UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
7.10% Senior Notes Due 2005 New York Stock Exchange
7.80% Senior Debentures Due 2025 New York Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 November 7, 1997.
1,000 shares of common stock no par value. (All shares are owned by PG&E Gas
Transmission Corporation.)
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (H) (1) (a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
TABLE OF CONTENTS
- -----------------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Consolidated Financial Statements
Statements of Consolidated Income
Consolidated Balance Sheets
Statements of Consolidated Common Stock Equity
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Note 2. PG&E Corporation Reorganization
Note 3. Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
<PAGE>
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
- -------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
- ------------------------------------------------------------------------------
(In Thousands) 1997 1996 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas transportation $ 49,203 $ 50,765 $ 143,132 $ 143,846
Gas transportation for affiliates 12,143 8,739 36,744 26,572
Gas supply restructuring cost - 3,229 - 17,847
recovery from affiliates
Gas supply restructuring cost - 3,525 - 14,104
recovery
- -------------------------------------------------------------------------------
Total operating revenues 61,346 66,258 179,876 202,369
- -------------------------------------------------------------------------------
OPERATING EXPENSES:
Gas supply restructuring costs - 6,754 - 31,951
Administrative and general 11,379 9,985 32,881 26,633
Operations and maintenance 5,102 3,389 13,418 11,851
Depreciation and amortization 10,375 10,127 31,080 28,479
Property and other taxes 2,826 3,019 8,621 8,917
- -------------------------------------------------------------------------------
Total operating expenses 29,682 33,274 86,000 107,831
- -------------------------------------------------------------------------------
OPERATING INCOME 31,664 32,984 93,876 94,538
- -------------------------------------------------------------------------------
OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used 96 93 329 289
during construction
Interest income 168 860 612 2,043
Other - net (1,734) (2,427) (6,349) (3,586)
- -------------------------------------------------------------------------------
Total other income and (1,470) (1,474) (5,408) (1,254)
(income deductions)
- -------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on long-term debt 11,711 11,798 35,405 32,125
Allowance for borrowed funds used (69) (69) (223) (223)
during construction
Other interest charges 296 1,047 835 3,077
- -------------------------------------------------------------------------------
Net interest expense 11,938 12,776 36,017 34,979
- -------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 18,256 18,734 52,451 58,305
INCOME TAX EXPENSE 7,008 7,274 20,560 22,905
- -------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 11,248 11,460 31,891 35,400
- -------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS BEFORE INCOME TAXES - - (11,901) -
INCOME TAX BENEFIT - - 4,157 -
- ------------------------------------------------------------------------------
NET INCOME $ 11,248 $ 11,460 $ 24,147 $ 35,400
- ------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
(In Thousands) 1997 1996
(Unaudited) (Audited)
- -----------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment in $ 1,473,991 $ 1,586,225
service
Accumulated depreciation (443,047) (416,190)
- ------------------------------------------------------------------------------
Net plant in service 1,030,944 1,170,035
Construction work in progress 16,435 17,529
- ------------------------------------------------------------------------------
Total property, plant and 1,047,379 1,187,564
equipment - net
- -----------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 10,497 11,969
Accounts receivable - gas 15,989 22,241
transportation
Accounts receivable - affiliated 2,188 15,890
companies
Deferred income taxes - 2,478
Inventories (at average cost) 6,596 6,510
Prepayments and other current assets 6,409 12,181
Net assets of Energy Trading (see Note 2) - 56,102
- ------------------------------------------------------------------------------
Total current assets 41,679 127,371
- ------------------------------------------------------------------------------
DEFERRED CHARGES:
Income tax related 25,587 26,016
Deferred charge on reacquired debt 13,956 14,859
Unamortized debt expense 4,110 5,229
Regulatory assets 15,901 15,687
Other 1,754 1,672
- ------------------------------------------------------------------------------
Total deferred charges 61,308 63,463
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 1,150,366 $ 1,378,398
- ------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
(In Thousands) 1997 1996
(Unaudited) (Audited)
- ------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stock - no par value, 1,000 shares $ 85,474 $ 85,474
authorized, issued and outstanding
Additional paid-in capital 192,250 242,000
