereunder and under the other Loan Documents in respect of such obligation only to the extent of the amount of the Agreed Currency which the relevant Bank, the Issuer or the Agent, as the case may be, is able to purchase with the amount of the Other Currency received by it before noon on the date of such receipt, or, if the amount of the Other Currency is received after noon, the Business Day next following such receipt, in accordance with its normal procedures and after deducting any premium and costs of exchange. Section 6.1.2 Conversion of Agreed Currency into Judgment Currency. If, for the purpose of obtaining or enforcing a judgment in any court in any jurisdiction, it becomes necessary to convert into a particular currency (the "Judgment Currency") any amount due in the Agreed Currency then the conversion shall be made on the basis of the rate of exchange prevailing on the day on which judgment is given (unless such day is not a Business Day in which case the conversion shall be made on the basis of the rate of exchange prevailing on the Business Day next preceding the day of which judgment is given) and in any event the Company shall be obligated to pay the Agent, the Issuer and the Banks any deficiency in accordance with Section 6.1.1. For the foregoing purposes "rate of exchange" means the rate at which the relevant Bank, the Issuer or the Agent, as applicable, in accordance with its normal banking procedures is able on the relevant date to purchase the Agreed Currency with the Judgment Currency after deducting any premium and costs of exchange. Section 6.1.3 Circumstances Giving Rise to Indemnity. If (i) any Bank, the Issuer or the Agent receives any payment or payments on account of the liability of the Company hereunder pursuant to any judgment or order in any Other Currency, and (ii) the amount of the Agreed Currency which the relevant Bank, the Issuer or the Agent, as applicable, is able to purchase on the Business Day next following such receipt with the proceeds of such payment or payments in accordance with its normal procedures and after deducting any premiums and costs of exchange is less than the amount of the Agreed Currency due in respect of such obligations immediately prior to such judgment or order, then the Company on demand shall, and the Company hereby agrees to, indemnify and save the Banks, the Issuer and the Agent harmless from and against any loss, cost or expense arising out of or in connection with such deficiency. SECTION 6.1.4 Indemnity Separate Obligation. The agreement of indemnity provided for in Section 6.1 shall constitute an obligation separate and independent from all other obligations contained in this Agreement, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted by the Banks, the Issuer or the Agent or any of them from time to time, and shall continue in full force and effect notwithstanding any judgment or order for a liquidated sum in respect of an amount due hereunder or under any judgment or order." M. Subsection 6.4(i)(b) of the Credit Agreement is hereby amended in its entirety to read as follows: "(b) second, in or toward payment to the Banks of such amount as is required to repay the Advances and the Reimbursement Obligations, including accrued interest thereon, which have fallen due, and if insufficient to pay all principal and interest then due thereon shall be applied first to payment of interest and then to principal; and" N. Sections 8.4, 8.5, 8.6 and the first and second sentence of Section 8.7 of the Credit Agreement are amended by (i) inserting after each use of the word "Bank" the phrase "or the Issuer" and (ii) inserting after each use of the word "Bank's" the phrase "or the Issuer's". O . The Preamble to Article 11 of the Credit Agreement is hereby amended in its entirety to read as follows: " The Company agrees with the Agent, the Issuer and each Bank that so long as any of the Commitments are in effect and until payment in full of all Advances hereunder (other than pursuant to any continuing indemnification obligations under this Agreement), all interest thereon and all other amounts payable by the Company hereunder remains outstanding, and until all Letters of Credit shall have expired or been terminated and the Issuer and the Banks shall have no further obligation or liability under any Letter of Credit, the Company will perform the obligations set forth in this Article 11:". Article 12 of the Credit Agreement is hereby amended by (i) amending clause (a) in its entirety to read as follows: " (a) The Company shall default in the payment when due (i) of any principal of any Advance or any Reimbursement Obligation (and such default shall continue unremedied for a period of two (2) Business