-----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, BC3xz+vS3yVdy6GcSGeMiaVi+LNzlGmVDEDN+zZa6i7VEqK4Wgw7sam2AbdXQGRH vVXPyvkZVEZaAz3wrvweZw== 0001032210-98-001241.txt : 19981116 0001032210-98-001241.hdr.sgml : 19981116 ACCESSION NUMBER: 0001032210-98-001241 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98748212 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 FOR THE PERIOD ENDED SEPTEMBER 30, 1998 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, 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 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 November 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 6. Exhibits and Reports on Form 8-K 17 Signatures 18
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) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING REVENUES: Gas transportation $ 45,471 $ 48,971 $ 138,048 $ 142,640 Gas transportation for affiliates 12,712 12,143 37,924 36,744 Other 220 232 539 492 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING REVENUES 58,403 61,346 176,511 179,876 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Administrative and general 8,621 8,859 22,679 26,915 Operations and maintenance 3,881 5,102 11,527 13,418 Depreciation and amortization 9,741 10,330 29,355 30,937 Property and other taxes 2,825 2,826 8,759 8,621 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 25,068 27,117 72,320 79,891 - ----------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 33,335 34,229 104,191 99,985 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME AND (INCOME DEDUCTIONS): Investment development - (4,174) - (11,270) Allowance for equity funds used during construction 417 96 730 329 Interest income 43 160 180 580 Other - net 1,065 (117) 866 (1,156) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INCOME AND (INCOME DEDUCTIONS) 1,525 (4,035) 1,776 (11,517) - ----------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on long-term debt 10,704 11,711 31,907 35,405 Allowance for borrowed funds used during construction (432) (69) (753) (223) Other interest charges 346 296 1,079 835 - ----------------------------------------------------------------------------------------------------------------------------------- NET INTEREST EXPENSE 10,618 11,938 32,233 36,017 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 24,242 18,256 73,734 52,451 INCOME TAX EXPENSE 8,511 7,008 27,805 20,560 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 15,731 11,248 45,929 31,891 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES - - - (11,901) INCOME TAX (EXPENSE) BENEFIT - - - 4,157 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME 15,731 11,248 45,929 24,147 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER COMPREHENSIVE INCOME, NET OF TAX: FOREIGN CURRENCY TRANSLATION ADJUSTMENT - 5,478 - (292) - ----------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME $ 15,731 $ 16,726 $ 45,929 $ 23,855 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1
-------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) - --------------------------------------------------------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT, AND EQUIPMENT: Property, plant and equipment in service $ 1,495,496 $ 1,478,735 Accumulated depreciation (474,518) (444,408) - --------------------------------------------------------------------------------------------------------------------------- Net plant in service 1,020,978 1,034,327 Construction work in progress 31,294 13,870 - --------------------------------------------------------------------------------------------------------------------------- TOTAL PROPERTY, PLANT & EQUIPMENT - NET 1,052,272 1,048,197 - --------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 2,814 48,249 Accounts receivable - gas transportation 15,211 16,701 Accounts receivable - affiliated companies 4,698 4,964 Accounts receivable - other 9,586 6,747 Inventories (at average cost) 6,766 6,523 Prepayments and other current assets 283 4,282 - --------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 39,358 87,466 - --------------------------------------------------------------------------------------------------------------------------- DEFERRED CHARGES: Income tax related 25,422 25,482 Deferred charge on reacquired debt 12,750 13,654 Unamortized debt expense 3,722 4,014 Regulatory assets 6,287 6,430 Other 183 240 - --------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED CHARGES 48,364 49,820 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,139,994 $ 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 SEPTEMBER 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 69,465 153,536 - ------------------------------------------------------------------------------------------------------------------------- Total common stock equity 347,656 431,727 Long-term debt 587,604 563,499 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION 935,260 995,226 - ------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Long-term debt - current portion 447 419 Accounts payable and other accrued liabilities 31,782 31,208 Accrued taxes 3,347 813 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 35,576 32,440 - ------------------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS: Deferred income taxes 157,945 145,727 Other 11,213 12,090 - ------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED CREDITS 169,158 157,817 - ------------------------------------------------------------------------------------------------------------------------- CONTINGENCIES (SEE NOTE 2) - - - ------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,139,994 $ 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) ------------------------------------------------------------------------------------------------------------------ NINE MONTHS ENDED SEPTEMBER 30, (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- BALANCE AT BEGINNING OF PERIOD $ 431,727 $ 510,502 Comprehensive income Net income 45,929 24,147 Other comprehensive income Foreign currency translation adjustment - (292) Return of Capital of PG&E Energy Trading to parent company - (49,275) Dividend paid to parent company (130,000) (52,000) - ------------------------------------------------------------------------------------------------------------------- BALANCE AT END OF PERIOD $ 347,656 $ 433,082 - -------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4
