<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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
incorporation or organization) (I.R.S. employer Identification No.)
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 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. X
State the aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 28, 1997. $0
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 28, 1997. 1,000 shares of common
stock, no par value.
(All shares are owned by PG&E Gas Holdings.)
Documents Incorporated by Reference: None
Registrant meets the conditions set forth in General Instruction (J) (1)
(a) and (b) of Form 10-K and is therefore filing this Form 10-K with the
reduced disclosure format.
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TABLE OF CONTENTS
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PART I
------
Item 1. Business
General
Foreign and Domestic Operations
<PAGE>
Certain Defined Terms
Pacific Gas Transmission Company's Transmission System
PGT Queensland Gas Pipeline
Future Expansions and Business Development
Customers and Services
Rates and Regulation
Environmental Matters
Item 2. Properties
Pacific Gas Transmission Company Pipeline
PGT Queensland Gas Pipeline
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
(omitted)
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data (omitted)
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Report of Independent Public Accountants
Statements of Consolidated Income
Consolidated Balance Sheets - Assets
Consolidated Balance Sheets - Capitalization and Liabilities
Statements of Consolidated Common Stock Equity
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
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Item 10.Directors and Executive Officers of the Registrant
(omitted)
Item 11.Executive Compensation (omitted)
Item 12.Security Ownership of Certain Beneficial Owners and Management
(omitted)
Item 13.Certain Relationships and Related Transactions
(omitted)
PART IV
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Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures<PAGE>
<PAGE>
PART I
------
ITEM 1. BUSINESS
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GENERAL
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Pacific Gas Transmission Company ("PGT"),
incorporated in 1957 as a California corporation, is an interstate natural gas
pipeline company and an indirect wholly owned subsidiary of PG&E Corporation.
Effective January 1, 1997, PG&E Corporation, incorporated in California in
1995, became the holding company for PGT's former parent company, Pacific
Gas and Electric Company ("PG&E"). PG&E's ownership interest in PGT and PG&E
Enterprises has been transferred to PG&E Corporation. PGT's debt securities
were unaffected and remain securities of PGT.
PGT and its subsidiaries are referred to collectively
as the "Company."
The following discussion of the Company's business
includes forward-looking statements that involve risks and uncertainties.
Words such as "estimates," " expects," " plans," and similar expressions
identify forward-looking statements involving risks and uncertainties.
Those risks and uncertainties include, but are not limited to, the ongoing
restructuring of the gas industry and the future results of new
acquisitions. The outcomes of these and other matters discussed below,
including the outcome of certain litigation with a firm shipper of PGT, may
cause future results to differ materially from historical results, or from
results or outcomes currently expected or sought by the Company.
PGT was formed to construct, own and operate the
interstate segment of an Alberta-California pipeline system, which was
originally built between 1960 and 1961 and expanded in 1981 and 1993. PGT's
mainline system extends from the British Columbia-Idaho border to the Oregon-
California border, traversing Idaho, Washington and Oregon. Extensions
from the mainline to Coyote Springs in northern Oregon and to Medford in
southern Oregon were constructed in 1995. PG&E owns and operates the portion
of the Alberta- California pipeline system within California. PGT's gas
pipeline facilities interconnect with PG&E at the Oregon-California border,
with Northwest Pipeline Corporation ("Northwest Pipeline" or "Northwest")
in northern Oregon and in eastern Washington, and with Tuscarora Gas
Transmission Company ("Tuscarora") in southern Oregon. (See "Pacific Gas
Transmission Company's Transmission System," below.)
PGT's principal business is the transportation of
natural gas, primarily from supplies in Canada, for customers located in the
Pacific Northwest, Nevada, and California. PGT's customers are principally
local retail gas distribution utilities, electric utilities that utilize natural
gas to generate electricity, natural gas marketing companies that purchase and
resell natural gas to end-use customers and utilities, natural gas producers,
and industrial companies. PGT's customers are responsible for securing their
own gas supplies and delivering them to PGT's system. PGT transports such
supplies either to downstream pipelines, which then transport such supplies to
customers, or directly to customers themselves. (See "Customers and
Services," below.)
PGT's natural gas transportation business is subject
to regulation by the Federal Energy Regulatory Commission ("FERC") under the
Natural Gas Act of 1938 ("Natural Gas Act") and the Natural Gas Policy Act of
1978 ("NGPA"). (See "Rates and Regulation," below.) PGT is also subject to
<PAGE>
the jurisdiction of the U.S. Department of Transportation with respect to
safety matters concerning the operation of the pipeline, and the U.S.
Department of Energy, with respect to the authorization to import natural gas
for its own use or for resale.
Building upon its expertise in the natural gas
industry, PGT is expanding its core pipeline business by pursuing domestic and
international business development opportunities that focus on the midstream
segment of the natural gas industry. The midstream segment involves the
gathering, processing, storing, transporting, and marketing of natural gas.
It excludes exploration and production of natural gas and local distribution
to customers.
Consistent with this strategy, during 1996, PGT established the PGT
Queensland Unit Trust ("PGT Trust"), created under the laws of Australia, to
hold all of the assets comprising the Queensland State Gas Pipeline acquired
from the Government of the State of Queensland, Australia. The pipeline is
referred to as the PGT Queensland Gas Pipeline ("PGTQ Pipeline"). The PGT
Trust is owned by two wholly owned subsidiaries of PGT - Pacific Gas
Transmission International, Inc. ("PGT International"), a California
corporation, and PGT Queensland Pty Limited ("PGT Queensland"), an Australian
corporation. PGT Queensland operates the pipeline. In addition, PGT also
established another wholly owned subsidiary, PGT Australia Pty Limited ("PGT
Australia"), an Australian corporation, to pursue new business development
opportunities in Australia and to serve as trustee of the PGT Trust.
The Australian pipeline, which began operations in
June 1990, extends 389-miles from Wallumbilla to Gladstone and Rockhampton in
Queensland, Australia. The pipeline serves customers in its vicinity.
During 1996, PGT also acquired the gas
marketing operations of Edisto Resources Corporation in the United States and
Canada, known jointly as "Energy Source, Inc." ("ESI"). ESI has offices in
Houston, Calgary, Tulsa, Pittsburgh and New York with a customer base in the
Northeast and Midwest regions of the United States.
ESI is engaged in the purchase and resale of natural
gas to a diversified customer base, primarily industrial/commercial companies,
local distribution companies, and industry partners. ESI aggregates natural
gas supplies from producing basins in the United States and Canada, arranges
transportation through pipelines from points of purchase to points of sale,
and resells natural gas to customers under a variety of standard and
customized arrangements. These arrangements include a variety of short-
term and long-term market sensitive and fixed price contracts and financial
instruments.
EMPLOYEES
---------
As of December 31, 1996, PGT had 329 employees, of
which approximately 124 were members of the International Brotherhood of
Electrical Workers, Local 1245. The Company renegotiated and ratified a two
year contract with that union effective January 1, 1997. As of December 31,
1996, PGT Australia/PGT Queensland had 30 employees and ESI had 71 employees.
PGT's corporate headquarters are located at 2100 SW
River Parkway, Portland, Oregon 97201, telephone (503) 833-4000. <PAGE>
<PAGE>
FOREIGN AND DOMESTIC OPERATIONS
-------------------------------
The following table shows the Company's
operating results and assets by geographic region for 1996. Australian
operations commenced on July 1, 1996, and Canadian operations began on
December 1, 1996.
(Dollars in Millions) United States Australia Canada
--------------------- ------------- ---------- -------
Sales $ 499.7 $ 5.7 $ 41.4
Net income(loss) $ 47.4 $ (3.9) $ (0.4)
Total assets $ 1,565.1 $ 139.2 $ 71.0
<PAGE>
CERTAIN DEFINED TERMS
---------------------
The following terms which are commonly used in the
natural gas industry and which are used herein are defined as follows:
"demand" or "reservation charge": The amount paid by firm transportation
service customers to reserve pipeline service. The reservation charge is
payable regardless of the volumes of gas transported by such customers.
"firm transportation service": The right to ship a quantity of gas between
two points for the term of the applicable contract.
"gas supply restructuring ("GSR") costs": Costs incurred as a result of a
pipeline's transition to unbundled transportation service under FERC Order
636.
The cost of terminating natural gas supply and transportation contracts tied
to the former merchant sales function comprises the majority of such costs for
PGT.
"incremental rates": Rates charged to shippers based primarily upon the
incremental capital and operating costs incurred by the pipeline in
constructing the additional facilities necessary to meet increased system
requirements. Under incremental rates, a pipeline would generally charge
higher rates to shippers contracting for capacity on newly added pipeline or
expansion facilities as compared to shippers having firm transportation
service rights on depreciated pre-expansion facilities.
"interruptible transportation service": Transportation of shippers' gas on an
as-available basis.
"merchant sales" or "bundled service": Natural gas aggregated by pipelines,
under purchase contracts with natural gas producers, that is transported and
resold to local distribution gas utility companies or end users at FERC-
approved rates that reflect a combination of sales and transportation service.
"open access": Transportation service provided on a nondiscriminatory
basis pursuant to applicable FERC rules and regulations.
"Order 636": The FERC pipeline service restructuring rule that guided
the industry's transition to unbundled, open-access pipeline service. Order
636 was issued in 1992 and most pipelines restructured their services from
merchant service to transportation-only service during 1993. PGT implemented
Order 636 on November 1, 1993.
"rolled-in rates": Rates charged to shippers based upon the average cost of
all of the pipeline's mainline facilities and related operating costs without
regard to the vintage of specific facilities. Costs related to facilities
specifically added to serve individual customers, such as laterals or
extensions, are generally excluded from the rolled-in system costs.
"shippers": Customers of a pipeline contracting to ship natural gas over the
pipeline's transportation facilities.
"straight fixed-variable" ("SFV"): A cost recovery method for firm service
under Order 636, which assigns all fixed costs, including return on equity and
related taxes, to the demand or reservation component of rates.
"units of measure": Mcf: One thousand cubic feet
MMcf: One million cubic feet
MMcf/d: One million cubic feet per day
Bcf: One billion cubic feet
Btu: One MMBtu equals one million Btus or 10 therms
Dt: Decatherm or one MMBtu
Therm: One hundred thousand Btus; the amount of heat
energy in approximately 100 cubic feet of natural
gas
<PAGE>
PACIFIC GAS TRANSMISSION COMPANY'S TRANSMISSION SYSTEM
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PRESENT SYSTEM
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PGT's mainline system extends for approximately 612
miles from the vicinity of Kingsgate, British Columbia, where it interconnects
with the pipeline system of Alberta Natural Gas Company, Ltd. ("ANG") and
Foothills Pipe Lines (South B.C.) Ltd. ("Foothills"), to the vicinity of
Malin, Oregon, where it interconnects with the pipeline facilities of PG&E and
Tuscarora. PGT's mainline system is comprised of two parallel pipelines, one
36-inch diameter and one 42-inch diameter, together with 12 compressor
stations, capable of transporting, on a firm basis, 2.4 Bcf of natural gas per
day.
PGT's mainline system reached its present capacity on
November 1, 1993, when PGT placed into service a major expansion of its
transmission system (the "1993 expansion"). The 1993 expansion consisted of
the addition of approximately 430 miles of 42-inch diameter pipeline (to the
original 36-inch diameter pipeline and the approximately 160 miles of 42-inch
diameter pipeline that was installed by PGT in 1981), and certain upgrades and
improvements to PGT's compressor stations. The 1993 expansion was, for the
most part, constructed within PGT's existing right-of-way parallel to the
existing 36-inch diameter pipeline. The expansion increased PGT's firm
transportation capacity by 755 MMcf/d to California and 148 MMcf/d to Idaho,
Oregon and Washington. PGT's total cost of the 1993 expansion is estimated
to be $852 million. In conjunction with PGT's expansion of its system,
PG&E and upstream Canadian pipeline companies also constructed new
capacity. (See Note 9, "Commitments and Contingencies," in the Notes to
Consolidated Financial Statements contained in Item 8, Financial Statements
and Supplementary Data, below, for a discussion of a rate controversy which
arose in connection with the 1993 Expansion, and which ultimately was resolved
in PGT's favor in an August 1996 decision by the U.S. Court of Appeals for the
District of Columbia Circuit.)
INTERCONNECTION WITH OTHER PIPELINES
------------------------------------
Pacific Gas and Electric Company's Pipeline Facilities
------------------------------------------------------
PG&E's intrastate gas pipeline system, which
interconnects with PGT's facilities at the Oregon-California border, includes
36-inch and 42-inch diameter parallel pipelines which extend approximately 300
miles south to near Antioch, California, just east of the San Francisco Bay
Area. There, the system becomes a twin 36-inch and 26-inch diameter gas
pipeline system to Fresno County in central California, where it becomes a
twin 34-inch diameter pipeline system extending to the California-Arizona
border near Topock, Arizona.
Northwest Pipeline
------------------
PGT's pipeline facilities are interconnected with the
facilities of Northwest Pipeline ("Northwest") near Spokane, Washington and
Stanfield, Oregon. Northwest is an interstate natural gas pipeline with which
PGT both competes and cooperates for the delivery of natural gas in the
Pacific Northwest and California.
<PAGE>
Tuscarora
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PGT's pipeline facilities are interconnected with the
facilities of Tuscarora near Malin, Oregon. Tuscarora is an interstate natural
gas pipeline which transports gas from the interconnection with PGT to primarily
the Reno, Nevada area. The pipeline was placed in service in November, 1995.
ANG, Foothills and NOVA Systems
-------------------------------
ANG and Foothills currently own pipelines that extend
through southeastern British Columbia and connect with the pipeline system of
NOVA Gas Transmission Ltd. ("NOVA") at the Alberta-British Columbia border
near Coleman, British Columbia and with the PGT pipeline system at the British
Columbia-Idaho border near Kingsgate, British Columbia. ANG's and Foothills'
pipeline facilities are operated by ANG as an integrated system. NOVA owns and
operates the intra-provincial pipeline transmission system in Alberta. NOVA
delivers gas from Alberta production areas to Alberta gas distribution
utilities, to some end-use customers and to all provincial export points,
including the Alberta-British Columbia border where NOVA's facilities
interconnect with those of ANG and Foothills for delivery south into the PGT
system. Through the ANG, Foothills, and NOVA systems, PGT's customers have
access to the western Canadian gas production basin.
OREGON EXTENSIONS
-----------------
In 1995, PGT constructed two pipeline extensions, the
Coyote Springs Extension to serve Portland General Electric Company ("Portland
General") and the Medford Extension to serve WP Natural Gas ("WP Natural"), a
division of the Washington Water Power Company (collectively, the "Oregon
Extensions"). Both extensions and related facilities were completed and fully
operational in November 1995, at a total cost estimated to be $50.1 million.
The Coyote Springs Extension is comprised of
approximately 18 miles of 12-inch pipeline, originating at a point on PGT's
system 27 miles south of Stanfield, Oregon, connecting to Portland General's
electric generation facility near Boardman, Oregon.
The Medford Extension consists of 22 miles of 16-inch
diameter and 66 miles of 12-inch diameter pipeline and extends from a point on
PGT's system near Bonanza, in southern Oregon, to interconnection points with WP
Natural at Klamath Falls and Medford, Oregon.
The larger 16-inch diameter pipeline of the Medford
Extension was installed to provide capacity for additional firm transportation
service to a proposed electric generating facility at Klamath Falls commencing
no earlier than 1999. (See "Rates and Regulations - Oregon Extensions,"
below.)
PGT QUEENSLAND GAS PIPELINE
---------------------------
The PGT Queensland Gas Pipeline in Australia consists
of a 329-mile 12-inch pipeline completed in June, 1990 from Wallumbilla to
Gladstone and a 60-mile 8-inch extension to Rockhampton completed in May, 1991.
<PAGE>
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 able to 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
exists.
In addition to mainline expansions and extensions off
of its mainline system, PGT is considering growth opportunities to expand its
core pipeline business through its midstream gas growth strategy. This strategy
focuses on investing in pipelines, storage, gathering and processing, and
marketing and trading capabilities in targeted geographic markets both within
and outside the United States.
The recent acquisition of the Australian pipeline
facilities is consistent with this strategy. The Company also established PGT
Australia in 1996 to pursue new business development opportunities in connection
with its strategy to expand its core pipeline business.
PGT Australia and the PGTQ Pipeline are pursuing new
business development opportunities in Australia including an extension of the
current mainline pipeline as well as the construction of new pipelines.
In addition, effective November 30, 1996, PGT acquired
Edisto Resources Corporation's gas marketing operations in the United States and
Canada, known jointly as "Energy Source, Inc."
CUSTOMERS AND SERVICES
----------------------
PACIFIC GAS TRANSMISSION COMPANY
--------------------------------
Customers
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PGT operates an open-access transportation system
whereby gas is transported for third-party shippers on a nondiscriminatory
basis. Transportation services represented 100 percent of PGT's total volumes
transported in 1996, 1995 and 1994; PGT's merchant sales service to PG&E was
terminated effective November 1, 1993 with the implementation of Order 636.
All but three percent of PGT's transportation service
capacity is subscribed by customers under long-term firm transportation service
agreements. These agreements have remaining terms ranging between 9 and 28
years. Additionally, PGT offers interruptible transportation service. Shippers
are given rights to interruptible transportation service based on the percentage
of the full tariff rate that the shipper agrees to pay. Among interruptible
transportation shippers who pay the full tariff rate, rights to as-available
transportation are allocated in order of their respective positions on a service
queue. During 1996, PGT provided transportation services for 91 customers; 49
of these customers have long-term firm service transportation agreements with
PGT while the remaining customers shipped under interruptible service or
capacity release contracts. PGT's customers are principally local retail gas
distribution utilities, electric utilities that utilize natural gas to generate
electricity, natural gas marketing companies that purchase and resell natural
gas to end-use customers and utilities, natural gas producers, and industrial
companies.
<PAGE>
The two largest customers of PGT in 1996 were PG&E and
Southern California Edison Company ("SCE"), accounting for approximately $55
million, or 21 percent, and $29 million, or 11 percent, respectively, of PGT's
transportation revenues. The firm service transportation agreements with PG&E
and SCE expire in the years 2005 and 2023, respectively. No other customer
accounted for 10 percent or more of PGT's total revenues during 1996.
In 1996, approximately five percent of PGT's
transportation volumes and three percent of transportation revenues were
attributable to interruptible transportation service.
In 1995, PGT constructed two pipeline extensions. The
Coyote Springs Extension serves Portland General's electric generation facility
near Boardman, Oregon. Portland General is an investor-owned electric utility
serving customers in western Oregon, including the Portland metropolitan area.
PGT provides firm transportation service over this extension for Portland
General under a 20-year firm transportation agreement.
PGT's Medford Extension interconnects with WP Natural
at Klamath Falls and Medford, Oregon. WP Natural is engaged in the purchase,
resale, and transportation of natural gas and serves natural gas end-use
customers in southwestern and northeastern Oregon and South Lake Tahoe,
California. PGT provides firm transportation service for WP Natural under a 30-
year firm transportation agreement.
PGT's total transportation and sales quantities for
each of the years 1992 through 1996 are set forth in the following table.
Quantities (MDt)
---------------------------------------
Year Total Transportation Sales
----- ----- ------------ -----
1992 512,477 202,640 309,837
1993 555,668 286,424 269,244
1994 815,627 815,627 0
1995 885,186 885,186 0
1996 934,029 934,029 0
FERC Order 636
--------------
In 1992, the FERC issued Order 636, which required
open-access pipelines to provide firm and interruptible transportation services
on a nondiscriminatory basis for all gas supplies, whether purchased from the
pipeline or from another gas supplier, and required the termination of all
merchant or bundled sales service. As a result of Order 636, PGT now operates
only as a transporter of natural gas. 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. On February 27, 1997,
the FERC issued an order on remand (Order 636C), largely affirming its 636
policies. Order 636C, which is subject to rehearing, 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.
<PAGE>
PGT implemented the provisions of Order 636 effective
November 1, 1993, pursuant to FERC orders dated July 12, 1993 and October 1,
1993. These orders provide for:
1) the unbundling of the sales service to PG&E into separate sales and
transportation components;
2) the termination of the Purchased Gas Adjustment ("PGA") mechanism by
which PGT recovered the cost of gas sold to PG&E;
3) the adoption of SFV rate design;
4) a mechanism by which certain of the firm transportation
service customers can assign their service rights to others
(generally referred to as "capacity release," see below); and
5) a transition cost recovery mechanism ("TCRM") to recover certain gas
supply restructuring costs incurred by PGT in connection with the
unbundling of its sales service to PG&E.
Pursuant to the FERC orders, effective November 1,
1993, PG&E terminated its gas purchases from PGT and began receiving an
equivalent amount of firm transportation service from PGT under a long-term
contract.
As required by Order 636, PGT has also implemented a
capacity release program. As a result, almost all of PGT's firm transportation
service customers have elected to execute new contracts which enable them to
release their capacity to replacement shippers on a temporary or permanent
basis. In the case of a capacity release for a term less than the remaining
contract term, a releasing shipper remains responsible to PGT for the
reservation charges associated with the released capacity. With respect to a
release for the full remaining term of the contract, the releasing shipper is no
longer responsible for the reservation charges associated with the released
capacity if the replacement shipper meets the credit-worthiness provisions of
PGT's tariff and agrees to pay the full reservation fee. The capacity release
program has affected the number and types of customers using PGT's system, but
has not impacted PGT's financial results. Capacity release also provides
customers seeking service from PGT with a potential alternative to the
construction of new facilities by PGT.
Order 636 authorized all interstate pipelines to adopt
the "straight fixed-variable" ("SFV") rate design method for all
transportation services, which PGT has implemented. Under this rate design, all
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.
In the past, the FERC has utilized various rate designs
that allocated varying percentages of fixed costs to the commodity or delivery
component of rates, thereby making a pipeline company's cost recovery dependent
upon the level of throughput or use of the pipeline system. On July 16,
1996, the United States Court of Appeals for the District of Columbia Circuit
affirmed the FERC's adoption of the SFV rate design for all natural gas
pipelines under the FERC's jurisdiction. In light of the Court's decision, it
appears unlikely that the FERC will mandate any industry-wide departure from
the SFV rate design in the near future. If the FERC were to depart from SFV,
that departure could once again subject the level of PGT's cost recovery to
variations in throughput volumes.
As a result of the SFV rate design, and based upon the
settlement of its 1994 rate case, PGT currently recovers approximately 95
percent of its total costs and 97 percent of its fixed costs through reservation
charges paid by firm transportation service customers. These customers pay a
reservation charge for access to firm transportation service capacity 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. As such, PGT's
<PAGE>
operating results are not significantly affected by fluctuating demand for gas
based on the weather or changes in the price of natural gas. Approximately
three percent of PGT's fixed costs are allocated to interruptible transportation
service, and recovery of such costs is subject to continued demand for PGT's
interruptible transportation service.
Competition
-----------
See "Competition," below, in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
PGT QUEENSLAND GAS PIPELINE
---------------------------
Customers
---------
The PGTQ Pipeline has three major industrial customers
that account for approximately 99 percent of its deliveries. Queensland Alumina
Limited's ("QAL") demand quantities account for almost 90 percent of the PGTQ
Pipeline's annual delivered volumes. QAL's contract expires in June 2006.
Under the contract, QAL pays a monthly reservation charge that is due to the
PGTQ Pipeline regardless of the quantity transported.
The PGTQ Pipeline also transports gas to Gas
Corporation of Queensland Limited which has gas franchises to serve residential
and commercial customers in the cities of Gladstone and Rockhampton. The third
major industrial customer is Queensland Magnesia (Operations) Pty Ltd.