Days), or (ii) of any interest on any Advance, any Reimbursement Obligation or any fees payable by the Company hereunder or in connection herewith, or of any other monetary Obligation (and such default shall continue unremedied for five (5) Business Days); or " ; (ii) amending clause (i) thereof by inserting after the word "Advance" the phrase ", all Letter of Credit Obligations"; and (iii) amending clause (ii) thereof by inserting after the word "Advance" the phrase ", all Letter of Credit Obligations". Q. Section 13.1 of the Credit Agreement is hereby amended by (i) amending the first sentence thereof in its entirety to read as follows: "Each Bank hereby irrevocably appoints and authorizes the Agent to act as its agent and CIBC to act as the Issuer under and for purposes of this Agreement, the Notes and the other Loan Documents with such powers as are specifically delegated to the Agent or the Issuer by the terms of this Agreement, the Notes and the other Loan Documents, together with such other powers as are reasonably incidental thereto." and (ii) amending the second and third sentence thereof by inserting after each use of the word "Agent" the phrase "or the Issuer". R. The first sentence of Section 13.2 and Section 13.3 of the Credit Agreement are hereby amended by inserting after each use of the word "Agent" the phrase "or the Issuer". S. Section 13.4 of the Credit Agreement is hereby amended by (i) amending the first sentence thereof by inserting (a) after the first use of the word "Agent" the phrase "or the Issuer" and (b) after the second use of the word "Agent" the phrase "and the Issuer"; and (ii) amending the second sentence thereof by inserting (a) after the first use of the word "Agent" the phrase ", the Issuer", (b) after the second use of the word "Agent" the phrase "or the Issuer", and (c) after the third use of the word "Agent" the phrase "and the Issuer". T. Section 13.5 of the Credit Agreement is hereby amended by (i) amending the first sentence thereof by (a) replacing the phrase "the Agent and its officers" with the phrase "the Agent and the Issuer and their officers", and (b) inserting after the second use of the word "Agent" the phrase "or the Issuer"; and (ii) amending the second sentence thereof in its entirety to read as follows: "The obligation of the Banks in this Section shall survive the payment of the Advances, the Letter of Credit Outstandings and of any other sums due from Company hereunder and the termination of the Commitments." U. Section 13.6 of the Credit Agreement is hereby amended by (i) amending the first sentence thereof by inserting after each use of the word "Agent" the phrase ", the Issuer"; and (ii) amending the second sentence thereof by inserting after the word "Agent" the phrase " and the Issuer"; (iii) amending the third sentence thereof by (a) inserting after the first use of the word "Agent" the phrase "or the Issuer", (b) inserting after the second use of the word "Agent" the phrase "and the Issuer", and (c) after the third use of the word "Agent" the phrase ", the Issuer"; and (iv) amending the fourth sentence thereof by inserting after the word "Agent" the phrase "or the Issuer". V. Section 13.7 of the Credit Agreement is hereby amended by (i) inserting after the first use of the word "Agent" the phrase "or the Issuer"; and (ii) inserting after the second use of the word "Agent" the phrase "and the Issuer". W. Section 13.8 of the Credit Agreement is hereby amended by (i) amending the first sentence thereof by inserting after the word "Agent" the phrase ", the Issuer"; (ii) amending the second sentence thereof by inserting after each use of word "Agent" the phrase "or the Issuer"; (iii) amending the third sentence thereof by (a) inserting after the word "agent" the phrase "or issuer", and (b) inserting after the word "Agent" the phrase "or Issuer"; (iv) amending the fourth sentence thereof by inserting after the word "Agent" the phrase "or the Issuer"; and (v) amending the fifth sentence thereof by (a) inserting after the word "Agent's" the phrase ", Issuer's", and (b) inserting after each use of the word "Agent" the phrase ", the Issuer". X. Section 14.1 of the Credit Agreement is hereby amended by inserting after the word "Agent" the phrase ", the Issuer". Y. Section 14.4 of the Credit Agreement is hereby amended by (i) amending the second sentence thereof by inserting after each use of the word "Agent" the phrase " and the Issuer"; and (ii) amending the third sentence thereof by inserting after each use of word "Agent" the phrase ", the Issuer". Z. Section 14.5 of the Credit Agreement is hereby amended by inserting after each use of the word "Co-Agents" the phrase ", the Issuer". AA. Subsection 