-----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, BX6ppYPV00AhFzq3hzVQW3Vmft2tDdhXiahdgOSkgYdHSS416CAQSPN6ORB1kb17 e8oSWj4Ols4MCVOYrCPNEg== 0001032210-98-000938.txt : 19980817 0001032210-98-000938.hdr.sgml : 19980817 ACCESSION NUMBER: 0001032210-98-000938 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PG&E GAS TRANSMISSION NORTHWEST CORP 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: 98688639 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 FORMER COMPANY: FORMER CONFORMED NAME: PACIFIC GAS TRANSMISSION CO DATE OF NAME CHANGE: 19950411 10-Q 1 FORM 10-Q 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 JUNE 30, 1998 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 PG&E GAS TRANSMISSION, NORTHWEST CORPORATION (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 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. Yes X No ---------------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 13, 1998. 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. TABLE OF CONTENTS - -----------------
PART I. FINANCIAL INFORMATION Page ------------------------------ Item 1. Consolidated Financial Statements Statements of Consolidated Income 1 Consolidated Balance Sheets 2 Statements of Consolidated Common Stock Equity 4 Statements of Consolidated Cash Flows 5 Notes to Consolidated Financial Statements 6 Note 1. Basis of Presentation 6 Note 2. Contingencies 7 Note 3. Other Comprehensive Income 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION - ------------------------------ Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
PART I: FINANCIAL INFORMATION - ------------------------------ ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING REVENUES: Gas transportation $ 44,759 $ 45,129 $ 92,577 $ 93,669 Gas transportation for affiliates 12,268 11,914 25,212 24,601 Other 176 134 319 260 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING REVENUES 57,203 57,177 118,108 118,530 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES: Administrative and general 6,280 8,019 14,058 18,056 Operations and maintenance 4,087 3,560 7,646 8,316 Depreciation and amortization 9,822 10,320 19,614 20,607 Property and other taxes 2,849 2,727 5,934 5,795 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 23,038 24,626 47,252 52,774 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 34,165 32,551 70,856 65,756 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER INCOME AND (INCOME DEDUCTIONS): Investment development - (3,540) - (7,096) Allowance for equity funds used during construction 174 161 313 233 Interest income 44 206 137 420 Other - net (93) (894) (199) (1,039) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OTHER INCOME AND (INCOME DEDUCTIONS) 125 (4,067) 251 (7,482) - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Interest on long-term debt 10,570 11,754 21,203 23,694 Allowance for borrowed funds used during construction (183) (105) (321) (154) Other interest charges 363 310 733 539 - ------------------------------------------------------------------------------------------------------------------------------------ NET INTEREST EXPENSE 10,750 11,959 21,615 24,079 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 23,540 16,525 49,492 34,195 INCOME TAX EXPENSE 9,093 5,432 19,294 13,552 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 14,447 11,093 30,198 20,643 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES - (11,359) - (11,901) INCOME TAX (EXPENSE) BENEFIT - 4,194 - 4,157 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME 14,447 3,928 30,198 12,899 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME, NET OF TAX: FOREIGN CURRENCY TRANSLATION ADJUSTMENT - (6,112) - (5,770) - ------------------------------------------------------------------------------------------------------------------------------------ COMPREHENSIVE INCOME $ 14,447 $ (2,184) $ 30,198 $ 7,129 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1
- ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, DECEMBER 31, (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY, PLANT, AND EQUIPMENT: Property, plant and equipment in service $ 1,487,983 $ 1,478,735 Accumulated depreciation (464,767) (444,408) - ------------------------------------------------------------------------------------------------------------------------------------ Net plant in service 1,023,216 1,034,327 Construction work in progress 27,181 13,870 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL PROPERTY, PLANT & EQUIPMENT - NET 1,050,397 1,048,197 - ------------------------------------------------------------------------------------------------------------------------------------ CURRENT ASSETS: Cash and cash equivalents 1,811 48,249 Accounts receivable - gas transportation 15,392 16,701 Accounts receivable - affiliated companies 3,641 4,964 Accounts receivable - other 9,149 6,747 Inventories (at average cost) 7,383 6,523 Prepayments and other current assets 703 4,282 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 38,079 87,466 - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED CHARGES: Income tax related 25,334 25,482 Deferred charge on reacquired debt 13,052 13,654 Unamortized debt expense 3,820 4,014 Regulatory assets 6,339 6,430 Other - 240 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEFERRED CHARGES 48,545 49,820 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 1,137,021 $ 1,185,483 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2
- ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES - ----------------------------------------------------------------------------------------------------------------------------------- JUNE 30, DECEMBER 31, (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION: Common stock - no par value, 1,000 shares authorized, issued and outstanding $ 85,474 $ 85,474 Additional paid-in capital 192,717 192,717 Reinvested earnings 68,734 153,536 - ------------------------------------------------------------------------------------------------------------------------------------ Total common stock equity 346,925 431,727 Long-term debt 596,390 563,499 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITALIZATION 943,315 995,226 - ------------------------------------------------------------------------------------------------------------------------------------ CURRENT LIABILITIES: Long-term debt - current portion 437 419 Accounts payable and other accrued liabilities 26,858 31,208 Accrued taxes 869 813 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 28,164 32,440 - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED CREDITS: Deferred income taxes 153,364 145,727 Other 12,178 12,090 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEFERRED CREDITS 165,542 157,817 - ------------------------------------------------------------------------------------------------------------------------------------ CONTINGENCIES (SEE NOTE 2) - - - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,137,021 $ 1,185,483 - -----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3
- ----------------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY (UNAUDITED) ----------------------------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT BEGINNING OF PERIOD $ 431,727 $ 510,502 Comprehensive income Net income 30,198 12,899 Other comprehensive income 0 Foreign currency translation - (5,770) Return of Capital of PG&E Energy Trading to parent company - (49,275) Dividend paid to parent company (115,000) (10,000) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT END OF PERIOD $ 346,925 $ 458,356 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4
- ------------------------------------------------------------------------------------------------------------------------------------ STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE 30, - ------------------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 30,198 $ 12,899 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 21,338 21,717 Discontinued operations - 7,744 Deferred income taxes 7,785 7,289 Allowance for equity funds used during construction (313) (233) Changes in operating assets and liabilities: Accounts receivable - gas transportation 1,309 4,103 Accounts receivable - affiliated companies 1,323 10,061 Accounts payable and other accrued liabilities (4,350) (6,138) Accrued taxes 56 (848) Other working capital 317 4,958 Other - net 419 (1,859) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 58,082 59,693 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Investment expenditures - (3,937) Construction expenditures (22,065) (17,643) Allowance for borrowed funds used during construction (321) (154) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN INVESTING ACTIVITIES (22,386) (21,734) - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (40,324) (26,635) Long-term debt issued, net of issuance costs 73,190 - Dividend paid to parent (115,000) (10,000) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED IN FINANCING ACTIVITIES (82,134) (36,635) - ------------------------------------------------------------------------------------------------------------------------------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (46,438) 1,324 CASH AND CASH EQUIVALENTS AT JANUARY 1 48,249 11,969 - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS AT JUNE 30 $ 1,811 $ 13,293 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for (received from): Interest $ 20,797 $ 22,546 Income taxes $ 11,409 $ (5,238) - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED - -------------------------------------------------------------------------------- NOTE 1: BASIS OF PRESENTATION - ------------------------------ Effective January 1, 1998, Pacific Gas Transmission Company, incorporated in California in 1957, changed its name to PG&E Gas Transmission, Northwest Corporation (PG&E GT-NW). PG&E GT-NW is affiliated with, but is not the same company as, Pacific Gas and Electric Company, the gas and electric company serving Northern and Central California. PG&E Corporation is the ultimate corporate parent for both PG&E GT-NW and Pacific Gas and Electric Company. The accompanying unaudited consolidated financial statements, which have been prepared in accordance with interim period reporting requirements, reflect the results for PG&E GT-NW and its wholly owned subsidiaries including Pacific Gas Transmission International, Inc. (PGT International) and the following subsidiaries through their respective dates of disposition: Through June 30, 1997: PG&E Energy Trading Corporation (PG&E Energy Trading) Through September 26, 1997: PG&E Gas Transmission Australia Pty Ltd (PG&E Australia) PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland) On June 30, 1997, PG&E GT-NW distributed all of