The condition, operation, and ownership of gas
transmission pipelines in Queensland are principally regulated by the Petroleum
Act of 1923 which is administered by the Queensland Department of Minerals and
Energy. The Petroleum Act of 1923, as amended, incorporates open access
principles promoting a competitive gas market.
Competition
-----------
The PGTQ Pipeline is the only gas pipeline serving the
Gladstone and Rockhampton areas. Presently, competition exists only in terms of
more expensive alternative energy sources including distillate and diesel fuel.
Prospectively, South Pacific Chevron Company has announced a proposal to
construct a natural gas pipeline from Papua New Guinea to Queensland that would
potentially be in service in 2001. The proposed pipeline may or may not extend
as far as the Gladstone area.
ENERGY SOURCE, INC.
-------------------
Customers
---------
The customer base for ESI's domestic and Canadian gas
marketing operations primarily consists of trading partners who serve as
marketing agents for other marketing or local distribution companies. No single
customer accounted for more than 10 percent of sales.
<PAGE>
Competition
-----------
ESI faces intense competition in marketing gas to end
user customers and local distributors in both its domestic and Canadian markets.
Its competitors include the major integrated oil and gas companies; other
marketing companies affiliated with interstate pipelines and regional gas
gatherers; and brokers and marketers of varying sizes, financial resources, and
experience.
This intense competition has placed downward pressure
on the gross margins for gas sales. As gross margins have decreased, the market
share necessary to compete effectively in the industry has grown. During 1996,
ESI responded to this pressure by increasing its sales volumes.
RATES AND REGULATION
--------------------
PACIFIC GAS TRANSMISSION COMPANY
--------------------------------
General
-------
PGT is a "natural gas company" under the Natural Gas
Act and the NGPA, and as such, is subject to the jurisdiction of the FERC.
The Natural Gas Act grants authority to the FERC over
the construction and operation of pipelines and related facilities utilized in
the transportation and sale of natural gas in interstate commerce, including the
extension, enlargement, or abandonment of such facilities, as well as the
interstate transportation and wholesale sales of natural gas. PGT holds
certificates of public convenience and necessity, issued by the FERC,
authorizing it to construct and operate its pipelines and related facilities now
in operation and to transport natural gas in interstate commerce. The FERC also
has authority to regulate rates for natural gas transportation in interstate
commerce.
In addition, the National Energy Board of Canada
("NEB") and the various Canadian gas-exporting provinces issue various
licenses and permits for the removal of gas from Canada. These requirements
parallel the process employed by the U.S. Department of Energy for the
importation of Canadian gas. Regulatory actions by the NEB or the U.S.
Department of Energy can have an impact on the ability of PGT's customers to
import Canadian gas for transportation over the PGT system. In addition,
actions of the NEB and Northern Pipeline Agency ("NPA") can affect the ability
of ANG and Foothills to construct any future facilities necessary for the
transportation of gas to the interconnection with PGT's system at the United
States-Canadian border.
FERC Ratemaking
---------------
Sections 4 and 5 of the Natural Gas Act provide the
FERC with rate-setting authority over interstate natural gas pipeline companies.
When PGT seeks a rate change, it must file an application with the FERC under
Section 4 at least 30 days prior to the proposed effective date of the new
rates. The FERC has the authority to suspend the effective date of the new
rates for up to five months, and as a general matter does so, although from time
to time the FERC will authorize a shorter suspension period. Section 4 also
allows the FERC to require that any increase in rates collected during the
pendency of a rate case (after the conclusion of the suspension period) be
collected subject to refund, with interest. Refunds, if any, would be made upon
conclusion of the rate case. The FERC routinely imposes such a refund condition
on proposals to increase rates.
<PAGE>
Any major rate changes requested by PGT under Section 4
would be typically set for evidentiary hearings before an administrative law
judge, whose initial decision is subject to review and a final decision by the
FERC. Following a final decision by the FERC, PGT, or any other party to the
proceeding, may seek judicial review of the decision by the United States Court
of Appeals.
Under Section 5 of the Natural Gas Act, the FERC may,
on its own initiative or at the request of a third party, investigate PGT's
rates to ascertain whether such rates are unjust or unreasonable. A Section 5
rate investigation proceeds in much the same fashion as a rate case under
Section 4, except that there is no suspension period (since neither the FERC nor
the company will have proposed new rates at the commencement of the rate case),
and the FERC's determinations will be effective on a prospective basis only, so
that the company is not required to make refunds.
In a rate case, rates are set by dividing PGT's total
cost of service by the total units of service, generally expressed as contract
demand quantities and quantities of natural gas transported. Components of cost
of service include operations and maintenance expenses, depreciation, return on
investment and related taxes. The calculation of the allowed return on
investment is made with reference to PGT's rate base, which is the total net
value of its tangible and intangible assets. The net value of PGT's largest
rate base component, utility plant in service, is determined on an original cost
basis, less depreciation.
The overall allowed rate of return on investment is a
function of: (i) PGT's debt cost; (ii) the return on PGT's preferred stock, if
any is outstanding; and (iii) the allowed return on PGT's common stock. The
FERC is required to set the allowed return on common stock at a level sufficient
to enable PGT to attract the equity capital necessary for its business and to be
commensurate with the equity return realized by businesses having similar risk
profiles.
To establish rates for services, costs are separated
into various functional aspects of a pipeline company's business, such as gas
transportation, gas gathering, and gas storage, since different rates apply to
the different services associated with those functions. The costs for each
function are classified as either fixed or variable, and rates are calculated.
PGT currently provides only gas transportation service. Therefore, the
"functional" allocation of costs does not presently apply to PGT in the
ratemaking context. However, for ratemaking purposes, PGT's plant and related
costs for the existing Oregon Extensions are segregated from PGT's mainline
pipeline.
Under the FERC's current policies, transportation
services are classified as either firm or interruptible, and PGT's fixed and
variable costs are allocated between these types of service for ratemaking
purposes. Firm transportation service customers pay both a reservation or
demand charge and a commodity or delivery charge. The reservation charge is
assessed for the customer's right to transport a specified quantity of gas over
the term of the customer's contract, and is payable regardless of the actual
volume of gas transported by the customer. The commodity or delivery charge is
payable only with respect to the actual volume of gas transported by the
customer. Interruptible transportation service customers pay only a commodity
or delivery charge with respect to the actual volume of gas transported by the
customer.
Under the SFV rate design, the reservation charge
assessed for firm transportation service is based on PGT's fixed costs, while
the commodity or delivery charge component of PGT's firm transportation service
rates is based only on PGT's variable costs. The commodity or delivery charge
payable by PGT's interruptible transportation service customers is based upon
both fixed and variable costs allocated to interruptible transportation service
for ratemaking purposes. Approximately three percent of PGT's fixed costs are
<PAGE>
currently allocated to interruptible transportation service for ratemaking
purposes. (See "Customers and Services - FERC Order 636," above.)
Both firm and interruptible transportation service
rates are established with a ceiling equal to PGT's total costs (fixed and
variable) allocated to the service and a floor equal to the variable costs
related thereto. PGT is allowed to vary or discount rates between the ceiling
and the floor amounts on a non-discriminatory basis. PGT has not discounted
firm transportation service rates, but PGT sometimes discounts interruptible
transportation service rates in order to maximize throughput.
1993 Expansion
--------------
On November 1, 1993, PGT placed in service a major
expansion of the mainline system. The new facilities were authorized by the
FERC on August 1, 1991. See Note 9, "Commitments and Contingencies," in the
Notes to Consolidated Financial Statements contained in Item 8, Financial
Statements and Supplementary Data, below, for a discussion of a rate controversy
which arose in connection with the 1993 expansion, and which ultimately was
resolved in PGT's favor in an August 1996 decision by the U.S. Court of Appeals
for the District of Columbia Circuit.
Oregon Extensions
-----------------
In 1995, PGT completed the Coyote Springs and the
Medford Extensions of its pipeline facilities in Oregon. Portland General,
PGT's customer on the Coyote Springs Extension, pays an incremental rate for
service over the Coyote Springs Extension based on costs associated with such
facilities.
Most of the capacity on the Medford Extension was
subscribed under a firm transportation service agreement with WP Natural, which
was effective November 1, 1995. Under this contract, WP Natural paid a
negotiated first year transportation rate which subsequently increases or
decreases each year by the percentage change in competing residential electric
rates in the region served by WP Natural, but not below $3.7 million. During
the first year of the contract, WP Natural paid rates based on the negotiated
$3.9 million cost of service. Effective November 1, 1996, the rate increased
$0.1 million to $4.0 million. The revenue shortfall resulting from the
difference between the annually adjusted rate and the rate which would otherwise
apply with respect to the total incremental cost of service of this extension,
will be offset by the revenue generated under the transportation agreement in
later years. The full cost of service is expected to be recovered over the life
of the 30-year firm transportation agreement. The first year deficiency, which
is expected to decline each year, was approximately $3.6 million.
The larger diameter pipeline for the initial 22 miles
of the Medford Extension was installed to provide additional firm transportation
service to a proposed electric generating facility to be owned by Diamond
Energy, Inc. ("Diamond"), a subsidiary of Mitsubishi Corp., commencing no
earlier than 1999. Diamond agreed to reimburse PGT for the incremental cost of
the 16-inch pipe if it did not sign a firm transportation agreement with PGT.
Diamond has subsequently assigned its interest to the City of Klamath Falls in
anticipation of a third party acquiring its facility certificate, and it has
established an escrow account in favor of PGT for the incremental costs should
the generating facility not be constructed.
Pacific Gas Transmission Company Rate Proceedings
-------------------------------------------------
<PAGE>
1994 Rate Case
--------------
On February 28, 1994, PGT filed an application to
increase its rates for transportation services. These rates were based on an
overall cost of service of approximately $217 million, including a cost of
equity of 13 percent. The proposed rate of return on equity applied to all
facilities and assumed the discontinuance of the penalty rate of return on
equity of 10.13 percent, which the FERC had earlier required to be used to
develop initial rates for PGT's 1993 expansion facilities.
On September 11, 1996, the FERC approved, without
modification, a proposed multi-party settlement of PGT's rate case, which was
filed with the FERC on March 21, 1996. See "Settlement of Rate Case" in Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, below, for a discussion of the settlement of this 1994 rate case.
Gas Supply Restructuring ("GSR") Costs
----------------------------------------
Until November 1993, when Order 636 was implemented,
PGT purchased all of its Canadian natural gas supply for resale to PG&E from
Alberta and Southern Gas Co. Ltd. ("A&S"), a wholly owned Canadian gas
purchasing subsidiary of PG&E, pursuant to a gas sales agreement between A&S and
PGT and a sales service agreement between PGT and PG&E, both of which extended
through the year 2005. A&S had commitments to purchase minimum quantities of
natural gas from over 200 Canadian gas producers under various long-term
contracts, most of which extended through 2005. As a result of the regulatory
restructuring pursuant to Order 636, PGT, PG&E, A&S and various Canadian gas
producers selling gas to A&S entered into agreements (collectively, the
"Decontracting Plan") under which PGT terminated its gas sales agreement with
A&S, its sales service agreement with PG&E, and A&S terminated its contracts
with the gas producers.
Under the Decontracting Plan, in return for settlement
payments of $210.1 million, the producers released A&S, PGT, and PG&E from any
claims they may have had that resulted from the termination of the former
arrangements, as well as any claims for losses arising from alleged historical
shortfalls in gas taken by A&S. In addition to the producers' settlement
payments, PGT paid A&S $29.6 million for costs incurred by A&S related to both
the termination of the sales agreement between A&S and PGT, and the
implementation of the Decontracting Plan.
The FERC approved the recovery of $168.5 million of the
total $239.7 million of gas supply restructuring costs incurred by PGT through a
transition cost recovery mechanism ("TCRM"). The difference of $71.2 million
was reflected as a net charge to expense from 1992 through 1995. Recovery of
approved GSR costs began in 1993, with PGT completing recovery of such costs in
1996 with the collection of the remaining $30.5 million.
Also, in 1996, the CPUC sought judicial review of the
FERC's orders in Public Utilities Commission of the State of California v. FERC,
D.C. Circuit Case No. 96-1022. However, in the settlement of the 1994 rate
case, the CPUC agreed to withdraw its petition for judicial review in
consideration for PGT's agreement to reduce PG&E's direct bill by $3.18 million
and refund this amount to PG&E. The CPUC moved to withdraw its petition and, on
October 28, 1996, the Court granted the withdrawal. On November 7, 1996, PGT
refunded the $3.18 million to PG&E. This aspect of the settlement is the
subject of one of the pending rehearing applications discussed above. PGT does
not expect the FERC to modify its settlement as a result of this issue.
Regulatory Developments
-----------------------
On January 31, 1996, the FERC issued a policy statement
on alternative methods for setting rates. The policy statement provides
<PAGE>
guidelines the FERC will use in evaluating market-based, incentive rate and
negotiated rate proposals by pipeline companies. 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.
On July 17, 1996, the FERC adopted a new rule which
standardizes technology and operating procedures for pipelines in order to
promote greater integration of the national gas grid. On July 31, 1996, the
FERC issued a Notice of Proposed Rulemaking ("NOPR") 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.
These regulatory initiatives are not expected to have a material impact on
PGT's financial position, liquidity or results of operations in the foreseeable
future.
PGT QUEENSLAND GAS PIPELINE
---------------------------
The condition, operation, and ownership of gas
transmission pipelines in Queensland, Australia is principally regulated by the
Petroleum Act of 1923 (the "Act") and is administered by the Queensland
Department of Minerals and Energy. The State of Queensland has recently amended
the Act to incorporate "open access" principles which facilitate a competitive
gas market. The Act identifies access objectives and provides factors that the
Minister of Minerals and Energy must consider in approving a pipeline's tariffs.
The objectives of the access principles include: facilitation of competitive
markets for the benefit of the public and industry; promotion of efficiency; and
provision of access on fair commercial terms. The access principles provide the
PGTQ Pipeline flexibility in formulating its tariffs.
ENERGY SOURCE, INC.
-------------------
Although ESI's operations are not regulated, its
marketing activities are affected by regulatory events and competitive forces in
gas markets. In recent years, the FERC has increased competition in natural gas
markets by eliminating or changing many of the procedures associated with
interstate pipelines' traditional role as wholesale merchants of gas so that all
gas suppliers will have a full and fair opportunity to compete in these markets.
As a result of these recent orders, wholesale gas
marketing has become a non-utility activity.
ENVIRONMENTAL MATTERS
---------------------
GENERAL
-------
The following discussion includes certain forward
looking information relating to the possible future impact of environmental
compliance. It is subject to a number of assumptions and uncertainties,
including changing laws and regulations, evolving technologies, and the
selection of compliance alternatives.
PACIFIC GAS TRANSMISSION COMPANY
--------------------------------
<PAGE>
See "Environmental Matters" in Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, below,
for a general description of PGT's environmental compliance.
PGT owns and operates the 4C Solar Mars compressor unit
near Sandpoint, Idaho ("Unit 4C"). In 1986, in connection with an upgrade of
Unit 4C, PGT applied for and received a construction permit from the State of
Idaho Department of Environmental Quality. At the time PGT received the
construction permit, it was determined that no permit for the modification was
needed under the Federal Prevention of Significant Deterioration ("PSD")
program, then being administered by the State of Idaho.
In the process of applying for a permit under the 1990
Clean Air Act, PGT conducted a review of its environmental permits and
discovered information which now causes it to question whether a construction
permit application incorporating PSD requirements may have been required prior
to the 1986 upgrade. If it is finally determined that PSD program requirements
did apply to the project, then PGT may be required to apply for and obtain a PSD
permit for Unit 4C and may be required to retrofit Unit 4C. At this time, PGT
believes that it is remote that any fines or penalties will be imposed in
connection with this matter.
The Company believes that the resolution of this matter
would not materially affect its ability to operate Unit 4C or have a material
adverse impact on its financial position, liquidity or results of operations.
PGT QUEENSLAND GAS PIPELINE
---------------------------
The PGTQ Pipeline is subject to the environmental
protection policies imposed by the Australian Environmental Protection Act of
1994, and the environmental requirements of the Environmental Impact Statement
and the Workplace and Safety Act for activities along the pipeline right of way.
The Company believes that compliance with applicable
environmental requirements is not likely to have a material effect upon its
financial position, liquidity or results of operations.
ITEM 2. PROPERTIES
-----------
PACIFIC GAS TRANSMISSION COMPANY PIPELINE
-----------------------------------------
PGT's pipeline system consists of approximately 639
miles of 36-inch diameter gas transmission line (612 miles of single 36-inch
pipeline and 27 miles of 36-inch pipeline looping), approximately 590 miles of
42-inch diameter pipeline, approximately 84 miles of 12-inch diameter pipeline,
and 22 miles of 16-inch diameter pipeline, twelve compressor stations with a
total of approximately 345,200 National Electrical Manufacturer's Association
("NEMA") installed horsepower, and facilities for the operation and
maintenance of the system, including metering and regulating facilities, and a
communications system. (For further information on PGT's pipeline system, see
the discussion under "Pacific Gas Transmission Company's Transmission System"
in Item 1, Business, above.)
PGT leases its corporate headquarters office building
in Portland, Oregon under a 20-year lease terminating in 2015. Payments under
the lease approximate the debt service payments on the debt issued to finance
the building, plus operating costs, taxes and insurance. See Note 5, "Long-term
Debt," in the Notes to Consolidated Financial Statements contained in Item 8,
Financial Statements and Supplementary Data, below.
<PAGE>
PGT QUEENSLAND GAS PIPELINE
---------------------------
The PGTQ Pipeline in Australia consists of a 329-mile
12-inch pipeline completed in June, 1990 from Wallumbilla to Gladstone and a 60-
mile 8-inch extension to Rockhampton completed in May, 1991. The transportation
capacity of the PGTQ Pipeline is approximately 26 Bcf annually, which can be
expanded to approximately 50 Bcf with the addition of compression facilities.
ITEM 3. LEGAL PROCEEDINGS
-----------------
See Item 1, Business, above, for a discussion of
certain regulatory proceedings and environmental matters affecting the Company.
For information concerning material legal proceedings,
see Note 9, "Commitments and Contingencies," in the Notes to Consolidated
Financial Statements contained in Item 8, Financial Statements and Supplementary
Data, below.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Since PGT meets the conditions set forth in General
Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
-------------------------------------------------
PGT is an indirect wholly owned subsidiary of PG&E
Corporation. Effective January 1, 1997, PG&E Corporation, incorporated in
California in 1995, became the holding company for PGT's former parent company,
Pacific Gas and Electric Company ("PG&E"). PG&E's ownership interest in PGT
and PG&E Enterprises has been transferred to PG&E Corporation.
The payment of dividends by PGT on its common stock is
restricted under the terms of a Credit Agreement dated May 31, 1995. (See
"1995 Refinancing" in Note 5, "Long-term Debt," in the Notes to Consolidated
Financial Statements contained in Item 8, Financial Statements and Supplementary
Data, below.) Under the most restrictive provisions, approximately $162.1
million of PGT's retained earnings was available for dividends on its common
stock as of December 31, 1996. In 1996 and 1995, PGT paid cash dividends on its
common stock of $10 million and $40 million, respectively.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Since PGT meets the conditions set forth in General
Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS(1)
-------------------------------------------------
The Consolidated Financial Statements include:
Pacific Gas Transmission Company
Pacific Gas Transmission Company's wholly owned businesses:
PGT Australia Pty Limited
Pacific Gas Transmission International, Inc.
PGT Queensland Pty Limited
Energy Source, Inc.
Pacific Gas Transmission Company ("PGT") and its
subsidiaries collectively are referred to as the "Company."
The following discussion includes forward-looking
statements that involve a number of risks and uncertainties. Those risks and
uncertainties include, but are not limited to, the ongoing restructuring of the
gas industry and the future results of new acquisitions. The outcomes of these
and other matters discussed below, including the outcome of certain litigation
with a firm shipper of PGT, may cause future results to differ materially from
historical results or from results or outcomes currently expected or sought by
the Company.
[FN]
(1)
See "Certain Defined Terms" in Item 1, Business, for a definition of terms
commonly used in the natural gas industry and herein.
<PAGE>
The information in this section should be read in
conjunction with the information set forth under Item 1, Business, above, and
the Consolidated Financial Statements and accompanying Notes to Consolidated
Financial Statements in Item 8, Financial Statements and Supplementary Data,
below.
GENERAL
-------
PGT is an indirect wholly owned subsidiary of PG&E
Corporation. Effective January 1, 1997, PG&E Corporation, incorporated in
California in 1995, became the holding company for PGT's former parent company,
Pacific Gas and Electric Company ("PG&E"). PG&E's ownership interest in PGT
and PG&E Enterprises has been transferred to PG&E Corporation.
Building upon its expertise in the natural gas
industry, PGT is expanding its core pipeline business by pursuing domestic and
international business development opportunities which focus on the midstream
segment of the natural gas industry. The midstream segment includes the
gathering, processing, storing, transporting, and marketing of natural gas. It
excludes exploration and production of natural gas and local distribution to
customers.
Consistent with this strategy, during 1996, PGT established the PGT
Queensland Unit Trust ("PGT Trust"), created under the laws of Australia, to
hold all of the assets comprising the Queensland State Gas Pipeline which were
purchased from the Government of the State of Queensland, Australia. The
pipeline is referred to as the PGT Queensland Gas Pipeline ("PGTQ Pipeline").
The PGT Trust is owned by two wholly owned subsidiaries of PGT - Pacific Gas
Transmission International, Inc. ("PGT International"), a California
corporation, and PGT Queensland Pty Limited ("PGT Queensland"), an Australian
corporation. PGT Queensland operates the pipeline. In addition, PGT also
established another wholly owned subsidiary, PGT Australia Pty Limited ("PGT
Australia"), an Australian corporation, to pursue new business development
opportunities in Australia and to serve as trustee of the PGT Trust.
During 1996, PGT also acquired the gas marketing
operations of Edisto Resources Corporation in the United States and Canada,
known jointly as "Energy Source, Inc." ("ESI"). ESI has offices in Houston,
Calgary, Tulsa, Pittsburgh and New York with a customer base in the Northeast
and Midwest regions of the United States.
ESI is engaged in the purchase and resale of natural gas
to a diversified customer base, primarily industrial/commercial companies, local
distribution companies, and industry partners. ESI aggregates natural gas
supplies from producing basins in the United States and Canada, arranges
transportation through pipelines from points of purchase to points of sale, and
resells natural gas volumes to customers under a variety of standard
and customized arrangements. These arrangements include a variety of short-term
and long-term market sensitive and fixed price contracts and financial
instruments.
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
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"), and various safety issues are
subject to the jurisdiction of the United States Department of Transportation.
A major expansion of PGT's system was placed into
service on November 1, 1993, increasing PGT's net utility plant in service from
approximately $150 million to nearly $1 billion. On November 1, 1993, PGT also
implemented the restructuring of its services as required by the FERC's Order
636 (see "Changing Regulatory Environment," below) and now operates as a
<PAGE>
transportation-only pipeline system serving a range of new customers in addition
to its principal historical customer, PG&E.
During 1996, PGT provided transportation services for
91 customers. Forty-nine of these customers have long-term firm transportation
service agreements with PGT. The two largest customers of PGT in 1996 were PG&E
and Southern California Edison Company, accounting for approximately 21 percent
and 11 percent, respectively, of PGT's transportation revenues. No other
customer accounted for more than 10 percent of PGT's total revenues. PGT's firm
transportation service agreements are generally long-term agreements and
accounted for approximately 97 percent of total transportation revenues in 1996.