14.7(a) of the Credit Agreement is hereby amended by inserting after the word "Agent" the phrase "and the Issuer". BB. Subsection 14.7(e) of the Credit Agreement is hereby amended by inserting after each use of the word "Co-Agents" the phrase ", the Issuer". CC. Section 14.8 of the Credit Agreement is hereby amended by inserting after the word "Agent" the phrase ", the Issuer". DD. Subsection 14.9(ii) of the Credit Agreement is hereby amended by inserting after the word "Advances" the phrase ", Letter of Credit Outstandings". EE. Sections 14.11, 14.19 and 14.20 of the Credit Agreement are hereby amended by inserting after the word "Agent" the phrase ", the Issuer". FF. Section 14.21 of the Credit Agreement is hereby amended by (i) inserting after the first use of the word "Banks" the phrase ", the Issuer" and (ii) inserting after the second use of the word "Agent" the phrase ", the Issuer". GG. Exhibit I to the Credit Agreement is amended in its entirety to read as provided in Exhibit I hereto. All references in the Credit Agreement to Exhibit I shall be deemed to refer to Exhibit I hereto. HH. The Credit Agreement is amended by adding Exhibit L hereto as Exhibit L to the Credit Agreement. All references in the Credit Agreement to Exhibit L shall be deemed to refer to Exhibit L hereto. II. The Credit Agreement is amended by adding Schedule A hereto as Schedule A to the Credit Agreement. All references in the Credit Agreement to Schedule A shall be deemed to refer to Schedule A hereto. SECTION 2. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned upon receipt by the Agent of all of the following, each in form and substance satisfactory to the Agent, and in sufficient number of signed counterparts to provide one for each Co-Agent and each Bank, (i) counterparts of this Amendment, executed by the Company, the Banks, the Co-Agents and the Agent and (ii) such other documents as the Agent may reasonably request. SECTION 3. Representations and Warranties. To induce the Banks, the Co-Agents and the Agent to enter into this Amendment, the Company hereby reaffirms, as of the date hereof, its representations and warranties contained in Article X of the Credit Agreement and in each other Loan Document to which it is a party (except to the extent such representations and warranties relate solely to an earlier date) and additionally represents and warrants as follows: A. Authorization; No Conflict. The execution and delivery of this Amendment and the performance by the Company of its Obligations under this Amendment, the Credit Agreement as amended by this Amendment, and the other Loan Documents, are within the Company's powers, have been duly authorized by all necessary action, have received all necessary governmental approval (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the articles of incorporation or bylaws of the Company, or of any material agreement binding upon the Company. B. Validity and Binding Nature. This Amendment and the Credit Agreement as amended by this Amendment are legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms subject as to enforcement only to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity. C. Consents. No action, consent or approval of, or registration or filing with, or any other action by any governmental authority is required in connection with the execution, delivery and performance by the Company of this Amendment, the Credit Agreement as amended by this Amendment, or any other Loan Document or the legality, validity, binding effect or enforceability of this Amendment, the Credit Agreement as amended by this Amendment, or the other Loan Documents. SECTION 4. Reaffirmation of Credit Agreement. This Amendment shall be deemed to be an amendment to the Credit Agreement, and the Credit Agreement, as amended hereby, is hereby ratified, approved and confirmed in each and every respect. All references to the Credit Agreement in any other document, instrument, agreement or writing shall hereafter be deemed to refer to the Credit Agreement as amended hereby. SECTION 5. Defined Terms. Except as amended hereby or otherwise indicated, terms defined in the Credit Agreement are used in this Amendment with the same meaning. SECTION 6. Section Captions. Section captions used in this Amendment are for convenience of reference only, and shall not affect the construction of this Amendment. SECTION 7. Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. All obligations of the Company and rights of the Agent, the Co-Agents, the Banks and any other holders of the Notes expressed herein or in the Notes shall be in addition to and not in limitation of those provided by applicable law. SECTION 8. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. SECTION 9. Successors and Assigns. This Amendment shall be binding upon the Company, the Banks, the Co-Agents and the Agent and their respective successors and assigns, and shall inure to the benefit of the Company, the Banks, the Co-Agents and the Agent and the respective successors and assigns of the Banks, the Co-Agent and the Agent; provided, however, that the Company may not assign or transfer its rights or obligations hereunder without the prior written consent of all Banks. SECTION 10. Severability. In case any provision in or obligation under this Amendment, the Credit Agreement as amended by this Amendment or any other Loan Document shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 11. No Oral Agreements. THIS WRITTEN AMENDMENT TOGETHER WITH THE OTHER LOAN DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES BEGIN ON FOLLOWING PAGE] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written and shall be effective as of such date. PACIFIC GAS TRANSMISSION COMPANY By: /s/ STANLEY C. KARCZEWSKI ----------------------------- Name: Stanley C. Karczewski Title: Vice President of Finance, Controller and Chief Financial Officer CANADIAN IMPERIAL BANK OF COMMERCE, as Agent for the Banks By:/s/ MARYBETH ROSS -------------------- Name: Marybeth Ross Title: Authorized Signator THE BANK OF NOVA SCOTIA, as Co-Agent for the Banks By: /s/ M. BROWN -------------------- Name: M. Brown Title: Officer BARCLAYS BANK PLC, as Co-Agent for the Banks By: /s/ HELEN L. CALVELLI -------------------------- Name: Helen Calvelli Title: Director THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agent for the Banks By: /s/ RICHARD WALDMAN -------------------------------------- AUTHORIZED AGENT CIBC INC., as a Bank By: /s/ MARYBETH ROSS ----------------- Name: Marybeth Ross Title: Authorized Signatory THE BANK OF NOVA SCOTIA, as a Bank By: /s/ M. BROWN ----------------- Name: M. Brown Title: Officer BARCLAYS BANK PLC, as a Bank By: /s/ HELEN L. CALVELLI -------------------------- Name: Helen Calvelli Title: Director THE FIRST NATIONAL BANK OF CHICAGO, as a Bank By: /s/ STEVEN P. CAPOUCH -------------------------- Name: Steven P. Capouch Title: First Vice President BANK OF AMERICA NT & SA, as a Bank By: /s/ GARY M. TSUYUKI ----------------------- Name: Gary M. Tsuyuki Title: Managing Director CITIBANK, N.A., as a Bank By: /s/ SANDIP SEN ---------------- Name: Sandip Sen Title: Vice President Attorney-in-Fact THE FUJI BANK, LIMITED, San Francisco Agency, as a Bank By: /s/ KEIICHI OZAWA --------------------- Name: Keiichi Ozawa Title: Joint General Manager SOCIETE GENERALE, a French bank, as a Bank By: /s/ J. BLAINE SHAUM ------------------------ Name: J. Blaine Shaum Title: Regional Manager SWISS BANK CORPORATION, New York Branch, as a Bank By: /s/ KAREN MAYROSE ---------------------- Name: Karen Mayrose Title: Associate Director Banking Finance Support, N.A. By: /s/ SABINA WU ------------------- Name: Sabina Wu Title: Director Credit Risk Management, N.A. UNITED STATES NATIONAL BANK OF OREGON, as a Bank By: /s/ DEREK RIDGLEY ---------------------- Name: Derek Ridgley Title: Vice President EXHIBIT I Form of Transfer Certificate To: [Name and address of Transferee] and Canadian Imperial Bank of Commerce, as Agent From: [Name of Transferor Bank and Facility Office] Date: ___________________, 199____ Re: Transfer Certificate - Credit Agreement, dated as of May 31, 1995 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement") among Pacific Gas Transmission Company (the "Company"), the various financial institutions as are and may become parties thereto (the "Banks"), The Bank of Nova Scotia, Barclays Bank PLC and The First National Bank of Chicago, as (the "Co-Agents"), and Canadian Imperial Bank of Commerce ("CIBC"), as Agent for the Banks (the "Agent") Ladies and Gentlemen: 1. [Name of Transferor Bank] (the "Transferor") confirms the accuracy of the summary of its participation in the Credit Agreement set out in the schedule attached hereto (the "Schedule") before and after giving effect to the assignment and transfer herein made. Transferor hereby assigns and transfers, without recourse, to [Name of Transferee Bank] (the "Transferee") the rights and obligations of Transferor under the Credit Agreement specified in the Schedule. Transferee accepts such assignment and transfer by countersigning and delivering this Transfer Certificate to Transferor. This assignment is effective as of the date set forth in the Schedule (the "Transfer Effective Date"). The principal amount of any outstanding Advances under the Credit Agreement as of the Transfer Effective Date shall be apportioned between Transferor and Transferee in accordance with the Schedule and Transferee shall pay Transferor in immediately available funds on the Transfer Effective Date or such other date as is agreed to between the Transferor and the Transferee an amount equal to the principal amount of any outstanding Advance being assigned and transferred hereunder. All interest and fees payable under the Credit Agreement shall be apportioned between Transferor and Transferee proportionately to the periods before and after the Transfer Effective Date as to which payable. 