- ----------------------------------------------------------------------------------------------------------------------------- STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED) - ----------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, - ----------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 45,929 $ 24,147 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,662 32,886 Discontinued operations - 7,744 Deferred income taxes 12,278 11,439 Allowance for equity funds used during construction (730) (329) Changes in operating assets and liabilities: Accounts receivable - gas transportation 1,490 4,815 Accounts receivable - affiliated companies 266 14,654 Accounts receivable - other (2,840) 2,294 Accounts payable and other accrued liabilities 574 (1,195) Accrued taxes 2,534 1,571 Other working capital 3,756 2,949 Other - net (677) (731) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 94,242 100,244 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of subsidiaries to affiliated company - 42,000 Investment expenditures - (2,891) Sale of fixed assets - 5,303 Construction expenditures (32,870) (27,737) Allowance for borrowed funds used during construction (753) (223) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (33,623) 16,452 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (64,140) (66,168) Long-term debt issued, net of issuance costs 88,086 - Dividend paid to parent (130,000) (52,000) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES (106,054) (118,168) - --------------------------------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (45,435) (1,472) CASH AND CASH EQUIVALENTS AT JANUARY 1 48,249 11,969 - --------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 2,814 $ 10,497 - --------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for (received from): Interest $ 24,578 $ 28,654 Income taxes $ 17,513 $ (3,451) - ---------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - ------------------------------------------------------------------------------- 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) - ------------------------------------------------------------------------------- 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. NOTE 3: OTHER COMPREHENSIVE INCOME - ----------------------------------- For the nine months ended September 30, 1997, PG&E GT-NW's other comprehensive loss was $0.3 million, reflecting the transfer of the foreign currency translation adjustments for the operations of the PG&E Queensland Gas Pipeline and PG&E Energy Trading to an affiliate and PG&E Corporation, respectively. 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 NINE MONTHS ENDED SEPTEMBER 30, 1997 BEFORE-TAX (EXPENSE) NET-OF-TAX (IN MILLIONS) AMOUNT OR BENEFIT AMOUNT - ------------------------------------------- ---------------------- ----------------------- ----------------------- Foreign currency translation adjustments $ (0.3) $ 0.0 $ (0.3) ====================== ======================= =======================
ACCUMULATED FOREIGN OTHER NINE MONTHS ENDED SEPTEMBER 30, 1997 CURRENCY COMPREHENSIVE (IN MILLIONS) ITEMS INCOME - ------------------------------------------- ----------------------- ----------------------- Beginning Balance $ (0.2) $ (0.2) Current-period change (0.3) (0.3) ----------------------- ----------------------- Ending Balance $ (0.5) $ (0.5) ======================= =======================
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 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. 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 Federal Energy Regulatory Commission (FERC or the Commission). Various safety issues are subject to the jurisdiction of the United States Department of Transportation. 8 CHANGING REGULATORY ENVIRONMENT - ------------------------------- During 1997 and 1998, the FERC issued several orders to standardize communications and practices of pipelines. In April 1998, the FERC issued Order 587-G which sets standards for electronic communication, nomination, and imbalance procedures. In May 1998, many companies, including PG&E GT-NW, filed for rehearing of certain aspects of Order 587-G. The order proposes, among other items, that all business transactions 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 September 1998, the Commission issued an order on rehearing clarifying certain aspects of Order 587-G and deferring the date for processing transactions over the Internet from June 1999 to June 2000. In July 1998, the Commission issued Order 587-H which establishes new nomination and scheduling procedures to offer shippers additional opportunities to modify their nominations for service within a given day. Such revised procedures were implemented by PG&E GT-NW effective November 2, 1998. 