These agreements have remaining terms that range between 9 and 28 years. See
"Legal Matters - Norcen Litigation" in Note 9, "Commitments and
Contingencies," in Item 8, Financial Statements and Supplementary Data, below,
for a discussion of litigation filed against PGT by one of its long-term firm
transportation service customers challenging the validity of its contract.
PGT incurred significant costs to terminate gas
purchase commitments as a result of the implementation of Order 636. Such costs
were either charged to operations primarily in 1992 and 1993, or were recovered
in rates under a transition cost recovery mechanism approved by the FERC. PGT
completed the recovery of these termination costs during 1996. (See "Rates and
Regulation - Gas Supply Restructuring ("GSR") Costs" in Item 1, Business,
above.)
<PAGE>
CHANGING REGULATORY ENVIRONMENT
-------------------------------
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 (see "Customers and Services - Pacific Gas Transmission
Company - FERC Order 636" in Item 1, Business, above, for a description of
Order 636). At that time, 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; PGT began recovering restructuring costs through the
transition cost recovery mechanism ("TCRM") (see Note 3, "Natural Gas Matters,"
in the Notes to Consolidated Financial Statements contained in Item 8, Financial
Statements and Supplementary Data, below, for a discussion of the TCRM) and PGT
implemented a capacity release program.
Order 636 also authorized PGT to adopt the straight-
fixed variable ("SFV") rate design method for all firm 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 SFV rate design and based upon the
settlement of its 1994 rate case, PGT currently recovers approximately 95
percent of its total costs and 97 percent of its fixed costs through reservation
charges paid by firm transportation service customers. These customers pay a
reservation charge for access to firm transportation service capacity 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. As such, 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.
On July 16, 1996, the United States Court of Appeals
for the District of Columbia Circuit affirmed the FERC's adoption of the SFV
rate design for all natural gas pipelines under FERC's jurisdiction. In light
of the Court's decision, it appears unlikely that the FERC will mandate any
industry-wide departure from the SFV rate design in the near future.
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.
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
proposals and negotiated rate proposals by pipeline companies. 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.
<PAGE>
On July 17, 1996, the FERC adopted a new rule which
standardizes technology and operating procedures for pipelines in order to
promote greater integration of the national gas grid. On July 31, 1996, the
FERC issued a Notice of Proposed Rulemaking ("NOPR") 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.
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.
SETTLEMENT OF RATE CASE
-----------------------
On February 28, 1994, PGT filed an application to
increase its rates for transportation services. These rates were based on an
overall cost of service of approximately $217 million, including a cost of
equity of 13 percent. The proposed rate of return on equity applied to all
facilities and assumed the discontinuance of the penalty rate of return on
equity of 10.13 percent, which the FERC had earlier required to be used to
develop initial rates for PGT's 1993 expansion facilities.
A major issue in this proceeding was 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 the rates paid by 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 interim incremental rates, and authorized PGT to place these
rates into effect on September 1, 1994, subject to refund. Although the FERC
rejected the proposal to place rolled-in rates into effect 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.
On September 11, 1996, the FERC approved, without
modification, the proposed settlement of PGT's rate case, which was filed with
the FERC on March 21, 1996. The settlement provided for rolled-in rates
effective on November 1, 1996. To mitigate the impact of the higher rolled-in
rates on shippers who were paying lower rates under contracts executed prior to
PGT's 1993 expansion (pre-1993 expansion shippers), most of the firm shippers
who took service prior to the 1993 expansion 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 implementation of rolled-in rates by
itself does not change PGT's total revenue requirement, 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 from September
1, 1994, the effective date of the rates in this case. In addition, under the
settlement, approximately three percent of PGT's firm transportation service
capacity was relinquished effective November 1, 1996, for subscription to other
shippers who may desire the capacity. Approximately $7.5 million of costs were
also allocated to short-term firm and interruptible services.
The overall effect of the settlement on rates,
including mitigation measures and the agreed upon lower cost of service, was 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 $0.48 to $0.33 per Decatherm(Dt) for the 1993 expansion shippers, <PAGE>
and to increase the transportation rate for most of the pre-1993 expansion
shippers from $0.16 to either $0.20 or $0.24 per Dt, depending upon the level of
mitigation applicable to each shipper. The rolled-in rate for the full distance
is $0.26 per Dt. In November 1996, PGT refunded the difference between the
<PAGE>
amounts based on its as-filed cost of service of $217 million and the amounts
that would have been collected at the settlement cost of service of $206
million. PGT had established a reserve adequate for its refund obligation under
the settlement.
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, however, the settlement permits PGT 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.
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, in
providing interruptible 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. Those companies are El
Paso Natural Gas Company, Transwestern Pipeline Company, Mojave Pipeline Company
and Kern River Gas Transmission Company.
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.
Fluctuating levels of throughput caused by these market
conditions only have 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.
The PGTQ Pipeline is the only gas pipeline serving the
Gladstone and Rockhampton areas of Australia. Presently, competition exists
only in terms of more expensive alternative energy sources including distillate
and diesel fuel. Prospectively, South Pacific Chevron Company has announced a
proposal to construct a natural gas pipeline from Papua New Guinea to Queensland
<PAGE>
that would potentially be in service in 2001. The proposed pipeline may or may
not extend as far as the Gladstone area.
ESI faces intense competition in marketing gas to end
user customers and local distributors in both its domestic and Canadian markets.
Its competitors include the major integrated oil and gas companies, other
marketing companies affiliated with interstate pipelines and regional gas
gatherers, and brokers and marketers of varying sizes, financial resources, and
experience.
This intense competition has placed downward pressure
on the gross margins for gas sales. As gross margins have decreased, the market
share necessary to compete effectively in the industry has grown. During 1996,
ESI responded to this pressure by increasing its sales 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.
In addition to mainline expansions and extensions off
of its mainline system, PGT is considering opportunities to expand its core
pipeline business through its midstream gas growth strategy. This strategy
focuses on investing in pipelines, storage, gathering and processing, and
marketing/trading capabilities in targeted geographic markets both within and
outside the United States.
The recent acquisition of the Australian pipeline
facilities is consistent with this strategy. The Company also established PGT
Australia in 1996 to pursue new business development opportunities in connection
with its strategy to expand its core pipeline business.
PGT Australia and the PGTQ Pipeline are pursuing new
business development opportunities in Australia including an extension of the
current mainline pipeline as well as the construction of new pipelines.
In addition, effective November 30, 1996, PGT acquired
Edisto Resources Corporation's gas marketing operations in the United States and
Canada, known jointly as "Energy Source, Inc."
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 $62.5 million of regulatory assets as of
December 31, 1996. Management recorded a reserve of $8.4 million ($5.2 million
after tax) in 1996 against deferred relocation costs associated with the
transfer of PGT's headquarters from San Francisco to Portland, Oregon in 1995.
Management expects to seek recovery of these relocation costs.
<PAGE>
FISCAL YEARS 1996, 1995 AND 1994
--------------------------------
RESULTS OF OPERATIONS
---------------------
Selected operating results and other data are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
------ ----- -----
(In Millions)
Operating revenues (a) $546.8 $269.2 $251.1
Operating expenses (a) 424.2 147.3 136.7
----- ----- -----
Operating income (loss) 122.6 121.9 114.4
Other income and (income deductions) (4.9) 7.3 8.9
Net interest expense 45.7 46.3 45.6
----- ------ -----
Income before income tax expense 72.0 82.9 77.7
Income tax expense 28.9 31.3 30.0
----- ----- -----
Net income $ 43.1 $ 51.6 $ 47.7
===== ===== =====
Ratio of earnings to fixed charges (b) 2.6 2.7 2.6
===== ===== ======
<FN>
----------
(a) 1996 results reflect: (i) ESI's operations since December 1, 1996,
including $281.3 million in operating revenues and $281.6 million in
operating expenses; and (ii) the results of the PGTQ Pipeline since
July 1, 1996, including $5.7 million in operating revenues and $3.7
million in operating expenses.
(b) For purposes of computing the ratio of earnings to fixed charges,
earnings are computed by adding to income from continuing operations,
the provision (benefit) for income taxes and fixed charges. Fixed
charges consist of interest, the amortization of debt issuance costs
and a portion of rents deemed to be representative of interest.
Fixed charges are not reduced by the allowance for borrowed funds
used during construction but such allowance is included in the
determination of earnings.
</FN>
</TABLE>
NET INCOME - Net income was $43.1 million in 1996,
compared with $51.6 million in 1995 and $47.7 million in 1994. Despite higher
transportation revenues and lower interest on long term debt in 1996 compared
with 1995, net income declined $8.5 million, or 16 percent. This primarily
resulted from the combination of three non-recurring adjustments. First, during
1996, a reserve of $8.4 million ($5.2 million after tax) was recorded against
deferred relocation costs associated with the transfer of PGT's headquarters
from San Francisco to Portland, Oregon. Second, and partially offsetting the
relocation cost reserve, was the reversal of a $4.2 million reserve ($2.6
million after tax) for use tax on compressor fuel and related interest. Third,
the results for 1995 included the benefit of reversing a $7.6 million ($4.7
million after tax) reserve for gas supply restructuring ("GSR") costs. The
$3.9 million increase in 1995 compared with 1994 was primarily the result of the
benefit of the GSR reversal and higher transportation revenues offset, in part,
by higher operations expenses, lower interest income and higher interest
expense.
<PAGE>
OPERATING REVENUES - The components of total operating
revenues are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
(In Millions)
Gas marketing sales $281.3 $ - $ -
Gas transportation 232.6 216.3 212.4
Gas supply restructuring (GSR) cost recovery 32.1 51.9 38.1
Other 0.8 1.0 0.6
----- ----- -----
Total operating revenues $546.8 $269.2 $251.1
===== ===== =====
</TABLE>
The $281.3 million in gas marketing sales in 1996
represents one month's activity for ESI, a natural gas marketing company which
PGT acquired effective November 30, 1996. ESI had a related cost of sales of
$280.5 million, resulting in a gross margin of $0.8 million.
Gas transportation revenues increased by $16.3 million,
or eight percent, in 1996 compared with 1995 as a result of increased firm and
interruptible volumes on PGT's system. In addition, the increase reflects a
full year of revenue from the Oregon Extensions and six months of revenues from
the PGTQ Pipeline.
The increase in natural gas transportation revenues of $3.9 million, or
two percent, from 1994 to 1995 was primarily due to higher transport rates which
were effective September 1, 1994, subject to refund, pursuant to the 1994 rate
case. In addition, 1995 revenues increased due to revenues from the Oregon
Extensions which were placed in service November 1, 1995. The impact of these
factors was partially offset by recognition in 1994 of additional revenues
related to the favorable settlement of PGT's 1990 rate case.
GSR cost recovery revenues reflect the collection from
customers through volumetric surcharges and direct bills of deferred GSR costs
effective November 15, 1993, over a three year period, as permitted by the
TCRM approved by the FERC. The FERC approved a total of $168.5 million of GSR
costs plus interest for recovery through the TCRM. Through December 31, 1995,
$138.0 million, excluding interest, was collected from customers and during
1996, PGT completed the collection of the remaining balance of $30.5 million.
These revenues have no effect on income as they are fully offset by the
amortization of like amounts of deferred GSR costs.
<PAGE>
OPERATING EXPENSES - The components of total operating
expenses are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
----- ----- -----
(In Millions)
Cost of sales $280.5 $ - $ 0.3
Gas supply restructuring (GSR)
costs 32.1 43.5 32.4
Operations and maintenance 63.6 58.3 53.0
Depreciation and amortization 39.1 33.1 38.9
Property and other taxes 8.9 12.4 12.1
----- ----- -----
Total operating expenses $424.2 $147.3 $136.7
===== ===== =====
</TABLE>
The $280.5 million in cost of sales for 1996 represents
one month's activity for ESI. As discussed above in "Customers and Services -
FERC Order 636" under Item 1, Business, PGT's gas sales service was eliminated
effective November 1, 1993 with the implementation of Order 636. PGT's expense
for 1994 relates to the sale of line pack gas.
The 1996 GSR costs include the amortization of the
December 31, 1995, uncollected balance of $30.5 million and related interest
collected through revenue. The 1995 GSR costs include the amortization of $55.1
million of deferred costs which were billed to customers in 1995, less an
adjustment for $11.6 million primarily to adjust previously estimated non-
recoverable GSR costs to actual. The 1994 GSR costs include the amortization of
$38.1 million of deferred costs which were billed to customers in 1994, less a
$5.7 million adjustment recorded as actual GSR costs were less than the
estimates previously recorded.
Operations and maintenance expenses increased by $5.3
million from 1995 to 1996 primarily as a result of the recognition of an $8.4
million reserve for the cost to relocate PGT's headquarters, offset, in part, by
reduced pension, legal, and rent expenses. In connection with its relocation to
Portland, Oregon, PGT entered into a capital lease on its new office building
which resulted in a decline in rent expense which was offset by the combination
of additional depreciation expense and interest expense associated with the
lease. Operations and maintenance expenses increased by $5.3 million from 1994
to 1995. The increase in 1995 was primarily due to additional expenses related
to the legal support for the 1994 rate case and relocation of the corporate
headquarters to Portland, Oregon.
The increase in depreciation and amortization from 1995
to 1996 resulted from increased plant in service and an adjustment recorded
in 1995 to adjust depreciation expense from September through December 1994 to
reflect the lower rates contained in the settlement of PGT's 1994 rate case.
The decrease in depreciation and amortization from 1994 to 1995 was due to
applying the lower depreciation rates retroactive to September 1, 1994, pursuant
to the settlement of PGT's 1994 rate case.
The decrease in other taxes in 1996 compared to both
1995 and 1994 primarily resulted from a $2.9 million reversal of a reserve for
use tax on compressor fuel for prior years.
OTHER INCOME AND (INCOME DEDUCTIONS) - Other income
decreased $12.2 million from 1995 to 1996 principally due to: increased
investment development expenses of $5.4 million in support of the Company's
midstream gas growth strategy; reduced interest income of $4.1 million as a
result of the combination of lower invested cash balances and reduced
unrecovered GSR balances, which earn interest; and decreased equity allowance
for funds used during construction ("AFUDC") reflecting the completion of
<PAGE>
extensions in Oregon on November 1, 1995. Other income decreased $1.6 million
from 1994 to 1995, due to a number of mainly offsetting items.
INTEREST EXPENSE - The Company's interest expense,
excluding AFUDC, decreased $1.6 million from 1995 to 1996, primarily due to the
combination of a reduction in average debt from $582 million in 1995 to $550
million in 1996 and a decline in the average interest rate from 7.7 percent in
1995 to 7.4 percent in 1996. In addition, 1996 reflects the reversal of
interest accrued on a use tax liability. These factors were offset, in part, by
an increase in interest associated with the capital lease of PGT's corporate
office, which was effective July 1995, and interest expense related to the PGTQ
Pipeline's operations of $3.4 million. The average effective interest rate for
the PGTQ Pipeline since July 1, 1996, the date of acquisition, was 7.5 percent,
based upon an average long-term debt balance of $91.7 million.
PGT's interest expense excluding the interest portion
of AFUDC increased $1.0 million from 1994 to 1995, primarily due to interest
associated with prior year tax issues. Interest on long-term debt increased
only slightly from 1994 to 1995 because the increase in the average interest
rate from 6.7 percent to 7.7 percent in 1995 was mitigated by a reduction in the
average debt outstanding from $669 million to $582 million in 1995.
AFUDC decreased $0.9 million in 1996 from 1995 because
of higher capital expenditures qualifying for AFUDC during 1995 for the Oregon
Extensions, which were placed in service on November 1, 1995. AFUDC increased
$0.3 million in 1995 from 1994 because of higher average construction work in
progress balances during 1995 than during 1994.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
During 1996, the balance of cash and cash equivalents
increased $27.3 million compared with 1995. The increase includes $25.2 million
in cash balances to support ESI's marketing operations. A detailed discussion
of the Company's operating, investing and financing activities follows below.
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 in return as part of a balanced approach to managing its capital
structure, funding its operations and capital expenditures and maintaining
appropriate cash balances. In connection with the acquisitions of State Gas
Pipeline and ESI during 1996, PG&E made capital contributions of $10.0 million
and $50.0 million, respectively.
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES - For
the year ended December 31, 1996, net cash provided by operating activities was
$96.3 million, as compared with net cash provided by operating activities of
$137.5 million in 1995. The $41.2 million decrease was due primarily to PGT's
refund of $31.4 million to customers in 1996 as a result of settlement of its
1994 rate case.
For the year ended December 31, 1995, net cash provided
by operating activities decreased $27.3 million as compared with net cash
provided by operating activities of $164.8 million during 1994. During 1995,
PGT recovered from customers approximately $50.5 million in GSR costs, excluding
carrying charges, which was $18.0 million more than in 1994. The increase in
collection of GSR costs in 1995 primarily resulted from the recovery approved by
the FERC of certain costs incurred to terminate PGT's gas sales agreement with
A&S, a wholly owned Canadian gas purchasing subsidiary of PG&E. During 1994,
PGT refunded $30.3 million to customers as a result of settlement of its 1990 <PAGE>
rate case and paid $17.1 million to A&S relating to the termination of PGT's gas
sales agreement. Offsetting these charges was $62.5 million which PGT received
from PG&E in 1994, primarily for the tax effects of the $210.1 million in GSR
<PAGE>
costs which PGT paid in 1993, and a $29.7 million decrease in the provision for
deferred income taxes.
CASH USED IN INVESTING ACTIVITIES - The Company's
expenditures for new acquisitions, property, plant and equipment (including
AFUDC debt ) amounted to $194.5 million, $77.3 million, and $52.4 million for
1996, 1995 and 1994, respectively. The $117.2 million increase in 1996 compared
to 1995 was primarily the result of expending $136.3 million for the acquisition
of the State Gas Pipeline and $23.2 million for the acquisition of ESI, offset
by $41.9 million in lower construction expenditures during 1996.
The increase in expenditures from 1994 to 1995 related
primarily to construction of the Oregon Extensions.
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES - For
the year ended December 31, 1996, cash provided by financing activities amounted
to $125.5 million, which primarily consisted of financing related to the
acquisitions of the State Gas Pipeline and ESI. The Company borrowed $91.7
million in long-term debt for the acquisition of the State Gas Pipeline and
$10.0 million for the acquisition of ESI. In addition, PG&E contributed $60.0
million in equity to PGT during 1996.
For the year ended December 31, 1995, cash used in
financing activities amounted to $125.1 million and included a net $75.9 million
reduction in long-term debt and construction financing, and a $40.0 million
dividend paid to PG&E. For the year ended December 31, 1994, cash used in
financing activities amounted to $48.5 million and included a net $26.3 million
reduction in long-term debt and construction financing, and a $22.0 million
dividend paid to PG&E. For both years, the cash used in financing activities
was provided by cash from operating activities.
CAPITAL REQUIREMENTS
--------------------
The Company's estimated capital requirements for each
of the next five years are as follows:
1997 1998 1999 2000 2001
----- ----- ----- ----- -----
(In Millions)
Capital requirements, including AFUDC $91.5 $59.8 $60.1 $57.5 $52.0
====== ===== ===== ====== ======
The above amounts are forward looking and involve a
number of assumptions and uncertainties. These estimates are subject to
revision and actual amounts may vary based upon changes in assumptions as to
pipeline capacity growth, rates of inflation, receipt of adequate and timely
rate relief, availability and timing of regulatory approvals, total cost of
major projects, availability and cost of suitable non-regulated investments, and
availability and cost of external sources of capital, as well as the outcome of
the ongoing restructuring in the gas industry.
Most of PGT's capital expenditures are associated with
projects aimed at the replacement and enhancement of existing transmission
facilities to enhance their efficiency and reliability and to comply with
environmental laws and regulations. The 1997 projected capital expenditures
include $30.0 million for pipeline projects in Australia.
The PGTQ Pipeline's capital expenditures are targeted
towards growth in new markets, which is consistent with the Company's midstream
<PAGE>
gas growth strategy. These estimated capital requirements do not include costs
to construct proposed new pipelines in Australia.
In addition to these capital requirements, the Company
has other commitments as discussed in Note 9, "Commitments and Contingencies,"
in the Notes to Consolidated Financial Statements contained in Item 8, Financial
Statements and Supplementary Data, below.
RISK MANAGEMENT
---------------
Due to the changing business environment, the Company's
exposure to risks associated with natural gas commodity prices, interest rates,
and foreign currencies is increasing. To manage these risks, PG&E Corporation
has adopted a price risk management policy which is also applicable to PGT and
its subsidiaries and established an officer-level price risk management
committee. PG&E Corporation's price risk management committee oversees
implementation of the policy, approves each price risk management program, and
monitors compliance with the policy.
PG&E Corporation's price risk management policy and
procedures adopted by the committee establish guidelines for implementation of
price risk management programs. Such programs may include the use of natural
gas and financial derivatives. (A derivative is a contract whose value is
dependent on or derived from the value of some underlying asset.) Additionally,
this policy allows derivatives to be used for hedging and non-hedging purposes.
(Hedging is the process of protecting one transaction by means of another to
reduce price risk.) Both hedging and non-hedging activities are limited to
those specifically approved by the committee only after appropriate controls and
procedures are put in place to measure, monitor, and control the risk of such
activities.
In 1996, PG&E Corporation approved and implemented
interest rate and foreign exchange risk management programs. In addition, PGT
acquired ESI which has natural gas marketing operations and engages in hedging
transactions. Gains and losses associated with price risk management activities
during 1996 were immaterial.
The Company also uses a number of techniques to
mitigate its financial risk, including the purchase of commercial insurance and
the maintenance of systems of internal control. The extent to which these
techniques are used depends on the risk of loss and the cost to employ such
techniques. These techniques do not eliminate financial risk to the Company.
During 1996, PGT Australia entered into derivative
contracts to manage its interest rate risk. (See Note 5, "Long-term Debt" and
Note 6, "Financial Instruments," in the Notes to Consolidated Financial
Statement in Item 8, Financial Statements and Supplementary Data, below.)
ENVIRONMENTAL MATTERS
---------------------
The following discussion includes certain forward
looking information relating to the possible future impact of environmental
compliance. It is subject to a number of uncertainties, including regulations
and the selection of compliance alternatives.
PGT is subject to regulation by the FERC in accordance
with the National Environmental Policy Act and other federal and state laws and
regulations governing environmental quality and pollution control. These laws
and regulations require PGT to take measures to mitigate the effect of its
operations on the environment.
The Company's expenditures for environmental protection
are subject to periodic review and revision to reflect changing technology and
<PAGE>
evolving regulatory requirements. For 1997, capital requirements for
environmental protection and safety compliance are estimated to be approximately
$1.4 million. For 1998 and 1999, such capital requirements are estimated to be
approximately $1 million per year. These amounts are included above in
"Capital Requirements."
On an ongoing basis, the Company assesses measures that
may need to be taken to comply with environmental laws and regulations related
to its operations. Management believes that it is in substantial compliance
with applicable existing environmental requirements and that the ultimate amount
of costs that will be incurred by the Company in connection with its compliance
and remediation activities will not be material to its financial position,
liquidity or results of operations. (See "Environmental Matters" in Item 1,
Business, above.)
LEGAL MATTERS AND CONTINGENCIES
-------------------------------
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 either the
Company's results of operations or financial position.
See Note 9, "Commitments and Contingencies," in the
Notes to Consolidated Financial Statements contained in Item 8, Financial
Statements and Supplementary Data, below, for a discussion of a lawsuit against
the Company involving antitrust and state law contract claims related to a 30-
year contract with a transportation customer of the Company.