2. Transferee is also delivering signed counterpart copies hereof to the Agent at its address for the service of notices specified in the Credit Agreement. The Agent is requested to make appropriate entries on its records to reflect the assignment and transfer effected hereby. 3. The Transferee hereby undertakes with the Transferor and each of the other parties to the Credit Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Credit Agreement it will assume upon delivery of this Transfer Certificate by it. Transferee agrees promptly to deliver to the Company, the Agent and any other withholding agent specified by the Company, two copies of a valid Form 1001, a valid Form 4224 or a certificate substantially in the form of Exhibit I to the Credit Agreement (in accordance with Sections 8.2 and 14.7(e) of the Credit Agreement). Transferee agrees promptly to pay to the Agent a transfer registration fee in the amount of $2,500. By its consent hereto the Company consents to the transfer herein provided, agrees that Transferee shall be a Bank under the Credit Agreement and releases the Transferor pro tanto as to the obligations of Transferor transferred to Transferee hereunder. 4. The Transferee confirms that it has received a copy of the Credit Agreement together with such other documents and information as it has required in connection with this transaction. Transferee hereby confirms that it has entered into this assignment and transfer on the basis of its own independent commercial relationship with the Company and its own independent investigation and that it has not relied and will not hereafter rely on the Transferor, the other Banks, the Agent, the Issuer or the Co- Agents with respect to the due execution, legality, validity, effectiveness, adequacy, accuracy or enforceability of the Credit Agreement or any other documents and information or with respect to the collectibility of any Advance or other amount due under the Credit Agreement. Transferee further agrees that it has not relied and will not rely on the Transferor, the other Banks, the Agent, the Issuer or the Co- Agents to assess or keep under review on its behalf or provide Transferee, except as expressly required under the terms of the Credit Agreement, with any information as to the financial condition, creditworthiness, condition, affairs, status or nature of the Company or the subsidiaries or of any other party to the Credit Agreement or the observance by the Company of any of its obligations under the Credit Agreement or any document relating thereto. 5. The Transferor makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Credit Agreement or any document relating thereto or the collectibility of any Advance or other amount due under the Credit Agreement and assumes no responsibility for the financial condition of the Company or any other party to the Credit Agreement or for the performance and observance by the Company or any other party of any of its obligations under the Credit Agreement or any document relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded. 6. The Transferee confirms the appointment of the Agent and the Issuer in accordance with the terms of Article 13 of the Credit Agreement. 7. This Transfer Certificate shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Transfer Certificate to be duly executed and delivered as of the date first above written. [TRANSFEROR] By Name: Title: "Transferor" [TRANSFEREE] By Name: Title: "Transferee" Consented to as of the above date by: PACIFIC GAS TRANSMISSION COMPANY By Name: Title: Receipt acknowledged and Consented to as of the above date: CANADIAN IMPERIAL BANK OF COMMERCE, as Agent By Name: Title: THE SCHEDULE TO THE TRANSFER CERTIFICATE Details of Transfer 1. Details of Commitments a. Transferor's Commitment before this Transfer: b. Amount of Commitment Transferred: c. Transferor's remaining Commitment: d. Transferee's Commitment: e. Transfer Effective Date: 2. Details of Advances a. Outstanding Advance(s) and Letter of Credit Outstandings of Transferor to Company prior to Transfer Effective Date: Type of Principal Drawdown Repayment Interest Advance Amount Date Date Rate - -------- ------- ----------- -------------- ----------- b. Principal