the shares of PG&E Energy Trading to PG&E GT-NW's sole shareholder, PG&E Gas Transmission Corporation. PG&E Gas Transmission Corporation immediately thereafter distributed these shares to its sole shareholder, PG&E Corporation. Accordingly, PG&E Energy Trading's results are reported as discontinued operations. On September 26, 1997, PG&E GT-NW sold all of its investments in Australia to another PG&E Corporation affiliate. The subsidiaries sold included PG&E Queensland, the operator of the PG&E Queensland Gas Pipeline, and PG&E Australia. The Company also sold its investment in the PG&E Qld Trust. The PG&E Qld Trust, which held the assets of the PG&E Queensland Gas Pipeline, was beneficially owned by PGT International (a PG&E GT-NW wholly owned subsidiary). PG&E GT-NW and its subsidiaries are collectively 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, 1997. 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. Subsidiary 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 1998 presentation. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED - -------------------------------------------------------------------------------- NOTE 2: CONTINGENCIES - ---------------------- 1994 RATE CASE - In September 1996, the Federal Energy Regulatory Commission (FERC) approved, without modification, the proposed settlement of PG&E GT-NW's rate case. The rate case was initially filed on February 28, 1994, while the proposed settlement was filed with the FERC on March 21, 1996. In March and June 1998, the FERC denied requests by several shippers for rehearing and reaffirmed its approval of the settlement. In May 1998, three shippers petitioned for judicial review of the FERC Orders by the United States Court of Appeals for the District of Columbia. In the event the settlement were to be modified as a result of an appeal, PG&E GT-NW would be required to implement the results as ordered by the court but would also have the right to appeal any order that modifies the settlement. LEGAL MATTERS - In the normal course of business, the Company is named as a party in a number of claims and lawsuits. PG&E GT-NW is not currently named in any litigation that would have a material adverse impact on the Company's financial condition, liquidity or results of operations. NOTE 3: OTHER COMPREHENSIVE INCOME - ----------------------------------- For the six months ended June 30, 1997, PG&E GT-NW's other comprehensive loss was $5.8 million, reflecting foreign currency translation adjustments for the operations of the PG&E Queensland Gas Pipeline and PG&E Energy Trading. As stated in Note 1, the PG&E Queensland Gas Pipeline and PG&E Australia were sold to another PG&E Corporation affiliate on September 26, 1997, and the shares of PG&E Energy Trading were transferred to PG&E Corporation on June 30, 1997.
TAX SIX MONTHS ENDED JUNE 30, 1997 BEFORE-TAX (EXPENSE) NET-OF-TAX (In Millions) AMOUNT OR BENEFIT AMOUNT - -------------------------------------------- ------------------ ------------------ --------------------- Foreign currency translation adjustments $(5.8) $0.0 $(5.8) ================== ================== ===================== ACCUMULATED FOREIGN OTHER SIX MONTHS ENDED JUNE 30, 1997 CURRENCY COMPREHENSIVE (In Millions) ITEMS INCOME - ---------------------------------- ------------------ --------------------- Beginning Balance $(0.2) $(0.2) Current-period change (5.8) (5.8) ------------------ --------------------- Ending Balance $(6.0) $(6.0) ================== =====================
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- GENERAL - ------- The unaudited consolidated financial statements include PG&E Gas Transmission, Northwest Corporation (PG&E GT-NW) and its wholly owned subsidiary, Pacific Gas Transmission International, Inc. (PGT International), and the following subsidiaries through their respective dates of disposition: Through June 30, 1997: PG&E Energy Trading Corporation (PG&E Energy Trading) Through September 26, 1997: PG&E Gas Transmission Australia Pty Limited (PG&E Australia) PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland) PG&E GT-NW and its subsidiaries are collectively 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, 1997. The following discussion includes forward-looking statements that involve a number of risks, uncertainties, and assumptions. When used in Management's Discussion and Analysis of Financial Condition and Results of Operations, words such as "estimates," "expects," "intends," "anticipates," "plans," and similar expressions identify those statements which are forward-looking. Actual results may differ materially from those expressed in the forward-looking statements. The important factors that could cause actual results to differ materially from those expressed in the forward-looking statements include, but are not limited to, the ongoing restructuring of the gas industry, changes in future rate- making, and the ability of the Company to expand its core pipeline business. PG&E GT-NW'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. PG&E GT-NW's transportation system also provides service to various delivery points in Idaho, Washington, and Oregon. PG&E GT-NW's natural gas transportation services are regulated by the FERC. Various safety issues are subject to the jurisdiction of the United States Department of Transportation. 