-----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, WdseMH4GyCpclpFO5+r7v+Dg0MGHO3NAHmb035OBjsP2suxi71ikNxxgkzbYAG/a tCoTmbQ2BLKWAuOtgsu9+A== 0000075491-97-000022.txt : 19971110 0000075491-97-000022.hdr.sgml : 19971110 ACCESSION NUMBER: 0000075491-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 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: SEC FILE NUMBER: 000-25842 FILM NUMBER: 97710768 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 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 No.) incorporation or organization) 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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of November 7, 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 WITH THE REDUCED DISCLOSURE FORMAT. TABLE OF CONTENTS - ----------------- PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Consolidated Financial Statements Statements of Consolidated Income Consolidated Balance Sheets Statements of Consolidated Common Stock Equity Statements of Consolidated Cash Flows Notes to Consolidated Financial Statements Note 1. Basis of Presentation Note 2. PG&E Corporation Reorganization Note 3. Contingencies Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signature PART I: FINANCIAL INFORMATION - ------------------------------ ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- - ------------------------------------------------------------------------------- STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) - -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended September 30, September 30, - ------------------------------------------------------------------------------ (In Thousands) 1997 1996 1997 1996 - ------------------------------------------------------------------------------- OPERATING REVENUES: Gas transportation $ 49,203 $ 50,765 $ 143,132 $ 143,846 Gas transportation for affiliates 12,143 8,739 36,744 26,572 Gas supply restructuring cost - 3,229 - 17,847 recovery from affiliates Gas supply restructuring cost - 3,525 - 14,104 recovery - ------------------------------------------------------------------------------- Total operating revenues 61,346 66,258 179,876 202,369 - ------------------------------------------------------------------------------- OPERATING EXPENSES: Gas supply restructuring costs - 6,754 - 31,951 Administrative and general 11,379 9,985 32,881 26,633 Operations and maintenance 5,102 3,389 13,418 11,851 Depreciation and amortization 10,375 10,127 31,080 28,479 Property and other taxes 2,826 3,019 8,621 8,917 - ------------------------------------------------------------------------------- Total operating expenses 29,682 33,274 86,000 107,831 - ------------------------------------------------------------------------------- OPERATING INCOME 31,664 32,984 93,876 94,538 - ------------------------------------------------------------------------------- OTHER INCOME AND (INCOME DEDUCTIONS): Allowance for equity funds used 96 93 329 289 during construction Interest income 168 860 612 2,043 Other - net (1,734) (2,427) (6,349) (3,586) - ------------------------------------------------------------------------------- Total other income and (1,470) (1,474) (5,408) (1,254) (income deductions) - ------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on long-term debt 11,711 11,798 35,405 32,125 Allowance for borrowed funds used (69) (69) (223) (223) during construction Other interest charges 296 1,047 835 3,077 - ------------------------------------------------------------------------------- Net interest expense 11,938 12,776 36,017 34,979 - ------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 18,256 18,734 52,451 58,305 INCOME TAX EXPENSE 7,008 7,274 20,560 22,905 - ------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 11,248 11,460 31,891 35,400 - ------------------------------------------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES - - (11,901) - INCOME TAX BENEFIT - - 4,157 - - ------------------------------------------------------------------------------ NET INCOME $ 11,248 $ 11,460 $ 24,147 $ 35,400 - ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------
September 30, December 31, (In Thousands) 1997 1996 (Unaudited) (Audited) - ----------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment in $ 1,473,991 $ 1,586,225 service Accumulated depreciation (443,047) (416,190) - ------------------------------------------------------------------------------ Net plant in service 1,030,944 1,170,035 Construction work in progress 16,435 17,529 - ------------------------------------------------------------------------------ Total property, plant and 1,047,379 1,187,564 equipment - net - ----------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 10,497 11,969 Accounts receivable - gas 15,989 22,241 transportation Accounts receivable - affiliated 2,188 15,890 companies Deferred income taxes - 2,478 Inventories (at average cost) 6,596 6,510 Prepayments and other current assets 6,409 12,181 Net assets of Energy Trading (see Note 2) - 56,102 - ------------------------------------------------------------------------------ Total current assets 41,679 