<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
--------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the 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 from to
Commission File Number 1-7414
NORTHWEST PIPELINE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 87-0269236
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
295 Chipeta Way
Salt Lake City, Utah 84108
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(801) 583-8800
----------------------------------------------------
(Registrant's telephone number, including area code)
No Change
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 11, 1998
- -------------------------- --------------------------------
Common stock, $1 par value 1,000 shares
The 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.
<PAGE> 2
NORTHWEST PIPELINE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements -
Condensed Consolidated Statement of Income, three and nine months
ended September 30, 1998 and 1997 ................................. 1
Condensed Consolidated Balance Sheet as of September 30, 1998 and
December 31, 1997 ................................................. 2
Condensed Consolidated Statement of Cash Flows, nine
months ended September 30, 1998 and 1997 .......................... 4
Notes to Condensed Consolidated Financial Statements ................... 5
Item 2. Management's Narrative Analysis of the Results of Operations ........ 8
PART II. OTHER INFORMATION ..................................................... 11
</TABLE>
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Northwest Pipeline Corporation
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. Such statements are
made in reliance on the "safe harbor" protections provided under the Private
Securities Reform Act of 1995. Additional information about issues that could
lead to material changes in performance is contained in Northwest Pipeline
Corporation's annual report on Form 10-K.
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES ..................... $ 73,908 $ 71,197 $ 215,438 $ 204,453
---------- ---------- ---------- ----------
OPERATING EXPENSES:
General and administrative .......... 12,511 10,262 33,338 34,501
Operation and maintenance ........... 9,339 9,178 27,010 26,080
Depreciation and amortization ....... 12,799 13,222 38,723 38,490
Taxes, other than income taxes ...... 3,131 2,966 10,152 10,641
---------- ---------- ---------- ----------
37,780 35,628 109,223 109,712
---------- ---------- ---------- ----------
Operating income ................. 36,128 35,569 106,215 94,741
---------- ---------- ---------- ----------
OTHER INCOME - net .................... 652 587 3,057 2,556
---------- ---------- ---------- ----------
INTEREST CHARGES:
Interest on long-term debt .......... 7,449 8,164 22,113 24,808
Other interest ...................... 1,903 1,840 7,023 5,395
Allowance for borrowed funds used
during construction ............... (195) (168) (397) (493)
---------- ---------- ---------- ----------
9,157 9,836 28,739 29,710
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES ............. 27,623 26,320 80,533 67,587
PROVISION FOR INCOME TAXES ............. 10,936 7,794 30,271 23,207
---------- ---------- ---------- ----------
NET INCOME ............................. $ 16,687 $ 18,526 $ 50,262 $ 44,380
========== ========== ========== ==========
CASH DIVIDENDS ON COMMON STOCK ......... $ 12,000 $ 21,400 $ 36,000 $ 51,837
========== ========== ========== ==========
</TABLE>
- -----------------------
See accompanying notes.
- 1 -
<PAGE> 4
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
================================================================================
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Thousands)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, at cost ..................... $ 1,487,406 $ 1,471,027
Less - Accumulated depreciation and amortization ....... 606,881 570,521
------------ ------------
880,525 900,506
Construction work in progress .......................... 40,931 18,819
------------ ------------
921,456 919,325
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents .............................. 317 627
Advances to parent ..................................... 57,269 71,823
Accounts receivable -
Trade ............................................... 15,973 26,873
Affiliated companies ................................ 2,823 668
Materials and supplies (principally at average cost) ... 10,651 10,619
Exchange gas due from others ........................... 8,390 12,859
Costs recoverable through rate adjustments ............. 492 --
Deferred income taxes .................................. 17,853 25,867
Prepayments and other .................................. 1,924 2,597
------------ ------------
115,692 151,933
------------ ------------
OTHER ASSETS:
Deferred charges ....................................... 51,527 54,181
------------ ------------
$ 1,088,675 $ 1,125,439
============ ============
</TABLE>
- -----------------------
See accompanying notes.