Amount of Outstanding Advance(s) and Letter of Credit Outstandings Transferred to Transferee: Type of Principal Drawdown Repayment Interest Advance Amount Date Date Rate ----------- ------------- --------- ----------- ------------ Administrative Details Respecting Transferee Facility Office for Advances: Attn: Address for Notices: Attn: Account for Payments: Telephone: Telefacsimile: Telex: Issuance Request Canadian Imperial Bank of Commerce as Agent and as Issuer 425 Lexington Avenue New York, New York 10017 Attention: [Name] [Title] Re: PACIFIC GAS TRANSMISSION COMPANY Gentlemen and Ladies: This Issuance Request is delivered to you pursuant to Section 2.8 of that certain Credit Agreement, dated as of May 31, 1995 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement"), among Pacific Gas Transmission Company, a California corporation (the "Company"), certain financial institutions and Canadian Imperial Bank of Commerce, as agent the "Agent"). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Company hereby requests that the Issuer issue a Letter of Credit for the account of -------------- on [date] in the initial face amount of $----- - ------- [and in the form attached hereto].(1) The beneficiary of the requested Letter of Credit will be------------ , and such Letter of Credit will be in support of the [provide description] and will have a Stated Expiry Date of [date]. The following documents will be required upon presentation: [provide description]. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the proposed issuance of the Letter of Credit, before and after giving effect thereto and to the application of the proceeds therefrom: (i) the face amount of the proposed Letter of Credit is not more than the Adjusted Available Facility Amount; (ii) no Default has occurred and is continuing; (iii) the representations and warranties contained in Sections 10.1, 10.4, 10.5, 10.6, 10.7 and 10.9 of the Credit Agreement are true and correct as of the date of such issuance except for changes reflecting transactions permitted by the Credit Agreement; (iv) no authorizations, approvals or consents of, and no filings or renegotiations with, any governmental or regulatory authority or agency are necessary for the incurring of obligations in connection with such Advance, other than approvals which have been duly obtained and are of full force and effect; and (v) the incurring of obligations in connection with such Advance does not conflict with or result in a breach of any applicable law or regulation, or any other, writ, injunction or decree of any court or regulatory authority. The Company agrees that if prior to the time of the issuance of the Letter of Credit requested hereby any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the Letter of Credit requested hereby the Agent shall receive written notice to the contrary from the Company, each matter certified to herein shall be deemed once again to be certified as true and correct at the date of such Borrowing as if then made. IN WITNESS WHEREOF, the Company has caused this Issuance Request to be executed and delivered, and the certification and warranties contained herein, by its duly Authorized Signatory this ------ day of------------ , 19 PACIFIC GAS TRANSMISSION COMPANY By: Name: Title: [Issuance Request to be accompanied by such additional information/documentation as is mutually acceptable to the Issuer and the Company, consistent with the terms of the Credit Agreement] - ----------------------- [FN] (1) Include where the Borrower is providing the form of Letter of Credit requested to be issued. EX-12 5 EXHIBIT 12.1 Pacific Gas Transmission Company Computation of Ratio of Earnings to Fixed Charges (Dollars in Millions)
Years Ended December 31, ----------------------------------- Ratio of Earnings to Fixed Charges 1996 1995 1994 1993 1992 ---------------------------------- ----- ----- ------ ------ ------ Earnings: Income from continuing operations $43.1 $51.6 $47.7 $6.3 $2.2 Adjustments: Income taxes 28.9 31.3 30.0 (12.2) (4.0) Fixed charges (as below) 46.3 48.2 47.4 27.2 22.8 ----- ----- ------ ------ ------ Total adjusted earnings $118.3 $131.1 $125.1 $21.3 $21.0 ======= ====== ====== ====== ====== Fixed charges: (a) Net interest expense $45.7 $46.3 $45.6 $11.7 $4.7 Adjustments: Interest component of rents 0.3 0.7 0.9 0.8 0.8 AFUDC debt 0.3 1.2 0.9 14.7 17.3 ------ ------ ------ ------ ------ Total fixed charges $46.3 $48.2 $47.4 $27.2 $22.8 ====== ====== ====== ====== ====== Ratio of earnings to fixed charges 2.6 2.7 2.6 0.8 0.9 ====== ====== ====== ====== ====== Deficiency of earnings to cover fixed charges N/A N/A N/A ($5.9) ($1.8) ====== ====== ====== ====== ====== Years Ended December 