Foreign currency translation adjustment - (183)
Reinvested earnings 155,358 183,211
- ------------------------------------------------------------------------------
Total common stock equity 433,082 510,502
Long-term debt 526,310 683,049
- ------------------------------------------------------------------------------
Total capitalization 959,392 1,193,551
- ------------------------------------------------------------------------------
CURRENT LIABILITIES:
Long-term debt - current portion 410 384
Accounts payable and other accrued 24,800 28,541
liabilities
Accrued taxes 4,053 2,482
- ------------------------------------------------------------------------------
Total current liabilities 29,263 31,407
- ------------------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 144,068 134,635
Other 17,643 18,805
- ------------------------------------------------------------------------------
Total deferred credits 161,711 153,440
- ------------------------------------------------------------------------------
CONTINGENCIES (see Note 3) - -
- -----------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,150,366 $ 1,378,398
- ------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
(In Thousands) 1997 1996
(Unaudited) (Audited)
- -------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT BEGINNING OF PERIOD $ 510,502 $ 417,540
Net income 24,147 43,145
Capital contributions from parent company - 60,000
Return of capital of PG&E Energy Trading (49,275) -
Corporation to parent company
Cash dividends from retained earnings (52,000) (10,000)
paid to parent company
Contributed capital from sale of Australian 8,619 -
investments
Foreign currency translation (10,447) (183)
Other 1,536 -
- -------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 433,082 $ 510,502
- -------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
- -------------------------------------------------------------------------------
(In Thousands) 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,147 $ 35,400
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 32,886 29,415
Discontinued operations 7,744 -
Deferred income taxes 11,439 (5,962)
Gas supply restructuring costs - 30,044
Allowance for equity funds used during construction (329) (289)
Changes in operating assets and liabilities:
Accounts receivable 4,815 9,058
Accounts payable and other accrued liabilities (1,195) (1,797)
Accounts receivable - affiliated companies 14,654 10,631
Accrued taxes 1,571 232
Regulatory accruals (214) 11,527
Other working capital 5,243 (1,569)
Other - net (517) 3,864
- ------------------------------------------------------------------------------
Net cash provided by operating activities 100,244 120,554
- ------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of subsidiaries to affiliated 42,000 -
company
Investment expenditures (2,891) (136,227)
Sale of fixed assets 5,303 -
Construction expenditures (27,737) (25,252)
Allowance for borrowed funds used during construction (223) (223)
- -----------------------------------------------------------------------------
Net cash provided by (used in) investing 16,452 (161,702)
activities
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt issued - 91,742
Equity contribution from parent company - 10,000
Long-term debt issuance costs - (323)
Repayment of long-term debt (66,168) (40,728)
Dividend paid to parent company (52,000) (10,000)
- -----------------------------------------------------------------------------
Net cash provided by (used in) financing (118,168) 50,691
activities
- -----------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,472) 9,543
CASH AND CASH EQUIVALENTS AT JANUARY 1 11,969 9,839
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 10,497 $ 19,382
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 28,654 $ 23,407
Income taxes $ (3,451) $ 22,673
- -----------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------
NOTE 1: BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited consolidated financial statements, which have
been prepared in accordance with interim period reporting requirements, reflect
the results for Pacific Gas Transmission Company (PGT) and its wholly owned
subsidiaries including Pacific Gas Transmission International, Inc. (PGT
International) and the following subsidiaries through their respective dates of
disposition (see Note 2, below):
Through June 30, 1997:
PG&E Energy Trading Corporation (Energy Trading)
Through September 26, 1997:
PG&E Gas Transmission Australia Pty Limited (PG&E Australia)
(formerly, PGT Australia Pty Limited)
PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland)
(formerly, PGT Queensland Pty Limited)
PGT and its subsidiaries collectively are referred to herein as the "Company."
This information should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data in the Company's Form 10-K for the
fiscal year ended December 31, 1996.
In the opinion of management, the accompanying statements reflect all
adjustments necessary to present a fair statement of the financial position and
results of operations for the interim periods. All material adjustments are of
a normal recurring nature unless otherwise disclosed in this Form 10-Q.
