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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _______________ to ________________
COMMISSION FILE NO. 0-25842
PACIFIC GAS TRANSMISSION COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1512922
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation or organization)
2100 SW RIVER PARKWAY, PORTLAND, OR 97201
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 833-4000
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at May 13, 1996
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Common Stock 1,000 Shares
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.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
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Item 1. Consolidated Financial Statements
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Statements of Consolidated Income.............................................. 1
Consolidated Balance Sheets.................................................... 2
Statements of Consolidated Cash Flows.......................................... 4
Notes to Consolidated Financial Statements..................................... 5
Note 1. Basis of Presentation.............................................. 5
Note 2. Contingencies...................................................... 5
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations........................................................ 8
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings................................................................. 15
Item 5. Other Information................................................................. 15
Item 6. Exhibits and Reports on Form 8-K.................................................. 15
Signatures ......................................................................... 16
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PART I: FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED INCOME (UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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(IN THOUSANDS) 1996 1995
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OPERATING REVENUES:
Gas transportation $48,150 $45,525
Gas transportation for PG&E 8,982 11,293
Gas supply restructuring cost recovery 7,090 12,368
from PG&E
Gas supply restructuring cost recovery 5,015 4,130
Other 185 140
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TOTAL OPERATING REVENUES 69,422 73,456
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OPERATING EXPENSES:
Gas supply restructuring costs 12,105 16,498
Operations 12,827 13,330
Maintenance 997 1,032
Depreciation and amortization 9,116 9,575
Income taxes 8,465 6,910
Property and other taxes 3,006 3,432
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TOTAL OPERATING EXPENSES 46,516 50,777
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OPERATING INCOME 22,906 22,679
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OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used during 89 261
construction
Interest income 751 2,060
Other - net (274) (898)
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TOTAL OTHER INCOME AND (INCOME 566 1,423
DEDUCTIONS)
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INTEREST EXPENSE:
Interest on long-term debt 10,309 12,641
Allowance for borrowed funds used (71) (262)
during construction
Other interest charges 983 302
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NET INTEREST EXPENSE 11,221 12,681
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NET INCOME $12,251 $11,421
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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CONSOLIDATED BALANCE SHEETS
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ASSETS
MARCH 31, December 31,
(IN THOUSANDS) 1996 1995
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(unaudited)
UTILITY PLANT:
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Gas plant in service - at original cost $1,422,017 $1,418,044
Accumulated depreciation (389,729) (380,585)
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Net utility plant in service 1,032,288 1,037,459
Construction work in progress 21,368 14,515
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UTILITY PLANT - NET 1,053,656 1,051,974
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CURRENT ASSETS:
Cash and cash equivalents 6,778 9,839
Accounts receivable from PG&E 7,117 7,021
Accounts receivable - other 25,105 27,697
Gas supply restructuring costs 19,000 30,531
recoverable
Deferred income taxes 4,075 -
Inventories (at average cost) 5,166 7,687
Other 9,794 10,216
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TOTAL CURRENT ASSETS 77,035 92,991
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DEFERRED CHARGES:
Income tax related 26,472 26,740
Deferred charge on reacquired debt 15,762 16,064
Unamortized debt expense 4,657 4,754
Other 11,535 13,682
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TOTAL DEFERRED CHARGES 58,426 61,240
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TOTAL ASSETS $1,189,117 $1,206,205
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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CONSOLIDATED BALANCE SHEETS
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CAPITALIZATION AND LIABILITIES
MARCH 31, December 31,
(IN THOUSANDS) 1996 1995
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(unaudited)
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CAPITALIZATION:
Common stock - no par value; 1,000
shares authorized,
issued and outstanding $ 85,474 $ 85,474
Additional paid-in capital 182,000 182,000
Reinvested earnings 152,317 150,066
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Total common stock equity 419,791 417,540
Long-term debt 560,027 592,471
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TOTAL CAPITALIZATION 979,818 1,010,011
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CURRENT LIABILITIES:
Long-term debt - current portion 357 355
Payable to PG&E 15,212 8,003
Accounts payable and accrued liabilities 25,750 27,527
Accrued taxes 9,763 8,646
Deferred income taxes 0 1,716