31, Ratio of Earnings Before Net Gas Supply ----------------------------------- Restructuring (GSR) Costs to Fixed Charges 1993 1992 ---------------------------------- ------ ------ Total adjusted earnings, as above $21.3 $21.0 GSR costs, net of GSR recoveries 51.0 37.5 ------ ------ Total adjusted earnings before net GSR costs $72.3 $58.5 ====== ====== Total fixed charges, as above $27.2 $22.8 ====== ====== Ratio of earnings before net GSR costs to fixed charges 2.7 2.6 ====== ====== - ------------------ (a) There were no shares of preferred stock issued or outstanding during any of the five years ended December 31, 1996, and therefore there were no fixed charges related to preferred stock during these periods.
EX-21 6 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Pacific Gas Transmission Company, a California Corporation, has the following subsidiaries: Ownership or Percentage of State or Voting Jurisdiction of Securities Incorporation or Name of Subsidiary Owned Organization ---------------------------------- --------------- ------------------- Energy Source, Inc. 100% California PG&E Energy Source Canada, Inc. 100% Canada PGT Australia Pty Ltd 100% Australia PGT Nominees Pty Ltd* 100% Australia PGT Queensland Pty Ltd 100% Australia PGT Queensland Unit Trust 100% Australia PGT Victoria Pty Ltd* 100% Australia PGT Western Australia Pty Ltd* 100% Australia Pacific Gas Transmission International, Inc. 100% California * Created in anticipation of future business activities; currently does no business. EX-23 7 EXHIBIT 23.1 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of our report dated February 10, 1997 included in Pacific Gas Transmission Company's previously filed Registration Statement File No. 33-91048. It should be noted that we have not audited any financial statements of the company subsequent to December 31, 1996 or performed any audit procedures subsequent to the date of our report. /s/ Arthur Andersen LLP ----------------------------- Arthur Andersen LLP Portland, Oregon March 27, 1997 EX-24 8 EXHIBIT 24.1 PACIFIC GAS TRANSMISSION COMPANY BOARD OF DIRECTORS ACTION BY WRITTEN CONSENT The Board of Directors of Pacific Gas Transmission Company, a California corporation, acting by written consent pursuant to the Bylaws of this corporation and the Corporations Code of California, hereby adopts the following resolutions: WHEREAS, the management of the corporation has recommended the filing of the corporation's Annual Report on Form 10-K of the fiscal year ending December 31, 1996, with the Securities and Exchange Commission; and WHEREAS, the Board finds that it is in the best interests of the corporation to approve the Annual Report on Form 10-K for fiscal year ended December 31, 1996 in substantially the form as circulated to the Board prior to approval; NOW, THEREFORE, BE IT RESOLVED, that Frank R. Lindh and Vincent P. Salvi are hereby authorized to sign, on behalf of this corporation and as attorneys in fact for the President, Vice President and Chief Financial Officer and Controller of this corporation, the Pacific Gas Transmission Company Annual Report on Form 10-K for the fiscal year ended December 31, 1996, required by Section 13 or 15(d) of the Securities Exchange Act of 1934, and all amendments and other filings or documents related thereto to be filed with the Securities and Exchange Commission, and to do any and all acts necessary to satisfy the requirements of the Securities Exchange Act of 1934 and the regulations of the Securities and Exchange Commission adopted thereto with regard to said Annual Report on Form 10-K. BE IT FURTHER RESOLVED, that this written consent may be signed in counterparts, the sum of which constitute the entire written consent. The undersigned, constituting all of the members of the Board of Directors, hereby consent to and approve the action described above and direct the Secretary to file this written consent with the minutes of the proceedings of the Board of Directors. Dated this 26th day of March, 1997. /s/ TONY F. DISTEFANO ---------------------- Tony F. DiStefano /s/ ROBERT D. GLYNN, JR. ------------------------- Robert D. Glynn, Jr. /s/ JACK F. JENKINS-STARK -------------------------- Jack F. Jenkins-Stark /s/ STEPHEN P. REYNOLDS -------------------------- Stephen P. Reynolds /s/ GORDON R. SMITH -------------------------- Gordon R. Smith EX-27 9
UT 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 1,052,412 136,761 498,808 87,313 0 1,775,294 85,474 242,000 183,028 510,502 0 0 558,187 0 0 108,087 0 0 16,775 384 581,359 1,775,294 546,785 28,889 424,235 453,124 93,661 (4,854) 88,807 45,662 43,145 0 43,145 0 29,450 96,301 43,145 43,145
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