- 2 -
<PAGE> 5
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(Thousands)
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity -
Common stock, par value $1 per share;
authorized and outstanding, 1,000 shares .......... $ 1 $ 1
Additional paid-in capital .......................... 262,844 262,844
Retained earnings ................................... 176,879 162,617
------------ ------------
439,724 425,462
Long-term debt, less current maturities (Note 3) ....... 372,435 408,287
------------ ------------
812,159 833,749
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt ................... 35,667 1,667
Accounts payable -
Trade ............................................... 14,782 14,934
Affiliated companies ................................ 4,818 15,456
Accrued liabilities -
Taxes, other than income taxes ...................... 6,366 4,044
Interest ............................................ 16,781 17,227
Employee costs ...................................... 7,696 8,103
Exchange gas due to others .......................... 9,571 9,650
Costs refundable through rate adjustments ........... -- 2,766
Reserves for estimated rate refunds .............. 39,074 74,083
Other ............................................... 2,489 8,705
------------ ------------
137,244 156,635
------------ ------------
DEFERRED INCOME TAXES ...................................... 132,446 126,801
------------ ------------
OTHER DEFERRED CREDITS ..................................... 6,826 8,254
------------ ------------
CONTINGENT LIABILITIES AND COMMITMENTS (Note 4) ............ -- --
------------ ------------
$ 1,088,675 $ 1,125,439
============ ============
</TABLE>
- -----------------------
See accompanying notes.
- 3 -
<PAGE> 6
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1998 1997
------------ ------------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................. $ 50,262 $ 44,380
Adjustments to reconcile to cash provided by operations -
Depreciation and amortization ........................... 38,723 38,490
Provision for deferred income taxes ..................... 13,659 13,105
Amortization of deferred charges and credits ............ 67 (1,099)
Sale of receivables ..................................... -- 8,000
Allowance for equity funds used during construction ..... (620) (577)
Increase (decrease) from changes in:
Accounts receivable and exchange gas due from others .. 13,214 (197)
Inventory ............................................. (32) (103)
Other current assets .................................. (2,585) 5,657
Other assets and deferred charges ..................... 1,527 (2,190)
Accounts payable and exchange gas due to others ....... (11,797) 4,510
Other accrued liabilities ............................. (39,755) 16,791
Other deferred credits ................................ (334) 1,203
Other ................................................... (7) (516)
------------ ------------
Net cash provided by operating activities ................... 62,322 127,454
------------ ------------
INVESTING ACTIVITIES:
Property, plant and equipment -
Capital expenditures .................................... (41,761) (31,241)
Proceeds from sales ..................................... 1,533 366
Changes in accounts payable ............................. 928 (9,291)
Advances to parent .......................................... 14,554 (27,137)
------------ ------------
Net cash used by investing activities ....................... (24,746) (67,303)
------------ ------------
FINANCING ACTIVITIES:
Principal payments on long-term debt ........................ (1,867) (192,020)
Premium on early retirement of long-term debt ............... (19) (22,695)
Proceeds from notes payable to bank ......................... -- 207,000
Dividends paid .............................................. (36,000) (51,837)
------------ ------------
Net cash used by financing activities ....................... (37,886) (59,552)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............ (310) 599
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ..................................................... 627 240
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 317 $ 839
============ ============
</TABLE>
- -----------------------
See accompanying notes.
- 4 -
<PAGE> 7
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
================================================================================
(1) GENERAL
The accompanying, unaudited interim condensed consolidated financial
statements of Northwest Pipeline Corporation ("Pipeline"), included herein, have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations; however, Pipeline believes that the disclosures made are adequate
to make the information presented not misleading. In the opinion of Pipeline,
all adjustments, which include only normal operating adjustments, have been made
to present fairly the financial position of Pipeline as of September 30, 1998
and December 31, 1997, the results of operations for the three and nine month
periods ended September 30, 1998 and 1997, and cash flows for the nine month
periods ended September 30, 1998 and 1997. The results of operations for the
periods presented are not necessarily indicative of the results for the
respective complete years. It is suggested that these condensed financial
statements be read in conjunction with the statements and the notes thereto
included in Pipeline's 1997 Annual Report on Form 10-K.
Effective May 7, 1998, Pipeline became a wholly-owned subsidiary of
Williams Gas Pipeline Company, which is a wholly-owned subsidiary of The
Williams Companies, Inc. ("Williams"). Prior to May 7, 1998, Pipeline was a
wholly-owned subsidiary of Williams Interstate Natural Gas Systems, Inc..
