<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 Quarterly Period Ended June 30, 1999
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 August 12, 1999
- -------------------------- ------------------------------
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 six months
ended June 30, 1999 and 1998............................................................ 1
Condensed Consolidated Balance Sheet as of June 30, 1999 and
December 31, 1998....................................................................... 2
Condensed Consolidated Statement of Cash Flows, six
months ended June 30, 1999 and 1998..................................................... 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 and 1999 first quarter report on Form
10-Q.
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES ....................... $ 77,276 $ 70,312 $ 147,417 $ 141,530
--------- --------- --------- ---------
OPERATING EXPENSES:
General and administrative ............ 10,307 8,982 23,651 20,827
Operation and maintenance ............. 9,545 9,404 18,435 17,671
Depreciation and amortization ......... 11,329 12,825 24,503 25,924
Taxes, other than income taxes ........ 3,625 3,258 8,377 7,021
--------- --------- --------- ---------
34,806 34,469 74,966 71,443
--------- --------- --------- ---------
Operating income .................... 42,470 35,843 72,451 70,087
--------- --------- --------- ---------
OTHER INCOME - net ....................... 564 1,158 1,297 2,405
--------- --------- --------- ---------
INTEREST CHARGES:
Interest on long-term debt ............ 6,507 7,450 13,051 14,664
Other interest ........................ (432) 2,521 1,404 5,120
Allowance for borrowed funds used during
construction ........................ (217) (131) (360) (202)
--------- --------- --------- ---------
5,858 9,840 14,095 19,582
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ............... 37,176 27,161 59,653 52,910
PROVISION FOR INCOME TAXES ............... 13,259 9,776 22,460 19,335
--------- --------- --------- ---------
NET INCOME ............................... $ 23,917 $ 17,385 $ 37,193 $ 33,575
========= ========= ========= =========
CASH DIVIDENDS ON COMMON STOCK ........... $ 18,000 $ 12,000 $ 36,000 $ 24,000
========= ========= ========= =========
</TABLE>
- ---------------------------
See accompanying notes.
1
<PAGE> 4
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
================================================================================
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(Thousands)
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT, at cost ................ $ 1,577,301 $ 1,573,593
Less - Accumulated depreciation and amortization ... 680,888 667,163
-------------- --------------
896,413 906,430
Construction work in progress ...................... 32,331 21,258
-------------- --------------
928,744 927,688
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents .......................... 369 1,164
Advances to parent ................................. 26,343 26,734
Accounts receivable -
Trade ............................................ 12,384 16,023
Affiliated companies ............................. 1,884 3,395
Materials and supplies (principally at average
cost)............................................. 10,566 10,575
Exchange gas due from others ....................... 7,255 19,792
Deferred income taxes .............................. 18,756 20,261
Prepayments and other .............................. 1,585 1,763
-------------- --------------
79,142 99,707
-------------- --------------
OTHER ASSETS:
Deferred charges ................................... 54,701 52,876
-------------- --------------
$ 1,062,587 $ 1,080,271
============== ==============
</TABLE>
- --------------------------
See accompanying notes.
2
<PAGE> 5
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
(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 .................................. 191,701 190,507
-------------- --------------
454,546 453,352
Long-term debt, less current maturities ................ 370,783 372,440
-------------- --------------
825,329 825,792
-------------- --------------
CURRENT LIABILITIES:
Current maturities of long-term debt ................... 1,667 1,667
Accounts payable -
Trade .............................................. 8,861 12,576
Affiliated companies ............................... 9,601 7,900
Accrued liabilities -
Income taxes ....................................... 1,257 --
Taxes, other than income taxes ..................... 6,016 4,138
Interest ........................................... 10,836 11,225
Employee costs ..................................... 9,743 10,602
Exchange gas due to others ......................... 7,944 20,481
Reserves for estimated rate refunds ................ 29,653 38,958
Other .............................................. 2,866 818
-------------- --------------
88,444 108,365
-------------- --------------
DEFERRED INCOME TAXES ..................................... 139,634 135,920
-------------- --------------
OTHER DEFERRED CREDITS .................................... 9,180 10,194
-------------- --------------
CONTINGENT LIABILITIES AND COMMITMENTS.....................
-------------- --------------
$ 1,062,587 $ 1,080,271
============== ==============
</TABLE>
- ---------------------------
See accompanying notes.