8 CHANGING REGULATORY ENVIRONMENT - ------------------------------- During 1997 and 1998, the Federal Energy Regulatory Commission (FERC or the Commission) issued several orders to standardize communications and practices of pipelines, thereby creating a more integrated and efficient pipeline grid. In April 1998, the FERC issued Order 587-G which sets standards for electronic communication, nomination, and imbalance procedures. The order proposes, among other items, that by June 1999, all business transactions will be conducted on the public Internet. Pipeline companies need to develop connections using internet tools, directory services, and communication protocols to provide non- discriminatory access to all electronic information. In May 1998, many companies, including PG&E GT-NW, filed for rehearing of certain aspects of Order 587-G. In July 1998, the Commission issued Order 587-H which establishes new nomination and scheduling procedures. Effective November 2, 1998, pipeline companies must offer shippers additional opportunities to modify their nominations for service within a given day. Also in July 1998, the FERC issued a Notice of Proposed Rulemaking (NOPR) that addresses several short-term service issues. The purpose of the NOPR is to maximize competition in the marketplace, monitor transactions through increased reporting, and mitigate market power where it exists. The NOPR includes, among other items, the removal of the price cap for the short-term market, establishment of auctions for short-term capacity, permission for negotiated terms and conditions with protections for recourse shippers, and removal of the five-year matching cap in the right-of-first-refusal procedure. Comments on the NOPR are due in November 1998, and a final rulemaking is expected in the first half of 1999. These regulatory initiatives are not expected to have a material impact on PG&E GT-NW's financial position, liquidity, or results of operations in the foreseeable future. FUTURE EXPANSIONS AND BUSINESS DEVELOPMENT - ------------------------------------------ On December 30, 1997, PG&E GT-NW filed a certificate application with the FERC to expand its pipeline capacity by upgrading three compressors on the northern portion of its mainline system. Approximately 72 percent of the additional new capacity of 56,000 Dt/day for annual service plus 20,000 Dt/day for winter service has been contracted with customers for terms ranging from three to seven years for the annual service and 15 years for the winter service. The regulatory review process, which encompasses the environmental impact of the project, is expected to be completed during August 1998. The estimated cost of the project is $6.0 million, and the facilities are expected to be placed in service by November 1998. PG&E GT-NW intends to solicit expressions of interest for additional capacity, and will consider developing 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, PG&E GT-NW is considering opportunities to expand its core pipeline business primarily within its service territory. Growth prospects are primarily focused on investing in pipelines, storage, and gathering and processing capabilities. 9 ACCOUNTING FOR THE EFFECTS OF REGULATION - ---------------------------------------- PG&E GT-NW 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, PG&E GT-NW has accumulated approximately $59.4 million of regulatory assets as of June 30, 1998, including $8.6 million for relocation costs associated with the transfer of its headquarters from San Francisco, California to Portland, Oregon, and $3.5 million for pension and other postretirement benefits related to PG&E GT-NW's 1997 Workforce Management Program (WMP). Although PG&E GT-NW recorded a reserve against the deferred WMP costs in 1997 and the relocation costs in 1996, management intends to seek recovery of these costs as well as all other regulatory assets through rates charged to customers. 10 RESULTS OF OPERATIONS - --------------------- Selected operating results and other data are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- (In Millions) (In Millions) Operating revenues $ 57.2 $ 57.2 $ 118.1 $ 118.5 Operating expenses 23.0 24.6 47.2 52.7 ----------- ----------- ----------- ---------- Operating income 34.2 32.6 70.9 65.8 Other income and (income deductions) 0.1 (4.1) 0.2 (7.5) Net interest expense 10.8 12.0 21.6 24.1 ----------- ----------- ----------- ---------- Income from continuing operations before taxes 23.5 16.5 49.5 34.2 Income tax expense 9.1 5.4 19.3 13.6 ----------- ----------- ----------- ---------- Income from continuing operations 14.4 11.1 30.2 20.6 Income (loss) from discontinued operations - (7.2) - (7.7) ----------- ----------- ----------- ---------- Net income $ 14.4 $ 3.9 $ 30.2 $ 12.9 =========== =========== =========== ==========