Reserve for pending regulatory issues 26,643 23,201
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TOTAL CURRENT LIABILITIES 77,725 69,448
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DEFERRED CREDITS:
Deferred income taxes 121,772 117,353
Other 9,802 9,393
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TOTAL DEFERRED CREDITS 131,574 126,746
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TOTAL CAPITALIZATION AND LIABILITIES $1,189,117 $1,206,205
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements
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STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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(IN THOUSANDS) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,251 $ 11,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,639 9,971
Deferred income taxes (1,104) (2,360)
Gas supply restructuring costs 11,531 15,272
Allowance for equity funds used during construction (89) (261)
Changes in operating assets and liabilities:
Accounts receivable 2,496 626
Accounts payable and accrued liabilities (1,777) (5,793)
Payable to PG&E 7,209 6,946
Accrued taxes 1,117 748
Regulatory accruals 3,442 2,335
Other working capital (237) 1,628
Other - net 2,517 (768)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 46,995 39,765
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CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (7,458) (14,514)
Allowance for borrowed funds used during construction (71) (262)
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NET CASH USED IN INVESTING ACTIVITIES (7,529) (14,776)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (33,112) (51,219)
Long-term debt issuance costs - (489)
Construction financing 585 4,492
Proceeds from swap termination - 1,264
Dividend paid to PG&E (10,000) -
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NET CASH USED IN FINANCING ACTIVITIES (42,527) (45,952)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (3,061) (20,963)
CASH AND CASH EQUIVALENTS AT JANUARY 1 9,839 74,664
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CASH AND CASH EQUIVALENTS AT MARCH 31 $ 6,778 $ 53,701
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest $ 4,356 $ 16,783
Income taxes 1,551 2,574
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</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1: BASIS OF PRESENTATION
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The accompanying unaudited consolidated financial statements of Pacific Gas
Transmission Company (PGT) and its wholly owned subsidiaries (collectively, the
Company) have been prepared in accordance with interim period reporting
requirements. 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, 1995.
In the opinion of management, the accompanying statements reflect all
adjustments which are 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. Prior year's amounts in the consolidated financial statements have
been reclassified where necessary to conform to the 1996 presentation. Results
of operations for interim periods are not necessarily indicative of results to
be expected for a full year.
NOTE 2: CONTINGENCIES
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REGULATORY MATTERS
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PIPELINE EXPANSION - On November 1, 1993, the Company placed in service a
major expansion of its natural gas transmission system in Idaho, Washington and
Oregon. The new facilities, which were authorized by the Federal Energy
Regulatory Commission (FERC or Commission) on August 1, 1991, run parallel to
and connect with the existing system and provide additional firm transportation
service capacity of 150,000 decatherms per day (Dt/d) to the Pacific Northwest
and 766,000 Dt/d to California. Similarly, the California Public Utilities
Commission (CPUC) authorized Pacific Gas and Electric Company (PG&E) to expand
its gas pipeline facilities in California to connect with the PGT expansion at
the California-Oregon border. The Company's total cost of the 1993 expansion is
currently estimated to be approximately $852 million.
In the August 1, 1991, order, the FERC found that transportation
arrangements for PG&E's facilities were discriminatory and initially declined to
authorize the start of construction. In particular, the FERC found that the
CPUC-imposed restraints on access by PGT's 1993 expansion shippers to PG&E's
pre-expansion facilities were discriminatory. However, on October 24, 1991, the
FERC permitted the Company to commence construction, while the CPUC re-examined
the features of its rate design for PG&E, but imposed a lower penalty return on
equity, 10.13 percent, instead of the previously prescribed 12.5 percent on the
1993 expansion, until such time that PGT demonstrated that neither its rates nor
its transportation policies nor PG&E's CPUC-approved rates and policies resulted
in unduly discriminatory restraints. PGT requested a rehearing of this feature
of the FERC's certificate. In October 1992, the CPUC reaffirmed its policies
which resulted in renewed petitions to the FERC requesting, among other things,
revocation of the Company's authorization to operate the 1993 expansion
facilities.
On March 16, 1993, the FERC issued an order addressing the various
petitions for rehearing of its prior decisions related to the interstate portion
of the 1993 expansion. In the order, the FERC upheld its decision to authorize
the construction and operation of the 1993 expansion and raised PGT's authorized
return to 12.75 percent, but reaffirmed the 10.13 percent penalty return on
equity for PGT's 1993 expansion facilities. The FERC denied a request for
rehearing of the March 16, 1993 order. PGT appealed the 10.13 percent penalty
return to the United States Court of Appeals. Irrespective of what the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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court may ultimately decide, in the proposed settlement of the 1994 rate case
(see "1994 Rate Case," below), it was agreed that the reduced rate of return
would not apply in the Company's 1994 rate case or in any subsequent rate case.
