-----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, SdqvVxaoKN8GwXkjN/tghCZAnqPVoqD+U4CP3MxNm3wNBfm8rCuTDO7WRKkLH1mK nSHlAaskkJjRDmvmRNygLw== 0000075491-97-000017.txt : 19970813 0000075491-97-000017.hdr.sgml : 19970813 ACCESSION NUMBER: 0000075491-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970812 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25842 FILM NUMBER: 97657459 BUSINESS ADDRESS: STREET 1: 2100 SW RIVER PKWY CITY: PORTLAND STATE: OR ZIP: 97201 BUSINESS PHONE: 5038334000 MAIL ADDRESS: STREET 1: 2100 SW RIVER PARKWAY CITY: PORTLAND STATE: OR ZIP: 97201 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ----------- to ------------ 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 (I.R.S. employer Identification incorporation or organization) No.) 2100 SW River Parkway, Portland, OR 97201 (Address of principal executive (Zip code) offices) Registrant's telephone number, including area code: (503) 833-4000 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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 12, 1997. 1,000 shares of common stock no par value. (All shares are owned by PG&E Gas Transmission Corporation.) Registrant meets the conditions set forth in General Instruction (H) (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format. PART I: FINANCIAL INFORMATION - ------------------------------ ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Statements of Consolidated Income (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, - ------------------------------------------------------------------------------ (In Thousands) 1997 1996 1997 1996 - ------------------------------------------------------------------------------ OPERATING REVENUES: Gas transportation $ 45,263 $ 44,746 $ 93,929 $ 93,081 Gas transportation for affiliates 11,914 8,851 24,601 17,833 Gas supply restructuring cost recovery - 7,528 - 14,618 from affiliates Gas supply restructuring cost recovery - 5,564 - 10,579 - ------------------------------------------------------------------------------ Total operating revenues 57,177 66,689 118,530 136,111 - ------------------------------------------------------------------------------ OPERATING EXPENSES: Gas supply restructuring costs - 13,092 - 25,197 Administrative and general 8,914 7,211 21,502 16,648 Operations and maintenance 3,560 4,075 8,316 8,462 Depreciation and amortization 10,375 9,236 20,705 18,352 Property and other taxes 2,727 2,892 5,795 5,898 - ------------------------------------------------------------------------------ Total operating expenses 25,576 36,506 56,318 74,557 - ------------------------------------------------------------------------------ OPERATING INCOME 31,601 30,183 62,212 61,554 - ------------------------------------------------------------------------------ OTHER INCOME AND (INCOME DEDUCTIONS): Allowance for equity funds used during construction 161 107 233 196 Interest income 351 432 444 1,183 Other - net (3,490) (720) (4,615) (1,159) - ------------------------------------------------------------------------------ Total other income and (income deductions) (2,978) (181) (3,938) 220 - ------------------------------------------------------------------------------ INTEREST EXPENSE: Interest on long-term debt 11,754 10,018 23,694 20,327 Allowance for borrowed funds used during construction (105) (83) (154) (154) Other interest charges 449 1,047 539 2,030 - ------------------------------------------------------------------------------ Net interest expense 12,098 10,982 24,079 22,203 - ------------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 16,525 19,020 34,195 39,571 INCOME TAX EXPENSE 5,432 7,331 13,552 15,631 - ------------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS 11,093 11,689 20,643 23,940 - ------------------------------------------------------------------------------ INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (11,359) - (11,901) - INCOME TAX BENEFIT 4,194 - 4,157 - - ------------------------------------------------------------------------------ NET INCOME $ 3,928 $ 11,689 $ 12,899 $ 23,940 - --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Balance Sheets - ----------------------------------------------------------------------------- ASSETS - -----------------------------------------------------------------------------
June 30, December 31, (In Thousands) 1997 1996 (Unaudited) Audited - ----------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment in service $ 1,589,679 $ 1,586,225 Accumulated depreciation (436,935) (416,190) - ------------------------------------------------------------------------------- Net plant in service 1,152,744 1,170,035 Construction work in progress 23,488 17,529 - ------------------------------------------------------------------------------- Total property, plant and equipment - net 1,176,232 1,187,564 - ------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 13,293 11,969 Accounts receivable - gas transportation 18,138 22,241 Accounts receivable - affiliated companies 5,829 15,890 Deferred income taxes 2,113 2,478 Inventories (at average cost) 6,943 6,510 Prepayments and other current assets 6,408 12,181 Net assets of Energy Trading (see Note 2) - 56,102 - ------------------------------------------------------------------------------- Total current assets 52,724 127,371 - ------------------------------------------------------------------------------- DEFERRED CHARGES: Income tax related 25,706 26,016 Deferred charge on reacquired debt 14,257 14,859 Unamortized debt expense 4,908 5,229 Regulatory assets 16,069 15,687 Other 8,171 1,672 - ------------------------------------------------------------------------------ Total deferred charges 69,111 63,463 - ------------------------------------------------------------------------------ TOTAL ASSETS $ 1,298,067 $ 1,378,398 - ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Consolidated Balance Sheets - ------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES - -------------------------------------------------------------------------------