(2) BASIS OF PRESENTATION
The financial position of Pipeline as of September 30, 1998 and December
31, 1997, the results of operations for the three and nine month periods ended
September 30, 1998 and 1997 and cash flows for the nine month periods ended
September 30, 1998 and 1997 include the operating results of NWP Enterprises
("Enterprises"), a wholly owned subsidiary of Pipeline, since its incorporation
on January 2, 1997.
(3) LONG-TERM DEBT AND BANKING ARRANGEMENTS
During September 1998, Pipeline announced an early redemption with
premium of the remaining $34 million of its 10.65% Debentures, due 2018, under
the early redemption provisions of the indenture. The redemption will take place
on November 15, 1998 at a premium of $1.8 million plus accrued interest. The
early redemption premium and the unamortized debt expense associated with the
10.65% Debentures, totaling $2 million, will be amortized over the life of the
retired debt. Excess funds previously advanced to Williams will be used to fund
the prepayment and the premium.
Pipeline shares in a $1 billion Revolving Credit Facility with Williams
and four affiliated companies. Pipeline's maximum borrowing availability,
subject to prior borrowing by other affiliated companies, is $400 million, none
of which was used by Pipeline at September 30, 1998. Interest rates vary with
current market conditions. The Facility contains restrictions which limit, under
certain circumstances, the issuance of additional debt, the attachment of liens
on any assets and any change of ownership of Pipeline. Any borrowings by
Pipeline under this Facility are not guaranteed by Williams and are based on
Pipeline's financial need and credit worthiness.
Pipeline has also arranged various uncommitted lines-of-credit at market
interest rates. Pipeline's credit facilities are subject to Pipeline's continued
credit worthiness.
- 5 -
<PAGE> 8
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
================================================================================
(4) CONTINGENT LIABILITIES AND COMMITMENTS
Pending Rate Cases
On April 1, 1993, Pipeline began collecting new rates, subject to
refund, under its rate case filed October 1, 1992 ("1993 Rate Case"). On May 31,
1995, Pipeline received an order from the Federal Energy Regulatory Commission
("FERC") on this rate case, which among other issues, supported an equity rate
of return of 13.2 percent. In a further order issued on July 19, 1996, FERC
required an Administrative Law Judge ("ALJ") to reconsider the long-term growth
component of the equity rate of return formula, and upheld its May 31, 1995
decision on all other issues. On October 22, 1996, the ALJ issued an initial
decision which recommended an equity rate of return of 11.62 percent. Pipeline
took exception to this decision before the FERC. On June 11, 1997, the FERC
issued an order revising its approved equity rate of return to 12.59 percent
based on a new policy for industry-wide application that requires the use of
forecasts of growth in the gross domestic product as the long-term growth
component of the rate of return formula. On July 11, 1997, Pipeline and several
parties in the case sought rehearing of the June 11 rate of return on equity
decision, seeking to have the FERC reconsider various aspects of its new rate of
return on equity policy. On October 16, 1997, the FERC issued an opinion denying
rehearing and reaffirming its previous policy pronouncements concerning rate of
return on equity, but convened a conference on January 30, 1998 to consider, on
an industry-wide basis, issues with respect to pipeline rates of return.
Pipeline made refunds to customers in June 1998 totaling $27 million, including
interest, in this rate case. Pipeline also sought judicial review of FERC's
decision concerning rate of return. In July 1998, FERC issued orders concerning
its rate of return on equity policy in rate proceedings of other pipelines
adopting a formula that gives less weight to the long-term growth component. If
this most recent formula modification were to be applied in this rate
proceeding, the rate of return result would be somewhat higher. Any additional
revenues to which Pipeline might be entitled would be collected through a
special FERC-authorized surcharge.
On February 1, 1996, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 1, 1995 ("1995 Rate
Case"). On October 18, 1996, the Commission issued an order approving a
settlement concerning certain liquid revenue credit issues relating to
Pipeline's agreement with an affiliate to have liquid hydrocarbon products
extracted from Pipeline's transportation stream at Ignacio, Colorado. The
litigation of all remaining issues took place in late 1996. Pipeline's rate
application seeks a revenue increase for increases in rate base related
primarily to the Northwest Natural and Expansion II facilities placed into
service December 1, 1995 and increased operating costs primarily associated with
an increase in headquarters office rent. During the first quarter of 1998, the
ALJ issued an Initial Decision. The ALJ found that the facts of this case
continue to support Pipeline's capital structure of 55% equity and 45% debt. The
ALJ also determined that Pipeline fits within the average risk range for
determining pipeline return on equity. However, the ALJ allowed a return on
equity of 11.2 percent. Pipeline is seeking FERC review of this and other
aspects of the ALJ decision. If the FERC applies its recently announced
modifications to the rate of return formula giving less weight to long-term
growth factors, the resulting rate of return on equity would be somewhat higher.