NEW ACCOUNTING STANDARD
-----------------------
Effective January 1, 1996, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 prescribes general standards for the
recognition and measurement of impairment losses. In addition, it 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. During 1996,
in compliance with the adoption of this standard, PGT recorded a reserve
(net of income tax) of $5.2 million against deferred relocation costs associated
with the transfer of its corporate headquarters from San Francisco to Portland,
Oregon.
Effective January 1, 1997, the Company will adopt 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 is not expected to have a material adverse impact on
the Company's financial position, liquidity, or results of operations.
<PAGE>
EFFECT OF INFLATION
-------------------
The Company generally has experienced increased costs
due to the effect of inflation on the cost of labor, material and supplies, and
plant and equipment. A portion of the increased labor and material and supply
costs can directly affect income through increased operations and maintenance
expenses. The cumulative impact of inflation over a number of years has
resulted in increased costs for current replacement of PGT's plant and
equipment. However, PGT's utility plant is subject to ratemaking treatment, and
the increased cost of replacement plant is generally recoverable through rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial statements of Pacific Gas Transmission Company and its
subsidiaries:
Report of Independent Public Accountants
Statements of Consolidated Income - for each of the three years ended
December 31, 1996, 1995, and 1994
Consolidated Balance Sheets - as of December 31, 1996 and 1995
Statements of Consolidated Common Stock Equity - for each of the three
years ended December 31, 1996, 1995, and 1994
Statements of Consolidated Cash Flows - for each of the
three years ended December 31, 1996, 1995, and 1994 <PAGE>
<PAGE>
Report of Independent Public Accountants
To the Shareholder and the Board of Directors
of Pacific Gas Transmission Company:
We have audited the accompanying Consolidated Balance
Sheets of Pacific Gas Transmission Company (a California corporation) and
subsidiaries as of December 31, 1996 and 1995, and the related Statements of
Consolidated Income, Common Stock Equity and Cash Flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial position of
Pacific Gas Transmission Company and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 10, 1997 <PAGE>
<PAGE>
Statements of Consolidated Income
--------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
In Thousands
-----------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
-----------------------------------------------------------------------------
OPERATING REVENUES:
Gas marketing $281,292 $ - $ -
Gas transportation 194,881 174,879 165,831
Gas transportation for PG&E 37,726 41,456 46,557
Gas supply restructuring cost
recovery from PG&E 17,847 33,942 27,445
Gas supply restructuring cost recovery 14,273 17,962 10,649
Other 766 979 616
------------------------------------------------------------------------------
Total operating revenues 546,785 269,218 251,098
------------------------------------------------------------------------------
OPERATING EXPENSES:
Gas marketing cost of sales 280,483 - -
Gas supply restructuring costs 32,120 43,553 32,414
Natural gas purchased - - 311
Operations 59,593 53,263 47,438
Maintenance 4,095 5,019 5,474
Depreciation and amortization 39,077 33,046 38,916
Property and other taxes 8,867 12,374 12,130
----------------------------------------------------------------------------
Total operating expenses 424,235 147,255 136,683
----------------------------------------------------------------------------
OPERATING INCOME 122,550 121,963 114,415
----------------------------------------------------------------------------
OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used during
construction 241 1,399 1,016
Interest income 2,272 6,328 8,763
Other - net (7,367) (404) (840)
-----------------------------------------------------------------------------
Total other income and
(income deductions) (4,854) 7,323 8,939
------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on long-term debt 44,072 44,777 44,360
Allowance for borrowed funds used during
construction (256) (1,167) (878)
Other interest charges 1,846 2,731 2,148
------------------------------------------------------------------------------
Net interest expense 45,662 46,341 45,630
------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 72,034 82,945 77,724
INCOME TAX EXPENSE 28,889 31,338 29,982
------------------------------------------------------------------------------
NET INCOME $ 43,145 $ 51,607 $ 47,742
------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements. <PAGE>
Consolidated Balance Sheets
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
In Thousands
--------------------------------------------------------------------------
<S> <C> <C>
December 31, 1996 1995
---------------------------------------------------------------------------
PROPERTY, PLANT & EQUIPMENT:
Property, plant and equipment
in service $1,589,940 $1,418,044
Accumulated depreciation (418,296) (380,585)
---------------------------------------------------------------------------
Net plant in service 1,171,644 1,037,459
Construction work in progress 17,529 14,515
---------------------------------------------------------------------------
Total property, plant &
equipment - net 1,189,173 1,051,974
---------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 37,124 9,839
Restricted cash 5,800 -
Assets from risk management activities 16,595 -
Accounts receivable from gas marketing 388,737 -
Accounts receivable from PG&E 5,859 7,021
Accounts receivable - gas
transportation 22,241 27,697
Allowance for uncollectible accounts (1,836) -
Gas supply restructuring costs
recoverable - 30,531
Deferred income taxes 2,478 -
Inventories (at average cost) 8,968 7,687
Prepayments and other current assets 12,842 10,216
---------------------------------------------------------------------------
Total current assets 498,808 92,991
---------------------------------------------------------------------------
DEFERRED CHARGES:
Income tax related 26,016 26,740
Goodwill, net of amortization 23,366 -
Deferred charge on reacquired debt 14,859 16,064
Unamortized debt expense 5,229 4,754
Regulatory assets 15,687 10,338
Other 2,156 3,344
---------------------------------------------------------------------------
Total deferred charges 87,313 61,240
---------------------------------------------------------------------------
TOTAL ASSETS $1,775,294 $1,206,205
---------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements. <PAGE>
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
--------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
In Thousands
--------------------------------------------------------------------
<S> <C> <C>
December 31, 1996 1995
--------------------------------------------------------------------
CAPITALIZATION:
Common stock - no par value;
1,000 shares authorized,
issued and outstanding $ 85,474 $ 85,474
Additional paid-in capital 242,000 182,000
Foreign currency translation adjustment (183) -
Reinvested earnings 183,211 150,066
--------------------------------------------------------------------
Total common stock equity 510,502 417,540
Long-term debt 683,049 592,471
--------------------------------------------------------------------
Total capitalization 1,193,551 1,010,011
--------------------------------------------------------------------
CURRENT LIABILITIES:
Long-term debt - current portion 384 355
Payable to PG&E 9,483 8,003
Accounts payable from gas marketing 386,552 -
Accrued liabilities and other accounts
payable 28,377 27,527
Accrued taxes 2,646 8,646
Deferred income taxes - 1,716
Reserve for pending regulatory issues - 23,201
Deferred revenue 861 -
--------------------------------------------------------------------
Total current liabilities 428,303 69,448
--------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 134,635 117,353
Other 18,805 9,393
Commitments and contingencies (Note 9) - -
--------------------------------------------------------------------
Total deferred credits 153,440 126,746
--------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $1,775,294 $1,206,205
--------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements. <PAGE>
<PAGE>
Statements of Consolidated Common Stock Equity
------------------------------------------------------------------------
In Thousands
------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Reinvested Total
Additional Earnings and Common
Common Paid-in Foreign Stock
Stock Capital Currency Equity
-------- --------- ------------ ----------
Balance December 31, 1993 $ 85,474 $132,000 $112,717 $330,191
Net income - 1994 - - 47,742 47,742
Capital contribution
from PG&E - 50,000 - 50,000
Dividend paid to PG&E - - (22,000) (22,000)
-----------------------------------------------------------------------------
Balance December 31, 1994 85,474 182,000 138,459 405,933
Net income - 1995 - - 51,607 51,607
Dividend paid to PG&E - - (40,000) (40,000)
------------------------------------------------------------------------------
Balance December 31, 1995 85,474 182,000 150,066 417,540
Net income - 1996 - - 43,145 43,145
Capital contribution
from PG&E - 60,000 - 60,000
Dividend paid to PG&E - - (10,000) (10,000)
Foreign Currency Translation - - (183) (183)
------------------------------------------------------------------------------
Balance December 31, 1996 $ 85,474 $242,000 $183,028 $510,502
------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements. <PAGE>
<PAGE>
Statements of Consolidated Cash Flows
------------------------------------------------------------------------
In Thousands
------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Years Ended December 31, 1996 1995 1994
------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,145 $ 51,607 $ 47,742
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 42,602 35,058 40,606
Deferred income taxes 13,812 9,127 38,816
Gas supply restructuring costs 30,531 39,580 30,770
Allowance for equity funds used
during construction (241) (1,399) (1,016)
Changes in operating assets and
liabilities (net of assets and
liabilities acquired):
Accounts receivable (144,379) (1,206) (4,824)
Accounts payable and accrued
liabilities 138,292 (2,021) (18,889)
Income tax receivable from PG&E - - 62,537
Payable to PG&E 1,740 (7,487) 6,630
Accrued taxes (6,164) 1,269 413
Regulatory accruals (23,201) 20,109 (36,137)
Other working capital (1,382) (1,917) (1,802)
Other - net 1,546 (5,177) (40)
--------------------------------------------------------------------------
Net cash provided by operating
activities 96,301 137,543 164,806
--------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of State Gas Pipeline (136,227) - -
Acquisition of Energy Source, Inc. (23,151) - -
Construction expenditures (34,204) (76,143) (51,556)
Purchase of risk management assets (646) - -
Allowance for borrowed funds used
during construction (256) (1,167) (878)
--------------------------------------------------------------------------
Net cash used in investment activities(194,484) (77,310) (52,434)
--------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of PG&E notes, net - - (47,000)
Repayment of long-term debt (65,555) (801,611) (11,219)
Long-term debt issued 141,850 715,662 25,000
Long-term debt issuance costs (827) (5,241) (281)
Construction financing - 10,030 6,964
Payments for swap termination - (3,898) -
Equity contribution from PG&E 60,000 - -
Dividend paid to PG&E (10,000) (40,000) (22,000)
-------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net cash provided by (used in)
financing activities 125,468 (125,058) (48,536)
---------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 27,285 (64,825) 63,836
CASH AND CASH EQUIVALENTS AT JANUARY 1 9,839 74,664 10,828
---------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT DECEMBER 31 $ 37,124 $ 9,839 $ 74,664
----------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements. <PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994
Note 1: Summary of Business and Significant Accounting Policies
Corporate Restructuring - Effective January 1, 1997,
Pacific Gas Transmission Company ("PGT") became an indirect wholly owned
subsidiary of PG&E Corporation. PG&E Corporation, incorporated in California in
1995, became the holding company for PGT's former parent company, Pacific Gas &
Electric Company ("PG&E"). PG&E's ownership interest in PGT and PG&E
Enterprises has been transferred to PG&E Corporation. PGT's debt securities
were unaffected and remain securities of PGT.
Basis of Presentation - The Consolidated Financial Statements include:
Pacific Gas Transmission Company
Pacific Gas Transmission Company's wholly owned businesses:
PGT Australia Pty Limited
Pacific Gas Transmission International, Inc.
PGT Queensland Pty Limited
Energy Source, Inc.
Pacific Gas Transmission Company and its subsidiaries
are referred to herein as the "Company."
The consolidated financial statements include the
accounts of PGT and its wholly owned and controlled subsidiaries. All
significant intercompany transactions have been eliminated. Certain amounts in
the prior years' consolidated financial statements have been reclassified to
conform to the 1996 presentation.
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of revenues, expenses, assets, and liabilities and disclosure of
contingencies. Actual results could differ from these estimates.
Business - The Company and its subsidiaries provide
natural gas transmission and marketing services.
Pacific Gas Transmission Company is an interstate
natural gas pipeline company which constructed, owns and operates an interstate
pipeline system which extends from the British Columbia - Idaho border to the
Oregon - California border, traversing Idaho, Washington and Oregon.
PGT's principal business is the transportation of
natural gas, primarily from supplies in Canada for customers located in the
Pacific Northwest, Nevada and California. PGT's customers are principally local
retail gas distribution utilities, electric utilities that utilize natural gas
to generate electricity, natural gas marketing companies that purchase and
resell natural gas to end-use customers and utilities, natural gas producers,
and industrial companies. PGT's customers are responsible for securing their
own gas supplies which are delivered to PGT's system. PGT transports such
supplies either to downstream pipelines, which then transport such supplies to
the customers, or directly to the customers themselves.
In addition, during 1996 PGT expanded its core pipeline
business by purchasing a 389-mile pipeline in Australia (referred to as the PGT
Queensland Gas Pipeline or the "PGTQ Pipeline") and Energy Source, Inc.
("ESI"), a natural gas marketing company headquartered in Houston, Texas with
<PAGE>
offices in the United States and Canada. (See Note 2, "Acquisitions," below,
for further information.)
Risk Management - Due to the changing business
environment, the Company's exposure to risks associated with changes in natural
gas commodity prices, interest rates, and foreign currencies is increasing. To
manage these risks, PG&E Corporation has adopted a price risk management policy
which is also applicable to PGT and its subsidiaries and established an officer-
level price risk management committee. PG&E Corporation's price risk management
committee oversees implementation of the policy, approves each price risk
management program, and monitors compliance with the policy.
These price risk management activities include the use
of derivatives. Gains and losses on derivatives used for hedging purposes are
intended to offset losses and gains on the underlying hedged item. Under hedge
accounting, changes in the market value of these transactions are deferred and
recognized as an addition to the income or expense of the underlying instrument
upon completion of the underlying transaction. All 1996 transactions were
accounted for using hedge accounting. (See Note 6, "Financial Instruments,"
below, for further information.)
Assets from risk management activities are primarily
cash on deposit with established brokerage firms and counterparties. The
Company had $16.6 million in assets from risk management at December 31, 1996.
The majority of the Company's financing is done on a
fixed-rate basis, thereby substantially reducing the financial risk associated
with variable interest rate borrowings. The Company has used financial
instruments to minimize the effects of fluctuations in interest rates on certain
of its debt. (See Note 5, "Long-term Debt" and Note 6, "Financial Instruments,"
below.)
The Company also uses a number of other techniques to
mitigate its financial risk, including the purchase of commercial
insurance, and the maintenance of systems of internal control. The extent to
which these techniques are used depends on the risk of loss and the cost to
employ such techniques. These techniques do not eliminate financial risk to
the Company.
Regulation - PGT's rates and charges for its natural
gas transportation business are regulated by the Federal Energy Regulatory
Commission ("FERC" or "Commission"). PGT's consolidated financial statements
reflect the ratemaking policies of the Commission in conformity with generally
accepted accounting principles for rate-regulated enterprises in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for
the Effects of Certain Types of Regulation." This statement allows PGT to
record certain regulatory assets and liabilities which would be included in
future rates and would not be recorded under generally accepted accounting
principles for nonregulated entities. Regulatory assets and liabilities
represent future probable increases or decreases, respectively, in revenues to
be recorded by PGT associated with certain costs to be collected from customers
or amounts to be refunded to customers, respectively, as a result of the
ratemaking process.
Effective January 1, 1996, the Company adopted SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 prescribes general standards for the
recognition and measurement of impairment losses. In addition, it 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 or reserved against if recovery is no longer
probable. During 1996, in compliance with the adoption of this standard, PGT
recorded a reserve of $8.4 million ($5.2 million net of tax) against deferred
<PAGE> <PAGE>
relocation costs associated with the transfer of its corporate headquarters from
San Francisco to Portland, Oregon. Management expects to pursue recovery of
these costs in future rate proceedings.
The following regulatory assets and liabilities were
reflected in PGT's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
<S> <C> <C>
In Thousands
------------------------------------------------------------------
December 31, 1996 1995
------------------------------------------------------------------
Regulatory Assets:
Gas supply restructuring costs recoverable $ - $30,531
Deferred charge on reacquired debt 14,859 16,064
Income taxes recoverable 26,016 26,740
Deferred corporate relocation costs 8,377 7,403
Fuel tracker 5,977 1,467
Pension costs 4,560 -
Postretirement benefit costs 2,750 2,912
Other - 23
------------------------------------------------------------------
Total $62,539 $85,140
------------------------------------------------------------------
Regulatory Liabilities:
Revenues subject to refund $ - $23,201
Other 1,010 415
------------------------------------------------------------------
Total $ 1,010 $23,616
------------------------------------------------------------------
</TABLE>
Excluding the deferred corporate relocation costs,
for which a reserve has been established, substantially all of PGT's net
regulatory assets are included in rates charged to customers and are being
amortized over future periods.
Cash Equivalents - Cash equivalents (stated at cost,
which approximates market) include working funds and short-term investments with
original maturities of three months or less. At December 31, 1996, restricted
cash of $5.8 million consisted of certificates of deposit held in escrow as
collateral for ESI's outstanding letters of credit. Restricted cash is not
included as a cash equivalent in the accompanying consolidated statements of
cash flows.
Property, Plant and Equipment - The costs of utility
plant additions for PGT, including replacements of plant retired, are
capitalized. Costs include labor, materials, construction overhead, and an
allowance for funds used during construction ("AFUDC"). AFUDC is the
estimated cost of debt and equity funds used to finance regulated plant
additions. AFUDC rates, calculated in accordance with FERC authorizations, are
based upon the last approved equity rate and an imbedded rate for borrowed
funds. The equity component of AFUDC is included in other income and the
borrowed funds component is recorded as a reduction of interest expense. Costs
of repairing property and replacing minor items of property are charged to
maintenance expense. The original cost of plant retired plus removal costs,
less salvage, is charged to accumulated depreciation upon retirement of plant in
service.
<PAGE>
For financial reporting purposes, PGT's utility plant
in service is depreciated using a straight-line remaining-life method as
approved by the FERC.
Upon acquisition, the assets of the PGTQ Pipeline were
recorded at their fair value. Subsequent asset additions are recorded at cost.
For financial reporting purposes, these assets are depreciated over their
estimated useful lives using a straight-line method.
Goodwill - Goodwill consists of the cost in excess of
net assets acquired for ESI which is being amortized on a straight-line basis
over 15 years.
Unamortized Debt Expense and Gains or Losses on
Reacquired Debt - PGT's debt issuance costs are amortized over the lives of the
issues to which they pertain. Unamortized debt cost and gains or losses
associated with refinanced debt are amortized over the life of the new debt
consistent with PGT's ratemaking treatment.
Revenues - PGT's operating revenues are recorded as
services are provided based on rate schedules approved by the FERC (see Note 3,
"Natural Gas Matters," and Note 9, "Commitments and Contingencies," below).
Pursuant to FERC policy, PGT is allowed to place into effect rates related to
rate proceedings, subject to refund. Management estimates amounts subject to
refund to customers and defers these amounts in a Reserve for Pending Regulatory
Issues on the Consolidated Balance Sheet.
Income Taxes - The Company is included in the
consolidated federal income tax return filed by PG&E. For financial reporting
purposes, income taxes are allocated to PGT and its subsidiaries on a modified
separate return basis, to the extent such taxes or tax benefits can be utilized
by PG&E in the consolidated return.
Foreign Currency Translation - Financial statements for
foreign subsidiaries are translated into United States dollars at year-end
exchange rates for assets and liabilities and weighted average exchange rates
for revenues and expenses. Any resulting translation adjustment is recorded as
a component of common stock equity.
Statements of Consolidated Cash Flows - Cash paid for
interest, net of amounts capitalized, totaled $40.9 million in 1996, $49.9
million in 1995, and $38.6 million in 1994. Payments to PG&E for income taxes
totaled $25.6 and $29.8 million in 1996 and 1995, respectively. Cash received
from PG&E for income taxes totaled $79.2 million in 1994.
In 1994, PG&E converted $50 million of its Gas Supply
Restructuring (GSR) Notes to additional paid-in capital of the Company. For
purposes of the Statements of Consolidated Cash Flows, this has been treated as
a noncash transaction.
Note 2: Acquisitions
Building upon its expertise in the natural gas
industry, PGT is expanding its core pipeline business by pursuing domestic and
international business development opportunities which focus on the midstream
segment of the natural gas industry. The midstream segment includes the
gathering, processing, storing, transporting, and marketing of natural gas. It
excludes exploration and production of natural gas and local distribution to
customers.
<PAGE>
Consistent with this strategy, during 1996, PGT
established the PGT Queensland Unit Trust ("PGT Trust"), created under the laws
of Australia, to hold all of the assets comprising the Queensland State Gas
Pipeline from the Government of the State of Queensland, Australia. The
pipeline is referred to as the PGT Queensland Gas Pipeline ("PGTQ Pipeline").
The PGT Trust is owned by two wholly owned subsidiaries of PGT - Pacific
Gas Transmission International, Inc.("PGT International"), a California
corporation, and PGT Queensland Pty Limited ("PGT Queensland"), an Australian
corporation. PGT Queensland operates the pipeline. In addition, PGT also
established another wholly owned subsidiary, PGT Australia Pty Limited
("PGT Australia"), an Australian corporation, to pursue new business development
opportunities in Australia and to serve as trustee of the PGT Trust.
The pipeline, which began operations in 1990, extends
389-miles from Wallumbilla to Gladstone and Rockhampton in Queensland,
Australia. The pipeline was operated by the Government of the State of
Queensland to provide natural gas transportation service to customers in its
vicinity. PGT Queensland intends to continue such operations.
The purchase price, including related stamp duty taxes
and acquisition costs, for the PGTQ Pipeline was approximately $136 million.
The acquisition of the PGTQ Pipeline by the PGT Trust
was financed through a combination of equity contributions from PGT and
aggregate loan proceeds of $92 million drawn under recourse and non-recourse
loan agreements (see Note 5, "Long-term Debt," and Note 6, "Financial
Instruments," below).
The PGTQ Pipeline had assets of approximately $138
million at December 31, 1996 and revenues of approximately $6 million for the
six months ended December 31, 1996.
During 1996, PGT also acquired ESI's gas marketing
operations in the United States and Canada. ESI has offices in Houston,
Calgary, Tulsa, Pittsburgh and New York with a customer base in the Northeast
and Midwest regions of the United States.
The purchase price, paid in cash, was approximately $23
million plus working capital. PGT plans on continuing the marketing operations
of ESI. ESI had assets of approximately $463 million at December 31, 1996 and
revenues of approximately $281 million for the one month ended December 31,
1996.
The acquisitions of the PGTQ Pipeline and ESI were
accounted for by the purchase method. The PGTQ Pipeline's results of operations
have been included in the consolidated results of operations beginning July 1,
1996, and ESI's results have been included in the Company's results of
operations beginning December 1, 1996. The following unaudited pro forma
summary combines the consolidated results of operations of PGT with the PGTQ
Pipeline and ESI as if their acquisitions had occurred at the beginning of 1995.
This information is presented for informational purposes only and is not
necessarily indicative of the operating results that would have occurred had the
acquisitions been consummated as of the beginning of 1995, nor are they
necessarily indicative of future operating results.
(Dollars in Millions)(unaudited) 1996 1995
--------------------------------- ------- ------
Total operating revenues $ 1,403 $ 449
Operating income $ 127 $ 130
Net income $ 46 $ 51
<PAGE>
The significant pro forma increase in operating
revenues reflects the impact of ESI's gas marketing activities; these activities
were significantly higher in 1996 than in 1995 due to ESI's efforts to increase
sales volumes.
Note 3: Natural Gas Matters
Until November 1993, when Order 636 was implemented,
PGT purchased all of its Canadian natural gas supply for resale to PG&E from
A&S, pursuant to a gas sales agreement between A&S and PGT and a sales service
agreement between PGT and PG&E, both of which extended through the year 2005.
A&S had commitments to purchase minimum quantities of natural gas from over 200
Canadian gas producers under various long-term contracts, most of which extended
through 2005. As a result of the regulatory restructuring pursuant to Order
636, PGT, PG&E, A&S and various Canadian gas producers selling gas to A&S
entered into agreements (collectively, the "Decontracting Plan") under which
PGT terminated its gas sales agreement with A&S, its sales service agreement
with PG&E, and A&S terminated its contracts with the gas producers.