127,371 - ------------------------------------------------------------------------------ DEFERRED CHARGES: Income tax related 25,587 26,016 Deferred charge on reacquired debt 13,956 14,859 Unamortized debt expense 4,110 5,229 Regulatory assets 15,901 15,687 Other 1,754 1,672 - ------------------------------------------------------------------------------ Total deferred charges 61,308 63,463 - ------------------------------------------------------------------------------ TOTAL ASSETS $ 1,150,366 $ 1,378,398 - ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. - ------------------------------------------------------------------------------ CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ CAPITALIZATION AND LIABILITIES - ------------------------------------------------------------------------------
September 30, December 31, (In Thousands) 1997 1996 (Unaudited) (Audited) - ------------------------------------------------------------------------------ CAPITALIZATION: Common stock - no par value, 1,000 shares $ 85,474 $ 85,474 authorized, issued and outstanding Additional paid-in capital 192,250 242,000 Foreign currency translation adjustment - (183) Reinvested earnings 155,358 183,211 - ------------------------------------------------------------------------------ Total common stock equity 433,082 510,502 Long-term debt 526,310 683,049 - ------------------------------------------------------------------------------ Total capitalization 959,392 1,193,551 - ------------------------------------------------------------------------------ CURRENT LIABILITIES: Long-term debt - current portion 410 384 Accounts payable and other accrued 24,800 28,541 liabilities Accrued taxes 4,053 2,482 - ------------------------------------------------------------------------------ Total current liabilities 29,263 31,407 - ------------------------------------------------------------------------------ DEFERRED CREDITS: Deferred income taxes 144,068 134,635 Other 17,643 18,805 - ------------------------------------------------------------------------------ Total deferred credits 161,711 153,440 - ------------------------------------------------------------------------------ CONTINGENCIES (see Note 3) - - - ----------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,150,366 $ 1,378,398 - ------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. - ------------------------------------------------------------------------------- STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY - -------------------------------------------------------------------------------
Nine Months Ended Year Ended September 30, December 31, (In Thousands) 1997 1996 (Unaudited) (Audited) - ------------------------------------------------------------------------------- BALANCE AT BEGINNING OF PERIOD $ 510,502 $ 417,540 Net income 24,147 43,145 Capital contributions from parent company - 60,000 Return of capital of PG&E Energy Trading (49,275) - Corporation to parent company Cash dividends from retained earnings (52,000) (10,000) paid to parent company Contributed capital from sale of Australian 8,619 - investments Foreign currency translation (10,447) (183) Other 1,536 - - ------------------------------------------------------------------------------- BALANCE AT END OF PERIOD $ 433,082 $ 510,502 - -------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. - ------------------------------------------------------------------------------- STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------
Nine Months Ended September 30, - ------------------------------------------------------------------------------- (In Thousands) 1997 1996 - ------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 24,147 $ 35,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 32,886 29,415 Discontinued operations 7,744 - Deferred income taxes 11,439 (5,962) Gas supply restructuring costs - 30,044 Allowance for equity funds used during construction (329) (289) Changes in operating assets and liabilities: Accounts receivable 4,815 9,058 Accounts payable and other accrued liabilities (1,195) (1,797) Accounts receivable - affiliated companies 14,654 10,631 Accrued taxes 1,571 232 Regulatory accruals (214) 11,527 Other working capital 5,243 (1,569) Other - net (517) 3,864 - ------------------------------------------------------------------------------ Net cash provided by operating activities 100,244 120,554 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the sale of subsidiaries to affiliated 42,000 - company Investment expenditures (2,891) (136,227) Sale of fixed assets 5,303 - Construction expenditures (27,737) (25,252) Allowance for borrowed funds used during construction (223) (223) - ----------------------------------------------------------------------------- Net cash provided by (used in) investing 16,452 (161,702) activities - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Long-term debt issued - 91,742 Equity contribution from parent company - 10,000 Long-term debt issuance costs - (323) Repayment of long-term debt (66,168) (40,728) Dividend paid to parent company (52,000) (10,000) - ----------------------------------------------------------------------------- Net cash provided by (used in) financing (118,168) 50,691 activities - ----------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,472) 9,543 CASH AND CASH EQUIVALENTS AT JANUARY 1 11,969 9,839 - ------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 10,497 $ 19,382 - ------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for (received from): Interest $ 28,654 $ 23,407 Income taxes $ (3,451) $ 22,673 - -----------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ------------------------------------------------------ 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 Pacific Gas Transmission Company (PGT) and its wholly owned subsidiaries including Pacific Gas Transmission International, Inc. (PGT International) and the following subsidiaries through their respective dates of disposition (see Note 2, below): Through June 30, 1997: PG&E Energy Trading Corporation (Energy Trading) Through September 26, 1997: PG&E Gas Transmission Australia Pty Limited (PG&E Australia) (formerly, PGT Australia Pty Limited) PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland) (formerly, PGT Queensland Pty Limited) 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. NOTE 2: PG&E CORPORATION REORGANIZATION - ---------------------------------------- In April 1997, PG&E Corporation, PGT's ultimate corporate parent, 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, PGT has transferred ownership of its subsidiaries other than PGT International to other PG&E Corporation affiliates. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED - ------------------------------------------------------------------ PG&E ENERGY TRADING: -------------------- 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 was 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 six months ended June 30, 1997, Energy Trading's revenues were $1,560.0 million. 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 charges 29.1 23.9 Accounts payable from gas marketing (356.8) (386.6) Other current liabilities (21.5) (20.4) ---------- ---------- Net assets $ 49.3 $ 56.1 ========== ==========
PGT'S AUSTRALIAN INVESTMENTS: ------------------------------ On September 26, 1997, PGT sold all of its investments in Australia to another PG&E Corporation affiliate for $42.0 million (see PGT's Current Report on Form 8-K dated October 6, 1997). The subsidiaries sold included PG&E Queensland, the operator of the the PG&E Queensland Gas Pipeline, and PG&E Australia. PG&E Australia was established to pursue new business development opportunities in Australia for PGT and to serve as trustee of the PG&E Queensland Unit Trust (PG&E Qld Trust). The PG&E Qld Trust, which holds the assets of the PG&E Queensland Gas Pipeline, was owned by PGT International (a PGT wholly owned subsidiary) and PG&E Queensland. Net assets of PGT's Australian investments at the date of disposal and at December 31, 1996 were as shown below. The $8.6 million difference between the sales price of $42.0 million and PGT's net investment of $33.4 million was credited to additional paid in capital as no gain or loss was recognized upon disposition since this transaction was between entities within the PG&E Corporation consolidated group.
At Date of December 31, Disposal 1996 ---------- ----------- (in millions) Property, plant & equipment - net $ 123.1 $ 135.2 Current assets 3.6 3.4 Deferred charges 0.6 0.8 Long-term debt (89.8) (90.8) Current liabilities (4.0) (2.6) Deferred credits (0.1) (0.1) ---------- --------- Net assets $ 33.4 $ 45.9 ========== =========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED - ------------------------------------------------------------------ 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 had previously 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, PGT is permitted 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 did 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) and its wholly owned subsidiaries including Pacific Gas Transmission International, Inc. (PGT International) and the following subsidiaries through their respective dates of disposition (see "PG&E Corporation Reorganization" in Note 2 of the Notes to Consolidated Financial Statements contained in Part I, Item 1, Consolidated Financial Statements, above): Through June 30, 1997: PG&E Energy Trading Corporation (Energy Trading) Through September 26, 1997: PG&E Gas Transmission Australia Pty Limited (PG&E Australia) (formerly, PGT Australia Pty Limited) PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland) (formerly, PGT Queensland Pty Limited) 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. 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 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). PG&E's ownership interest in PGT was transferred to PG&E Corporation. 