Intercompany accounts and transactions have been eliminated. Prior year's
amounts in the consolidated financial statements have been reclassified where
necessary to conform to the 1997 presentation. Results of operations for
interim periods are not necessarily indicative of results to be expected for a
full year.
NOTE 2: PG&E CORPORATION REORGANIZATION
- ----------------------------------------
In April 1997, PG&E Corporation, PGT's ultimate corporate parent, announced
its intention to reorganize certain aspects of its corporate structure and
business lines to support its long-term strategic goals. Consistent with this
strategy, PGT has transferred ownership of its subsidiaries other than PGT
International to other PG&E Corporation affiliates.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
- ------------------------------------------------------------------
PG&E ENERGY TRADING:
--------------------
On June 30, 1997, PGT distributed all of the shares of Energy Trading to
PGT's sole shareholder, PG&E Gas Transmission Corporation. PG&E Gas
Transmission Corporation, in turn immediately thereafter, distributed these
shares to its sole shareholder, PG&E Corporation (see PGT's Current Report on
Form 8-K dated July 11,1997 for further discussion and related pro forma
financial statements).
Accordingly, Energy Trading's results are reported as discontinued
operations. For financial reporting purposes, the measurement date applied was
June 30, 1997, the date of disposal. In addition, since the shares of Energy
Trading were transferred at the $49.3 million net book value at the time of
distribution, there was no gain or loss on disposal. For the six months ended
June 30, 1997, Energy Trading's revenues were $1,560.0 million. For the
purposes of cash flow presentation, this transfer was a noncash transaction.
Net assets of Energy Trading at the date of disposal and at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
At Date
of December 31,
Disposal 1996
---------- -----------
(in millions)
<S> <C> <C>
Property, plant & equipment - net $ 1.9 $ 1.6
Cash, restricted cash and cash 14.4 31.0
equivalents
Assets from risk management 27.5 16.6
Accounts receivable - net 348.7 386.9
Other current assets 6.0 3.1
Goodwill and other deferred charges 29.1 23.9
Accounts payable from gas marketing (356.8) (386.6)
Other current liabilities (21.5) (20.4)
---------- ----------
Net assets $ 49.3 $ 56.1
========== ==========
</TABLE>
PGT'S AUSTRALIAN INVESTMENTS:
------------------------------
On September 26, 1997, PGT sold all of its investments in Australia to
another PG&E Corporation affiliate for $42.0 million (see PGT's Current Report
on Form 8-K dated October 6, 1997). The subsidiaries sold included PG&E
Queensland, the operator of the the PG&E Queensland Gas Pipeline, and PG&E
Australia. PG&E Australia was established to pursue new business development
opportunities in Australia for PGT and to serve as trustee of the PG&E
Queensland Unit Trust (PG&E Qld Trust). The PG&E Qld Trust, which holds the
assets of the PG&E Queensland Gas Pipeline, was owned by PGT International
(a PGT wholly owned subsidiary) and PG&E Queensland. Net assets of PGT's
Australian investments at the date of disposal and at December 31, 1996 were as
shown below. The $8.6 million difference between the sales price of $42.0
million and PGT's net investment of $33.4 million was credited to additional
paid in capital as no gain or loss was recognized upon disposition since this
transaction was between entities within the PG&E Corporation consolidated group.
<TABLE>
<CAPTION>
At Date
of December 31,
Disposal 1996
---------- -----------
(in millions)
<S> <C> <C>
Property, plant & equipment - net $ 123.1 $ 135.2
Current assets 3.6 3.4
Deferred charges 0.6 0.8
Long-term debt (89.8) (90.8)
Current liabilities (4.0) (2.6)
Deferred credits (0.1) (0.1)
---------- ---------
Net assets $ 33.4 $ 45.9
========== =========
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
- ------------------------------------------------------------------
NOTE 3: CONTINGENCIES
- ----------------------
1994 RATE CASE - In September 1996, the Federal Energy Regulatory
Commission (FERC) approved a settlement of PGT's rate case which was filed in
February 1994. The settlement provided for rolled-in rates effective on
November 1, 1996. To mitigate the impact of the higher rolled-in rates, most of
the firm shippers that had previously paid rates lower than the rolled-in rate
are receiving a reduction from the rolled-in rates for a six-year period, while
the 1993 expansion shippers are paying a surcharge in addition to the rolled-in
rates to offset the effect of the mitigation.