Under the Decontracting Plan, in return for settlement payments of $210.1
million, the producers released A&S, PGT, and PG&E from any claims they may have
had that resulted from the termination of the former arrangements, as well as
any claims for losses arising from alleged historical shortfalls in gas taken by
A&S. In addition to the producers' settlement payments, PGT paid A&S $29.6
million for costs incurred by A&S related to both the termination of the sales
agreement between A&S and PGT, and the implementation of the Decontracting Plan.
The FERC approved the recovery of $168.5 million of the
total $239.7 million of gas supply restructuring costs ("GSR") incurred by PGT
through a transition cost recovery mechanism ("TCRM"). The difference of
$71.2 million was reflected as a net charge to expense from 1992 through 1995.
Recovery of approved GSR costs began in 1993, with PGT completing recovery of
such costs in 1996 with the collection of the remaining $30.5 million.
Also, in 1996, the CPUC sought judicial review of the
FERC's orders in Public Utilities Commission of the State of California v. FERC,
D.C. Circuit Case No. 96-1022. However, in the settlement of the 1994 rate
case, discussed in Note 9, "Commitments and Contingencies," below, the CPUC
agreed to withdraw its petition for judicial review in consideration for PGT's
agreement to reduce PG&E's direct bill by $3.18 million and refund this amount
to PG&E. The CPUC moved to withdraw its petition and, on October 28, 1996, the
Court granted the withdrawal. On November 7, 1996, PGT refunded the $3.18
million to PG&E. This aspect of the settlement is the subject of one of the
pending rehearing applications discussed above. PGT does not expect the FERC to
modify its settlement as a result of this issue.
Note 4: Related Party Transactions
The Company invests its available cash balances with,
or borrows from, PG&E on an interim basis pursuant to a pooled cash management
arrangement. The principal amount of this investment is payable upon demand.
The balance invested with PG&E at December 31, 1996 and 1995 was $9.2 million
and $9.6 million, respectively (included in "Cash and Cash Equivalents" on the
Consolidated Balance Sheets), at an interest rate of 5.4 percent and 5.8
percent, respectively. The interest rate on these cash investments or borrowings
averaged 5.4 percent in 1996, 6.6 percent in 1995, and 5.0 percent in 1994. The
related interest income was $0.3 million in 1996, $0.9 million (net of $0.6
million interest expense) in 1995, and $3.1 million in 1994.
<PAGE>
PG&E performs certain administrative services on
behalf of PGT for which it has charged PGT approximately $0.2 million in 1996,
$0.3 million in 1995, and $0.5 million in 1994. Such amounts are included in
PGT's operating expenses.
Note 5: Long-term Debt
<TABLE>
<CAPTION>
<S> <C> <C>
In Thousands
------------------------------------------------------------------------
December 31, 1996 1995
------------------------------------------------------------------------
PGT 1995 Refinancing
Senior Unsecured Notes, due 2005 $249,792 $249,767
Senior Unsecured Debentures, due 2025 147,545 147,458
Medium Term Notes, due 2000 to 2003 70,000 70,000
Commercial Paper 108,087 108,607
------------------------------------------------------------------------
Subtotal 575,424 575,832
PGT Australia, due 2001 90,850 -
PGT Capital Lease Obligation 17,159 16,994
Current Portion of PGT Capital Lease Obligation (384) (355)
------------------------------------------------------------------------
Long-term debt included in capitalization $683,049 $592,471
------------------------------------------------------------------------
</TABLE>
<PAGE>
The following summarizes the annual maturities of long-
term debt for the next five years:
Year ending December 31, In Thousands
----------------------------------------
1997 $ 384
1998 $ 419
1999 $ 457
2000 $ 139,893
2001 $ 91,393
1995 Refinancing - On May 31, 1995, PGT completed the
sale of $400 million of debt securities through a $700 million shelf
registration under the Securities Act of 1933. PGT issued $250 million of 7.10
percent 10-year senior unsecured notes due June 1, 2005, and $150 million of
7.80 percent 30-year senior unsecured debentures due June 1, 2025. The 10-year
notes were issued at a discount to yield 7.11 percent and the 30-year debentures
were issued at a discount to yield 7.95 percent. The 30-year debentures are
callable after June 1, 2005, at the option of PGT.
On May 31, 1995, PGT also issued $200 million of
commercial paper, of which $108 million was outstanding as of December 31, 1996,
at an average rate of 5.64 percent. The average balance during 1996 was $78.3
million at an average rate of 5.8 percent. The commercial paper is backed by a
$200 million revolving bank credit agreement which expires May 30, 2000. This
agreement was amended during 1996 to allow for a total of $70 million in letters
of credit for PGT or its subsidiaries out of the $200 million. The annual fee
for this facility is $200,000 plus a fee based on the amount of outstanding
letters of credit. In accordance with the credit agreement, PGT must not permit
the ratio of total debt to total capitalization to exceed 70 percent and must
not permit its tangible net worth to be less than $325 million. There were no
letters of credit outstanding under this agreement at December 31, 1996.
The commercial paper is classified as long-term debt
based upon the availability of committed credit facilities expiring in the year
2000 and management's intent to maintain such amounts in excess of one year. At
December 31, 1996, PGT was in compliance with all terms and conditions of the
credit agreement and the bond indentures.
Proceeds from the issuance of the notes, debentures and
commercial paper in May 1995, were used to retire $600 million of long-term debt
which was then outstanding.
On July 5, 1995, PGT completed the sale of $70 million
of medium-term notes under the shelf registration. The notes were issued at an
average maturity of 6.2 years at an average yield of 6.76 percent. Proceeds
from the issuance of the notes were used to repay $70 million of outstanding
commercial paper.
1993 Bank Financing - PGT secured long-term debt
financing from a consortium of banks pursuant to a loan agreement dated April
30, 1993. Under the loan agreement, PGT borrowed $673 million to finance the
pipeline expansion and the existing system. The debt was guaranteed by PG&E.
The weighted average rate of interest on this loan during 1995, 1994 and 1993
was 8 percent, 6.7 percent and 4.1 percent, respectively.
The interest rate on the debt (which ranged from 4
percent to 8.4 percent in 1994 and 1995) was at a floating rate subject to
periodic determination in accordance with the terms of the loan agreement and
<PAGE>
varied depending on the nature and the length of the borrowings, but was
generally tied to the bank's base rate, domestic certificate of deposit rates,
or the applicable London Interbank Offered Rates (LIBOR) for maturities ranging
from one to twelve months. From March through July 1994, PGT executed a series
of interest rate swap transactions which effectively converted $639 million of
the floating rate debt to a fixed rate. The remaining debt outstanding at
December 31, 1994, which represented the principal payments due in 1995, was
fixed by utilizing options available to PGT under the loan agreement.
The swap agreements were terminated in 1995, concurrent
with the refinancing of the bank debt described above. As a result of decreases
in interest rates in 1995, PGT incurred a $3.9 million net loss from the early
termination of the swap agreements, which was deferred and is being amortized
over the average life of the new debt.
Capital Lease Obligation - PGT leases its corporate
office building in Portland, Oregon under a 20-year lease terminating in the
year 2015. Payments under the lease total $1.9 million per year and approximate
the debt service payments on the debt issued to finance the $17 million cost of
the building. In addition, PGT is obligated to pay operating costs, taxes and
insurance for the building. PGT does not have the option to extend the lease
beyond twenty years, but may at any time purchase the building for approximately
the balance of the debt outstanding used to finance the building. PGT must
purchase the building at the end of the lease term.
Based on the provisions of the lease agreement, PGT
accounts for the obligation as a capital lease. The total future commitments
are $35.3 million with a principal portion of $17.2 million. The effective
interest rate inherent in the lease is 8.8 percent.
PGT Australia - The non-recourse loan agreement between
PGT Australia, in its capacity as trustee of the PGT Trust, and a group of
lenders, provided for loans denominated in both United States and Australian
dollars totaling approximately $60 million. Repayment of amounts outstanding
under the non-recourse agreement is secured by a first mortgage and first
security interest in substantially all of the assets held by the PGT Trust (with
certain limited exceptions), but is otherwise non-recourse to PGT Australia, PGT
International, PGT Queensland, and PGT.
PGT Australia, in its trustee capacity, also entered
into a recourse loan agreement with a group of lenders providing for loans in
U.S. dollars in the amount of $40 million. Repayments of amounts outstanding
under the recourse agreement are not secured by mortgage or security interests
in the assets of the PGT Trust.
In connection with this financing, PG&E, the parent of
PGT at that time, entered into a Capital Infusion Agreement with PGT under which
PG&E has agreed to make additional capital contributions to PGT, under certain
circumstances, in an aggregate amount not exceeding $40 million. PGT has
assigned its rights under the Capital Infusion Agreement to the facility agent
for the lenders under the Recourse Facility Agreement. Equity contributions
made by PG&E during 1996 were made independent of the Capital Infusion
Agreement.
In the event of a default by PGT Australia on its
obligations under the Recourse Facility Agreement, the facility agent may cause
PG&E to pay directly to the Facility Agent, as agent for and on behalf of the
lenders under the Recourse Facility Agreement, all amounts due thereunder up to
PG&E's maximum obligation under the Capital Infusion Agreement. In certain
circumstances, an unconditional guaranty by PGT may be substituted for the
Capital Infusion Agreement as credit support for the PGT Trust's obligations
<PAGE>
under the recourse agreement. In addition, PGT has issued a guarantee in favor
of the Facility Agent with respect to all interest, fees, expenses, and other <PAGE>
obligations under the recourse agreement, other than principal, in an aggregate
amount not to exceed $2 million. PGT International has guaranteed the repayment
in full by the PGT Trust of all amounts payable under the recourse agreement.
ESI - During 1996, ESI established a $35 million line
of credit which also supports its letters of credit with vendors. During 1996,
there were no draws on this line of credit. At December 31, 1996, total
outstanding letters of credit were $19.0 million with maturities ranging from
one to four months. These letters of credit were issued under ESI's separate
credit agreements which have been subsequently terminated. The Company has
amended its bank credit agreement to allow for a total of $70 million in letters
of credit to be issued for PGT or its subsidiaries.
Fair Value - At December 31, 1996, the Company's
primarily fixed rate long-term debt had a carrying value of $683.4 million and
had an estimated fair market value of $691.9 million. At December 31, 1995, the
Company's primarily fixed rate long-term debt had a carrying value of $592.8
million and had an estimated fair market value of $630.2 million. The estimated
fair value of long-term debt was based upon quoted market prices.
Note 6: Financial Instruments
General - The Company uses certain financial derivative
instruments in its risk management activities. Derivative instruments used in
hedging activities are matched to existing assets, liabilities, or transactions
with the objective of mitigating financial exposure to changes in the price of
energy commodities and interest rates. Gains and losses on derivative
instruments offset losses and gains on the hedged item.
Financial derivatives involve, to varying degrees,
credit and market risk. With regard to credit risk, the Company may be exposed
to loss in the event of non-performance by a counterparty. The credit risk of
futures contracts, which are traded on the NYMEX, is limited due to the daily
cash settlement of the net change in the value of open contracts and because of
NYMEX procedures. The potential credit risk for swap agreements is
substantially higher, as it depends on the type of counterparties involved,
since daily cash settlements are not required. The Company maintains credit
policies with regard to its counterparties that management believes
significantly minimize overall credit risk. These policies include a thorough
review of the financial statements of counterparties on a regular basis and,
when necessary, require that collateral such as letters of credit be
maintained. In addition, the Company sets limits as to the level of exposure
with each counterparty.
With regard to market risk, the possibility of a change
in commodity prices, interest rates, and foreign exchange rates will cause the
value of a financial instrument to decrease or its obligations to become more
costly to settle. In hedging activities, when derivatives are used for the
purpose of risk management, the Company's exposure to market risk is limited
because the gains and losses on the derivatives offset the losses and gains on
the asset, liability, or transaction being hedged.
Commodity Price Contracts - ESI generally attempts to
balance its fixed-price physical and financial purchase and sales contracts in
terms of contract volumes and the timing of performance and delivery
obligations. However, net open positions often exist or are established due to
the origination of new transactions and ESI's assessment of, and response to,
changing market conditions. Additionally, ESI will at times create a net open
<PAGE>
position or allow a net open position to continue when it believes, based upon
competitive information gained from its energy marketing activities, that future
price movements will be consistent with its net open position. To the extent
ESI has a net open position, it is exposed to the risk that fluctuating market <PAGE>
prices may adversely impact its financial position or results of operations.
The Company closely monitors and manages its exposure to market risk. Policies
are in place that are designed to limit the Company's exposure. Procedures
exist which allow senior management to monitor ESI's commitments and positions
on a daily basis.
The following table sets forth ESI's contract amount
and term for all instruments held for price risk management purposes at December
31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Notional Estimated Fixed Price Deferred
Thousands) Amounts Fair Maximum ---------------- Gain
Description (MMcf) Value Term Payor Receiver (Loss)
----------- -------- --------- ------- ----- -------- --------
Fixed-price
swaps: 89,920 $ (565) 12 mos. 25,720 64,200 -
Basis Swaps: 59,728 $ (99) 21 mos. 15,613 44,115 -
Options: 37,810 $(2,061) 12 mos. 18,740 19,070 $ 4,429
Futures: 26,730 $ 4,040 17 mos. 18,790 7,940 $(3,781)
</TABLE>
The market price used to value these transactions
reflects management's best estimate of market prices considering various factors
underlying the commitments.
Interest Rate Swap Agreements - In connection with the
financing of the acquisition of State Gas Pipeline's assets, PGT Australia, in
its capacity as trustee of the PGT Queensland Unit Trust, entered into interest
rate swap agreements with domestic and international banks, under which the
underlying LIBOR or Australian Bank Bill ("BBSW") components of the floating
rate interest payment obligations were swapped for fixed rate interest payment
obligations as described below:
<TABLE>
<CAPTION>
(Dollars in Millions) December 31, 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Deferred
Notional Effective Maturity Fixed Floating Gain
Type Amounts Date Date Rate Index (Loss)
---------- -------- --------- -------- ----- -------- --------
Fixed for
Float US$22 7/1/96 7/3/01 6.684% 6mLIBOR $(0.4)
Fixed for
Float US$45 7/1/96 7/3/01 6.700% 6mLIBOR $(0.9)
Fixed for
Float A$13 7/2/96 7/2/01 8.718% 6mBBSW $(0.9)
</TABLE>
<PAGE>
PGT Australia's payment obligations for the swap
agreements related to the recourse debt are guaranteed by PGT up to an amount
not exceeding US$9 million.
Note 7: Income Taxes
The significant components of income tax expense were:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
In Thousands
--------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
--------------------------------------------------------------------------
Current - Federal $13,821 $18,832 $(3,792)
- State 1,282 3,404 (5,017)
--------------------------------------------------------------------------
Total current 15,103 22,236 (8,809)
--------------------------------------------------------------------------
Deferred - Federal 12,314 9,152 29,569
- State 1,497 (25) 9,247
--------------------------------------------------------------------------
Total deferred 13,811 9,127 38,816
---------------------------------------------------------------------
Investment tax credit amortization (25) (25) (25)
--------------------------------------------------------------------------
Total income tax expense $28,889 $31,338 $29,982
--------------------------------------------------------------------------
</TABLE>
<PAGE>
The differences between reported income taxes and tax amounts determined by
applying the federal statutory rate of 35 percent to income before income tax
expense were:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
In Thousands
----------------------------------------------------------------
Years ended December 31, 1996 1995 1994
----------------------------------------------------------------
Expected federal income tax expense $25,212 $29,031 $27,203
Increase (decrease) in income tax
expense resulting from:
State income taxes, net of
federal benefit 2,436 2,198 2,749
Non-deductible foreign losses 745 - -
Allowance for equity funds used
during construction 364 22 (113)
Other 132 87 143
----------------------------------------------------------------
Total income tax expense $28,889 $31,338 $29,982
----------------------------------------------------------------
</TABLE>
The significant components of net deferred income tax liabilities were as
follows:
<TABLE>
<CAPTION>
In Thousands
<S> <C> <C>
---------------------------------------------------------------
December 31, 1996 1995
---------------------------------------------------------------
Deferred income tax assets:
Deferred income taxes - current
reserve for regulatory issues $ 2,478 $ 10,042
---------------------------------------------------------------
Deferred income tax liabilities:
Deferred income taxes - current
Gas supply restructuring costs $ - $ (11,758)
---------------------------------------------------------------
Total deferred income taxes - current 2,478 (1,716)
---------------------------------------------------------------
Deferred income taxes - noncurrent
Plant in service (126,601) (109,242)
Debt financing costs (5,725) (6,187)
Other (2,309) (1,924)
----------------------------------------------------------------
Total deferred income taxes -
noncurrent (134,635) (117,353)
----------------------------------------------------------------
Total deferred income tax liabilities (134,635) (129,111)
-----------------------------------------------------------------
Net deferred income taxes $(132,157) $(119,069)
-----------------------------------------------------------------
Classification of net deferred income taxes:
Included in current assets $ 2,478 $ -
Included in current liabilities - (1,716)
Included in deferred credits (134,635) (117,353)
-----------------------------------------------------------------
Net deferred income taxes $(132,157) $(119,069)
-----------------------------------------------------------------
</TABLE>
<PAGE>
Note 8: Employee Benefit Plans
Retirement Plan - Until January 1, 1996, through
participation in PG&E's multiple-employer defined benefit pension plan, PGT
provided a noncontributory defined benefit pension plan covering substantially
all employees. The retirement benefits under this plan were based on years of
service and the employee's base salary. Effective as of January 1, 1996, plan
assets and liabilities attributable to PGT were allocated to a new separate PGT
defined benefit pension plan. The benefits under the new PGT plan are
substantially the same as those provided under the PG&E plan.
PGT realized a liability of $3.9 million as a result of
the allocation of plan assets and liabilities from the PG&E combined plan to the
PGT plan. In conformity with accounting for rate-regulated enterprises,
regulatory adjustments have been recorded for the difference between utility
pension cost determined for accounting purposes and that for ratemaking, which
is based on a funding approach. PGT's policy is to fund each year not more than
the maximum amount deductible for federal income tax purposes and not less than
the minimum legal funding requirement. Plan assets consist primarily of common
stock, fixed-income securities, and cash equivalents.
Prior to 1996, the actuarial determination of net
pension expense for the retirement plan was performed on the PG&E consolidated
parent company level. As such, PGT does not have requisite information
necessary to present the 1995 and 1994 disclosures for pension expense as
required by SFAS NO. 87, "Employers' Accounting for Pensions."
Using the projected unit credit actuarial cost
method, net pension expense consisted of the following components:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
In Thousands
------------------------------------------------------
Years ended December 31, 1996 1995 1994
----------------------------- ------ ------- ------
Service cost $ 1,583 N/A N/A
Interest cost 1,827 N/A N/A
Return on plan assets (4,492) N/A N/A
Net amortization and deferral 1,735 N/A N/A
------------------------------------------------------
SFAS No. 87 pension cost 653 N/A N/A
Deferral of costs (653) N/A N/A
Amortization of regulatory asset - N/A N/A
------------------------------------------------------
Net pension cost $ - N/A N/A
------------------------------------------------------
</TABLE>
The following table reconciles the plan's funded status to the pension liability
recorded on the Consolidated Balance Sheet:
<TABLE>
<S> <C> <C>
In Thousands
--------------------------------------------------------------
Years ended December 31, 1996 1995
------------------------------- ------- -------
Vested benefit obligation $19,398 $16,883
---------------------------------------------------------------
<PAGE>
<S> <C> <C>
Accumulated benefit obligation $21,020 $19,159
---------------------------------------------------------------
Funded status as of December 31:
Plan assets at fair value $32,379 $28,239
Projected benefit obligation
for service rendered to date 27,259 26,017
---------------------------------------------------------------
Funded status 5,120 2,222
Unrecognized net gain (10,489) (6,816)
Unrecognized net liability at
transition 534 605
Unrecognized prior service costs 286 81
---------------------------------------------------------------
Total deferred pension liability $(4,549) $(3,908)
---------------------------------------------------------------
Total deferred regulatory asset $ 4,560 $ -
---------------------------------------------------------------
Discount rate 7.50% 7.25%
--------------------------------------------------------------
Expected long-term return on
plan assets 9.00% 9.00%
--------------------------------------------------------------
Rate for compensation increases 5.00% 5.00%
--------------------------------------------------------------
</TABLE>
Savings Fund Plan - PGT provides a defined
contribution pension plan to which employees with at least six months to one
year of service may make contributions of up to 15 percent of their covered
compensation on a pretax or after-tax basis. These contributions, up to a
maximum of 6 percent of covered compensation, are eligible for matching PGT
contributions at specified rates. These benefits were provided in conjunction
with PG&E through December 31, 1994, and through PGT's separate stand-alone
plans effective January 1, 1995. The cost of PGT's contributions was charged to
expense and to plant in service, and totaled $0.6 million, $0.6 million and $0.5
million for 1996, 1995 and 1994, respectively.
Postretirement Benefits Other Than Pensions - PGT
provides a contributory defined benefit medical plan for retired employees and
their eligible dependents and a noncontributory defined benefit life insurance
plan for retired employees. Substantially all employees retiring at or after age
55 who began employment with PGT prior to January 1, 1994, are eligible for
these benefits. The medical benefits are provided through plans administered by
an insurance carrier or a health maintenance organization. Certain retirees are
responsible for a portion of the cost based on the past claims experience of
PGT's retirees.
Effective January 1, 1993, PGT adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," which
requires accrual of the expected cost of these benefits during the employees'
years of service. The assumptions and calculations involved in determining the
accrual closely parallel pension accounting requirements. These costs are
charged to expense and to plant in service. PGT previously recognized these
benefit costs when paid and funded, which was consistent with ratemaking.
In December 1992, the FERC issued a "Statement of
Policy on Post-Employment Benefits Other Than Pensions" which addresses the
Commission's general policy regarding the recovery of the costs of these
benefits through rates. The Commission's policy provides for the recognition,
as a component of cost-based rates, of allowances for prudently incurred costs
of such benefits when determined on an accrual basis that is consistent with the
accounting principles set forth in SFAS No. 106, subject to certain funding
conditions. Additionally, the difference between the costs determined pursuant
to accounting practices previously followed and SFAS No. 106 accruals may be
deferred from the time SFAS No. 106 is adopted until a general rate case is
filed and new rates are placed into effect that include the SFAS No. 106 cost on
a full accrual basis. The regulatory asset created from the deferral of costs
is to be amortized over a period not to exceed 20 years beyond the SFAS No. 106
adoption date. Amortization of the regulatory asset will be eligible for
recovery in future rates.
In accordance with the Commission's policy, PGT
deferred $1.3 million in 1994, and $1.8 million in 1993, representing the
difference between the amount accrued pursuant to SFAS No. 106 and the previous
method, from January 1, 1993, when SFAS No. 106 was adopted until September 1,
1994, when such costs were reflected in rates. PGT began amortizing deferred
postretirement benefit costs in September 1994. Due to regulatory treatment,
adoption of SFAS No. 106 did not have a material effect on PGT's financial
position, liquidity or results of operations.
As required by the Commission's policy, in 1995, PGT
began funding, in an interest-bearing escrow account, the SFAS No. 106 revenues
collected in rates. The amount funded in 1995, net of benefit payments, totaled
$2.2 million and was invested in three-month U.S. Treasury bills. Once PGT's
rates in the 1994 rate case became final, PGT established an irrevocable trust
for funding all benefit payments. The total contribution to the trust was $4.1
million in 1996, which included the transfer of funds from the escrow account
related to 1995 funding.