NET INCOME - Income from continuing operations for the three and six month periods ended June 30, 1998, increased $3.3 million and $9.6 million, respectively, compared to the same periods in 1997. The increases in the 1998 periods were primarily the result of lower operating expenses, lower investment development expenses, and lower interest expense. OPERATING REVENUES - Operating revenues for the three and six month periods ended June 30, 1998, were unchanged and decreased $0.4 million, respectively, compared to the same periods in 1997. The absence of the PG&E Queensland Gas Pipeline revenue in 1998 was offset by an increase in revenue from PG&E GT-NW's pipeline in the Pacific Northwest which primarily resulted from higher short- term firm and interruptible revenue. The revenue from PG&E GT-NW's pipeline in the Pacific Northwest increased $2.8 million and $5.1 million for the three and six month periods ended June 30, 1998, respectively, compared to the same periods in 1997. The PG&E Queensland Gas Pipeline, which was sold on September 26, 1997, realized $2.8 million and $5.5 million of revenue for the three and six month periods ended June 30, 1997, respectively. 11 OPERATING EXPENSES - The components of total operating expenses are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- (In Millions) (In Millions) Administrative and general $ 6.3 $ 8.0 $ 14.1 $ 18.0 Operations and maintenance 4.1 3.6 7.6 8.3 Depreciation and amortization 9.8 10.3 19.6 20.6 Property and other taxes 2.8 2.7 5.9 5.8 ------------ ------------ ----------- ------------ Total operating expenses $ 23.0 $ 24.6 $ 47.2 $ 52.7 ============ ============ =========== ============
For the three and six month periods ended June 30, 1998, compared with the same periods in 1997, operating expenses decreased $1.6 million and $5.5 million, respectively. The decreases reflect lower operating expenses for PG&E GT-NW's pipeline in the Pacific Northwest and the absence of the PG&E Queensland Gas Pipeline, which incurred $1.7 million and $3.2 million of operating expenses for the three and six month periods ended June 30, 1997, respectively. OTHER INCOME AND (INCOME DEDUCTIONS) - Other income, net of income deductions, for the three and six month periods ended June 30, 1998, increased $4.2 million and $7.7 million, respectively, compared to the same periods in 1997, primarily reflecting lower investment development expenses. INTEREST EXPENSE - Interest expense for the three and six month periods ended June 30, 1998, decreased $1.2 million and $2.5 million, respectively, compared to the same periods in 1997 primarily due to the absence of interest on debt for the PG&E Queensland Gas Pipeline, which was sold on September 26, 1997. During the three and six month periods ended June 30, 1997, interest expense for the PG&E Queensland Gas Pipeline was $1.7 million and $3.4 million, respectively. This decrease was partially offset by higher interest expense for PG&E GT-NW's pipeline in the Pacific Northwest primarily due to higher long-term debt balances. Interest on PG&E GT-NW's long-term debt for the pipeline in the Pacific Northwest was approximately $21.2 million for the six-month period ended June 30, 1998 and $20.3 million for the same period in 1997. For the six months ended June 30, 1998 and 1997, the average interest rate was approximately 7.3 percent and 7.4 percent, respectively, while the average balance of long-term debt outstanding was $586 million and $553 million, respectively. For the six months ended June 30, 1997, 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. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- 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. PG&E GT-NW 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, 1998, net cash provided by operating activities was $58.1 million, compared with $59.7 for the same period 12 in 1997. The $1.6 million decrease was due to a $13.5 million decrease in the cash provided by the change in working capital which primarily resulted from a $10.3 million net refund for income taxes in the first quarter of 1997. This decrease was partially offset by a $9.6 million increase in net income from continuing operations. NET CASH USED IN INVESTING ACTIVITIES - For the six months ended June 30, 1998 compared to the same period in 1997, net cash used in investing activities increased $0.7 million reflecting higher construction expenditures, offset in part by lower investment expenditures. NET CASH USED IN FINANCING ACTIVITIES For the six months ended June 30, 1998, cash used in financing activities was $82.1 million reflecting $115.0 million in dividends paid, partially offset by a $32.9 million net increase in long-term debt. For the six months ended June 30, 1997, cash used in financing activities was $36.6 million resulting from a $26.6 million reduction in long-term debt and $10.0 million of dividends paid. In July 1998, an additional $15.0 million of dividends was paid. YEAR 2000 COMPLIANCE - --------------------- The Year 2000 issue exists because many software products use only two digits to identify a year in the date field and were developed without considering the impact of the upcoming change in the century. Some of these software products are critical to PG&E GT-NW's operations and business processes and might fail or function incorrectly if not repaired or replaced with Year 2000 compliant products. In addition, many electronic monitoring and control systems have two- digit date coding embedded within their circuitry and may also be susceptible to failure or incorrect operation unless corrected or replaced with Year 2000 compliant products. Currently, PG&E GT-NW is focusing its efforts to be Year 2000 ready on those software and embedded systems which are critical to its business. PG&E GT-NW expects to complete substantially all remediation of the critical software systems by the end of 1998 and to complete testing of these systems by the third quarter of 1999. Although PG&E GT-NW