The Company agreed not to retroactively bill the customers for the period from
November 1, 1993, through August 31, 1994, for a rate higher than the 10.13
percent penalty return previously approved by the FERC. The proposed settlement
is subject to approval by the FERC and is opposed by one competitor and four
shippers representing approximately five percent of PGT's total firm
transportation service capacity. In the event the FERC rejects the settlement,
PGT's 1994 rate case would proceed to a FERC decision based upon the evidence in
the case.
In addition to PGT's appeal to the United States Court of Appeals, a number
of parties also sought rehearing of all of these FERC orders and have petitioned
for judicial review in the United States Court of Appeals for the District of
Columbia Circuit. On June 4, 1993, the Court of Appeals consolidated the cases
for processing. The consolidated cases were argued on November 14, 1995, with
a group of petitioners requesting the court to direct the FERC to provide for
compensation to shippers for alleged damages they suffered as a result of the
discriminatory conditions discussed above. Petitioners did not specify the
extent of the alleged damages or a basis for computing such damages.
The Company is unable to assess the extent of any claims for damages that
could be asserted in the consolidated cases currently pending before the Court
of Appeals or the validity of such claims if they are eventually made to the
FERC. However, the Company believes that the ultimate resolution of the issues
discussed above will not have a material adverse impact on its financial
position, liquidity or results of operations .
1994 RATE CASE - On February 28, 1994, PGT filed an application with the
FERC to change its rates for transportation services. These rates are based on
an overall cost of service of approximately $217 million, including a return on
equity of 13 percent. The proposed rate of return on equity applied to all
facilities and discontinued the penalty rate of return on equity of 10.13
percent that the FERC had earlier required to be used to develop initial rates
for PGT's expansion facilities, discussed in more detail above. The major issue
in this proceeding is whether PGT's mainline transportation rates should be
equalized through the use of rolled-in cost allocation, or whether they should
continue to reflect the current use of incremental costs to determine rates to
be paid by firm shippers. PGT proposed that mainline rates reflect the rolled-
in approach on a prospective basis.
On March 31, 1994, the FERC issued an order that accepted PGT's incremental
rates, and authorized PGT to place these rates into effect on September 1, 1994,
when the Company was permitted to begin charging the increased rates subject to
refund, and established a hearing before an administrative law judge to consider
the reasonableness of the proposed rates. Although the FERC rejected the
proposal to place rolled-in rates into effect on September 1, 1994, the FERC
indicated that PGT would be afforded the opportunity at the hearing to support
and justify a rolled-in rate proposal. Evidentiary hearings before an
administrative law judge were concluded in September 1995. Initial briefs were
submitted in November 1995.
On March 21, 1996, the Company filed a proposal settlement with the FERC
which would resolve all issues in this case. On May 2, the administrative law
judge certified the settlement for decision by the FERC. Of primary significance
to the case, the proposed settlement agreement provides that rolled-in rates
will become effective on the letter of November 1, 1996, or upon an initial
order by the Commission. Under the terms of the proposed settlement, to mitigate
the impact of the higher rolled-in rates, most of the firm pre-1993 expansion
shippers will be receiving a reduction from the rolled-in rates for six years,
while the 1993 expansion shippers will pay a surcharge in addition to the
rolled-in rates to offset the effect of the mitigation. Although the
implementation ofrolled-in rates by itself will not change PGT's total revenue
requirement,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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the settlement does provide for, among other things, a lower total cost of
service of $206 million, lower depreciation rates, and a return on equity of
12.2 percent. In addition, at such time that the settlement becomes effective,
up to three percent of PGT's firm transportation service capacity will be turned
back to PGT for subscription to other shippers. The overall effect of the
settlement on current rates, including mitigation measures and agreed upon lower
cost of service, will be to decrease PGT's current 100 percent load factor
transportation rates for the full distance of the pipeline (from the Canadian-
U.S. border to the Oregon-California border) from $.48 to $.33 per Decatherm
(Dt) for the 1993 expansion shippers, and to increase the transportation rate
for most of the pre-1993 expansion shippers from $.16 to either $.20 or $.24 per
Dt depending upon the level of mitigation. The rolled-in rate for the full
distance will be $.26 per Dt.