Using the projected unit credit actuarial cost method,
PGT's net postretirement medical and life insurance cost, pursuant to SFAS No.
106, consisted of:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
In Thousands
----------------------------------------------------------
Years ended December 31, 1996 1995 1994
----------------------------------------------------------
Service cost $ 346 $ 432 $ 579
Interest cost 691 770 843
Return on plan assets (1) (9) (7)
Amortization of transition
obligation 461 461 561
Net amortization and deferral (168) (94) -
----------------------------------------------------------
Actuarial postretirement
benefit cost 1,329 1,560 1,976
Deferral of costs - - (1,315)
Amortization of regulatory asset 162 162 54
----------------------------------------------------------
Net postretirement benefit
cost $1,491 $1,722 $ 715
---------------------------------------------------------
</TABLE>
The following table reconciles the medical and life
insurance plans' funded status to the postretirement benefit liability recorded
on the Consolidated Balance Sheet:
<PAGE>
<TABLE>
<S> <C> <C>
In Thousands
-----------------------------------------------------------
December 31, 1996 1995
------- -------
Accumulated postretirement
benefit obligation:
Retirees $(4,381) $(4,313)
Other fully eligible participants (2,065) (2,018)
Other active plan participants (3,594) (3,730)
-----------------------------------------------------------
Total accumulated postretirement
benefit obligation (10,040) (10,061)
Plan assets at market value 4,123 115
-----------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (5,917) (9,946)
Unrecognized transition obligation 7,383 7,844
Unrecognized net gain (3,467) (2,871)
-----------------------------------------------------------
Accrued postretirement liability $(2,001) $(4,973)
-----------------------------------------------------------
</TABLE>
In accordance with SFAS No. 106, PGT elected to
amortize the estimated transition obligation at January 1, 1993, of
approximately $11.2 million over 20 years beginning in 1993. The amortization
in 1996 and 1995 was based upon a revised estimated transition obligation of
$8.3 million.
The actuarial assumptions used in 1996 and 1995 to
determine the benefit obligations and costs for postretirement benefits other
than pensions include a weighted average discount rate of 7.25 percent and 7.00
percent, respectively; and for both years, a weighted average expected long-term
rate of return on plan assets of 8.00 percent and a rate of increase in future
compensation levels of 4.00 percent.
The assumed health care cost trend rate in 1996 is
approximately 10 percent, trending down to an ultimate rate in 2005 of
approximately 6 percent. The effect of a one-percentage-point increase in the
assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation at December 31, 1996, by approximately $1.3
million and the 1996 annual aggregate service and interest costs by
approximately $0.2 million.
Note 9: Commitments and Contingencies
Capital Requirements - PGT continues to require capital
for additions to its facilities and to maintain and enhance the efficiency and
reliability of existing transmission facilities. Requirements for these
purposes, including AFUDC debt and equity, were $34.6 million for 1996. PGT's
capital requirements for 1997 are estimated to be $57.6 million. The $23.0
million increase in projected capital expenditures in 1997 compared with actual
expenditures in 1996 is primarily due to carryover items and the cost to replace
existing turbines with high efficiency gas turbine units. In addition, capital
expenditures related to system expansions, maintenance and new projects for PGT
Queensland/PGT Australia and ESI are estimated to be $33.9 million during 1997.
<PAGE>
Operating Lease Commitments - Operating lease expense
amounted to $0.8 million in 1996, $1.6 million in 1995, and $2.2 million in
1994. Future minimum payments for operating leases are:
Years ending December 31, In Thousands
--------------------------------------------
1997 $ 1,024
1998 637
1999 582
2000 506
2001 341
Thereafter 857
--------------------------------------------
Total future commitments $ 3,947
--------------------------------------------
1993 Expansion - On November 1, 1993, PGT 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 FERC 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 PG&E to expand
its gas pipeline facilities in California to connect with the PGT expansion at
the California-Oregon border. PGT's total cost of the 1993 expansion is
estimated to be $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 a CPUC-imposed rate structure applicable to PGT's 1993 expansion
shippers for transportation service on the downstream PG&E system was
discriminatory.
On October 24, 1991, the FERC permitted PGT to
commence construction, while the CPUC reexamined the features of its rate design
for PG&E. However, the FERC imposed on PGT a lower penalty return on equity,
10.13 percent, instead of the previously prescribed 12.5 percent for 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 PGT'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. PGT
appealed the 10.13 percent penalty return to the United States Court of Appeals.
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. 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.
<PAGE>
On August 23, 1996, the Court of Appeals found that the
FERC had exceeded its jurisdiction in imposing the penalty return and therefore
granted PGT's appeal and denied the appeals of the adverse petitioners. The
effect of the Court's decision is that PGT was entitled to apply the 12.75
percent rate of return, that questions concerning the FERC's certification of
the expansion were removed, and that the FERC is not required to consider
questions of compensation to shippers.
With respect to the application of the 12.75 percent
rate of return, it should be noted that in the settlement of the 1994 rate case
(see "1994 Rate Case," below), PGT agreed not to retroactively bill its
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 settlement rates related to the 1994 rate case were effective
starting on September 1, 1994.
On October 24, 1996, the Court denied a petition for
rehearing and the suggestion for rehearing en banc filed by a group of shippers.
On January 22, 1997, the shippers filed a petition for a writ of certiorari with
the U.S. Supreme Court based on the same issues as raised at the U.S. Court of
Appeals. The petition was placed on the U.S. Supreme Court's docket on January
29, 1997. The U.S. Supreme Court is expected to act on that petition prior to
the expiration of its term in July 1997.
1994 Rate Case - On February 28, 1994, PGT filed an
application to increase its rates for transportation services. These rates were
based on an overall cost of service of approximately $217 million, including a
cost of equity of 13 percent. The proposed rate of return on equity applied to
all facilities and assumed the discontinuance of the penalty rate of return on
equity of 10.13 percent, which the FERC had earlier required to be used to
develop initial rates for PGT's 1993 expansion facilities. (See "1993
Expansion," above.)
A major issue in this proceeding was 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 the rates paid by 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 interim
incremental rates, and authorized PGT to place these rates into effect on
September 1, 1994, subject to refund. Although the FERC rejected the proposal
to place rolled-in rates into effect 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.
On September 11, 1996, the FERC approved, without
modification, a proposed multi-party settlement of PGT's rate case, which was
filed with the FERC on March 21, 1996. The settlement provided for rolled-in
rates effective on November 1, 1996. To mitigate the impact of the higher
rolled-in rates on shippers who were paying lower rates under contracts executed
prior to PGT's 1993 expansion (pre-1993 expansion shippers), most of the firm
shippers who took service prior to the 1993 expansion 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 implementation of rolled-in rates by
itself does not change PGT's total revenue requirement, 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 from September
1, 1994, the effective date of the rates in this case. In addition, under the
<PAGE>
settlement, approximately three percent of PGT's firm transportation service
capacity was relinquished effective November 1, 1996, for subscription to other
shippers who may desire the capacity. Approximately $7.5 million of costs were
also allocated to short-term firm and interruptible services.
The overall effect of the settlement on rates,
including mitigation measures and the agreed upon lower cost of service, was 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 $0.48 to $0.33 per Decatherm (Dt) for the 1993 expansion shippers,
and to increase the transportation rate for most of the pre-1993 expansion
shippers from $0.16 to either $0.20 or $0.24 per Dt, depending upon the level of
mitigation applicable to each shipper. The rolled-in rate for the full distance
is $0.26 per Dt. In November 1996, PGT refunded the difference between the
amounts based on its as-filed cost of service of $217 million and the amounts
that would have been collected at the settlement cost of service of $206
million. PGT had established a reserve adequate for its refund obligation under
the settlement.
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, however, the settlement permits PGT 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.
Legal Matters - 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 MMBtu/day on the interstate portion of the 1993 expansion
project. The annual demand charges under the contract were approximately $7.8
million, and decreased to $5.5 million effective November 1996 pursuant to the
settlement of the 1994 rate case discussed above. Norcen Energy is a guarantor
of the 30-year transportation contract between PGT and Norcen Marketing. Since
January 1, 1995, Norcen Marketing has been utilizing most of the interstate
expansion capacity for which it contracted with PGT, whereas prior to that date,
Norcen Marketing used none of it.
The complaint alleged that PGT and PG&E wrongfully
induced Norcen Energy and Norcen Marketing to enter into the 30-year contract
with PGT 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.
<PAGE>
On September 19, 1994, the U.S. District Court,
Northern District of California, granted PGT's and PG&E's motions 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 U.S. Court of Appeals. Plaintiffs still seek rescission
of the above-mentioned gas transportation contract and compensatory and
punitive damages in connection with their remaining state law claims. It is
believed that the plaintiffs might seek contract damages of approximately $100
million in this case.
At this stage of litigation, the Company is unable to
estimate the 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.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Since PGT meets the conditions set forth in General
Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Since PGT meets the conditions set forth in General
Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
---------------------------------------------------
Since PGT meets the conditions set forth in General
Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Since PGT meets the conditions set forth in General
Instruction (J) (1) (a) and (b) of Form 10-K, this information is omitted.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
------------------------------------------------------
(a) Financial Statements
1. The following Financial Statements are filed
herewith as part of Item 8, Financial Statements and Supplementary
Data:
Statements of Consolidated Income for each of the
three years ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996
and 1995
Statements of Consolidated Common Stock Equity
each of the three years ended December 31, 1996,
1995 and 1994
<PAGE>
Statements of Consolidated Cash Flows for each of
three years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Report of Independent Public Accountants
(b) Exhibits required to be filed by Item 601 of Regulation
S-K:
No. Description
---- ---------------------------------------------
2.1 State Gas Pipeline Sale Agreement dated as of April 29, 1996,
between the Secretary for Mines of the State of Queensland,
Australia and PGT Australia Pty Limited, as Trustee of the PGT
Queensland Unit Trust (incorporated by reference to PGT's
Current Report on Form 8-K dated July 15, 1996 (File No. 0-
25842), Exhibit 2).
3.1 Restated Articles of Incorporation of Pacific Gas Transmission
Company effective as of March 6, 1997 (filed herewith).
3.2 By-Laws of Pacific Gas Transmission Company as of January 24,
1997 (filed herewith).
4.1 Senior Trust Indenture Between PGT and The First National Bank
of Chicago, as Trustee (Senior Debt), dated as of May 22,
1995, (incorporated by reference to PGT's Current Report on
Form 8-K dated June 21, 1995 (File No. 0-25842), Exhibit 4.2).
4.2 First Supplemental Indenture Between PGT and The First
National Bank of Chicago, as Trustee (Senior Debt), dated as
of May 30, 1995, (incorporated by reference to PGT's Current
Report on Form 8-K dated June 21, 1995 (File No. 0-25842),
Exhibit 4.3).
4.3 Second Supplemental Indenture Between PGT and The First
National Bank of Chicago as Trustee (Senior Debt), dated as of
June 23, 1995 (incorporated by reference to PGT's Current
Report on Form 8-K dated July 6, 1995 (File No. 0-25842),
Exhibit 4.2).
10.1 Firm Transportation Service Agreement between PGT and Pacific
Gas and Electric Company dated October 26, 1993, Rate Schedule
FTS-1, and general terms and conditions (incorporated by
reference to Pacific Gas and Electric Company (PG&E) Form 10-K
for fiscal year 1993 (File No. 1-2348), Exhibit 10.4).
10.2 Firm Transportation Service Agreements between PGT and
Southern California Edison Company dated December 20, 1993,
and March 2, 1994, Rate Schedule FTS-1 (incorporated by
reference to PGT's Form 10/A (File No. 0-25842), Exhibit
10.2).
10.3 Lease Agreement dated as of April 15, 1994, between PGT and
GIC Development 94-I, L.L.C. (incorporated by reference to
PGT's Form 10/A (File No. 0-25842), Exhibit 10.3).
10.4 Savings Fund Plan for Employees of Pacific Gas Transmission
Company applicable to management employees, effective January
<PAGE>
1, 1995 (incorporated by reference to PGT's Form 10-K for
fiscal year 1995 (File No. 0-25842), Exhibit 10.4).
10.5 Performance Incentive Plan of Pacific Gas Transmission Company
(incorporated by reference to PGT's Form 10-K for fiscal year
1995 (File No. 0-25842), Exhibit 10.5).
10.6 The Pacific Gas and Electric Company Retirement Plan
applicable to non-union employees, as amended October 18,
1995, effective January 1, 1996 (incorporated by reference to
PG&E Form 10-K for fiscal year 1995 (File No. 1-2348), Exhibit
10.8).
10.7 Pacific Gas and Electric Company Supplemental Executive
Retirement Plan, as amended through October 16, 1991
(incorporated by reference to PG&E Form 10-K for fiscal year
1991 (File No. 1-2348), Exhibit 10.11).
10.8 Pacific Gas and Electric Company Stock Option Plan, as amended
effective as of September 16, 1992 (incorporated by
reference to PG&E Form 10-K for fiscal year 1994
(File No. 1-2348), Exhibit 10.13).
10.9 Pacific Gas and Electric Company Performance Unit Plan
(incorporated by reference to PG&E Form 10-K for fiscal year
1991 (File No. 1-2348), Exhibit 10.13).
10.10 Pacific Gas and Electric Company Executive Flexible
Perquisites Program (incorporated by reference to PG&E Form
10-K for fiscal year 1993 (File No. 1-2348), Exhibit 10.16).
10.11 Pacific Gas Transmission Company Retirement Plan for Non-
Employee Directors (incorporated by reference to PGT's Form
10/A (File No. 0-25842), Exhibit 10.13).
10.12 Deferred Compensation Plan of Pacific Gas Transmission Company
(incorporated by reference to PGT's Form 10/A
(File No. 0-25842), Exhibit 10.14).
10.13 Phantom Stock Plan of Pacific Gas Transmission Company
(incorporated by reference to PGT's Form 10/A
(File No. 0-25842), Exhibit 10.15).
10.14 Employment Agreement between Pacific Gas Transmission Company
and Stephen P. Reynolds (incorporated by reference to PGT's
Form 10/A (File No. 0-25842), Exhibit 10.16).
10.15 Employment Agreement between Pacific Gas Transmission Company
and Gary L. Walker (incorporated by reference to PGT's Form
10/A (File No. 0-25842), Exhibit 10.17).
10.16 Employment Agreement between Pacific Gas Transmission Company
and Stanley C. Karczewski (incorporated by reference to PGT's
Form 10/A (File No. 0-25842), Exhibit 10.18).
10.17 Credit Agreement among PGT and the Banks, Co-Agents and Agent
named therein, dated as of May 31, 1995 (incorporated by
reference to PGT's Current Report on Form 8-K dated June 21,
1995 (File No. 0-25842), Exhibit 4.4).
<PAGE>
10.18 First Amendment to Credit Agreement among PGT and the Banks,
Co-Agents and Agent named therein, dated as of September 14, <PAGE>
1995 (incorporated by reference to PGT's 10-K for fiscal year
1995 (File No. 0-25842), Exhibit 10.19).
10.19 Second Amendment to Credit Agreement among PGT and the Banks,
Co-Agents and Agent named therein, dated as of December 24,
1996 (filed herewith).
10.20 Pacific Gas Transmission Company Retirement Plan applicable to
management employees, effective July 1, 1995 (incorporated by
reference to PGT's 10-K for fiscal year 1995
(File No. 0-25842), Exhibit 10.20).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed
herewith).
21 List of Subsidiaries (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed herewith).
23.2 Consent of Independent Public Accountants provided by the
office of the Auditor General of Queensland (incorporated by
reference to the Company's Form 8-K/A No. 1
(File No. 0-25842), Exhibit 23).
24.1 Resolution and Powers of Attorney of the Board of Directors of
Pacific Gas Transmission Company authorizing the execution of
the Form 10-K (filed herewith).
27 Financial Data Schedule (filed herewith).
The exhibits filed herewith are attached hereto (except
as noted) and those indicated above which are not filed herewith were previously
filed with the Commission as indicated and are hereby incorporated by reference.
Exhibits will be furnished to security holders of the Company upon written
request and payment of a fee of $0.30 per page, which fee covers only the
Company's reasonable expenses in furnishing such exhibits. The Company agrees
to furnish to the Securities and Exchange Commission upon request a copy of any
instrument defining the rights of long-term debt holders not otherwise required
to be filed hereunder.
(c) Reports on Form 8-K
Reports on Form 8-K during the quarter ended December
31, 1996 and through the date hereof:
1. January 10, 1997
Item 5. Other Events
- Acquisition of Energy Source Assets
- Holding Company Formation <PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Portland, County of Multnomah, Oregon, on the
28th day of March, 1997.
PACIFIC GAS TRANSMISSION COMPANY
(Registrant)
By: /s/ FRANK R. LINDH
-------------------------
(Frank R. Lindh, Attorney-in-Fact)
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signature Title
Date
Principal Executive Officer
STEPHEN P. REYNOLDS President, Chief Executive Officer and Director
March 28, 1997
Principal Financial and Accounting Officer
STANLEY C. KARCZEWSKI Vice President of Finance and Controller and Chief
Financial Officer March 28, 1997
Directors
JACK F. JENKINS-STARK Chairman of the Board March 28, 1997
TONY F. DISTEFANO Director March 28, 1997
ROBERT D. GLYNN, JR. Director March 28, 1997
GORDON R. SMITH Director March 28, 1997
By: /s/ FRANK R. LINDH
---------------------------------------
(Frank R. Lindh, Attorney-in-Fact) <PAGE>
<PAGE>
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION OF
PACIFIC GAS TRANSMISSION COMPANY
Dated March 6, 1997
JACK F. JENKINS-STARK and FRANK R. LINDH certify that:
1. They are the Chairman of the Board and the Secretary, respectively, of
Pacific Gas Transmission Company, a California Corporation.
2. The Articles of Incorporation of the corporation are amended and restated
to read as follows:
First: That the name of this corporation is PACIFIC GAS TRANSMISSION COMPANY.
Second: The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business,
or the practice of a profession permitted to be incorporated by the
California Corporations Code.
Third: The corporation elects to be governed by all of the provisions of the
General Corporation Law (as added to the California Corporations Code effective
January 1, 1977, and as subsequently amended) not otherwise applicable to this
corporation under Chapter 23 of said General Corporation Law.
Fourth: The corporation is authorized to issue two classes of shares
designated respectively "Common Stock" and "Preferred Stock." The total
numbers of shares of Common Stock is 1,000, and the total number of shares of
Preferred Stock which the corporation is authorized to issue 5,000,000. The
Preferred Stock may be issued from time to time in one or more series. The
Board of Directors is authorized to fix the number of shares of any series of
Preferred Stock and to determine the designation of any such series. The
Board of Directors is also authorized, except as to matters fixed as to
Preferred Stock in this Article Fourth, to determine or alter the rights,
preferences, privileges, and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing the number of shares constituting any series, to increase or decrease
(but not below the number of shares of such series then outstanding) the number
of shares of any such series subsequent to the issue of shares of that series.
Except as otherwise provided by law, the holders of Common Stock shall have and
possess the exclusive right to notice of shareholders' meetings and the
exclusive voting rights and powers, and the holders of Preferred Stock shall not
be entitled to notice of any shareholders' meetings or to vote on the election
of directors or on any other matter.
Fifth: The shares of stock may be offered for sale for money or in exchange
for property, from time to time upon such terms and conditions as the Board of
Directors may prescribe.
<PAGE>
Sixth: The number of directors of this corporation shall be not less than
five (5) nor more than seven (7) as prescribed in the Bylaws.
Seventh: The liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
Eighth: The corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code)
through Bylaws, resolutions, agreements with agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations Code, subject
only to the applicable limits set forth in Section 204 of the California
Corporations Code.
3. The foregoing amendment and the restatement of the Articles of
Incorporation of the corporation have been duly approved by the Board of
Directors.
4. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the required vote of the shareholders in accordance with
Section 902 of the California Corporation Code. The corporation has only one
class of shares outstanding. The total number of outstanding shares of the
corporation entitled to vote on the amendment is 1,000. The number of shares
voting in favor of the amendment exceeded the vote required. The percentage
vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this certificate are true and correct
of our own knowledge.
Dated March 6, 1997.
/s/ JACK F. JENKINS-STARK
-------------------------
Jack F. Jenkins-Stark
Chairman of the Board
/s/ FRANK R. LINDH
-------------------------
Frank R. Lindh
Secretary
<PAGE>
EXHIBIT 3.2
BYLAWS
OF
Pacific Gas Transmission Company
As amended January 24, 1997
ARTICLE 1.
SHAREHOLDERS
1. Place of Meeting. All meetings of the shareholders shall be
held at the office of the Corporation in the City and County of San
Francisco, State of California, or at such other place within the
State of California as may be designated by the Board of Directors.
2. Annual Meetings. The annual meeting of shareholders shall
be held each year at 11:00 a.m. on the first Thursday after the
first Monday in April, if not a legal holiday, or if a legal
holiday, then on the next business day following. Any proper
business pertaining to the affairs of the Corporation may be
transacted at the annual meeting.
Written notice of the annual meeting shall be given not less
than ten or more than sixty days prior to the date of the meeting
to each shareholder entitled to vote thereat. The notice shall
state the place, day and hour of such meeting, and those matters
which the Board, at the time of mailing, intends to present for
action by the shareholders.
Notice of any meeting of the shareholders shall be given
either personally or by mail or telegraphic or other written
communication, postage prepaid, to each holder of record of the
stock entitled to vote thereat, at his address, as it appears on
the books of the Corporation.
3. Special Meetings. Special meetings of the shareholders
shall be called by the Secretary or an Assistant Secretary at any
time on order of the Board of Directors, the Chairman of the
Board, the Chairman of the Executive Committee, or the President.
Special meetings of the shareholders shall also be called by the
Secretary or an Assistant Secretary upon the written request of
holders of shares entitled to cast not less than ten percent of
the votes at the meeting. Such request shall state the purposes
of the meeting, and shall be delivered to the Chairman of the
Board, the Chairman of the Executive Committee, the President, or
the Secretary.
A special meeting so requested shall be held on the date requested,
but not less than thirty-five nor more than sixty days after the
date of receipt of the original request. Written notice of each
special meeting of shareholders, stating the place, day and hour
of such meeting and the business proposed to be transacted
thereat, shall be given in the manner stipulated in Article I,
Section 2, Paragraph 3 of these Bylaws within twenty days after
receipt of the written request.
4. Attendance at meetings. At any meeting of the shareholders,
each holder of record of stock entitled to vote thereat may attend
in person or may designate an agent or a reasonable number of
agents, not to exceed three, to attend the meeting and cast votes
for his shares. The authority of agents must be evidenced by a
written proxy signed by the shareholder designating the
<PAGE>
agents authorized to attend the meeting and be delivered to the
Secretary of the Corporation prior to the commencement of the
meeting.
ARTICLE II.
DIRECTORS
1. Number. The Board of Directors shall consist of five
(5) directors.
2. Powers. The Board of Directors shall exercise all the
powers of the Corporation except those which are by law, or by the
Articles of Incorporation of this Corporation, or by the Bylaws
conferred upon or reserved to the shareholders.
3. Executive Committee. The Board of Directors, by a two-
thirds vote of the whole Board, shall elect from their number an
Executive Committee. Such Executive Committee shall consist of the
Chairman of the Committee, if that office be filled, the Chairman of
the Board, the President, and two other Directors. The members of
the Executive Committee shall hold office at the pleasure of the
Board of Directors, and may be removed at any time by an affirmative
vote of two-thirds of the whole Board.