Although the FERC approved the settlement without modification, several
shippers have sought rehearing of the FERC's order. PGT does not expect the
FERC to modify the settlement as a result of these requests. Parties that have
sought rehearing may petition the Court of Appeals if the FERC does not grant
their rehearing requests. In the event the FERC does modify the settlement, PGT
is permitted to terminate the settlement and reinstate the rates contained in
its rate case proposal and proceed to a FERC decision based upon the evidence in
the case.
NORCEN LITIGATION: On June 27, 1997, PGT and Pacific Gas and Electric
Company (PG&E) entered into a settlement agreement with Norcen Energy Resources
Limited (Norcen Energy) and Norcen Marketing Incorporated (Norcen Marketing)
resolving the litigation filed against PGT and PG&E by Norcen Energy and Norcen
Marketing in the U.S. District Court, Northern District of California, on March
17, 1994. The settlement of this matter did not have a material adverse impact
on the Company's financial condition, liquidity, or results of operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
The unaudited consolidated financial statements include Pacific Gas
Transmission Company (PGT) and its wholly owned subsidiaries including Pacific
Gas Transmission International, Inc. (PGT International) and the following
subsidiaries through their respective dates of disposition (see "PG&E
Corporation Reorganization" in Note 2 of the Notes to Consolidated Financial
Statements contained in Part I, Item 1, Consolidated Financial Statements,
above):
Through June 30, 1997:
PG&E Energy Trading Corporation (Energy Trading)
Through September 26, 1997:
PG&E Gas Transmission Australia Pty Limited (PG&E Australia)
(formerly, PGT Australia Pty Limited)
PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland)
(formerly, PGT Queensland Pty Limited)
PGT and its subsidiaries collectively are referred to as the "Company."
This information should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data in the Company's Form 10-K for the
fiscal year ended December 31, 1996.
The following discussion includes forward-looking statements that involve a
number of risks and uncertainties including, but not limited to, the ongoing
restructuring of the gas industry. When used in Management's Discussion and
Analysis of Financial Condition and Results of Operations, the words
"estimates," "expects," "anticipates," "plans," and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Importantly, the ultimate impact of the restructuring of the gas
industry on future results is uncertain, but is expected to cause changes in the
way the Company conducts its business and to cause earnings to be more volatile.
These outcomes may cause future results to differ materially from historical
results or from results or outcomes currently expected or sought by the Company.
GENERAL
-------
PGT is a wholly owned subsidiary of its parent holding company, PG&E Gas
Transmission Corporation, which is wholly owned by PG&E Corporation. Effective
January 1, 1997, PG&E Corporation became the holding company for PGT's former
parent company, Pacific Gas and Electric Company (PG&E). PG&E's ownership
interest in PGT was transferred to PG&E Corporation.
PGT's domestic 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 system also
provides service to various delivery points in Idaho, Washington and Oregon.
PGT's natural gas transportation services are regulated by the Federal Energy
Regulatory Commission (FERC). Various safety issues are subject to the
jurisdiction of the United States Department of Transportation.
<PAGE>
PG&E CORPORATION REORGANIZATION
-------------------------------
In April 1997, PG&E Corporation announced its intention to reorganize
certain aspects of its corporate structure and business lines to support its
long-term strategic goals. Consistent with this strategy, on June 30, 1997, PGT
distributed all of the shares of Energy Trading to PGT's sole shareholder, PG&E
Gas Transmission Corporation. PG&E Gas Transmission Corporation, in turn
immediately thereafter, distributed these shares to its sole shareholder, PG&E
Corporation (see PGT's Current Report on Form 8-K dated July 11,1997 for further
discussion and related pro forma financial statements).