The proposed settlement is subject to approval by the FERC and is primarily
opposed by one competitor and by four shippers representing approximately five
percent of PGT's total firm transportation service capacity. In the event the
FERC rejects the settlement, PGT's 1994 rate case would proceed to a FERC
decision based upon the evidence in the case.
PGT has provided a reserve for revenues subject to refund and related
interest of $26.6 million at March 31, 1996. PGT believes that the ultimate
resolution of this rate case will not have a material impact on its financial
position, liquidity or results of operations.
GAS SUPPLY RESTRUCTURING (GSR) COSTS - Through March 31, 1996, PGT has
incurred total Gas Supply Restructuring (GSR) costs of $239.7 million. Pursuant
to the Transition Cost Recovery Mechanism (TCRM), the FERC has approved the
recovery of $168.5 million of such GSR costs, of which $56.2 million was
recovered through direct bills principally to PG&E and $112.3 million, plus
carrying costs, is being recovered on a monthly basis through November 14, 1996,
via a surcharge applicable to volumes transported under certain of PGT's rate
schedules. As of March 31, 1996, the balance of unrecovered GSR costs is $19.0
million.
On January 25, 1996, the CPUC sought judicial review of the FERC's approval
of approximately $10.9 million of GSR costs which were submitted to the FERC for
recovery on January 30, 1995. However, in the proposed settlement of PGT's 1994
rate case discussed above, the CPUC has agreed to withdraw its petition
for judicial review in consideration of PGT's agreement to refund $3.2 million
of the GSR costs direct billed to PG&E. Accordingly, PGT has recorded a reserve
of $3.2 million, which is included in Reserve for Pending Regulatory Issues on
the Consolidated Balance Sheet.
LEGAL MATTERS
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NORCEN LITIGATION: On March 17, 1994, Norcen Energy Resources Limited
(Norcen Energy) and Norcen Marketing Incorporated (Norcen Marketing) filed a
complaint in the U.S. District Court, Northern District of California, against
PG&E and PGT. Norcen Marketing signed a 30-year firm service agreement with PGT
for transportation of approximately 47,000 Dt/d on the PGT 1993 expansion. The
annual demand charges under the contract currently are approximately $7.8
million, and will decrease to approximately $5.5 million effective November 1996
pursuant to the proposed settlement of the 1994 rate case discussed above.
Norcen Energy is a guarantor of the 30-year transportation contract between PGT
and Norcen Marketing.
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Notes To Consolidated Financial Statements (Unaudited)
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The complaint alleged that PGT and PG&E wrongfully induced Norcen Energy
and Norcen Marketing to enter into the 30-year contract by concealing legal
action taken by PG&E before the CPUC (requesting clarification that gas shipped
on the PGT expansion should pay PG&E's incremental expansion rates for
intrastate service) two days before Norcen Marketing's contract became binding.
The complaint further alleged breach of representations to plaintiffs that PG&E
would not "unreasonably" build its expansion with less than "sufficient" firm
subscription. The complaint also alleged breach of an agreement between PGT and
a Norcen predecessor relating to the installation of additional capacity.
The complaint also alleged various federal and state antitrust, contractual
and other claims against the defendants and seeks rescission, restitution and
recovery of unspecified damages. In a pleading filed in June 1994, the
plaintiffs indicated a claim for $140 million (before trebling) based on
defendants' allegedly exclusionary business behavior, as well as an unspecified
amount of contract damages.
On September 19, 1994, the U.S. District Court, Northern District of
California, granted PGT's and PG&E's motion to dismiss all federal antitrust
claims in the complaint originally filed in this case, and dismissed the
remaining state law claims for lack of jurisdiction.
On October 18, 1994, plaintiffs filed an amended complaint. The amended
complaint reasserted part of the original complaint's antitrust claims, asserted
new antitrust claims based upon the same facts, and specifically alleged
diversity jurisdiction for the state law contract claims. On July 27, 1995, the
District Court issued an order on PGT's and PG&E's motions to dismiss the
amended complaint. The order dismissed all of plaintiffs' federal and state
antitrust claims with prejudice, but did not dismiss various state law contract
claims, including claims based on fraudulent inducement and breach of contract.
Plaintiffs have the right to appeal the dismissal of the antitrust
claims to the Court of Appeals. Plaintiffs still seek rescission of their gas
transportation contracts and compensatory and punitive damages in connection
with their remaining state law claims. The Company believes plaintiffs in this
action might seek contract damages of approximately $50 million in connection
with such claims.