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 January 1999, and a final rulemaking is expected in mid 1999. Although the Company is planning some capital expenditures to adopt these initiatives, they 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 - ------------------------------------------ In August 1998, the FERC granted PG&E GT-NW's application 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 decatherms per day (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 estimated cost of the project is $6.0 million, and the service was effective on November 1, 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 $59.5 million of regulatory assets as of September 30, 1998, including $8.6 million for relocation costs associated with the transfer of its headquarters from San Francisco, California to Portland, Oregon, and $2.5 million for pension 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 pension 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 Nine Months Ended September 30, September 30, 1998 1997 1998 1997 (In Millions) (In Millions) Operating revenues $ 58.4 $ 61.3 $ 176.5 $ 179.9 Operating expenses 25.1 27.1 72.3 79.9 ------------ ------------ ----------- ------------ Operating income 33.3 34.2 104.2 100.0 Other income and (income deductions) 1.5 (4.1) 1.7 (11.6) Net interest expense 10.6 11.9 32.2 36.0 ------------ ------------ ----------- ------------ Income from continuing operations before taxes 24.2 18.2 73.7 52.4 Income tax expense 8.5 7.0 27.8 20.6 ------------ ------------ ----------- ------------ Income from continuing operations 15.7 11.2 45.9 31.8 Income (loss) from discontinued operations - - - (7.7) ------------ ------------ ----------- ------------ Net income $ 15.7 $ 11.2 $ 45.9 $ 24.1 ============ ============ =========== ============
NET INCOME - Income from continuing operations for the three and nine month periods ended September 30, 1998, increased $4.5 million and $14.1 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 nine month periods ended September 30, 1998, decreased $2.9 million and $3.4 million, respectively, compared to the same periods in 1997. The decreases in the 1998 periods were due to the absence of revenue from the PG&E Queensland Gas Pipeline in 1998. The PG&E Queensland Gas Pipeline, which was sold on September 26, 1997, realized $2.9 million and $8.4 million of revenue for the three and nine month periods ended September 30, 1997, respectively. The decrease in revenue for the nine month period ended September 30, 1998 was partially offset by a $5.0 million 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. 11 OPERATING EXPENSES - The components of total operating expenses are as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- (In Millions) (In Millions) Administrative and general $ 8.6 $ 8.9 $ 22.7 $ 26.9 Operations and maintenance 3.9 5.1 11.5 13.4 Depreciation and amortization 9.8 10.3 29.3 31.0 Property and other taxes 2.8 2.8 8.8 8.6 ------------ ------------ ----------- ------------ Total operating expenses $ 25.1 $ 27.1 $ 72.3 $ 79.9 ============ ============ =========== ============
For the three and nine month periods ended September 30, 1998, compared with the same periods in 1997, operating expenses decreased $2.0 million and $7.6 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 $1.6 million and $4.8 million of operating expenses for the three and nine month periods ended September 30, 1997, respectively. OTHER INCOME AND (INCOME DEDUCTIONS) - Other income, net of income deductions, for the three and nine month periods ended September 30, 1998, increased $5.6 million and $13.3 million, respectively, compared to the same periods in 1997, primarily reflecting the absence of investment development expenses in 1998. INTEREST EXPENSE - Interest expense for the three and nine month periods ended September 30, 1998, decreased $1.3 million and $3.8 million, respectively, compared to the same periods in 1997. The decrease was 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 nine month periods ended September 30, 1997, interest expense for the PG&E Queensland Gas Pipeline was $1.7 million and $5.1 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 $31.9 million for the nine month period ended September 30, 1998 and $30.3 million for the same period in 1997. For the nine months ended September 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 $583 million and $546 million, respectively. For the nine months ended September 30, 1997, the average effective 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. 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. 12 NET CASH PROVIDED BY OPERATING ACTIVITIES - For the nine months ended September 30, 1998, net cash provided by operating activities was $94.2 million, compared with $100.2 for the same period in 1997. The $6.0 million decrease was primarily due to a $19.3 million decrease in the cash provided by the change in working capital, offset in part by a $14.1 million increase in net income from continuing operations. The decrease in cash provided by the change in working capital primarily resulted from a refund for income taxes in the first quarter of 1997 and from a decrease in receivables reflected in 1997. NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - For the nine months ended September 30, 1998 compared to the same period in 1997, net cash used in investing activities increased $50.1 million. The increase primarily reflected proceeds from the sale of PG&E GT-NW's investments in Australia in 1997 and higher construction expenditures in 1998. NET CASH USED IN FINANCING ACTIVITIES - For the nine months ended September 30, 1998, cash used in financing activities was $106.1 million reflecting $130.0 million in dividends paid, partially offset by a $23.9 million net increase in long-term debt. For the nine months ended September 30, 1997, cash used in financing activities was $118.2 million resulting from a $66.2 million reduction in long-term debt and $52.0 million of dividends paid. In October 1998, an additional $15.0 million of dividends was paid. YEAR 2000 COMPLIANCE - -------------------- The Year 2000 issue exists for the Company because many