3
<PAGE> 6
NORTHWEST PIPELINE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1999 1998
-------------- --------------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ........................................................ $ 37,193 $ 33,575
Adjustments to reconcile to cash provided by operations -
Depreciation and amortization .................................. 24,503 25,924
Provision for deferred income taxes ............................ 5,219 7,563
Amortization of deferred charges and credits ................... 1,088 259
Allowance for equity funds used during construction ............ (639) (316)
Increase (decrease) from changes in:
Accounts receivable and exchange gas due from
others ...................................................... 32,886 15,801
Inventory .................................................... 9 (272)
Other current assets ......................................... (15,341) (313)
Other assets and deferred charges ............................ (3,462) (403)
Accounts payable and exchange gas due to others .............. (12,040) (7,099)
Other accrued liabilities .................................... (5,370) (29,024)
Other deferred credits ....................................... (455) (472)
Other .......................................................... 1 (7)
-------------- --------------
Net cash provided by operating activities ......................... 63,592 45,216
-------------- --------------
INVESTING ACTIVITIES:
Property, plant and equipment -
Capital expenditures ........................................... (25,288) (26,182)
Proceeds from sales ............................................ 368 1,737
Changes in accounts payable .................................... (2,191) (3,064)
Advances to parent ................................................ 391 7,760
-------------- --------------
Net cash used by investing activities ............................. (26,720) (19,749)
-------------- --------------
FINANCING ACTIVITIES:
Principal payments on long-term debt .............................. (1,667) (1,867)
Premium on early retirement of long-term debt ..................... -- (19)
Dividends paid .................................................... (36,000) (24,000)
-------------- --------------
Net cash used by financing activities ............................. (37,667) (25,886)
-------------- --------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ....................................................... (795) (419)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 1,164 627
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 369 $ 208
============== ==============
</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 June 30, 1999 and
December 31, 1998, the results of operations for the three and six month periods
ended June 30, 1999 and 1998, and cash flows for the six month periods ended
June 30, 1999 and 1998. 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, notes thereto and management's narrative analysis included
in Pipeline's 1998 Annual Report on Form 10-K.
Pipeline is a wholly owned subsidiary of Williams Gas Pipeline Company
("WGP") (formerly Williams Interstate Natural Gas Systems, Inc.). WGP is a
wholly owned subsidiary of The Williams Companies, Inc. ("Williams").
(2) Basis of Presentation
The condensed consolidated financial statements include the operating
results of NWP Enterprises ("Enterprises"), a wholly owned subsidiary of
Pipeline.
(3) Long-Term Debt and Banking Arrangements
Pipeline is a participant in a $1 billion Revolving Credit Facility with
Williams and certain 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 June 30, 1999. Interest rates
vary with current market conditions based on the base rate of Citibank N.A.,
three-month certificates of deposit of major United States money market banks,
federal funds rate or the London Interbank Offered Rate. 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 that were unused by Pipeline at June 30, 1999. Pipeline's credit
facilities are subject to Pipeline's continued credit worthiness.
(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
5
<PAGE> 8
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
================================================================================
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,
reflecting the FERC's resolution of all disputed matters in this case. Pipeline
and other parties sought judicial review of the FERC's decision concerning rate
of return on equity. One party is seeking judicial review of the inclusion of
unpaid accruals in rate base. 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. In April
1999, the Court of Appeals for the D.C. Circuit remanded the 1993 Rate Case to
the FERC for application of its revised rate of return on equity policy. On July
14, 1999, FERC issued an order requiring Pipeline to: (a) submit a surcharge
plan to the FERC, (b) recalculate rates consistent with the new weighting
formula favoring short term growth, and (c) address in a remand hearing the
appropriate source for GDP growth data. Pipeline anticipates that the further
proceedings in this case concerning long term growth will raise the previously
authorized rate of return on equity.
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 and allowed a return on equity of 11.2
percent. On June 1, 1999, FERC issued its order affirming many aspects of the
ALJ's initial decision, but finding that the return on equity issue should be
resolved by using the FERC's new policy concerning rate of return
determinations. Pipeline has reduced its rate refund liabilities $9.9 million to
reflect FERC's recent 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 certain aspects of
the FERC's decisions. Pipeline made refunds to customers in August 1998 totaling
$16.7 million, including interest, in this rate case.