June 30, December 31, (In Thousands) 1997 1996 (Unaudited) Audited - -------------------------------------------------------------------------------- CAPITALIZATION: Common stock - no par value, 1,000 shares authorized, issued and outstanding $ 85,474 $ 85,474 Additional paid-in capital 242,000 242,000 Foreign currency translation adjustment (5,953) (183) Reinvested earnings 136,835 183,211 - ------------------------------------------------------------------------------- Total common stock equity 458,356 510,502 Long-term debt 655,921 683,049 - ------------------------------------------------------------------------------- Total capitalization 1,114,277 1,193,551 - ------------------------------------------------------------------------------- CURRENT LIABILITIES: Long-term debt - current portion 401 384 Accounts payable and other accrued 22,403 28,541 liabilities Accrued taxes 1,634 2,482 - -------------------------------------------------------------------------------- Total current liabilities 24,438 31,407 - -------------------------------------------------------------------------------- DEFERRED CREDITS: Deferred income taxes 141,249 134,635 Other 18,103 18,805 - -------------------------------------------------------------------------------- Total deferred credits 159,352 153,440 - -------------------------------------------------------------------------------- Commitments and contingencies (see Note 3) - - - -------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,298,067 $ 1,378,398 - --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Statements of Consolidated Cash Flows (Unaudited) - -------------------------------------------------------------------------------
Six Months Ended June 30, (In Thousands) 1997 1996 - ------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 12,899 $ 23,940 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,717 19,398 Discontinued operations 7,744 - Deferred income taxes 7,289 (3,588) Gas supply restructuring costs - 24,314 Allowance for equity funds used during construction (233) (196) Changes in operating assets & liabilities: Accounts receivable 4,103 1,634 Accounts payable and other accrued liabilities (6,138) (9,915) Accounts receivable-affiliated companies 10,061 9,959 Accrued taxes (848) (2,440) Regulatory accruals (382) 7,368 Other working capital 5,340 1,421 Other - net (1,859) (760) - -------------------------------------------------------------------------------- Net cash provided by operating activities 59,693 71,135 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment expenditures (3,937) (3,295) Construction expenditures (17,643) (19,059) Allowance for borrowed funds used during (154) (154) construction - -------------------------------------------------------------------------------- Net cash used in investing activities (21,734) (22,508) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (26,635) (36,272) Construction financing - 338 Dividend paid to parent company (10,000) (10,000) - -------------------------------------------------------------------------------- Net cash used in financing activities (36,635) (45,934) - -------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1,324 2,693 CASH AND CASH EQUIVALENTS AT JANUARY 1 11,969 9,839 - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT JUNE 30 $ 13,293 $ 12,532 - -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for (received from): Interest $ 22,546 $ 21,652 Income taxes $ (5,238) $ 10,208 - --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Note 1: Basis of Presentation - ------------------------------ The accompanying unaudited consolidated financial statements, which have been prepared in accordance with interim period reporting requirements, reflect the results for the following entities: Pacific Gas Transmission Company (PGT) PGT's wholly owned subsidiaries: PG&E Gas Transmission Australia Pty Ltd (PG&E Australia) (formerly, PGT Australia Pty Limited) Pacific Gas Transmission International, Inc. (PGT International) PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland) (formerly, PGT Queensland Pty Limited) PGT's former wholly owned subsidiary : PG&E Energy Trading Corporation (Energy Trading) through its date of disposition effective June 30, 1997 (see Note 2, below) PGT and its subsidiaries collectively are referred to herein as the "Company." This information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data in the Company's Form 10-K for the fiscal year ended December 31, 1996. In the opinion of management, the accompanying statements reflect all adjustments necessary to present a fair statement of the financial position and results of operations for the interim periods. All material adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. Intercompany accounts and transactions have been eliminated. Prior year's amounts in the consolidated financial statements have been reclassified where necessary to conform to the 1997 presentation. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. It is currently anticipated that prior to year end, PGT's Australian operations will be transferred by PGT to another PG&E Corporation affiliate. Note 2: Discontinued Operations - ----------------------------------- In April 1997, PG&E Corporation announced its intention to reorganize certain aspects of its corporate structure and business lines to support its long-term strategic goals. Consistent with this strategy, on June 30, 1997, PGT distributed all of the shares of Energy Trading to PGT's sole shareholder, PG&E Gas Transmission Corporation. PG&E Gas Transmission Corporation, in turn immediately thereafter, distributed these shares to its sole shareholder, PG&E Corporation (see PGT's Current Report on Form 8-K dated July 11,1997 for further discussion and related pro forma financial statements). Accordingly, Energy Trading's results are reported as discontinued operations. For financial reporting purposes, the measurement date applied is June 30, 1997, the date of disposal. In addition, since the shares of Energy Trading were transferred at the $49.3 million net book value at the time of distribution, there was no gain or loss on disposal. For the three and six months ended June 30, 1997, Energy Trading's revenues were $637.5 million and $1,560.0 million, respectively. For the purposes of cash flow presentation, this transfer was a noncash transaction. Net assets of Energy Trading at the date of disposal and at December 31, 1996 were as follows:
At Date of December 31, Disposal 1996 ------------ ----------- (in millions) Property, plant & equipment - net $ 1.9 $ 1.6 Cash, restricted cash and cash 14.4 31.0 equivalents Assets from risk management 27.5 16.6 Accounts receivable - net 348.7 386.9 Other current assets 6.0 3.1 Goodwill and other deferred 29.1 23.9 charges Accounts payable from gas marketing (356.8) (386.6) Other current liabilities (21.5) (20.4) ----------- ---------- Net assets $ 49.3 $ 56.1 =========== ==========
Note 3: Contingencies - ---------------------- 1994 Rate Case - In September 1996, the Federal Energy Regulatory Commission (FERC) approved a settlement of PGT's rate case which was filed in February 1994. The settlement provided for rolled-in rates effective on November 1, 1996. To mitigate the impact of the higher rolled-in rates, most of the firm shippers that paid rates lower than the rolled-in rate 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 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. Norcen Litigation: On June 27, 1997, PGT and Pacific Gas and Electric Company (PG&E) entered into a settlement agreement with Norcen Energy Resources Limited (Norcen Energy) and Norcen Marketing Incorporated (Norcen Marketing) resolving the litigation filed against PGT and PG&E by Norcen Energy and Norcen Marketing in the U.S. District Court, Northern District of California, on March 17, 1994. The settlement of this matter will not have a material adverse impact on the Company's financial condition, liquidity, or results of operations. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------- The unaudited consolidated financial statements include: Pacific Gas Transmission Company (PGT) PGT's wholly owned businesses: PG&E Gas Transmission Australia Pty Ltd (PG&E Australia) (formerly, PGT Australia Pty Limited) Pacific Gas Transmission International, Inc. (PGT International) PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland) (formerly, PGT Queensland Pty Limited) PGT's former wholly owned subsidiary: PG&E Energy Trading Corporation (Energy Trading) through its date of disposition effective June 30, 1997 (see Note 2 "Discontinued Operations" in the Notes to Consolidated Financial Statements contained in Item 1, Consolidated Financial Statements, above) PGT and its subsidiaries collectively are referred to as the "Company." This information should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data in the Company's Form 10-K for the fiscal year ended December 31, 1996. The following discussion includes forward-looking statements that involve a number of risks and uncertainties including, but not limited to, the ongoing restructuring of the gas industry and the future results of new acquisitions. When used in Management's Discussion and Analysis of Financial Condition and Results of Operations, the words "estimates," "expects," "anticipates," "plans," and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Importantly, the ultimate impact of the restructuring of the gas industry and new acquisitions on future results is uncertain, but is expected to cause changes in the way the Company conducts its business and to cause earnings to be more volatile. These outcomes may cause future results to differ materially from historical results or from results or outcomes currently expected or sought by the Company. General ------- PGT is a wholly owned subsidiary of its parent holding company, PG&E Gas Transmission Corporation, which is wholly owned by PG&E Corporation. Effective January 