has completed an enterprise-wide inventory of all embedded systems to assess the degree of Year 2000 compliance, additional embedded systems that require Year 2000 remediation may be discovered as the remediation and testing phases of the compliance effort is begun. PG&E GT-NW expects to complete the assessment of all critical embedded systems, and to repair or replace those systems found to be non-compliant, by the second quarter of 1999. PG&E GT-NW also depends on external parties including customers, suppliers, business partners, government agencies, and financial institutions to reliably deliver products and services. To the extent that any of these parties experience Year 2000 problems in their systems, the demand for, and the reliability of, PG&E GT-NW's services may be adversely affected. The Company has begun to assess the degree to which third parties with which it has significant business relationships plan to address Year 2000 problems in their systems. PG&E GT-NW expects to complete this assessment by the fourth quarter of 1998. To the extent appropriate, PG&E GT-NW plans to develop contingency plans to reduce the risk of material impacts on operations from Year 2000 problems. Due to the speculative nature of contingency planning, it is uncertain whether such plans actually will be sufficient to reduce the risk of material impacts on operations due to Year 2000 problems. Through June 30, 1998, the Company has spent approximately $4 million to assess and remediate Year 2000 problems and to replace non-compliant software systems. In large part, these non-compliant software systems were replaced for business purposes other than addressing Year 2000 issues. The replacement costs for these systems were capitalized. The remaining costs, including costs incurred to assess and remediate Year 2000 problems, were expensed. 13 Currently, PG&E GT-NW estimates that it will spend approximately $14 million in the aggregate for the remainder of 1998 and 1999 to address Year 2000 issues, to replace non-compliant software systems, and to replace hardware in non- compliant embedded systems and computer systems. The Company expects that approximately $11 million of the estimated aggregate amount will represent replacement costs incurred primarily for business purposes other than to address Year 2000 issues. This amount will be capitalized. The remaining amount, approximately $3 million, will be expensed. As the systems assessment continues and as the remediation and testing phases of the compliance effort progress, these estimated costs may increase. Further, the Company expects to incur costs after the Year 1999 to remediate and replace less critical software and embedded systems. PG&E GT-NW's current schedule is subject to change, depending on developments that may arise through further assessment of the systems and through the remediation and testing phases of the compliance effort. Further, PG&E GT-NW's current schedule is partially dependent on the efforts of third parties including vendors, suppliers, and customers. Therefore, delays by third parties may cause the schedule to change. Based on the current schedule for the completion of Year 2000 tasks, PG&E GT- NW believes that the plan is adequate to secure Year 2000 readiness of its critical systems. Nevertheless, achieving Year 2000 readiness is subject to various risks and uncertainties, many of which are described above. The Company is not able to predict all the factors that could cause actual results to differ materially from its current expectations as to Year 2000 readiness. However, if PG&E GT-NW, or third parties with whom it has significant business relationships, fail to achieve Year 2000 readiness with respect to critical systems, there could be a material adverse impact on the Company's financial position, results of operations, and cash flows. NEW ACCOUNTING STANDARD - ------------------------ Effective January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The adoption of SFAS No. 130 did not have an adverse impact on the Company's financial position, liquidity, or results of operations. 14 PART II: OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS ----------------- For information concerning legal proceedings, see Note 2, "Contingencies," in the Notes to Consolidated Financial Statements contained in Item 1, Consolidated Financial Statements, above. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibit 27 - Financial Data Schedule for the six months ended June 30, 1998. (b) Reports on Form 8-K during the quarter ended June 30, 1998 and through the date hereof: None. 15 SIGNATURES 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. PG&E GAS TRANSMISSION, NORTHWEST CORPORATION --------------------------------------------- (Registrant) August 13, 1998 By: /s/ STANLEY C. KARCZEWSKI ---------------------------------- Name: Stanley C. Karczewski Title: Vice President of Finance and Controller and Chief Financial Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
UT 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 6-MOS DEC-31-1998 JUN-30-1998 PER-BOOK 1,050,397 0 38,079 48,545 0 1,137,021 85,474 192,717 68,734 346,925 0 0 467,504 0 0 112,759 0 0 16,127 437 193,269 1,137,021 118,108 19,294 47,252 66,546 51,562 251 51,813 21,615 30,198 0 30,198 115,000 14,604 58,082 30,198 30,198
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