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. PG&E CORPORATION REORGANIZATION ------------------------------- 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). On September 26, 1997, PGT sold all of its investments in Australia to another PG&E Corporation affiliate for $42.0 million. The subsidiaries sold included PG&E Queensland, the operator of the PG&E Queensland Gas Pipeline, and PG&E Australia. PG&E Australia was established to pursue new business development opportunities in Australia for PGT and to serve as trustee of the PG&E Queensland Unit Trust (PG&E Qld Trust). The PG&E Qld Trust, which holds the assets of the PG&E Queensland Gas Pipeline, was owned by PGT International (a PGT wholly owned subsidiary) and PG&E Queensland. Since this transaction was between entities within the PG&E Corporation consolidated group, no gain or loss was recognized upon disposition. 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 that 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. 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 continues 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 $57.6 million of net regulatory assets as of September 30, 1997 including $8.6 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. YEAR 2000 COMPLIANCE -------------------- PGT has an information system initiative in process that will require increased expenditures during the next several years to convert certain computer systems to be Year 2000 compliant. The Year 2000 compliance issue exists because many computer systems and applications currently use two-digit fields to designate a year. As the century date change occurs, date-sensitive systems may either fail or not operate properly unless the underlying programs are modified or replaced. PGT is continuing to assess the extent of programming changes required to address this issue. Although final cost estimates have yet to be determined for these programming changes, it is anticipated that such costs will result in increased expenses during 1998 and 1999. It is not expected that these expenses will have a material adverse impact on PGT's financial condition, liquidity, or results of operations. RESULTS OF OPERATIONS --------------------- Selected operating results and other data are as follows:
Three Months Nine Months Ended Ended September 30, September 30, ----------------- ------------------ 1997 1996 1997 1996 ----------------- ------------------ (in millions) (in millions) Operating revenues $ 61.3 $ 66.3 $179.8 $ 202.4 Operating expenses (29.7) (33.3) (86.0) (107.8) ------- ------- ------- -------- Operating income 31.6 33.0 93.8 94.6 Other income and (income deductions) (1.5) (1.5) (5.4) (1.3) Net interest expense (11.9) (12.8) (36.0) (35.0) ------- ------- ------- -------- Income from continuing operations 18.2 18.7 52.4 58.3 before taxes Income tax expense (7.0) (7.2) (20.6) (22.9) ------- ------- ------- -------- Income from continuing operations 11.2 11.5 31.8 35.4 Income (loss) from discontinued - - (11.9) - operations Income tax benefit - - 4.2 - ------- ------- ------- -------- Net Income $ 11.2 $ 11.5 $ 24.1 $ 35.4 ======= ======= ======= ========
NET INCOME - Net income from continuing operations was $11.2 million and $31.8 million, respectively for the three and nine months ended September 30, 1997, compared with $11.5 million and $35.4 million for the same periods in 1996. The $0.3 million and $3.6 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 higher losses of $0.1 million and $0.9 million, respectively, by the PG&E Queensland Gas Pipeline, which was purchased effective July 1, 1996. The net loss of $7.7 million from discontinued operations for the nine month period ended September 30, 1997 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 Nine Months Ended September 30, September 30, ------------------ ----------------- 1997 1996 1997 1996 -------- ------- ------- ------- (in millions) (in millions) Gas transportation $ 61.3 $ 59.5 $ 179.8 $ 170.4 Gas supply restructuring (GSR) cost - 6.8 - 32.0 recovery ------- ------- ------- ------- Total Operating Revenues $ 61.3 $ 66.3 $ 179.8 $ 202.4 ======= ======= ======= =======
Gas transportation revenues for the three and nine month periods ended September 30, 1997, increased $1.8 million and $9.4 million, respectively, compared to the same periods in 1996. These increases were primarily a result of improved revenues for PGT's pipeline in the Pacific Northwest. In addition, the nine months ended September 30, 1997, also reflects $5.6 million in revenues for an additional six months of operations in Australia since the PG&E Queensland Gas Pipeline was not purchased until July 1, 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 Nine Months Ended September 30, September 30, ---------------- ----------------- 1997 1996 1997 1996 ---------------- ----------------- (in millions) (in millions) Gas supply restructuring (GSR) $ - $ 6.8 $ - $ 32.0 costs Administrative and general 11.4 10.0 32.9 26.6 Operations and maintenance 5.1 3.4 13.4 11.8 Depreciation and amortization 10.4 10.1 31.1 28.5 Property and other taxes 2.8 3.0 8.6 8.9 ------- ------ ------ ------- Total Operating Expenses $ 29.7 $33.3 $86.0 $ 107.8 ======= ====== ====== =======