software and embedded systems use only two digits to identify a year in a date field and were developed without considering the impact of the upcoming change in the century. Some of these systems 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 ready products. "Ready" means that the system is remediated so that it will perform its essential functions. "Software" is defined as both computer programming that has been developed by the Company for its own purposes ("in-house software") and that purchased from vendors ("vendor software"). "Embedded systems" refers to both computing hardware and other electronic monitoring, communications, and control systems that have microprocessors within them. The Year 2000 project focuses on those systems that are critical to PG&E GT- NW's business. "Critical" is defined as those systems which the failure of would directly and adversely affect the Company's ability to generate or deliver its products and services or otherwise affect revenues, safety, or reliability for such a period of time as to lead to unrecoverable consequences. For these critical systems, PG&E GT-NW has adopted a phased approach to address Year 2000 issues. The primary phases include: (1) an enterprise-wide inventory, in which systems critical to the business are identified; (2) assessment, in which critical systems are evaluated as to their readiness to operate after December 31, 1999; (3) remediation, in which critical systems that are not Year 2000 ready are made so, either through modifications or replacement; (4) testing, in which remediation is validated by checking the ability of the critical system to operate within the Year 2000 time frame; and (5) certification, in which systems are formally acknowledged to be Year 2000 ready, and acceptable for production or operation. PG&E GT-NW's Year 2000 project is proceeding generally on schedule. For in- house and vendor software, the Company has completed the inventory phase and has identified approximately 20 critical systems. Additional software that requires Year 2000 remediation may be discovered as the assessment, remediation, and testing phases continue. PG&E GT-NW plans to complete remediation of all identified, critical in-house software by the end of 1998, and remediation/ replacement of all identified, critical vendor software by February, 1999. 13 The Company expects to finish testing remediated in-house and vendor software by May 1999 and expects to complete the certification phase for software by July 1999. PG&E GT-NW has also completed the inventory of all embedded systems and has identified approximately 275 critical items. Additional embedded items that require Year 2000 repair or replacement may be discovered as the assessment, remediation, and testing phases continue. The Company estimates that approximately 15 percent of these items are through the remediation phase. Remediation of all critical embedded systems is expected to be completed by April 1999. PG&E GT-NW expects to finish testing of these remediated systems by August 1999 and plans to complete the certification phase for embedded systems by October 1999. PG&E GT-NW is testing remediated software and embedded systems both for ability to handle Year 2000 dates, including appropriate leap year calculations, and to assure that code repair has not affected the base functionality of the code. Software and embedded systems are tested individually and where necessary will be tested in an integrated manner with other systems, with dates and data advanced and aged to simulate Year 2000 operations. Testing, by its nature however, cannot comprehensively address all future combinations of dates and events. Some uncertainty will remain after testing as to the ability of code to process future dates as well as the ability of remediated systems to work in an integrated fashion with other systems. PG&E GT-NW also depends upon external parties including customers, suppliers, business partners, gas system operators, and financial institutions to reliably deliver its 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 the Company's services may be adversely affected. The primary phases that have been undertaken to deal with external parties are: (1) inventory, in which critical business relationships are identified; (2) action planning, in which the Company develops a series of actions and a time frame for monitoring expected compliance status; (3) assessment, in which the likelihood of external party Year 2000 readiness is periodically evaluated; and (4) contingency planning, in which appropriate plans are made to be ready to deal with the potential failure of the external party to be Year 2000 ready. The Company has completed an inventory of external contacts and has identified approximately 65 critical relationships. PG&E GT-NW will soon complete the action-planning phase for each of these entities. Additional critical relationships may be entered into or discovered as the process continues. Assessment of Year 2000 readiness of these external parties will continue through 1999. The Company expects to complete contingency plans for each of these critical business relationships by July 1999. PG&E GT-NW is developing contingency plans for its critical software or embedded systems that may be at risk for Year 2000 repair or replacement. For example, if the schedule lags and cannot be re-scheduled to meet certain milestones, then the Company expects to begin an appropriate contingency planning process. These contingency plans would be implemented as necessary if a remediated system does not become available by the date it is needed. In addition, as described above, PG&E GT-NW plans to develop contingency plans for the potential failure of critical external parties to fully address their Year 2000 issues. PG&E GT-NW also recognizes that, given the complex interaction of today's computing and communication systems, the Company cannot be certain that all of its efforts to make all critical systems be Year 2000 ready will be successful. Therefore, irrespective of the progress of the Year 2000 project, PG&E GT-NW is preparing contingency plans for each essential business function. 