1, 1997, PG&E Corporation became the holding company for PGT's former parent company, Pacific Gas and Electric Company (PG&E)and PG&E's ownership interest in PGT was transferred to PG&E Corporation. In April 1997, PG&E Corporation announced its intention to reorganize certain aspects of its corporate structure and business lines to support its long-term strategic goals. Consistent with this strategy, on June 30, 1997, PGT distributed all of the shares of Energy Trading to PGT's sole shareholder, PG&E Gas Transmission Corporation. PG&E Gas Transmission Corporation, in turn immediately thereafter, distributed these shares to its sole shareholder, PG&E Corporation (see PGT's Current Report on Form 8-K dated July 11,1997 for further discussion and related pro forma financial statements). Energy Trading primarily consists of the gas marketing operations of Edisto Resources Corporation in the United States and Canada which were acquired by PGT in 1996. Energy Trading is engaged in the purchase and resale of natural gas to a diversified customer base, primarily consisting of industrial and commercial companies, local distribution companies, and industry partners. During 1996, PGT established the PGT Queensland Unit Trust, to be renamed the PG&E Queensland Unit Trust (PG&E Qld Trust), to hold all of the assets of the Queensland State Gas Pipeline. These assets were purchased effective July 1, 1996, from the Government of the State of Queensland, Australia. The pipeline is referred to as the PG&E Queensland Gas Pipeline, formerly the PGT Queensland Gas Pipeline. The PG&E Qld Trust is owned by two wholly owned subsidiaries of PGT; PGT International, a California corporation, and PG&E Queensland, an Australian corporation. PG&E Queensland operates the pipeline. In addition, PGT established another wholly owned subsidiary, PG&E Australia (formerly PGT Australia Pty Limited), an Australian corporation, to pursue new business development opportunities in Australia and to serve as trustee of the PG&E Qld Trust. In connection with PG&E Corporation's reorganization, it is anticipated that prior to year end, PGT's Australian operations will be transferred to another PG&E Corporation affiliate. PGT's domestic 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). Various safety issues are subject to the jurisdiction of the United States Department of Transportation. Changing Regulatory Environment ------------------------------- Since November 1, 1993, when PGT adopted FERC Order 636, PGT has applied the straight fixed-variable (SFV) rate design method for firm rate schedules. Under the SFV rate design, an open access 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 current SFV rate design and based upon the settlement of its 1994 rate case, PGT is permitted to recover 97 percent of its fixed costs through reservation charges paid by firm transportation service customers. These customers pay a reservation charge for firm transportation service 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, and 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. 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. In January 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 or 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. In July 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. During the same month, the FERC issued a Notice of Proposed Rulemaking 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. Also 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. In February 1997, the FERC issued an order on remand (Order 636C), largely affirming its 636 policies. Order 636C 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. A number of parties, including PGT, have requested rehearing of this change in policy. 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. 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, by providing interruptible and short-term firm 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. 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 have only 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 PG&E Queensland Gas 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. Another entity 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. As noted above, it is anticipated that prior to year end, PGT's Australian operations will be transferred to another PG&E Corporation affiliate. 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 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. 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 $61.7 million of net regulatory assets as of June 30, 1997 including $8.5 million for relocation costs associated with the transfer of its headquarters from San Francisco to Portland, Oregon. Although PGT recorded a reserve against these relocation costs in 1996, management intends to seek recovery of these costs as well as all other regulatory assets through rates charged to customers. Results of Operations --------------------- Selected operating results and other data are as follows:
Three Months Ended Six Months Ended June 30, June 30, - ----------------------------------------------------------------------------- 1997 1996 1997 1996 (in millions) (in millions) Operating revenues $ 57.2 $ 66.7 $ 118.5 $ 136.1 Operating expenses (25.6) (36.5) (56.3) (74.6) - ------------------------------------------------------------------------------- Operating income 31.6 30.2 62.2 61.5 Other income and (income (3.0) (0.2) (3.9) 0.2 deductions) Net interest expense (12.1) (11.0) (24.1) (22.2) - -------------------------------------------------------------------------------- Income from continuing operations before taxes 16.5 19.0 34.2 39.5 Income tax expense (5.4) (7.3) (13.6) (15.6) - ------------------------------------------------------------------------------- Income from continuing operations 11.1 11.7 20.6 23.9 Income (loss) from discontinued operations (11.4) - (11.9) - Income tax benefit 4.2 - 4.2 - - -------------------------------------------------------------------------------- Net Income $ 3.9 $ 11.7 $ 12.9 $ 23.9 ================================================================================
Net Income - Net income from continuing operations was $11.1 million and $20.6 million, respectively for the three and six months ended June 30, 1997, compared with $11.7 million and $23.9 million for the same periods in 1996. The $0.6 million and $3.3 million decreases in the 1997 periods, respectively, were primarily the result of the timing and level of investment development expenditures incurred by the Company and losses of $0.3 million and $0.7 million, respectively, by the PG&E Queensland Gas Pipeline. The net losses from discontinued operations of $7.2 million and $7.7 million for the three and six month periods ended June 30, 1997, respectively, represent the results of Energy Trading's operations prior to disposition. Operating Revenues - The components of total operating revenues are as follows:
Three Months Ended Six Months Ended June 30, June 30, - ------------------------------------------------------------------------------- 1997 1996 1997 1996 - -------------------------------------------------------------------------------- (in millions) (in millions) Gas transportation $ 57.2 $ 53.6 $ 118.5 $ 110.9 Gas supply restructuring - 13.1 - 25.2 (GSR) cost - -------------------------------------------------------------------------------- Total Operating Revenues $ 57.2 $ 66.7 $ 118.5 $ 136.1 ================================================================================
Gas transportation revenues for the three and six month periods ended June 30, 1997, increased $3.6 million and $7.6 million, respectively, compared to the same periods in 1996. These increases were primarily a result of $2.7 million and $5.5 million in revenues for the three and six month periods ended June 30, 1997, respectively, from the PG&E Queensland Gas Pipeline, which was purchased effective July 1, 1996. In addition, firm and interruptible revenues for the three and six month periods ended June 30, 1997 increased on PGT's pipeline compared to the same periods in 1996. GSR cost recovery revenues reflect the collection from customers through volumetric surcharges and direct bills of deferred GSR costs over a three-year period, ending in November 1996, as permitted by the transition cost recovery mechanism (TCRM) approved by the FERC. These revenues had no effect on income as they were fully offset by the amortization of like amounts of deferred GSR costs. Operating Expenses - The components of total operating expenses are as follows:
Three Months Ended Six Months Ended June 30, June 30, - -------------------------------------------------------------------------------- 1997 1996 1997 1996 - -------------------------------------------------------------------------------- (in millions) (in millions) Gas supply restructuring (GSR) costs $ - $ 13.1 $ - $ 25.2 Administrative and general 8.9 7.2 21.5 16.6 Operations and maintenance 3.6 4.1 8.3 8.5 Depreciation and amortization 10.4 9.2 20.7 18.4 Property and other taxes 2.7 2.9 5.8 5.9 - -------------------------------------------------------------------------------- Total Operating Expenses $ 25.6 $ 36.5 $ 56.3 $ 74.6 ================================================================================
As discussed above, GSR costs, which were directly offset by related revenues, were fully amortized during 1996. For the three and six month periods ended June 30, 1997 compared with the same periods in 1996, operating expenses, exclusive of GSR costs, increased $2.2 million and $6.9 million, respectively, as a result of expenses associated with the operating activities of the PG&E Queensland Gas Pipeline and PG&E Australia. These entities were not owned or operated by the Company during the first six months of 1996. Other Income and (Income Deductions) - Other income deductions for the three and six months ended June 30, 1997, increased $2.8 million and $4.1 million, respectively, compared to the same periods in 1996 primarily due to increased investment development expenses and reduced carrying charges on GSR costs earned in 1997 compared to 1996. The GSR costs were fully recovered during 1996. Interest Expense - Net interest expense for the three and six month periods ended June 30, 1997, increased $1.1 million and $1.9 million, respectively, compared to the same periods in 1996, primarily due to the interest incurred by the PG&E Queensland Gas Pipeline. During 1997, interest expense for the PG&E Queensland Gas Pipeline was $3.4 million which was partially offset by $1.0 million in lower interest expense associated with PGT's revenue subject to refund balances which were repaid to customers during 1996. For both the six months ended June 30, 1997 and 1996, interest on PGT's long-term debt was approximately $20.3 million, based upon an average interest rate of 7.4 percent applied to an average balance of $553 million. The average effective interest rate for the PG&E Queensland Gas Pipeline was 7.6 percent, based upon an average long-term debt balance of $90.6 million. 