The Executive Committee, subject to the provisions of law,
may exercise any of the powers and perform any of the duties of
the Board of Directors; but the Board may by an affirmative vote
of a majority of its members withdraw or limit any of the powers
of the Executive Committee.
The Executive Committee, by a vote of a majority of its members,
shall fix its own time and place of meeting and shall prescribe its
own rules of procedure. A quorum of the Committee for the
transaction of business shall consist of two members.
4. Time and Place of Directors' Meetings. Regular meetings
of the Board of Directors shall be held on such days and at such
times and at such locations as shall be fixed by resolution of the
Board, or designated by the Chairman of the Board or, in his
absence, the President of the Corporation and contained in the
notice of any such meeting. Notice of meetings shall be delivered
personally or sent by mail or telegram at least seven days in
advance. A meeting of the Board of Directors shall also be held
immediately after each annual meeting of the shareholders.
5. Special Meetings. The Chairman of the Board, the Chairman
of the Executive Committee, the President, or any four Directors may
call a special meeting of the Board of Directors at any time.
Notice of the time and place of special meetings shall be given to
each Director by the Secretary. Such notice shall be delivered
personally or by telephone to each Director at least four hours in
advance of such meeting, or sent by first-class mail or telegram,
postage prepaid, at least two days in advance of such meeting.
6. Quorum. A quorum for the transaction of business at any
meeting of
<PAGE>
the Board of Directors shall consist of three members.
7. Action by Consent. Any action required or permitted to
be taken by the Board of Directors may be taken without a meeting if
all Directors individually or collectively consent in writing to
such action. Such written consent or consents shall be filed with
the minutes of the proceedings of the Board of Directors.
8. Method of Meeting. Any meeting, regular or special, of
the Board of Directors or any committee of the Board, including the
Executive Committee, may be held by conference telephone or similar
communication equipment as long as all Directors participating in
the meeting can hear one another. Directors participating in any
meeting in this fashion shall be deemed to be present in person at
such meeting.
ARTICLE III.
OFFICERS
1. Officers. The officers of the Corporation shall be a
Chairman of the Board, a Chairman of the Executive Committee
(whenever the Board of Directors in its discretion fills these
offices), a President, one or more Vice Presidents, a
Secretary and one or more Assistant Secretaries, a Treasurer and
one or more Assistant Treasurers, a General Counsel, and a
Controller, all of whom shall be elected by the Board of
Directors. The Chairman of the Board, the Chairman of the
Executive Committee, and the President shall be members of the
Board of Directors. Any two or more offices, except those of
President and Secretary, may be held by the same person.
2. Chairman of the Board. The Chairman of the Board, if
that office be filled, shall preside at all meetings of the
shareholders, of the Directors, and of the Executive Committee in
the absence of the Chairman of that Committee. He shall be the
chief executive officer of the Corporation if so designated by the
Board of Directors. He shall have such duties and
responsibilities as may be prescribed by the Board of Directors or
the Bylaws. The Chairman of the Board shall have authority to sign
on behalf of the Corporation agreements and instruments of every
character, and in the absence or disability of the President,
shall exercise his duties and responsibilities.
3. Chairman of the Executive Committee. The Chairman of the
Executive Committee, if that office be filled, shall preside at all
meetings of the Executive Committee, and in the absence of the
Chairman of the Board, shall preside at all meetings of the Board of
Directors and of the shareholders.
The Chairman of the Executive Committee, in the absence or
disability of the Chairman of the Board and the President, shall
exercise their duties and responsibilities. He shall aid and
assist the other officers in the performance of their duties and
shall have such other duties as may be prescribed by the Board of
Directors or the Bylaws.
4. President. The President shall have such duties and
responsibilities as may be prescribed by the Board of Directors,
the Chairman of the Board or the Bylaws. He shall be the chief
executive officer of the
<PAGE>
Corporation if so designated by the Board of Directors. If there
be no Chairman of the Board and no Chairman of the Executive
Committee available and able to act, the President shall also
exercise the duties and responsibilities of both those offices.
The President shall have authority to sign on behalf of the
Corporation agreements and instruments of every character.
5. Vice Presidents. Each Vice President shall have such duties
and responsibilities as may be prescribed by the Board of Directors,
the Chairman of the Board, the President or the Bylaws. Each Vice
President's authority to sign agreements and instruments on behalf
of the Corporation shall be as prescribed by the Board of
Directors. The Board of Directors, the Chairman of the Board or
the President may confer a special title upon any Vice President.
6. Secretary. The Secretary shall attend all meetings of the
Board of Directors and the Executive Committee, and all meetings of
the shareholders, and he shall record the minutes of all proceedings
in books to be kept for that purpose. He shall be responsible for
maintaining a proper share register and stock transfer books for
all classes of shares issued by the Corporation. He shall give, or
cause to be given, all notices required either by law or the
Bylaws. He shall keep the seal of the Corporation in safe
custody, and shall affix the seal of the Corporation to any
instrument requiring it and shall attest the same by his
signature.
The Secretary shall have such other duties as may be prescribed
by the Board of Directors, the Chairman of the Board, the President,
or the Bylaws.
The Assistant Secretaries shall perform such duties as may be
assigned from time to time by the Board of Directors, the Chairman
of the Board, the President, or the Secretary. In the absence or
disability of the Secretary, his duties shall be performed by an
Assistant Secretary.
7. Treasurer. The Treasurer shall have custody of all
moneys and funds of the Corporation, and shall cause to be kept
full and accurate records of receipts and disbursements of the
Corporation. He shall deposit all moneys and other valuables of the
Corporation in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. He
shall disburse such funds of the Corporation as have been duly
approved for disbursement.
The Treasurer shall perform such other duties as may from time to
time be prescribed by the Board of Directors, the Chairman of the
Board, the President, or the Bylaws.
The Assistant Treasurers shall perform such duties as may be
assigned from time to time by the Board of Directors, the Chairman
of the Board, the President, or the Treasurer. In the absence or
disability of the Treasurer, his duties shall be performed by an
Assistant Treasurer.
8. General Counsel. The General Counsel shall be
responsible for handling on behalf of the Corporation all
proceedings and matters of a legal nature. He shall render
advice and legal counsel to the Board of Directors, officers and
employees of the Corporation, as necessary to the proper conduct
of the business. He shall keep the management of the Corporation
informed of all significant developments of a legal nature
affecting the interests of the Corporation.
<PAGE>
The General Counsel shall have such other duties as may from time
to time be prescribed by the Board of Directors, the Chairman of the
Board, the President, or the Bylaws.
9. Controller. The Controller shall be responsible for maintaining
the accounting records of the Corporation and for preparing
necessary financial reports and statements, and he shall properly
account for all moneys and obligations due the Corporation and all
properties, assets, and liabilities of the Corporation. He shall
render to the Chairman of the Board, The Chairman of the Executive
Committee, and the President such periodic reports covering the
results of operations of the Corporation as may be required by them
or any one of them.
The Controller shall have such other duties as may from time to
time be prescribed by the Board of Directors, the Chairman of the
Board, the President, or the Bylaws.
ARTICLE IV.
GENERAL CORPORATE MATTERS
1. Record Date. The Board of Directors may fix a time in the future <PAGE>
as a record date for the determination of the shareholders entitled to
notice of and to vote at any meeting of shareholders, or entitled to
receive any dividend or distribution, or allotment of rights, or to
exercise rights in respect to any change, conversions or exchange of
shares. The record date so fixed shall be not more than sixty nor less
than ten days prior to the date of such meeting nor more than sixty days
prior to any other action for the purposes for which it is fixed. When
a record date is so fixed, only shareholders of record on that date are
entitled to notice of and to vote at the meeting, or entitled to receive
any dividend or distribution, or allotment of rights, or to exercise the
rights, as the case may be.
2. Transfer of Stock. Upon surrender to the Secretary or Transfer
Agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment, or authority
to transfer, and payment of transfer taxes, the Corporation shall issue
a new certificate to the person entitled thereto, cancel the old
certificate, and record the transaction upon its books. Subject to the
foregoing the Board of Directors shall have power and authority to make
such rules and regulations as it shall deem necessary or appropriate
concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation, and to appoint and remove Transfer
Agents and Registrars of transfers.
3. Lost Certificates. Any person claiming a certificate of stock to
be lost, stolen, mislaid or destroyed shall make an affidavit or
affirmation of that fact and verify the same in such manner as the Board
of Directors may require, and shall, if the Board of Directors so
requires, give the Corporation, its Transfer Agents, Registrars and/or
other agents a bond of indemnity in form approved by counsel, and in
amount and with such sureties as may be satisfactory to the Secretary of
the Corporation, before a new certificate may be issued of the same
tenor and for the same number of shares as the one alleged to have been
lost, stolen, mislaid or destroyed.
<PAGE>
4. Annual Report to Shareholders. For so long as this Corporation has
fewer than 100 shareholders, the annual report to shareholders referred
to in Section 1501 of the California General Corporation Law is
expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the Board of Directors from issuing annual or other periodic
reports to the shareholders of the corporation as they consider proper.
5. Corporate Contracts and Instruments. The Board of Directors,
except as otherwise provided in these Bylaws, may authorize any officer
or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Corporation, and this
authority may be general or confined to specific instances; and,
unless so authorized or ratified by the Board of Directors or within
the agency power of an officer, and except as provided in these
Bylaws, no officer, agent, or employee shall have any power
or authority to bind the corporation by any contract or engagement
or to pledge its credit or to render it liable for any purpose or
for any amount.
6. Construction and Definitions. Unless the contract requires
otherwise, the general provisions, rules of construction, and
definitions in the California General Corporation Law shall govern the
construction of these Bylaws.
7. Shares of Other Corporations: How Voted. Shares of other
corporations standing in the name of this Corporation shall be voted by
one of the following persons, listed in order of preference: (1) the
Chairman of the Board, or person designated by the Chairman of the
Board; (2) the President, or person designated by the President;
(3) the Secretary, or person designated by the Secretary; (4) any
other person designated by the Board of Directors. The authority
to vote share granted by this section includes the authority to
execute a proxy in the name of this Corporation for purposes of
voting the shares.
ARTICLE V.
AMENDMENTS
1. Amendment by Shareholders. Except as otherwise provided by
law, these Bylaws, or any of them, may be amended or repealed or new
Bylaws adopted by the affirmative vote of a majority of the outstanding
shares entitled to vote at any regular or special meeting of the
shareholders, provided, however, that the range for the authorized
number of directors may be changed only by an amendment of the
Articles of Incorporation.
2. Amendment by Directors. To the extent provided by law,
these Bylaws, or any of them, may be amended or repealed or new Bylaws
adopted by resolution adopted by a majority of the members of the Board
of Directors, provided, however, that the Board of Directors may
adopt a Bylaw or amendment of a Bylaw changing the authorized
number of directors only for the purpose of fixing the exact
number of directors within the limits specified in the Articles of
Incorporation.
<PAGE>
EXHIBIT 10.19
SECOND AMENDMENT TO CREDIT AGREEMENT among
PACIFIC GAS TRANSMISSION COMPANY, as the Company,
and
CERTAIN COMMERCIAL LENDING INSTITUTIONS, as the Banks, and
THE BANK OF NOVA SCOTIA, BARCLAYS BANK PLC, and
THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agents for the Banks,
and
CANADIAN IMPERIAL BANK OF COMMERCE, as Agent for the Banks
Dated as of December 24, 1996
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of December 24,
1996 (this "Amendment"), is entered into by and among PACIFIC GAS
TRANSMISSION COMPANY, a corporation duly organized and validly existing
under the laws of the State of California (the "Company"), the various
financial institutions as are or may become parties hereto (collectively, the
"Banks"), THE BANK OF NOVA SCOTIA, BARCLAYS BANK PLC and THE FIRST NATIONAL
BANK OF CHICAGO, as co-agents for the Banks (the "Co-Agents"), and CANADIAN
IMPERIAL BANK OF COMMERCE ("CIBC"), acting through certain of its U.S.
branches or agencies, as Agent (the "Agent") for the Banks.
W I T N E S S E T H:
WHEREAS, the Company, the Banks, the Co-Agents and the Agent have
heretofore entered into a certain Credit Agreement, dated as of May 31, 1995,
as previously amended (the "Credit Agreement"); and
WHEREAS, the Company, the Banks, the Co-Agents and the Agent now intend to
amend the Credit Agreement (i) to add a letter of credit subfacility and (ii)
to address various other issues in connection therewith,
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, each of the Company, the Banks, the Co-Agents
and the Agent agree as follows:
SECTION 1. Amendments to Credit Agreement.
---------------------------------------------
A. Section 1.1 of the Credit Agreement is amended by adding the
following definitions in the appropriate alphabetical order:
"Agreed Currency" is defined in Section 6.1.1.
"Approved Account Party" shall mean, at any time, any Person listed
on Schedule A attached hereto or designated in writing by the
Company to the Agent.
"Cash Collateral" is defined in Section 2.10.7.
"Cash Equivalent Investments" shall mean, at any time:
(a) any evidence of Indebtedness, maturing not more than one year after such
time, issued or guaranteed by the United States Government;
(b) commercial paper, maturing not more than nine months from the date of
issue, which is issued by (i) a corporation (other Than an Affiliate of the
Company) organized under the laws of any state of the United States or of
the District of Columbia and rated A-l by Standard & Poor's Corporation or
P-l by Moody's Investors Service, Inc., or (ii) any Bank (or its holding
company);
(c) any certificate of deposit or bankers acceptance, maturing not
more than one year after such time, which is issued by either
(i) a commercial banking institution that is a member of the Federal
Reserve System and has a combined capital and surplus and undivided
profits of not less than $500,000,000, or (ii) any Bank; or
(d) any repurchase agreement entered into with any Bank (or
other commercial banking institution of the stature referred to in
clause (c)(i)) which (i) is secured by a fully perfected security
interest in any obligation of the type described in any of clauses
(a) through (c); and (ii) has a market value at the time
such repurchase agreement is entered into of not less than 100% of
the repurchase obligation of such Bank (or other commercial
banking institution) thereunder.
<PAGE>
"Dollar Equivalent" shall mean, (i) with respect to Dollars or an
amount denominated in Dollars, such amount, and (ii) with respect to any
monetary amount in a currency other than Dollars, at any time for the
determination thereof, the amount of Dollars obtained by converting such
foreign currency involved in such computation into Dollars at the spot
rate for the purchase of Dollars with the applicable foreign
currency as quoted by the Issuer at approximately 11:00 a.m. on the
date of determination thereof specified herein.
"Issuance Request" shall mean an application for a Letter of Credit
duly executed by an Authorized Signatory of the Company, substantially in
the form of Exhibit L hereto or in such other form satisfactory to the
Issuer, in its sole discretion.
"Issuer" shall mean CIBC in its capacity as issuer of the Letters of
Credit and each other Person as shall have been subsequently appointed as
the successor Issuer pursuant to Section 13.8.
"Judgment Currency" is defined in Section 6.1.2.
"Letter of Credit" is defined in Section 2.10.
"Letter of Credit Cash Collateral Account" is defined in Section
2.10.7.
"Letter of Credit Commitment" shall mean the Issuer's obligation to issue
Letters of Credit for the account of the Company pursuant to Section 2.10 and,
with respect to each of the other Banks, the obligation of each such Bank to
participate in such Letter of Credit pursuant to Section 2.10.1.
"Letter of Credit Commitment Amount" shall mean, on any date, a maximum
Dollar Equivalent amount equal to the lesser of (i) $70,000,000 or (ii)
the Loan Commitment, as such amount may be reduced from time to time
pursuant to Section 2.5.
"Letter of Credit Outstandings" shall mean, on any date, an amount equal to
the sum of (a) the then aggregate Dollar Equivalent amount which is undrawn
and available under all issued and outstanding Letters of Credit, plus (b) the
then aggregate amount of all Reimbursement Obligations then outstanding with
respect to the amount of any drawing made under any Letters of Credit.
"Loan Commitment" shall mean, as to each Bank, the obligation of such Bank
to make Committed Advances in an aggregate amount at any one time outstanding
equal to the amount set opposite such Bank's name on the signature pages
hereof under the caption "Commitment" (as the same may be reduced pursuant to
Section 2.5 hereof).
"Other Currency" is defined in Section 6.1.1.
"Permitted Currency" shall mean Dollars and Canadian Dollars, and such
other currencies of major industrialized nations as shall be designated by
the Company and acceptable to the Agent and the Issuer, each in their sole
and absolute discretion.
"Reimbursement Obligations" shall mean the obligation of the
Company to reimburse the Issuer and the Banks, as applicable, for the
Dollar Equivalent of the drawings made under the Letters of Credit, or any
of the Letters of Credit.
"Stated Amount" shall mean, with respect to any Letter of Credit, the
Dollar equivalent amount available to be drawn under such Letter of
Credit upon the issuance thereof.
"Stated Expiry Date" of each Letter of Credit is defined in Section 2.10.
B The subsection (b) of the definition of "Indebtedness" in Section 1.1 of the
Credit Agreement is amended in its entirety as follows:
" (b) all obligations relative to the Dollar Equivalent of the
face amount of all letters of credit, including, without limitation,
the Letters of Credit, and banker's acceptances issued for the
account of such Person or other Approved Account Party;"
C. The definition of "Applicable Margin" in Section 1.1 of
the Credit Agreement is amended by inserting after the words "LIBOR Advance" in
the first line thereof the phrase "or in connection with the issuance of a
Letter of Credit".
D. The definitions of "Adjusted Available Facility Amount", "Advance",
"Advance Request", "Available Facility Amount", "Commitment", "Commitment
Proportion", "Drawdown Date", "Facility", "Loan Document", "Majority Banks",
"Obligations" and "Total Commitments" in Section 1.1 of the Credit Agreement
are respectively amended in their entirety as follows:
"Adjusted Available Facility Amount" shall mean, at any time and in respect of
any proposed Advance, the Available Facility Amount at such time:
(i) increased to take account of any Advances which shall become repayable on
or before the Drawdown Date of the proposed Advance in question and to take
into account any decrease in Letter of Credit Outstandings which shall become
effective
<PAGE>
on or before such Drawdown Date; and (ii) reduced to take account of any
Advance which is to be made on or before such Drawdown Date (but
excluding the proposed Advance in question) and to take into
account any increase in Letter of Credit Outstandings which
shall become effective on or before such Drawdown Date and to take
account of any reduction in the Total Commitments which shall become
effective on or before such Drawdown Date.
"Advance" shall mean, except as otherwise provided herein, any LIBOR
Advance, Reference Rate Advance, Competitive Bid Advance and/or issuance of
any Letter of Credit or the extension of the Stated Expiry Date of any Letter
of Credit.
"Advance Request" shall mean any LIBOR Advance Request, Reference Rate
Advance Request, Competitive Bid Advance Request or Issuance Request.
"Available Facility Amount" shall mean at any time the Total Commitments
less the sum of (i) the Advance Outstandings at such time and (ii) the Letter
of Credit Outstandings at such time.
"Commitment" means, as the context may require, a Bank's or Issuer's
Letter of Credit Commitment or Loan Commitment.
"Commitment Proportion" shall mean, in relation to a Bank, at any time
the proportion which its Loan Commitment bears to the Total Commitments at such
time.
"Drawdown Date" shall mean: (i) in relation to any LIBOR Advance, the
Business Day for the making thereof as specified in the LIBOR Advance Request
relating thereto; (ii) in relation to any Reference Rate Advance, the
Business Day for the making thereof as specified in the Reference Rate Advance
Request relating thereto; (iii) in relation to any Competitive Bid Advance, the
Business Day for the making thereof as specified in the Competitive Bid Advance
Request relating thereof or as agreed to between the Company and a Bank pursuant
to Article 5, and(iv)in relation to any issuance of a Letter of Credit, the
Business Day for the issuance thereof as specified in the Issuance Request
relating thereto.
"Facility" shall mean the committed advance facility which may be utilized
subject to the other terms and provisions hereof for LIBOR Advances, Reference
Rate Advances and the issuance of Letters of Credit which is evidenced by the
Revolving Notes and Competitive Bid Advances which is evidenced by the
Competitive Bid Notes.
"Loan Document" means this Agreement, the Notes, each Advance Request,
each Letter of Credit and any other agreement, document or instrument from time
to time executed and delivered pursuant to and in connection with any of the
foregoing.
"Majority Banks" shall mean, at any time while Commitments are in
effect, Banks having at least 51% of the aggregate amount of the Commitments
and, at any time while no Commitments are in effect, Banks holding at least
51% of the outstanding aggregate principal amount of the Advances and the
Letter of Credit Outstandings.
"Obligations" means all obligations (monetary or otherwise) of the
Company arising under or in connection with this Agreement, the Notes, any
Letters of Credit and each other Loan Document.
"Total Commitments" shall mean the aggregate from time to time of the
Banks' Loan Commitments.
E . Section 1.2 (i) of the Credit Agreement is amended in its entirety to
read as follows:
" (i) any of the "Company," the "Agent", the
"Issuer" or the "Banks" shall be construed so
as to include their respective successors, permitted assigns
and, in the case of the Banks, transferees;".
F. Section 2.1 of the Credit Agreement is amended by (x)
deleting the "and" at the end of clause (ii), (y) replacing the period at the
end of clause (iii) with "; and"; and (z) by inserting the following clause (iv)
following clause (iii) thereof:
" (iv) the Issuer agrees that it will issue Letters of Credit
denominated in a Permitted Currency in accordance with Section 2.10, and each
Bank severally agrees that it will purchase participation interests in
such Letters of Credit in accordance with Section 2.10.4."
G Section 2.2 of the Credit Agreement is amended in its
entirety to read as follows:
" Section 2.2 Maximum Outstandings. Subject to
cancellation and reduction in accordance with the terms hereof, the maximum
aggregate principal amount of the Facility which may be utilized at any
time for Advances and the issuance of Letters of Credit is $200,000,000.
In no event, however, shall (a) the sum of (i)aggregate Advance
Outstandings at any time and (ii) aggregate Letter of Credit Outstandings
at any time exceed the principal amount
<PAGE>
of $200,000,000 or such lesser amount as from time to time may result from
any reduction pursuant to Section 2.5 hereof, or (b) the aggregate Letter
of Credit Outstandings at any time exceed the Letter of Credit Commitment
Amount."
H . Section 2.5 of the Credit Agreement is amended in its entirety to
read as follows:
Section 2.5 Changes in Commitments Section 2.5 Changes in
Commitments. The Company shall have the right in accordance with
Section 7.1 hereof to terminate or reduce the amount of the Commitments
at any time or from time to time to an amount not less than the sum of (i)
Advance Outstandings, if any, and (ii) Letter of Credit Outstandings, if
any, at the effective date of such termination or reduction, upon not less
than three (3) Business Days' prior notice to the Agent (which shall
promptly notify the Banks) of each such termination or reduction, which
shall specify the effective date thereof and the amount of any such
reduction (which shall not be less than $5,000,000 and, if more than
$5,000,000, in integral multiples of $1,000,000) and shall be irrevocable
and effective only upon receipt by the Agent. The Commitments once
terminated or reduced may not be reinstated."