14 The plans will take into account the possibility of multiple system failures, both internal and external, due to Year 2000 effects. These essential business function contingency plans will build on existing emergency and business restoration plans. Although no definitive list of scenarios for this planning has yet been developed, the events that are being considered for planning purposes include increased frequency and duration of interruptions of the power, computing, financial, and communications infrastructure. PG&E GT-NW expects to complete first drafts of these essential business function contingency plans in the first quarter of 1999. The Company anticipates testing and revision of these plans throughout 1999. Due to the speculative nature of contingency planning, it is uncertain whether the Company's contingency plans to address failure of external parties or internal systems will be sufficient to reduce the risk of material impacts on operations due to Year 2000 problems. PG&E GT-NW is currently revising and refining its procedures for tracking and reporting costs associated with its Year 2000 effort. From 1997 through September 1998, the Company has spent approximately $1.3 million to assess and remediate Year 2000 problems. All of these costs have been expensed. PG&E GT-NW estimates that the future costs to address Year 2000 issues will be approximately $5.3 million. Approximately $1.4 million of these remaining Year 2000 costs are expected to be capitalized because they relate to the purchase and installation of systems for general business purposes, and the remaining $3.9 million is expected to be expensed. As the assessment of systems continues and as the remediation, testing, and certification phases of the compliance effort progress, the estimated costs may change. Further, PG&E GT-NW expects to incur costs in the year 2000 and beyond to remediate and replace less critical software and embedded systems. PG&E GT-NW does not believe that the incremental cost of addressing Year 2000 issues will have a material impact on the financial position, results of operations, or cash flows of the Company. The Company's current schedule is subject to change, depending on developments that may arise through further assessment of its 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. Delays by third parties may cause the schedule to change. There are also risks associated with the loss of, or the inability to locate, critical personnel to remediate and return to service the identified critical systems. PG&E GT-NW may fail to locate all systems critical to its business processes that require remediation. External businesses may fail to be Year 2000 ready, which may lead to a substantial reduction in demand for PG&E GT-NW's gas transportation services. Based on the Company's current schedule for the completion of Year 2000 tasks, PG&E GT-NW believes its plan is adequate to secure Year 2000 readiness of critical systems. PG&E GT-NW expects its remediation efforts and those of external parties to be largely successful. Nevertheless, achieving Year 2000 readiness is subject to various risks and uncertainties, many of which are noted above. PG&E GT-NW 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. If the Company, or third parties with whom the Company has significant business relationships, fail to achieve Year 2000 readiness with respect to critical systems, there could be a material adverse impact on PG&E GT-NW's financial position, results of operations, and cash flows. 15 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. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." The Statement is required to be adopted in years beginning after June 15, 1999 but permits early adoption as of the beginning of any fiscal quarter. PG&E GT-NW expects to adopt the new Statement no later than January 1, 2000. The statement will require the recognition of all derivatives, as defined in the Statement, on the balance sheet at fair value. Derivatives, or any portion thereof, that are not effective hedges must be adjusted to fair value through income. If the derivative is an effective hedge, depending on the nature of the hedge, changes in the fair value of derivatives either will be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recognized in other comprehensive income until the hedged item is recognized in earnings. PG&E GT-NW is currently evaluating the potential impact of Statement 133 on the earnings and financial position of the Company. 16 PART II: OTHER INFORMATION --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibit 27 Financial Data Schedule for the nine months ended September 30, 1998. (b) Reports on Form 8-K during the quarter ended September 30, 1998 and through the date hereof: None. 17 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) November 13, 1998 By: /s/ STANLEY C. KARCZEWSKI ---------------------------------- Name: Stanley C. Karczewski Title: Vice President of Finance and Controller and Chief Financial Officer 18 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 9-MOS DEC-31-1998 SEP-30-1998 PER-BOOK 1,052,272 0 39,358 48,364 0 1,139,994 85,474 192,717 69,465 347,656 0 0 467,530 0 0 104,059 0 0 16,015 447 204,287 1,139,94 176,511 27,805 72,320 100,125 76,386 1,776 78,162 32,233 45,929 0 45,929 130,000 22,027 94,242 45,929 45,929
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