On September 26, 1997, PGT sold all of its investments in Australia to
another PG&E Corporation affiliate for $42.0 million. The subsidiaries sold
included PG&E Queensland, the operator of the PG&E Queensland Gas Pipeline, and
PG&E Australia. PG&E Australia was established to pursue new business
development opportunities in Australia for PGT and to serve as trustee of the
PG&E Queensland Unit Trust (PG&E Qld Trust). The PG&E Qld Trust, which holds
the assets of the PG&E Queensland Gas Pipeline, was owned by PGT International
(a PGT wholly owned subsidiary) and PG&E Queensland. Since this transaction was
between entities within the PG&E Corporation consolidated group, no gain or loss
was recognized upon disposition.
CHANGING REGULATORY ENVIRONMENT
-------------------------------
Since November 1, 1993, when PGT adopted FERC Order 636, PGT has applied
the straight fixed-variable (SFV) rate design method for firm rate schedules.
Under the SFV rate design, an open access 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 based upon the settlement of
its 1994 rate case, PGT is permitted to recover 97 percent of its fixed costs
through reservation charges paid by firm transportation service customers.
These customers pay a reservation charge for firm transportation service on
PGT's system, regardless of the volumes of gas transported. Consequently, the
volume of gas transported by PGT for firm transportation service customers does
not currently have a significant impact on PGT's operating results, and PGT's
operating results are not significantly affected by fluctuating demand for gas
based on the weather or changes in the price of natural gas.
While PGT believes that SFV rate design is likely to continue over the near
term, a 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, the extent to which PGT's cost of service
is recovered under long-term contracts also affects the impact that variations
in PGT's throughput would have on its operating results.
In January 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 proposals and negotiated rate
proposals by pipeline companies. Of particular note is the negotiated or
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.
<PAGE>
In July 1996, the FERC adopted a new rule that standardizes technology and
operating procedures for pipelines in order to promote greater integration of
the national gas grid. During the same month, the FERC issued a Notice of
Proposed Rulemaking to improve the efficiency of capacity release procedures and
to allow rates above the cost-based rate cap in markets where pipelines can
demonstrate they lack market power.
Also in July 1996, the United States Court of Appeals for the District of
Columbia Circuit generally affirmed Order 636, but remanded a few issues to FERC
for further explanation. In February 1997, the FERC issued an order on remand
(Order 636C), largely affirming its 636 policies. Order 636C changes the policy
under which a firm shipper may renew its contract at the expiration of the
original contract term. Under this new policy, existing shippers may renew
their contracts if they pay the maximum reservation fee or if they pay the
highest rate offered by other shippers for that capacity based upon a contract
term of five years. A number of parties, including PGT, have requested
rehearing of this change in policy.
These regulatory initiatives are not expected to have a significant effect
on PGT's financial position, liquidity, or results of operations in the
foreseeable future.
COMPETITION
-----------
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 addition, by providing interruptible
and short-term firm transportation service, PGT competes with released capacity
offered by shippers holding firm PGT capacity.
PGT's principal competitor in providing transportation services to the
Pacific Northwest is Northwest Pipeline Corporation. In California, four major
interstate pipeline companies provide transportation services which compete with
the services offered by PGT.
In the current open access environment, the competitiveness of a pipeline
company'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, but also to some extent on the
quality and reliability of transportation services. PGT's system delivers gas
primarily from western Canada. Gas from this region has been competitively
priced in relation to gas from other supply basins serving PGT's market areas.
The competitive strength of Canadian gas supplies in western U.S. markets has
been evidenced by consistently high throughput on the PGT system since Canadian
gas prices were deregulated in the mid-1980's.
PGT's transportation volumes are affected by market conditions in all
markets it serves. A significant factor is the level of available hydroelectric
generation which, in turn, causes the demand for natural gas as a fuel for
electric generation to fluctuate. In addition, PGT's services face modest
competition from fuel oil.
<PAGE>
Fluctuating levels of throughput caused by these market conditions have
only a minor financial effect on PGT because 97 percent of PGT's firm
transportation service capacity is currently subscribed under long-term
contracts with service billed under the SFV rate design.
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
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 continues 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.
ACCOUNTING FOR THE EFFECTS OF REGULATION
----------------------------------------
PGT 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, PGT has accumulated approximately
$57.6 million of net regulatory assets as of September 30, 1997 including $8.6
million for relocation costs associated with the transfer of its headquarters
from San Francisco to Portland, Oregon. Although PGT recorded a reserve against
these relocation costs in 1996, management intends to seek recovery of these
costs as well as all other regulatory assets through rates charged to customers.