The Company is unable to predict the ultimate outcome of this matter, but
such outcome could have a material adverse impact on the Company's results of
operations in a future reporting period. The Company believes that the ultimate
outcome of this matter will not have a material adverse impact on its financial
position or liquidity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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The following discussion includes some forward looking information. The
ultimate impact of increased competition and the changing regulatory environment
on future results is uncertain, but is expected to cause changes in the way PGT
conducts its business and to cause earnings to be more volatile. This outcome,
and other matters discussed below including the outcome of certain litigation
with a firm shipper, may cause future results to differ materially
from historical results or from results or outcomes currently expected or sought
by the Company.
General
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PGT is an interstate natural gas pipeline company and a wholly owned
subsidiary of PG&E. PGT'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. PGT's transportation
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system also provides service to various delivery points in Idaho, Washington and
Oregon. The Company's natural gas transportation services are regulated by the
United States Department of Energy, in particular the FERC. Various safety
issues are subject to the jurisdiction of the United States Department of
Transportation .
The PG&E Board of Directors has authorized a plan, approved by the
shareholders of PG&E on April 17, 1996, to restructure the corporate
organization of PG&E and its subsidiaries. The result of the change in
corporate structure will be to have PG&E become a subsidiary of a parent holding
company (ParentCo) with the present holders of PG&E common stock becoming
holders of ParentCo common stock. As part of the change in structure, it is
contemplated that PG&E will transfer its ownership interests in its two
principal subsidiaries, PGT and PG&E Enterprises, to ParentCo, so that PGT and
PG&E Enterprises will become subsidiaries of ParentCo.
CHANGING REGULATORY ENVIRONMENT
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Prior to November 1, 1993, PGT's business was primarily to provide bundled
natural gas sales and transportation services to PG&E, firm transportation
service to Pacific Interstate Transmission Company and to Northwest Pipeline,
and open-access interruptible transportation service to various other customers.
In 1992, the FERC issued Order 636, which required open-access pipelines to
provide firm and interruptible transportation services on an equal basis for all
gas supplies, whether purchased from the pipeline or from another gas supplier,
and required the termination of all pipeline bundled sales and transportation
service. PGT implemented the provisions of Order 636 effective November 1,
1993, pursuant to the FERC orders dated July 12, 1993 and October 1, 1993.
Effective November 1, 1993, PG&E terminated its gas purchases from PGT and PG&E
began receiving an equivalent amount of firm transportation service from PGT
under a long-term contract.
Order 636 authorized PGT to adopt the straight fixed-variable (SFV) rate
design method for all rate schedules, which it did effective November 1, 1993.
Under the SFV rate design, a pipeline company's fixed costs, including return on
equity and related taxes, associated with firm transportation service are
collected through the reservation charge component of the pipeline company's
firm transportation service rates.
As a result of the current SFV rate design and PGT's existing long-term
contracts, there are presently only minor financial effects due to fluctuating
levels of throughput on PGT's system. While the Company believes that SFV rate
design is likely to continue as the basis for ratemaking for PGT over the near
term, any departure from SFV rate design (whereby a portion of fixed costs would
be assigned to the commodity or delivery component of rates) could cause PGT's
operating results to be affected by fluctuations in the volumes of gas
transported on its system. Similarly, if PGT did not have all of its firm
transporation serivce capacity subscribed under long-term contracts, variations
in PGT's throughput would have a more significant impact on its operating
results. See the discussion of PGT's 1994 rate case below. In addition, see
"Legal Matters - Norcen Litigation" in Note 2 of the Notes to Consolidated
Financial Statements contained in Item 1, above, for a discussion of litigation
filed against PGT by one of its long-term firm transportation service customers
which is seeking rescission of that contract.