Pipeline has not yet made any changes to its accounting reserves pending FERC
action in this proceeding.
On March 1, 1997, Pipeline began collecting new rates, subject to
refund, under the provisions of its rate case filed August 30, 1996 ("1996 Rate
Case"). The application sought an increase in rates due to a proposed use of a
higher depreciation rate which also considers a net negative salvage value for
Pipeline's facilities, higher operating costs and a redesign of Pipeline's rates
because of impacts relating to the sale of Pipeline's south-end facilities in
the third quarter of 1996. On July 22, 1997, Pipeline filed a settlement which
would resolve all issues in this rate case. On November 25, 1997, the FERC, over
the objection of one dissenting party, issued an order approving all aspects of
the settlement. The one dissenting party sought and was denied rehearing of the
FERC's order. That party has now sought judicial review of the FERC's decisions.
Pipeline made refunds to customers in August 1998 totaling $16.7 million,
including interest, in this rate case.
- 6 -
<PAGE> 9
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
================================================================================
Significant Litigation
In October 1995, Pipeline received a judge's order following a non-jury
trial involving claims arising from a transportation agreement of a former
customer. In the decision, which was amended in January 1996, it was held that
Pipeline was liable to the former customer in the amount of $5.3 million, plus
interest. Pipeline settled this case in May 1998 for an amount that approximated
its previously recorded financial reserve.
Other Legal and Regulatory Matters
In addition to the foregoing, various other proceedings are pending
against Pipeline incidental to its operations.
Summary of Contingent Liabilities
Management believes that the ultimate resolution of the foregoing
matters, after consideration of amounts accrued, insurance coverage or other
indemnification arrangements, will not have a materially adverse effect upon
Pipeline's future financial position, results of operations, and future cash
flow requirements.
Other Matters
In February 1997, Enterprises entered into a new agreement for the sale,
with limited recourse, of certain receivables of Pipeline. Net proceeds to
Enterprises are limited to $15 million of which $10 million was utilized at
September 30, 1998.
- 7 -
<PAGE> 10
Item 2. Management's Narrative
Analysis of the
Results of Operations
This analysis discusses financial results of Pipeline's operations for
the nine month periods ended September 30, 1998 and 1997. Variances due to
changes in price and volume do not have a significant impact on revenues,
because under its straight-fixed-variable rate design methodology, the majority
of Pipeline's overall cost of service is recovered through fixed demand charges
in its transportation rates.
This analysis should be read in conjunction with the consolidated
financial statements, notes and management's discussion and analysis contained
in Items 7 and 8 of Pipeline's 1997 Annual Report on Form 10-K and in Pipeline's
1998 First and Second Quarter Reports on Form 10-Q and with the condensed
consolidated financial statements and notes contained in this report.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
Operating revenues increased $11 million, or 5%, due primarily to the
1998 reversal of rate reserves associated with the 1993 and 1996 rate cases and
the reversal of a demand charge credit reserve, coupled with increases in rate
reserves in 1997.
Pipeline's transportation service accounted for 95% and 94% of operating
revenues for the nine month periods ended September 30, 1998 and 1997,
respectively. Additionally, 3% and 4% of operating revenues represented gas
storage service for the nine month periods ended September 30, 1998 and 1997,
respectively.
Operating expenses decreased $.5 million due primarily to lower general
and administrative expenses and taxes other than income, partially offset by an
increase in property damage reserves and increased depreciation and amortization
expense.
Operating income increased $11.5 million, or 12%, primarily due to the
1998 reversal of rate reserves associated with the 1993 and 1996 rate cases, the
1997 increases in rate reserves, and lower general and administrative expenses
and taxes other than income, partially offset by increased depreciation and
amortization expense.