YEAR 2000 COMPLIANCE
--------------------
PGT has an information system initiative in process that will require
increased expenditures during the next several years to convert certain computer
systems to be Year 2000 compliant. The Year 2000 compliance issue exists
because many computer systems and applications currently use two-digit fields to
designate a year. As the century date change occurs, date-sensitive systems may
either fail or not operate properly unless the underlying programs are modified
or replaced.
PGT is continuing to assess the extent of programming changes required to
address this issue. Although final cost estimates have yet to be determined for
these programming changes, it is anticipated that such costs will result in
increased expenses during 1998 and 1999. It is not expected that these expenses
will have a material adverse impact on PGT's financial condition, liquidity, or
results of operations.
<PAGE>
RESULTS OF OPERATIONS
---------------------
Selected operating results and other data are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
----------------- ------------------
1997 1996 1997 1996
----------------- ------------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Operating revenues $ 61.3 $ 66.3 $179.8 $ 202.4
Operating expenses (29.7) (33.3) (86.0) (107.8)
------- ------- ------- --------
Operating income 31.6 33.0 93.8 94.6
Other income and (income deductions) (1.5) (1.5) (5.4) (1.3)
Net interest expense (11.9) (12.8) (36.0) (35.0)
------- ------- ------- --------
Income from continuing operations 18.2 18.7 52.4 58.3
before taxes
Income tax expense (7.0) (7.2) (20.6) (22.9)
------- ------- ------- --------
Income from continuing operations 11.2 11.5 31.8 35.4
Income (loss) from discontinued - - (11.9) -
operations
Income tax benefit - - 4.2 -
------- ------- ------- --------
Net Income $ 11.2 $ 11.5 $ 24.1 $ 35.4
======= ======= ======= ========
</TABLE>
NET INCOME - Net income from continuing operations was $11.2 million and
$31.8 million, respectively for the three and nine months ended September 30,
1997, compared with $11.5 million and $35.4 million for the same periods in
1996. The $0.3 million and $3.6 million decreases in the 1997 periods,
respectively, were primarily the result of the timing and level of investment
development expenditures incurred by the Company, and higher losses of $0.1
million and $0.9 million, respectively, by the PG&E Queensland Gas Pipeline,
which was purchased effective July 1, 1996.
The net loss of $7.7 million from discontinued operations for the nine
month period ended September 30, 1997 represent the results of Energy Trading's
operations prior to disposition.
OPERATING REVENUES - The components of total operating revenues are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------- ------- -------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Gas transportation $ 61.3 $ 59.5 $ 179.8 $ 170.4
Gas supply restructuring (GSR) cost - 6.8 - 32.0
recovery
------- ------- ------- -------
Total Operating Revenues $ 61.3 $ 66.3 $ 179.8 $ 202.4
======= ======= ======= =======
</TABLE>
Gas transportation revenues for the three and nine month periods ended
September 30, 1997, increased $1.8 million and $9.4 million, respectively,
compared to the same periods in 1996. These increases were primarily a result
of improved revenues for PGT's pipeline in the Pacific Northwest. In addition,
the nine months ended September 30, 1997, also reflects $5.6 million in revenues
for an additional six months of operations in Australia since the PG&E
Queensland Gas Pipeline was not purchased until July 1, 1996.
<PAGE>
GSR cost recovery revenues reflect the collection from customers through
volumetric surcharges and direct bills of deferred GSR costs over a three-year
period, ending in November 1996, as permitted by the transition cost recovery
mechanism (TCRM) approved by the FERC. These revenues had no effect on income as
they were fully offset by the amortization of like amounts of deferred GSR
costs.
OPERATING EXPENSES - The components of total operating expenses are as
follows:
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Ended
September 30, September 30,
---------------- -----------------
1997 1996 1997 1996
---------------- -----------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Gas supply restructuring (GSR) $ - $ 6.8 $ - $ 32.0
costs
Administrative and general 11.4 10.0 32.9 26.6
Operations and maintenance 5.1 3.4 13.4 11.8
Depreciation and amortization 10.4 10.1 31.1 28.5
Property and other taxes 2.8 3.0 8.6 8.9
------- ------ ------ -------
Total Operating Expenses $ 29.7 $33.3 $86.0 $ 107.8
======= ====== ====== =======
</TABLE>
As discussed above, GSR costs, which were directly offset by related
revenues, were fully amortized during 1996.