As discussed above, GSR costs, which were directly offset by related revenues, were fully amortized during 1996. For the three and nine month periods ended September 30, 1997 compared with the same periods in 1996, operating expenses, exclusive of GSR costs, increased $3.2 million and $10.2 million, respectively, primarily as a result of $2.6 million and $9.4 million, respectively, for 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 months ended September 30, 1997 and 1996 were both $1.5 million. Other income deductions for the nine months ended September 30, 1997 increased $4.1 million compared to the same period in 1996 primarily due to increased investment development expenses and the absence of 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 months ended September 30, 1997, decreased $0.9 million compared to the same period in 1996 primarily as a result of interest expense associated with PGT's revenue subject to refund balances which were repaid to customers during 1996. Net interest expense for the nine months ended September 30, 1997 increased $1.0 million compared to the same period in 1996, primarily due to the interest incurred by the PG&E Queensland Gas Pipeline offset, in part, by reduced interest expense on PGT's revenue subject to refund balances. During the nine months ended September 30, 1997, interest expense for the PG&E Queensland Gas Pipeline increased $3.4 million compared to same period in 1996 since no interest was incurred prior to the July 1, 1996 acquisition date. For the nine months ended September 30, 1997, interest on PGT's long-term debt was approximately $30.3 million, based upon an average interest rate of 7.4 percent applied to an average balance of $546 million. For the nine months ended September 30, 1996, interest on PGT's long-term debt was approximately $30.4 million, based upon an average interest rate of 7.4 percent applied to an average balance of $549 million. For the nine months ended September 30, 1997, interest expense for the PG&E Queensland Gas Pipeline was approximately $5.1 million, based upon an average interest rate of 7.6 percent applied to an average balance of $90.4 million. For the three and nine month periods ended September 30, 1996, the average interest rate for the PG&E Queensland Gas Pipeline was 7.3 percent, based upon an average long-term debt balance of $91.7 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 nine months ended September 30, 1997, net cash provided by operating activities was $100.2 million, as compared with net cash provided by operating activities of $120.6 million for the same period in 1996. The $20.4 million reduction is primarily a result of $30.0 million in GSR collections in 1996 offset, in part, by deferred taxes on revenues that were refunded to customers during 1996. NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - For the nine months ended September 30, 1997, PGT received $42.0 million in proceeds for the sale of its Australian subsidiaries. The Company's expenditures for property, plant and equipment (including the allowance for borrowed funds used during construction) amounted to $28.0 million and $25.5 million for the nine months ended September 30, 1997 and 1996, respectively. NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - For the nine months ended September 30, 1997, cash used in financing activities amounted to $118.2 million as a result of a $66.2 million reduction in long-term debt and a $52.0 million dividend paid to PGT's parent company. For the nine months ended September 30, 1996, cash provided by financing activities amounted to $50.7 million and included $91.4 million in additional debt issued to purchase the PG&E Queensland Gas Pipeline and a $10.0 million equity contribution from PGT's parent company offset, in part, by a $40.7 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. See "Contingencies" in Note 3 of the Notes to Consolidated Financial Statements contained in Part I, Item 1, Consolidated Financial Statements, above, for further discussion of significant pending legal matters. 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, PGE 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 did not have a material adverse impact on the Company's financial condition, liquidity, or results of operation. ITEM 5. OTHER INFORMATION ----------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibit 27 - Financial Data Schedule for the nine months ended September 30, 1997 (b) Reports on Form 8-K during the quarter ended September 30, 1997 and through the date hereof: 1. 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 2. October 6, 1997 Item 5. Other Events - PGT's sale of its Australian subsidiaries and interest in the PG&E Queensland Gas Pipeline to another PG&E Corporation affiliate 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) November 7, 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 FINANCIAL DATA SCHEDULE THIS SECTION OF THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 1,047,379 0 41,679 61,308 0 1,150,366 85,474 192,250 155,358 433,082 0 0 467,420 0 0 42,429 0 0 16,461 410 190,564 1,150,366 179,876 20,560 86,000 106,560 73,316 (13,152) 60,164 36,017 24,147 0 24,147 52,000 0 100,244 24,147 24,147
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