Interest on long-term debt decreased $2.7 million as a result of the
1997 early retirement of over $200 million of high cost debt under a
Williams-wide debt restructuring plan. Other interest expense increased $1.6
million due to higher revenues subject to refund and increased amortization of
loss on reacquired debt as a result of the 1997 early debt retirements.
The following table summarizes volumes and capacity for the periods
indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------------------
1998 1997
----------------- ---------------
<S> <C> <C>
Total Gas Volumes Throughput (TBtu) 546 521
Average Daily Transportation Volumes (TBtu) 2.0 1.9
Average Daily Firm Reserved Capacity (TBtu) 2.6 2.4
</TABLE>
- 8 -
<PAGE> 11
FINANCIAL CONDITION AND LIQUIDITY
Pipeline anticipates 1998 capital expenditures will total approximately
$67.6 million, of which $41.8 million has been expended through September 30,
1998. Funds necessary to complete capital projects are expected to come from
several sources, including Pipeline's operations and the return of funds
previously advanced to Williams. In addition, Pipeline expects to be able to
obtain financing, when necessary, on reasonable terms. To allow flexibility in
the timing of issuance of long-term securities, financing may be provided on an
interim basis with bank debt and from sources discussed below.
Pipeline shares in a $1 billion Revolving Credit Facility with
Williams and four affiliated companies. Pipeline's maximum borrowing
availability, subject to prior borrowing by other affiliated companies, is $400
million, none of which was used by Pipeline at September 30, 1998. Interest
rates vary with current market conditions. The Facility contains restrictions
which limit, under certain circumstances, the issuance of additional debt, the
attachment of liens on any assets and any change of ownership of Pipeline. Any
borrowings by Pipeline under this Facility are not guaranteed by Williams and
are based on Pipeline's financial need and credit worthiness.
Pipeline has also arranged various uncommitted lines-of-credit at market
interest rates. Pipeline's credit facilities are subject to Pipeline's continued
credit worthiness.
OTHER
Reference is made to Note 4 of Notes to Condensed Consolidated Financial
Statements for information about regulatory, judicial and business developments
which cause operating and financial uncertainties.
Year 2000 Compliance
Williams and its wholly-owned subsidiaries, which include Pipeline,
initiated an enterprise-wide project in 1997 to address the year 2000 compliance
issue for both traditional information technology areas and non-traditional
areas, including embedded technology which is prevalent throughout the company.
The project focuses on all technology hardware and software, external interfaces
with customers and suppliers, operations process control, automation and
instrumentation systems, and facility items. The phases of the project are
awareness, inventory and assessment, renovation and replacement, testing and
validation. The awareness and inventory/assessment phases of this project as
they relate to both traditional and non-traditional information technology areas
have been completed. During the inventory and assessment phase, all systems with
possible year 2000 implications were inventoried and classified into five
categories: 1) highest, business critical, 2) high, compliance necessary within
a short period of time following January 1, 2000, 3) medium, compliance
necessary within 30 days from January 1, 2000, 4) low, compliance desirable but
not required, and 5) unnecessary. Categories 1 - 3 were designated as critical
and are the major focus of this project. Renovation/replacement and
testing/validation of critical systems are expected to be completed by June 30,
1999, except for replacement of certain critical systems scheduled for
completion by September 1, 1999. Certain non-critical systems may not be
compliant by January 1, 2000.
Testing and validation activities have begun and will continue
throughout the process with substantial completion expected by June 30, 1999.
Year 2000 test labs are in place and operational. As was expected, few problems
have been detected during testing for items believed to be compliant. The
following table indicates the approximate project status, at September 30, 1998,
for traditional information technology and non-traditional areas. The tested
category indicates the percentage that has been fully tested or otherwise
validated as compliant. The untested category includes items that are believed
to be compliant but which have not yet been validated. The not compliant
category includes items which have been identified as not year 2000 compliant.
<TABLE>
<CAPTION>
Tested Untested Not Compliant
------ -------- -------------
<S> <C> <C> <C>
Traditional Information Technology 10% 87% 3%
Non-Traditional Information Technology 32% 65% 3%
</TABLE>
Pipeline has initiated a formal communications process with other
companies with which Pipeline's systems interface or rely on to determine the
extent to which those companies are addressing their year 2000 compliance. In
connection with this process, Pipeline has sent approximately 80 letters and
questionnaires to third parties including customers, vendors, service providers,
etc. Additional communications are being
- 9 -
<PAGE> 12
mailed during the fourth quarter of 1998. Pipeline is evaluating responses as
they are received or otherwise investigating the status of these companies' year
2000 compliance efforts. Where necessary Pipeline will be working with key
business partners to reduce the risk of a break in service or supply and with
non-compliant companies to mitigate any material adverse effect on Pipeline.