For the three and nine month periods ended September 30, 1997 compared with
the same periods in 1996, operating expenses, exclusive of GSR costs, increased
$3.2 million and $10.2 million, respectively, primarily as a result of $2.6
million and $9.4 million, respectively, for expenses associated with the
operating activities of the PG&E Queensland Gas Pipeline and PG&E Australia.
These entities were not owned or operated by the Company during the first six
months of 1996.
OTHER INCOME AND (INCOME DEDUCTIONS) - Other income deductions for the
three months ended September 30, 1997 and 1996 were both $1.5 million. Other
income deductions for the nine months ended September 30, 1997 increased $4.1
million compared to the same period in 1996 primarily due to increased
investment development expenses and the absence of carrying charges on GSR
costs earned in 1997 compared to 1996. The GSR costs were fully recovered
during 1996.
INTEREST EXPENSE - Net interest expense for the three months ended
September 30, 1997, decreased $0.9 million compared to the same period in 1996
primarily as a result of interest expense associated with PGT's revenue subject
to refund balances which were repaid to customers during 1996. Net interest
expense for the nine months ended September 30, 1997 increased $1.0 million
compared to the same period in 1996, primarily due to the interest incurred by
the PG&E Queensland Gas Pipeline offset, in part, by reduced interest expense on
PGT's revenue subject to refund balances. During the nine months ended
September 30, 1997, interest expense for the PG&E Queensland Gas Pipeline
increased $3.4 million compared to same period in 1996 since no interest was
incurred prior to the July 1, 1996 acquisition date.
<PAGE>
For the nine months ended September 30, 1997, interest on PGT's long-term
debt was approximately $30.3 million, based upon an average interest rate of 7.4
percent applied to an average balance of $546 million. For the nine months
ended September 30, 1996, interest on PGT's long-term debt was approximately
$30.4 million, based upon an average interest rate of 7.4 percent applied to an
average balance of $549 million.
For the nine months ended September 30, 1997, interest expense for the PG&E
Queensland Gas Pipeline was approximately $5.1 million, based upon an average
interest rate of 7.6 percent applied to an average balance of $90.4 million.
For the three and nine month periods ended September 30, 1996, the average
interest rate for the PG&E Queensland Gas Pipeline was 7.3 percent, based upon
an average long-term debt balance of $91.7 million.
SOURCES OF CAPITAL - The Company's capital requirements are funded from
cash provided by operations and, to the extent necessary, external financing and
capital contributions from its parent company. PGT pays dividends as part of a
balanced approach to managing its capital structure, funding its operations and
capital expenditures and maintaining appropriate cash balances.
NET CASH PROVIDED BY OPERATING ACTIVITIES - For the nine months ended
September 30, 1997, net cash provided by operating activities was $100.2
million, as compared with net cash provided by operating activities of $120.6
million for the same period in 1996. The $20.4 million reduction is primarily a
result of $30.0 million in GSR collections in 1996 offset, in part, by deferred
taxes on revenues that were refunded to customers during 1996.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - For the nine months
ended September 30, 1997, PGT received $42.0 million in proceeds for the sale of
its Australian subsidiaries. The Company's expenditures for property, plant and
equipment (including the allowance for borrowed funds used during construction)
amounted to $28.0 million and $25.5 million for the nine months ended September
30, 1997 and 1996, respectively.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - For the nine months
ended September 30, 1997, cash used in financing activities amounted to $118.2
million as a result of a $66.2 million reduction in long-term debt and a $52.0
million dividend paid to PGT's parent company. For the nine months ended
September 30, 1996, cash provided by financing activities amounted to $50.7
million and included $91.4 million in additional debt issued to purchase the
PG&E Queensland Gas Pipeline and a $10.0 million equity contribution from PGT's
parent company offset, in part, by a $40.7 million reduction in long-term debt
and a $10.0 million dividend.