As discussed more fully in "Regulatory Matters - 1994 Rate Case" in Note 2
of the Notes to Consolidated Financial Statements contained in Item 1, above,
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on March 21, 1996, PGT filed a proposed settlement at FERC which would resolve
all issues in this pending rate case. This proposed settlement, among other
things, provides for the adoption of rolled-in rates beginning on the latter of
November 1, 1996, or upon an initial order by the Commission. In addition, at
such time as the settlement becomes effective up to three percent of PGT's firm
transportation service capacity will be turned back to PGT for subscription to
other shippers. To mitigate the impact of the higher rates, most of the firm
pre-1993 expansion shippers will be receiving a reduction from the rolled-in
rates for six years, while the 1993 expansion shippers will pay a surcharge in
addition to the rolled-in rates to offset the effect of the mitigation on PGT's
total revenue requirement. The proposed settlement is subject to approval by the
FERC and is primarily opposed by one competitor and by four shippers
representing approximately five percent of PGT's total firm transportation
service capacity. In the event the FERC rejects the settlement, PGT's 1994 rate
case would proceed to a FERC decision based upon the evidence in the case.
On January 31, 1996, the FERC issued a policy statement on alternative
methods for setting rates. The policy statement provides guidelines the FERC
will use in evaluating market-based incentive rate and negotiated rate
proposals by pipelines. Of particular note is the negotiated/recourse rate
program which provides a framework to allow negotiated terms and/or conditions
for individual shippers, with the traditional cost of service rates and tariffs
made available to all shippers as a default or recourse. The FERC is currently
requesting comments on the policy statement. The statement is not expected to
have a material impact on PGT's financial position, liquidity or results of
operations in the foreseeable future.
COMPETITION
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Competition to provide natural gas transportation services has intensified
in recent years. Regulatory changes, such as Order 636, have significantly
increased customers' flexibility, choices and responsibility to directly manage
their gas supplies.
PGT has in the past, and will in the future, actively compete with other
pipeline companies for transportation customers on the basis of transportation
rates, access to competitively priced gas supply basins, and quality and
reliability of transportation services. In the current open access environment,
the competitiveness of the pipeline's transportation services in the market it
serves is determined generally on the basis of delivered natural gas prices, of
which transportation cost is a portion of the total delivered price. Because
PGT's firm transportation service capacity is currently fully subscribed under
long-term contracts, and because of the current SFV rate design, there are no
material financial effects due to fluctuating levels of throughput on its system
because of changes in market conditions. However, under the proposed settlement
of its 1994 rate case, effective on the latter of November 1, 1996, or upon an
initial order by the Commission, up to three percent of PGT's firm
transportation service capacity will be turned back to PGT. As a result, PGT is
at risk for the subscription of this capacity. In addition, any departure from
SFV rate design would also subject PGT's revenue to variations in throughput
volumes.
FUTURE EXPANSIONS AND BUSINESS DEVELOPMENT
------------------------------------------
PGT has received preliminary expressions of interest in providing firm
transportation service to parties who cannot be accommodated with PGT's existing
available firm transportation service capacity and whose needs may not be met
through the release of capacity by PGT's current firm transportation service
customers. PGT intends to continue to solicit such expressions of interest, and
will consider adding additional firm transportation service capacity to its
mainline system in the future if sufficient demand develops.
-10-
<PAGE>
In addition to mainline expansions, PGT is also considering opportunities
to expand its core pipeline business through other means, such as through
extensions off its mainline system or the acquisition of gas storage and other
gas-related properties. Such opportunities may be located outside the Pacific
Northwest and California, and outside of the United States.
On April 29, 1996, a wholly owned subsidiary of PGT signed an agreement
with the state of Queensland, Australia, to purchase its State Gas Pipeline, a
376-mile natural gas transportation system in northeastern Australia. The
purchase price is approximately US$132 million and the purchase is expected to
be completed by June 30, 1996. The Company granted an unrelated third party a
60-day option, which expires June 1996, to purchase up to 50 percent of State
Gas Pipeline. The Company is presently evaluating its options with respect to
the financing of this acquisition. However, at the present time, this
acquisition is not expected to impact PGT's ratio of debt to total
capitalization.
ACCOUNTING FOR THE EFFECTS OF REGULATION
----------------------------------------
The Company 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, the Company has accumulated
approximately $73.7 million of regulatory assets (including $19 million of
recoverable gas supply restructuring costs) as of March 31, 1996. Management
expects to recover all of these costs through rates charged to customers.