Pipeline expects to utilize both internal resources and external
contractors to complete the year 2000 compliance project. Existing resources
will be redeployed, and several previously planned system implementations
currently in process are scheduled for completion on or before September 1,
1999, which are expected to lessen possible year 2000 impacts. In situations
where planned system implementations will not be in service timely, alternative
steps are being taken to make existing systems compliant.
Although all critical systems over which Pipeline has control are
planned to be compliant and tested before the year 2000, there is a possibility
of service interruptions due to non-compliance by third parties. In particular,
power failures along the communications network or transportation system would
cause service interruptions. This risk should be minimized by the
enterprise-wide effort to communicate with and evaluate third-party compliance
plans. Another area of risk for non-compliance is the delay of system
replacements scheduled for completion during 1999. The status of these systems
is being closely monitored to reduce the chance of delays in completion dates.
Contingency plans are being developed for critical business processes, critical
business partners, suppliers and system replacements that experience significant
delays. These plans are expected to be defined by August 31, 1999 and
implemented where appropriate.
Costs incurred for new software and hardware purchases are being
capitalized and other costs are being expensed as incurred. While estimates of
the total cost of Pipeline's project continue to be refined, Pipeline estimates
that future costs, including the cost to accelerate system replacements,
necessary to complete the project within the schedule described will total
approximately $2.1 million. Of this total, approximately $1 million will be
expensed and the remainder capitalized. This estimate does not include
Pipeline's potential share of year 2000 costs that may be incurred by
partnerships and joint ventures in which the company participates but is not the
operator. To date, approximately $.8 million and $.1 million of costs have been
capitalized and expensed, respectively. The costs of the project and the
completion dates are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party year 2000 compliance modification
plans and other factors. There can be no guarantee that these estimates will be
achieved and actual results could differ materially from these estimates.
The above contains forward-looking statements including, without
limitation, statements relating to the company's plans, strategies, objectives,
expectations, intentions, and adequate resources, that are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Readers are cautioned that such forward-looking statements contained in
the year 2000 update are based on certain assumptions which may vary from actual
results. Specifically, the dates on which the company believes the year 2000
project will be completed and computer systems will be implemented are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, or that there will not be a
delay in, or increased costs associated with, the implementation of the year
2000 project. Other specific factors that might cause differences between the
estimates and actual results include but are not limited to, the availability
and cost of personnel trained in these areas, the ability to locate and correct
all relevant computer code, timely responses to and corrections by third-parties
and suppliers, the ability to implement interfaces between the new systems and
the systems not being replaced, and similar uncertainties. Due to the general
uncertainty inherent in the year 2000 problem, resulting in large part from the
uncertainty of the year 2000 readiness of third-parties, the company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
- 10 -
<PAGE> 13
PART II. OTHER INFORMATION
The information required by items in Part II is omitted because the
items are inapplicable, the answer is negative or substantially the same
information is included elsewhere in this report or has been previously reported
by the Registrant.
- 11 -
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NORTHWEST PIPELINE CORPORATION
---------------------------------------
Registrant
By: /s/ Curtis C. Kennedy
---------------------------------------
Curtis C. Kennedy
Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Date: November 11, 1998
- 12 -
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 317
<SECURITIES> 0
<RECEIVABLES> 18,796
<ALLOWANCES> 0
<INVENTORY> 10,651
<CURRENT-ASSETS> 115,692
<PP&E> 1,528,337
<DEPRECIATION> 606,881
<TOTAL-ASSETS> 1,088,675
<CURRENT-LIABILITIES> 137,244
<BONDS> 372,435
0
0
<COMMON> 1
<OTHER-SE> 439,723
<TOTAL-LIABILITY-AND-EQUITY> 1,088,675
<SALES> 0
<TOTAL-REVENUES> 215,438
<CGS> 0
<TOTAL-COSTS> 109,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,739
<INCOME-PRETAX> 80,533
<INCOME-TAX> 30,271
<INCOME-CONTINUING> 50,262
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,262
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