Significant Litigation
In 1998, the United States Department of Justice informed Williams that
Jack Grynberg, an individual, had filed claims in the United States District
Court for the District of Colorado under the False Claims Act against Williams
and certain of its wholly-owned subsidiaries including Pipeline. Mr. Grynberg
had also filed claims against approximately 300 other energy companies and
alleged that the defendants violated the False Claims Act in connection with the
measurement and purchase of hydrocarbons. The relief sought was an unspecified
amount of royalties allegedly not paid to the Federal government, treble
damages, a civil penalty, attorneys' fees and costs. On April 9, 1999, the
United States Department of Justice announced that it was declining to intervene
in any of the Grynberg qui tam cases; including the action filed against the
Williams entities in the United States District Court for the District of
Colorado.
6
<PAGE> 9
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
================================================================================
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 cash flow
requirements.
Other Matters
Enterprises participates in an 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 June 30, 1999.
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 six-month periods ended June 30, 1999 and 1998. Variances due to changes in
price and volume have little impact on revenues, because under Pipeline's rate
design methodology, the majority of overall cost of service is recovered through
firm capacity reservation charges in its transportation rates.
This analysis should be read in conjunction with the consolidated
financial statements, notes and management's narrative analysis of the results
of operations contained in Items 7 and 8 of Pipeline's 1998 Annual Report on
Form 10-K and in Pipeline's 1999 First Quarter Report on Form 10-Q and with the
condensed consolidated financial statements and notes contained in this report.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
Operating revenues increased $5.9 million, or 4%, due primarily to the
1999 reduction to rate refund liabilities of $8.3 million associated with the
1995 rate case, partially offset by lower short-term firm and interruptible
transportation revenues and the 1998 reduction to rate refund liabilities of
$1.5 million associated with the 1993 rate case and gain of $.4 million on the
sale of system balancing gas.
Pipeline's transportation service accounted for 97% and 95% of operating
revenues for the six-month periods ended June 30, 1999 and 1998, respectively.
Additionally, 2% and 3% of operating revenues represented gas storage service
for the six-month periods ended June 30, 1999 and 1998, respectively.
Operating expenses increased $3.5 million, or 5%, due primarily to $2.3
million in accruals for damages associated with pipeline ruptures and higher
general and administrative and operation and maintenance expenses, depreciation
and taxes, other than income taxes, partially offset by a $2.1 million reduction
to depreciation associated with the 1995 rate case.
Operating income increased $2.4 million, or 3%, primarily due to the
1999 reversal of reserves and reduction to depreciation associated with the 1995
rate case, partially offset by accruals for damages associated with 1999
pipeline ruptures, lower short-term firm and interruptible transportation
revenues, the 1998 reversal of reserves associated with the 1993 rate case, the
1998 gain on the sale of system balancing gas, and higher operating expenses.
Interest on long-term debt decreased $1.6 million as a result of the
early retirement of the 10.65% Debentures in November of 1998. Other interest
expense decreased $3.7 million due to the reduction to accrued interest
liabilities of $2.2 million associated with the 1995 rate case and lower
revenues subject to refund as a result of rate case settlements in 1998.
The following table summarizes volumes and capacity for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
Total Gas volumes throughput (TBtu) 366 383
Average Daily Transportation Volumes (TBtu) 2.0 2.1
Average Daily Firm Reserved Capacity (TBtu) 2.6 2.5
</TABLE>
FINANCIAL CONDITION AND LIQUIDITY
Pipeline anticipates 1999 capital expenditures will total approximately
$90.4 million, of which $25.3 million has been expended through June 30, 1999.
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.
8
<PAGE> 11
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 is a participant in a $1 billion Revolving Credit Facility
with Williams and certain 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 June 30, 1999. Interest rates
vary with current market conditions based on the base rate of Citibank N.A.,
three-month certificates of deposit of major United States money market banks,
federal funds rate or the London Interbank Offered Rate. 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
Pipeline believes that strong economies in the Pacific Northwest and the
growing preference for natural gas in response to environmental concerns support
future expansions of its mainline capacity.
Reference is made to Note 4 of Notes to 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.
This 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 through 3 were designated as
critical and are the major focus of this project. Some non-critical systems may
not be compliant by January 1, 2000.
Renovation/replacement and testing/validation of critical systems has
been completed except for replacement of certain critical systems scheduled for
completion later in 1999. Testing and validation activities will continue
throughout the process as replacement systems come online and as remediation of
systems pursuant to an implemented contingency plan are completed. As of June
30, 1999, all traditional information technology and nontraditional areas have
been fully tested or otherwise validated as compliant.