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 as part of a balanced approach to managing its capital structure, funding its operations and capital expenditures and maintaining appropriate cash balances. Net Cash Provided by Operating Activities - For the six months ended June 30, 1997, net cash provided by operating activities was $59.7 million, as compared with net cash provided by operating activities of $71.1 million for the same period in 1996. The $11.4 million reduction is primarily a result of $24.3 million in GSR collections in 1996 offset, in part, by deferred taxes on revenues which were refunded to customers during 1996. Net Cash Used in Investing Activities - The Company's expenditures for property, plant and equipment (including the allowance for borrowed funds used during construction) amounted to $17.8 million and $19.2 million for the six months ended June 30, 1997 and 1996, respectively. Net Cash Used in Financing Activities - For the six months ended June 30, 1997, cash used in financing activities amounted to $36.6 million as a result of a reduction in long-term debt and a $10.0 million dividend paid to PGT's parent company. For the six months ended June 30, 1996, cash used in financing activities amounted to $45.9 million and included a net $36.3 million reduction in long-term debt and a $10.0 million dividend. Legal Matters ------------- 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 the Company's financial position, liquidity, or results of operations. On June 27, 1997, PGT and Pacific Gas and Electric Company (PG&E) entered into a settlement agreement with Norcen Energy Resources Limited (Norcen Energy) and Norcen Marketing Incorporated (Norcen Marketing) resolving the litigation filed against PGT and PG&E by Norcen Energy and Norcen Marketing in the U.S. District Court, Northern District of California, on March 17, 1994. The settlement of this matter will not have a material adverse impact on the Company's financial condition, liquidity or results of operations. New Accounting Standards ------------------------ Effective January 1, 1997, the Company adopted 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 did not have an adverse impact on the Company's financial position, liquidity, or results of operations. During 1997, the Financial Accounting Standards Board has adopted the following new accounting statements: SFAS Number Description ------------------------------------------------------------------------ 128 Earnings per Share 129 Disclosure of Information about Capital Structure 130 Reporting Comprehensive Income 131 Disclosures about Segments of an Enterprise and Related Information These statements primarily establish standards for financial statement presentation and disclosure requirements. Both SFAS No. 128 and 129 are effective for financial statements issued for periods ending after December 15, 1997 while SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. The adoption of these statements will not have any effect on PGT's financial condition, liquidity, or results of operations. PART II: OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS - -------------------------- On June 27, 1997, PGT and Pacific Gas and Electric Company (PG&E) entered into a settlement agreement with Norcen Energy Resources Limited (Norcen Energy) and Norcen Marketing Incorporated (Norcen Marketing) resolving the litigation filed against PGT and PG&E by Norcen Energy and Norcen Marketing in the U.S. District Court, Northern District of California, on March 17, 1994. The settlement of this matter will not have a material adverse impact on the Company's financial condition, liquidity, or results of operations. ITEM 5. OTHER INFORMATION - -------------------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Exhibit 27 - Financial Data Schedule for the six months ended June 30, 1997 (b) Reports on Form 8-K during the quarter ended June 30, 1997 and through the date hereof: 1. June 11, 1997 Item 5. Other Events - Litigation Settlement 2. July 11, 1997 Item 2. Disposition of Assets - Distribution of all of the shares of PG&E Energy Trading Company to PG&E Gas Transmission Company Item 7. Pro Forma Financial Information - Pro Forma Financial Statements reflecting the disposition of PG&E Energy Trading Company SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PACIFIC GAS TRANSMISSION COMPANY -------------------------------- (Registrant) August 12, 1997 By: /s/ STANLEY C. KARCZEWSKI ---------------------------------- Name: Stanley C. Karczewski Title: Vice President of Finance and Controller and Chief Financial Officer EX-27 2
UT YEAR DEC-31-1997 JUN-30-1997 PER-BOOK 1,048,528 127,704 52,724 69,111 0 1,298,067 85,474 242,000 130,882 458,356 0 0 557,642 0 0 81,715 0 0 16,564 401 183,389 1,298,067 118,530 13,552 56,318 69,870 48,660 (11,682) 36,978 24,079 12,899 0 12,899 59,275 0 59,693 12,899 12,899
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