RESULTS OF OPERATIONS
---------------------
INCOME STATEMENT DATA -
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
---- ----
(In Millions)
<S> <C> <C>
Operating revenues $69.4 $73.5
Operating expenses 46.5 50.8
----- -----
Operating income 22.9 22.7
Other income and (income deductions) .6 1.4
Net interest expense 11.2 12.7
----- -----
Net income $12.3 $11.4
===== =====
</TABLE>
-11-
<PAGE>
BALANCE SHEET DATA -
<TABLE>
<CAPTION>
AT MARCH 31, At December 31,
1996 1995
------------ ---------------
(In Millions)
<S> <C> <C>
Total Assets $1,189.1 $1,206.2
======== ========
</TABLE>
OPERATING REVENUES - The components of total operating revenues are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
----- -----
(In millions)
<S> <C> <C>
Gas transportation $57.1 $56.8
Gas supply restructuring (GSR) cost 12.1 16.5
Other 0.2 0.2
----- -----
Total operating revenues $69.4 $73.5
===== =====
</TABLE>
Gas transportation revenues for the three-month period ended March 31,
1996, increased $.3 million compared to the same period in 1995. This increase
was primarily a result of transportation revenues of $1.8 million related to
two separate extensions in northern and southern Oregon off PGT's mainline
facilities which were placed on service on November 1, 1995. This increase was
offset, in part, by lower transportation revenues for PGT's mainline facilities,
pursuant to the proposed settlement of the 1994 rate case.
GSR cost recovery revenues reflect the collection from customers through
volumetric surcharges and direct bills of deferred GSR costs, over a three-year
period beginning November 15, 1993, as permitted by the transition cost recovery
mechanism (TCRM) approved by the FERC. These revenues have no effect on income
as they are fully offset by the amortization of like amounts of deferred GSR
costs. The decrease for the three-month period ended March 31, 1996, compared to
the same period in 1995, resulted primarily from a direct billing of $4.7
million of GSR costs to PG&E in March 1995, pursuant to the January 1995 GSR
filing approved by the FERC.
OPERATING EXPENSES - The components of total operating expenses are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1996 1995
----- -----
(In millions)
<S> <C> <C>
Gas supply restructuring (GSR) costs 12.1 16.5
Operations and maintenance 13.8 14.4
Depreciation and amortization 9.1 9.6
Income taxes 8.5 6.9
Property and other taxes 3.0 3.4
----- -----
Total operating expenses $46.5 $50.8
===== =====
</TABLE>
-12-
<PAGE>
GSR costs for the three-month period ended March 31, 1996, and 1995,
include the amortization of the deferred GSR costs which were billed to
customers during the same period.
Operations and maintenance expenses for the three months ended March 31,
1996, decreased by $.6 million compared to the same period in 1995. This
decrease was primarily due to lower rent expense, resulting from the capital
lease of PGT's new corporate office in Portland, Oregon effective July 1995.
This decrease in rent expense is offset by higher depreciation and interest
expense related to this capital lease. The decrease in depreciation and
amortization expense for the three months ended March 31, 1996, compared to the
same period in 1995, was due to lower depreciation rates pursuant to the
proposed settlement of PGT's 1994 rate case. Variations in income taxes included
in operating expenses were primarily due to changes in taxable income. Property
and other taxes for the three months ended March 31, 1996, decreased by $.4
million compared to the same period in 1995 due to lower property taxes in
Oregon.
OTHER INCOME AND (INCOME DEDUCTIONS) - Other income for the three months
ended March 31, 1996, decreased $.9 million compared to the same period in 1995
primarily due to a decrease in interest income resulting from lower invested
cash balances maintained in 1996 and from a decrease in the carrying charges on
the unrecovered GSR costs resulting from a decrease in the unrecovered balance.
INTEREST EXPENSE - Interest expense, excluding AFUDC debt, for the three
months ended March 31, 1996, decreased $1.7 million compared to the same period
in 1995, primarily due to lower long-term debt interest offset, in part, by an
increase in interest associated with the capital lease of PGT's corporate
office. The lease of PGT's new corporate office in Portland, Oregon was
effective July 1995. Interest on long-term debt decreased because of a
reduction in the average interest rate from 8.1 percent in the three months
ended March 31, 1995 compared to 7.4 percent during the same period in 1996. In
addition, the average balance of long-term debt outstanding during the three
months ended March 31, 1995, was $627 million compared to $563 million during
the same period in 1996.
AFUDC debt for the three months ended March 31, 1996, decreased $.2 million
compared to the same period in 1995 due to completion of the construction of the
Oregon Extensions, which were placed in service on November 1, 1995.
NET INCOME - Net income was $12.3 million for the three months ended March
31, 1996, compared with $11.4 million for the same period in 1995. The $.9
million increase in the 1996 period, described in detail above, was primarily
the result of higher transportation revenues, lower operations and maintenance
expense, and lower long-term debt interest expense. The effects of these items
were offset, in part, by lower interest income.