Pipeline initiated a formal communications process with other companies
in 1998 to determine the extent to which those companies are addressing year
2000 compliance. In connection with this process, Pipeline has sent
approximately 530 letters and questionnaires to third parties including
customers, vendors and service providers. Pipeline is evaluating responses as
they are received or otherwise investigating the status of these companies' year
2000 compliance efforts. As of June 30, 1999, approximately 54% of the companies
contacted have responded and virtually all of these have indicated that they are
already compliant or will be compliant on a timely basis. 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. Pipeline has a core
group of 30 people involved in this enterprise-wide project. This includes 1
individual responsible for coordinating, organizing, managing, communicating,
and monitoring the project and another 29 staff members responsible for
completing the project. Depending on which phase the project is in and what area
is being focused on at any given point in time, there can be an additional 20 to
25 employees who are also contributing a portion of their time to the completion
of this project.
Several previously planned system implementations have been or are
scheduled for completion during 1999, which will lessen possible year 2000
impacts. For example, a new year 2000 compliant payroll/human
9
<PAGE> 12
resources system was implemented January 1, 1999. It replaced multiple human
resources administration and payroll processing systems previously in place. WGP
completed implementation of a new telephone system in 1998, and an upgrade to
the financial system is scheduled for completion September 30, 1999.
Although all critical systems over which Pipeline has control are
planned to be compliant and tested before the year 2000, Pipeline has identified
two areas that would equate to a most reasonably likely worst case scenario.
First is the possibility of service interruptions due to non-compliance by third
parties. For example, power failures along the transportation system would cause
service interruptions. This risk should be minimized by the enterprise-wide
communications effort with and evaluation of third-party compliance plans and by
the development of contingency 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. In situations where planned system implementations
will not be in service timely or are delayed past an implementation date of
September 1, 1999, alternative steps are being taken to make existing systems
compliant. It is not possible to quantify the possible financial impact if this
most reasonably likely worst case scenario were to come to fruition.
Significant focus on the contingency plan phase of the project has been
taking place in 1999. Guidelines for the contingency planning process were
issued in January 1999. 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. The following is
a discussion of contingency plans that have been developed to date. Pipeline's
contingency plans include manning all operational stations twenty-four hours a
day, putting extra security measures into place and stocking up on supplies. In
addition, most of Pipeline's compressor stations are capable of independently
generating electricity in the event of a loss of electricity, and operation of
the pipeline can be done manually in case there is a loss of telecommunications
capability.
Costs incurred for new software and hardware purchases are being
capitalized and other costs are being expensed as incurred. Pipeline currently
estimates the total cost of the project, including any accelerated system
replacements, to be approximately $1.6 million. Prior to 1998 and during the
first quarter of 1998, Pipeline was conducting the project awareness and
inventory/assessment phases of the project. The second quarter of 1998 was spent
on the renovation/replacement and testing/validation phases and completion of
the inventory/assessment phase. The third and fourth quarters of 1998 focused on
the renovation/replacement and testing/validation phases. During the first
quarter 1999, renovation/replacement and testing/validation continued and
contingency planning began. During the second quarter of 1999 the primary focus
shifted to testing/validation and contingency planning. The third and fourth
quarters of 1999 will focus mainly on contingency planning and final testing.
The first two quarters of 2000 will focus on monitoring and problem resolution.
Of the $1.2 million incurred to date, approximately $.3 million has been
expensed, and approximately $.9 million has been capitalized. Of the $.4 million
of future costs necessary to complete the project within the schedule described,
approximately $.2 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. The costs of previously planned system replacements are
not considered to be year 2000 costs and are, therefore, excluded from the
amounts discussed above.
The preceding discussion contains forward-looking statements including,
without limitation, statements relating to Pipeline'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 Pipeline 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, Pipeline 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/ Jeffrey R. Valentine
---------------------------------
Jeffrey R. Valentine
Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Date: August 12, 1999
12
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 369
<SECURITIES> 0
<RECEIVABLES> 14,268
<ALLOWANCES> 0
<INVENTORY> 10,566
<CURRENT-ASSETS> 79,142
<PP&E> 1,609,632
<DEPRECIATION> 680,888
<TOTAL-ASSETS> 1,062,587
<CURRENT-LIABILITIES> 88,444
<BONDS> 370,783
0
0
<COMMON> 1
<OTHER-SE> 454,545
<TOTAL-LIABILITY-AND-EQUITY> 1,062,587
<SALES> 0
<TOTAL-REVENUES> 147,417
<CGS> 0
<TOTAL-COSTS> 74,966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,095
<INCOME-PRETAX> 59,653
<INCOME-TAX> 22,460
<INCOME-CONTINUING> 37,193
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,193
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