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. See "Contingencies" in Note 3 of
the Notes to Consolidated Financial Statements contained in Part I, Item 1,
Consolidated Financial Statements, above, for further discussion of significant
pending legal matters.
<PAGE>
NEW ACCOUNTING STANDARDS
------------------------
Effective January 1, 1997, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 96-1, "Environmental Remediation Liabilities." This SOP provides
authoritative guidance for recognition, measurement, display, and disclosure of
environmental remediation liabilities in financial statements. The adoption of
SOP 96-1 did not have an adverse impact on the Company's financial position,
liquidity, or results of operations.
During 1997, the Financial Accounting Standards Board has adopted the
following new accounting statements:
SFAS
Number Description
---------------- ----------------------------------------------
128 Earnings per Share
129 Disclosure of Information about Capital Structure
130 Reporting Comprehensive Income
131 Disclosures about Segments of an Enterprise and Related
Information
These statements primarily establish standards for financial statement
presentation and disclosure requirements. Both SFAS No. 128 and 129 are
effective for financial statements issued for periods ending after December 15,
1997 while SFAS No. 130 is effective for fiscal years beginning after December
15, 1997 and SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. The adoption of these statements will not
have any effect on PGT's financial condition, liquidity, or results of
operations.
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
On June 27, 1997, PGE and Pacific Gas and Electric Company (PG&E) entered
into a settlement agreement with Norcen Energy Resources Limited (Norcen Energy)
and Norcen Marketing Incorporated (Norcen Marketing) resolving the litigation
filed against PGT and PG&E by Norcen Energy and Norcen Marketing in the U.S.
District Court, Northern District of California, on March 17, 1994. The
settlement of this matter did not have a material adverse impact on the
Company's financial condition, liquidity, or results of operation.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule for the nine months ended
September 30, 1997
(b) Reports on Form 8-K during the quarter ended September 30, 1997 and
through the date hereof:
1. July 11, 1997
Item 2. Disposition of Assets - Distribution of all of the
shares of PG&E Energy Trading Company to PG&E Gas Transmission
Company
Item 7. Pro Forma Financial Information - Pro Forma Financial
Statements reflecting the disposition of PG&E Energy Trading
Company
2. October 6, 1997
Item 5. Other Events - PGT's sale of its Australian
subsidiaries and interest in the PG&E Queensland Gas Pipeline to
another PG&E Corporation affiliate
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.
PACIFIC GAS TRANSMISSION COMPANY
--------------------------------
(Registrant)
November 7, 1997 By: /s/ STANLEY C. KARCZEWSKI
---------------------
Name: Stanley C. Karczewski
Title: Vice President of Finance and Controller
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>FINANCIAL DATA SCHEDULE
THIS SECTION OF THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
<S> <C>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,047,379
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 41,679
<TOTAL-DEFERRED-CHARGES> 61,308
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,150,366
<COMMON> 85,474
<CAPITAL-SURPLUS-PAID-IN> 192,250
<RETAINED-EARNINGS> 155,358
<TOTAL-COMMON-STOCKHOLDERS-EQ> 433,082
0
0
<LONG-TERM-DEBT-NET> 467,420
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 42,429
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 16,461
<LEASES-CURRENT> 410
<OTHER-ITEMS-CAPITAL-AND-LIAB> 190,564
<TOT-CAPITALIZATION-AND-LIAB> 1,150,366
<GROSS-OPERATING-REVENUE> 179,876
<INCOME-TAX-EXPENSE> 20,560
<OTHER-OPERATING-EXPENSES> 86,000
<TOTAL-OPERATING-EXPENSES> 106,560
<OPERATING-INCOME-LOSS> 73,316
<OTHER-INCOME-NET> (13,152)
<INCOME-BEFORE-INTEREST-EXPEN> 60,164
<TOTAL-INTEREST-EXPENSE> 36,017
<NET-INCOME> 24,147
0
<EARNINGS-AVAILABLE-FOR-COMM> 24,147
<COMMON-STOCK-DIVIDENDS> 52,000
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 100,244
<EPS-PRIMARY> 24,147
<EPS-DILUTED> 24,147
</TABLE>