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 PG&E. The Company pays dividends to PG&E as part of
a balanced approach to managing its capital structure, funding its operations
and capital expenditures and maintaining appropriate cash balances.
-13-
<PAGE>
CASH PROVIDED BY OPERATING ACTIVITIES - For the three months ended March
31, 1996, net cash provided by operating activities was $47.0 million, as
compared with net cash provided by operating activities of $39.8 million for
the same period in 1995.
CASH USED IN INVESTING ACTIVITIES - The Company's expenditures for
property, plant and equipment (including the allowance for borrowed funds used
during construction) amounted to $7.5 million and $14.8 million for the three
months ended March 1996, and 1995, respectively.
CASH USED IN FINANCING ACTIVITIES - For the three months ended March 31,
1996, cash used in financing activities amounted to $42.5 million and included a
net $32.5 million reduction in long-term debt and a $10.0 million dividend paid
to PG&E. For the three months ended March 31, 1995, cash used in financing
activities amounted to $46.0 million and included a net $46.7 million reduction
in long-term debt.
LEGAL MATTERS
-------------
In the normal course of business, the Company is named as a party in a
number of claims and lawsuits. In the past, substantially all of these have
been litigated or settled with no significant impact on the Company's financial
position, liquidity, or results of operations.
There is one litigation case discussed in Note 2 of the Notes to
Consolidated Financial Statements contained in Item 1, Consolidated Financial
Statements, above. This case involves antitrust and state law contract claims
for damages related to a 30-year contract with a transportation customer. The
Company is unable to predict the ultimate outcome of this matter, but such
outcome could have a material adverse impact on the Company's results of
operations in a future reporting period. The Company believes that the ultimate
outcome of this matter will not have a material adverse impact on its financial
position or liquidity.
NEW ACCOUNTING STANDARD
-----------------------
The Financial Accounting Standards Board has issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The Company adopted SFAS No. 121 effective January 1, 1996.
-14-
<PAGE>
The general provisions of SFAS No. 121 require, among other things, that
the existence of an impairment be evaluated whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable, and prescribes standards for the recognition and measurement of
impairment losses. In addition, SFAS No. 121 requires that regulatory assets
continue to be probable of recovery in rates, rather than only at the time the
regulatory asset is recorded. Regulatory assets currently recorded would be
written off if recovery is no longer probable. Under current ratemaking
circumstances, there was not any material impact of adopting the standard on
PGT's financial position, liquidity or results of operations.
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Information responding to this Item is included in Note 2 of the Notes to
Consolidated Financial Statements in Part I, Item 1, Consolidated Financial
Statements, above, which information is hereby incorporated herein by reference.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
No reports on Form 8-K were filed by the Company during the quarterly
period ended March 31, 1996.
-15-
<PAGE>
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.
PACIFIC GAS TRANSMISSION COMPANY
------------------------------------
(Registrant)
May 13, 1996 By: /s/ Stanley C. Karczewski
-----------------------------------------
Name: Stanley C. Karczewski
Title: Vice President of Finance and
Controller and Chief Financial Officer
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PACIFIC GAS
TRANSMISSION CO. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 6,778 9,839
<SECURITIES> 0 0
<RECEIVABLES> 32,222 34,718
<ALLOWANCES> 0 0
<INVENTORY> 5,166 7,687
<CURRENT-ASSETS> 77,035 92,991
<PP&E> 1,443,385 1,432,559
<DEPRECIATION> 389,729 380,585
<TOTAL-ASSETS> 1,189,117 1,206,205
<CURRENT-LIABILITIES> 77,725 69,448
<BONDS> 560,027 592,471
0 0
0 0
<COMMON> 267,474 267,474
<OTHER-SE> 152,317 150,066
<TOTAL-LIABILITY-AND-EQUITY> 1,189,117 1,206,205
<SALES> 0 0
<TOTAL-REVENUES> 69,422 73,456
<CGS> 0 0
<TOTAL-COSTS> 38,051 43,867
<OTHER-EXPENSES> (566) (1,423)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,221 12,681
<INCOME-PRETAX> 20,716 18,331
<INCOME-TAX> 8,465 6,910
<INCOME-CONTINUING> 12,251 11,421
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,251 11,421
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