I. Section 2.6 of the Credit Agreement is hereby amended by inserting
the following subsection (c) following subsection (b):
" (c) Letter of Credit Fees. The Company agrees to pay:
(i) to the Agent for the account of each Bank a nonrefundable
issuance fee equal to the rate per annum equal to the Applicable
Margin on the Stated Amount of each such Letter of Credit,
in each case multiplied by such Bank's Commitment Proportion,
such fees being payable quarterly in arrears on each Quarterly
Date and on the Final Repayment Date; and
(ii) to the Agent for its own account a non refundable fronting fee
equal to 0.0625% of the Stated Amount of each such Letter of
Credit, such fee being payable quarterly in arrears on each
Quarterly Date and on the Final Repayment Date, together with
customary administrative, issuance, amendment, payment and
negotiation charges incurred by the Issuer in connection with
such Letter of Credit."
J. . Subsection 2.8(b) of the Credit Agreement is hereby amended in its
entirety to read as follows:
" (b) If, at any time, the sum of (i) the outstanding aggregate
principal amount of the Advances and (ii) the Letter of Credit Outstandings
exceeds the aggregate amount of the Commitments as then in effect, the
Company shall (i) pay or prepay the Advances and (ii) deposit Cash
Collateral with the Agent in accordance with the provisions of Section
2.10.7 on such date in an aggregate principal amount equal to the excess,
together with interest thereon accrued to the date of such payment or
prepayment and any amounts payable pursuant to Section 8.11 hereof in
connection therewith. If, at any time, the Letter of Credit Outstandings
exceeds the Letter of Credit Commitment Amount as then in effect, the
Company shall deposit Cash Collateral with the Agent in accordance with
the provisions of Section 2.10.7 on such date in an aggregate principal
amount equal to such excess."
K. Article 2 of the Credit Agreement is hereby amended by inserting the
following Section 2.10 following Section 2.9:
"Section 2.10 Letters of Credit. The Issuer agrees to issue under the
several obligations of the Banks in accordance with their respective
Letter of Credit Commitments, or extend the Stated Expiry Date of, from
time to time on any Business Day occurring prior to the Final Repayment
Date, one or more standby letters of credit (herein individually referred
to as a "Letter of Credit" and collectively referred to as "Letters of
Credit") denominated in a Permitted Currency at the request of the
Company and for the account and for the general purposes of the Company or
an Approved Account Party. Each Letter of Credit shall be substantially
upon such terms as the Company may specify in an Issuance Request therefor
duly executed by an Authorized Signatory of the Company and delivered to
the Issuer and the Agent on or before 11:00 a.m., New York time, on a
Business Day, at least three (3) Business Days before the requested
issuance of such proposed Letter of Credit. Each Letter of Credit must be
in form and substance satisfactory to the Issuer, in its sole discretion,
and shall have a fixed expiration date (with respect to each Letter of
Credit, its "Stated Expiry Date") occurring not later than one year after
the date of the issuance thereof (and in no event later than the Final
Repayment Date, as in effect from time to time). Each Bank (other than
the Issuer) severally agrees that it will hold participation interests in
each Letter of Credit as provided to Section 2.10.1. The Issuer will make
available to the beneficiary thereof the original of each Letter of Credit
which it issues hereunder and will notify the beneficiary under any Letter
of Credit of any extensions of the Stated Expiry Date thereof. In the
event that any Letters of Credit remain outstanding after the Final
Repayment Date, upon such Final Repayment Date, the Company (if it has not
already done so) shall deposit with the Agent an amount in cash equal to
the aggregate amount of Letter of Credit Outstandings attributable to
such Letters of Credit, which cash amount shall be held as Cash Collateral
in accordance with the provisions of Section 2.10.7.
<PAGE>
Section 2.10.1 Other Banks' Participation. Upon the issuance of each
Letter of Credit, and without further action, each Bank (other than the
Issuer) shall be deemed to have irrevocably and unconditionally
purchased, to the extent of its Commitment Proportion, a participation
interest in such Letter of Credit. Each Bank shall, to
the extent of its Commitment Proportion, be responsible for
reimbursing promptly (and in any event within one (1) Business Day),
without setoff, deduction or counterclaim, the Issuer for
Reimbursement Obligations which have not been reimbursed by the
Company in accordance with Section 2.10.2. Without limiting the
foregoing, the Issuer will promptly notify the Banks of the issuance of
each Letter of Credit.
Section 2.10.2 Company's Agreement to Repay Letter of Credit Drawings. The
Company hereby irrevocably and unconditionally agrees to reimburse the
Issuer, forthwith, for each payment or disbursement made by the Issuer to
settle its obligations under any draft drawn under any Letter of Credit,
with interest on the amount so paid or disbursed by the Issuer from and
including the date of payment or disbursement to but not including
the date the Issuer is reimbursed therefor, at a fluctuating rate per
annum equal to (i) for each day in the period commencing on and including
the day such payment or disbursement is made to and including the date
three (3) Business Days after the Issuer gives notice of such payment or
disbursement to the Company, the Reference Rate from time to time in effect
or such other higher interest rate, if any, then applicable to Reference
Rate Advances, and (ii) for any day thereafter to but not including the
day of payment in full, the sum of the Reference Rate from time to time
in effect plus two percent (2%). The Issuer shall promptly give
notice to the Company by telephone, confirmed by telecopy to the
Company's treasury
department, of each receipt by the Issuer of a drawing under a Letter of
Credit that appears on its face to conform to the requirements of such
Letter of Credit. No later than 11:00 a.m., New York time, on the day
which is three (3) Business Days after the date on which a payment to
a beneficiary of a Letter of Credit occurs pursuant to a draw thereunder,
the Company shall pay to the Issuer in immediately available funds for
its account at the Payment Office the amount of such draw plus accrued
interest at the rate set forth above. The foregoing notwithstanding, the
obligation of the Company to reimburse the Issuer is not subject to
demand thereof by the Issuer (or any Bank) and any failure by the
Issuer (or any Bank)to notify the Company pursuant to the provisions
of this Section shall in no way affect or impair the Reimbursement
Obligations of the Company under the Letter of Credit, this Agreement, the
Issuance Requests or any other Loan Document.
Section 2.10.3 Absolute Duty to Reimburse for Letter of Credit
Liabilities2.10.3 Absolute Duty to Reimburse for Letter of Credit
Liabilities. Any provision in this Agreement or in any other Loan
Document to the contrary notwithstanding, the Company's obligation to
reimburse the Issuer and the Banks, as applicable,
for any payment or disbursement under or in connection with a Letter of Credit
shall be absolute and unconditional under any and all circumstances
without and irrespective of any setoff, counterclaim or other defense to payment
which the Company may have or have had against the Issuer or any Bank or any
other Person. Without limiting the generality of the foregoing, the Company
assumes all risks of the acts or omissions of any beneficiary or transferee
of any Letter of Credit with respect to its use of the Letter of Credit and
none of the Issuer, any Bank or any of their respective officers or directors
shall be liable or responsible for (i) the use which may be made of any Letter
of Credit or any acts or omissions of any beneficiary or transferee in
connection therewith, (ii) the validity, sufficiency or genuineness of
documents, or of any endorsement thereon, even if such documents should prove
to be in any or all respects invalid, insufficient, fraudulent or forged
(and each of the Issuer, any Bank, and any corresponding bank may accept
documents that appear on their face to be in order, without responsibility
for further investigation, regardless of any notice or information to the
contrary), (iii) the enforceability of any instrument or document which is
supported by a Letter of Credit, or (iv) any other circumstances whatsoever
in making or failing to make payment under any Letter of Credit other than
as a result of the willful misconduct or gross negligence by the Issuer or
such Bank. None of the foregoing shall affect, impair, or prevent the
vesting of any of the rights or powers granted the Issuer or any Bank
hereunder. In furtherance and extension, and not in limitation or
derogation, of any of the foregoing, any action taken or omitted to be taken
by the Issuer in good faith (and not constituting gross negligence or wilful
misconduct) shall be binding upon the Company and each Bank and shall not
put such Issuer under any resulting liability to the Company or any Bank, as the
case may be.
Section 2.10.4 Reimbursement Obligations of the Banks
under the Letters of Credit. If the Company shall fail pursuant to the
terms of Section 2.10.2 forthwith to reimburse the Issuer for each payment
of disbursement made by the Issuer to settle its obligations under
any draft drawn under
any Letter of Credit, then upon demand by the Issuer each Bank shall forthwith
make available to the Issuer at the Payment Office (or other office or
branch of a financial institution which Issuer may designate from time to
time by written notice to the Banks) immediately available funds in an
amount equal to such Bank's pro rata share (according to its respective
Commitment Proportion) of the amount so paid or disbursed by the Issuer.
Each Bank shall indemnify and hold harmless the Issuer from and against
any and all losses, liabilities (including, without limitation, liabilities
for penalties, actions, suits, judgments, demands and damages) costs and
expenses (including, without limitation, attorneys' fees and expenses)
resulting from any failure on the part of such Bank to provide, or from any
delay in providing, the Issuer with such Bank's share of the
<PAGE>
amount of any payment or disbursement made by the Issuer to settle
its obligations under any draft drawn under any Letter of Credit in
accordance with the provisions of the preceding sentence.
The obligations of each Bank to provide the Issuer with such Bank's pro
rata share of the amount of any payment or disbursement made by the Issuer
to settle its obligations under any draft drawn under any Letter of Credit in
accordance with the provisions of the preceding paragraph shall be absolute
and unconditional under any and all circumstances and irrespective of any
setoff, counterclaim or defense to payment which such Bank may have or have
had against the Issuer, including, without limitation, any defense based on
the failure of the demand for payment under such Letter of Credit to conform to
the terms of such Letter of Credit or the legality, validity, regularity or
enforceability of such Letter of Credit AND INCLUDING BUT NOT LIMITED TO THOSE
RESULTING FROM THE ISSUER'S OWN SIMPLE OR CONTRIBUTORY NEGLIGENCE; provided,
however, that no Bank shall be obligated to reimburse the Issuer pursuant
to the preceding provisions of this Section 2.10.4 for any wrongful payment or
disbursement made by the Issuer under any Letter of Credit as a result of
acts or omissions constituting gross negligence or willful misconduct on the
part of the Issuer or any of its officers, employees or agents.
Section 2.10.5 Letter of Credit Operations. The Issuer
shall, promptly following its receipt thereof, examine all documents purporting
to represent a demand for payment by a beneficiary under a Letter of Credit to
ascertain that the same appear on their face to be in conformity with the
terms and conditions of such Letter of Credit. If, after examination, the
Issuer shall have determined that a demand for payment under such Letter of
Credit does not conform to the terms and conditions of such Letter of Credit,
then the Issuer shall, as soon as reasonably practicable, give notice to such
beneficiary to the effect that such demand for payment was not in accordance
with the terms and conditions of such Letter of Credit, stating the
reasons therefor. Thereupon, such beneficiary may attempt to correct any
such non-conforming demand for payment under such Letter of Credit if, and
to the extent that, such beneficiary is entitled (without regard to the
provisions of this sentence) and able to do so. The Issuer hereby further
agrees to notify the Company of any demand for payment by a beneficiary under
a Letter of Credit which in the Issuer's determination does not conform
to the terms and conditions of the relevant Letter of Credit; provided,
however, that failure to give any such notification to the Company shall not
affect or otherwise impair the Company's obligations hereunder or under the
Issuance Request or any other Loan Documents nor subject the Issuer to any
claim or liability. After determining that a demand for payment under such
Letter of Credit conforms to the terms and conditions thereof, the Issuer
shall make available to such beneficiary, in immediately available funds, the
amount so demanded in accordance with the terms of such Letter of Credit.
Section 2.10.6 Action With Respect to Letters of Credit Upon Occurrence
of Default. Upon the occurrence of a Default under Sections (e) or (f) of
Article 12, an amount equal to the amount of the then contingent liability
of the Issuer (and the other Banks) under each outstanding Letter of Credit
shall be, without demand upon or notice to the Banks, and, upon the
occurrence of any other Event of Default, an amount equal to the amount of
the then contingent liability of the Issuer (and the other Banks) under each
outstanding Letter of Credit shall be, at the option of the Agent and without
demand upon or notice to the Banks, deemed (as between the Company and the
Issuer) to have been paid or disbursed by the Issuer under such Letters of
Credit (notwithstanding that such amount may not in fact have been so paid
or disbursed), and the Company shall be obligated (i) forthwith to
reimburse the Issuer for the amount deemed to have been so paid or disbursed
by the Issuer, and (ii) if the Issuer, in its discretion, so demands, to pay to
the Issuer, forthwith on demand, such additional amounts as may be required so
that the aggregate of all amounts previously paid by the Company to the Issuer
under this Section 2.10.6, and not theretofore applied to the payment of
amounts payable by the Company to the Issuer with respect to such Letter of
Credit shall equal the amount of the then contingent liability of the Issuer
(and the other Banks) under such Letter of Credit. Such amount shall be paid
by depositing Cash Collateral with the Agent in accordance with the provisions
of Section 2.10.7.
Section 2.10.7 Procedures for Depositing, Investing and Returning
of Cash Collateral. Any cash collateral amounts received by the Agent
pursuant to the provisions of Section 2.8(b), Section 2.10 or Section
2.10.6 (such cash collateral amounts, the "Cash Collateral") shall be deposited
in a cash collateral account (the "Letter of Credit Cash Collateral
Account") maintained at the offices of the Agent or such other Bank or
other Person acting as bailee for the Agent as the Agent shall designate but
under the sole dominion and control of the Agent and shall be retained by
the Agent for the pro rata benefit of the Issuer and the Banks in accordance
with the Letter of Credit Outstandings owing to them as collateral
security for, and the Company hereby grants to the Agent and its bailees or
agents for the benefit of the Issuer, the Agent and the Banks a security
interest in such Cash Collateral including all interest accruing thereon and
the proceeds thereof. The Company further agrees that the Agent shall have all
of the rights and remedies of a secured party under the Uniform
Commercial Code as adopted in the State of New York with respect to such
security interest and that an Event of Default under this Agreement shall
constitute a default for purposes of such security interest. Any amounts so
received by the Agent pursuant to the provisions of the preceding sentence
shall be held as collateral security for, first, the repayment of the
Company's Obligations in connection with the Letters of Credit and then the
other Obligations of the Company under or in connection with this Agreement
and any other Loan Documents. If and to the extent that (a) all
<PAGE>
Obligations of the Company in connection with the Letters of Credit have been
fully paid and satisfied, and (b) the commitments and obligations of the Issuer
(and the other Banks) under the Letters of Credit and related documents have
terminated, the Agent shall pay to the Company, upon the Company's request
therefor, all amounts previously paid to the Agent by the Company pursuant to
this Section 2.10.7 and accrued interest thereon to the extent but only to
the extent such amounts or accrued interest were not theretofore applied by
the Agent to reduce amounts payable by the Company to the Issuer or the Banks
under such Letters of Credit or include any other Obligation; provided,
however, that if any Advances are outstanding as of such date, the Bank may
continue to hold such amounts and accrued interest as security for the Loans
and may thereafter apply such amounts and accrued interest to the payment of
the Loans and/or any other Indebtedness secured thereby. All amounts on deposit
in the Letter of Credit Cash Collateral Account may, until their
application to any Obligation or their return to the Company, as the case
may be, at the Company's written request, be invested in Cash Equivalent
Investments designated by the Company, which Cash Equivalent Investments
shall be held by the Agent as additional collateral security for the repayment
of the Company's Obligations under and in connection with the Letters of Credit
and all other Obligations. Any losses, net of earnings, and reasonable fees
and expenses of such Cash Equivalent Investments shall be charged against the
principal amount invested. The Agent, the Issuer and the Banks shall not be
liable for any loss resulting from any Cash Equivalent Investment made at the
Company's request. The Agent is not obligated hereby, or by any other Loan
Document, to make or maintain any Cash Equivalent Investment, except upon
written request by the Company."
L. Section 6.1 of the Credit Agreement is amended in its entirety to
read as follows:
" Section 6.1 Currency Conversion and Currency Indemnity.
Section 6.1.1 Payments in Agreed Currency
The Company shall make payment relative to each Advance or
Reimbursement Obligation in Dollars (the "Agreed Currency"). If any payment is
received on account of any Advance in any currency (the "Other Currency")
other than the Agreed Currency (whether voluntarily or pursuant to an order or
judgment or the enforcement thereof or the realization of any security or
the liquidation of the Company or otherwise howsoever), such payment shall
constitute a discharge of the liability of the Company hereunder and under the
other Loan Documents in respect of such obligation only to the extent of the
amount of the Agreed Currency which the relevant Bank, the Issuer or the Agent,
as the case may be, is able to purchase with the amount of the Other Currency
received by it before noon on the date of such receipt, or, if the amount
of the Other Currency is received after noon, the Business Day next
following such receipt, in accordance with its normal procedures and after
deducting any premium and costs of exchange.
Section 6.1.2 Conversion of Agreed Currency into Judgment Currency. If,
for the purpose of obtaining or enforcing a judgment in any court in any
jurisdiction, it becomes necessary to convert into a particular currency
(the "Judgment Currency") any amount due in the Agreed Currency then the
conversion shall be made on the basis of the rate of exchange prevailing on
the day on which judgment is given (unless such day is not a Business Day in
which case the conversion shall be made on the basis of the rate of exchange
prevailing on the Business Day next preceding the day of which judgment
is given) and in any event the Company shall be obligated to pay the Agent, the
Issuer and the Banks any deficiency in accordance with Section 6.1.1. For the
foregoing purposes "rate of exchange" means the rate at which the relevant
Bank, the Issuer or the Agent, as applicable, in accordance with its
normal banking procedures is able on the relevant date to purchase the
Agreed Currency with the Judgment Currency after deducting any premium and costs
of exchange.
Section 6.1.3 Circumstances Giving Rise to Indemnity. If (i) any
Bank, the Issuer or the Agent receives any payment or payments on account
of the liability of the Company hereunder pursuant to any judgment or
order in any Other Currency, and (ii) the amount of the Agreed Currency which
the relevant Bank, the Issuer or the Agent, as applicable, is able to
purchase on the Business Day next following such receipt with the
proceeds of such payment or payments in accordance with its normal procedures
and after deducting any premiums and costs of exchange is less than the
amount of the Agreed Currency due in respect of such obligations immediately
prior to such judgment or order, then the Company on demand shall, and the
Company hereby agrees to, indemnify and save the Banks, the Issuer and the
Agent harmless from and against any loss, cost or expense arising out of or in
connection with such deficiency.
SECTION 6.1.4 Indemnity Separate Obligation. The agreement of indemnity
provided for in Section 6.1 shall constitute an obligation separate and
independent from all other obligations contained in this Agreement, shall give
rise to a separate and independent cause of action, shall apply irrespective
of any indulgence granted by the Banks, the Issuer or the Agent or any of them
from time to time, and shall continue in full force and effect
notwithstanding any judgment or order for a liquidated sum in respect of an
amount due hereunder or under any judgment or order."
M. Subsection 6.4(i)(b) of the Credit Agreement is hereby amended in its
entirety to read as follows:
"(b) second, in or toward payment to the Banks of such amount as is
required to repay the Advances and the Reimbursement Obligations, including
accrued interest thereon, which
<PAGE>
have fallen due, and if insufficient to pay all principal and interest then due
thereon shall be applied first to payment of interest and then to principal;
and"
N. Sections 8.4, 8.5, 8.6 and the first and second sentence of
Section 8.7 of the Credit Agreement are amended by (i) inserting after each use
of the word "Bank" the phrase "or the Issuer" and (ii) inserting after each
use of the word "Bank's" the phrase "or the Issuer's".
O . The Preamble to Article 11 of the Credit Agreement is hereby amended
in its entirety to read as follows:
" The Company agrees with the Agent, the Issuer and each Bank that so
long as any of the Commitments are in effect and until payment in full of
all Advances hereunder (other than pursuant to any continuing
indemnification obligations under this Agreement), all interest thereon and
all other amounts payable by the Company hereunder remains outstanding,
and until all Letters of Credit shall have expired or been terminated and
the Issuer and the Banks shall have no further obligation or liability
under any Letter of Credit, the Company will perform the obligations set
forth in this Article 11:".
Article 12 of the Credit Agreement is hereby amended by (i) amending clause
(a) in its entirety to read as follows:
" (a) The Company shall default in the payment when due (i) of
any principal of any Advance or any Reimbursement Obligation (and such
default shall continue unremedied for a period of two (2) Business Days),
or (ii) of any interest on any Advance, any Reimbursement Obligation or
any fees payable by the Company hereunder or in connection herewith, or
of any other monetary Obligation (and such default shall continue
unremedied for five (5) Business Days); or "
; (ii) amending clause (i) thereof by inserting after the word "Advance" the
phrase ", all Letter of Credit Obligations"; and (iii) amending clause (ii)
thereof by inserting after the word "Advance" the phrase ", all Letter of
Credit Obligations".
Q. Section 13.1 of the Credit Agreement is hereby amended by (i)
amending the first sentence thereof in its entirety to read as follows:
"Each Bank hereby irrevocably appoints and authorizes the Agent to act as
its agent and CIBC to act as the Issuer under and for purposes of this
Agreement, the Notes and the other Loan Documents with such powers as are
specifically delegated to the Agent or the Issuer by the terms of this
Agreement, the Notes and the other Loan Documents, together with such other
powers as are reasonably incidental thereto."
and (ii) amending the second and third sentence thereof by inserting
after each use of the word "Agent" the phrase "or the Issuer".
R. The first sentence of Section 13.2 and Section 13.3 of
the Credit Agreement are hereby amended by inserting after each use of the word
"Agent" the phrase "or the Issuer".
S. Section 13.4 of the Credit Agreement is hereby amended by (i)
amending the first sentence thereof by inserting (a) after the first use of the
word "Agent" the phrase "or the Issuer" and (b) after the second use of the word
"Agent" the phrase "and the Issuer"; and (ii) amending the second sentence
thereof by inserting (a) after the first use of the word "Agent" the phrase ",
the Issuer", (b) after the second use of the word "Agent" the phrase "or the
Issuer", and (c) after the third use of the word "Agent" the phrase "and the
Issuer".
T. Section 13.5 of the Credit Agreement is hereby amended by (i)
amending the first sentence thereof by (a) replacing the phrase "the Agent and
its officers" with the phrase "the Agent and the Issuer and their officers",
and (b) inserting after the second use of the word "Agent" the phrase "or the
Issuer"; and (ii) amending the second sentence thereof in its entirety to read
as follows:
"The obligation of the Banks in this Section shall survive the
payment of the Advances, the Letter of Credit Outstandings and of any other
sums due from Company hereunder and the termination of the Commitments."
U. Section 13.6 of the Credit Agreement is hereby amended by (i)
amending the first sentence thereof by inserting after each use of the
word "Agent" the phrase ", the Issuer"; and (ii) amending the second sentence
thereof by inserting after the word "Agent" the phrase " and the Issuer";
(iii) amending the third sentence thereof by (a) inserting after the first
use of the word "Agent" the phrase "or the Issuer", (b) inserting after the
second use of the word "Agent" the phrase "and the Issuer", and (c) after the
third use of the word "Agent" the phrase ", the Issuer"; and (iv) amending
the fourth sentence thereof by inserting after the word "Agent" the phrase
"or the Issuer".
V. Section 13.7 of the Credit Agreement is hereby amended by (i)
inserting after the first use of the word "Agent" the phrase "or the
Issuer"; and (ii) inserting after the second use of the word "Agent" the phrase
"and the Issuer".
W. Section 13.8 of the Credit Agreement is hereby amended by (i)
amending the first sentence thereof by inserting after the word "Agent" the
phrase ", the Issuer"; (ii) amending the second sentence thereof by inserting
after each use of word "Agent" the phrase "or the Issuer"; (iii) amending the
third sentence thereof by (a) inserting after the word "agent" the phrase "or
issuer", and (b) inserting after the word "Agent" the phrase "or Issuer"; (iv)
amending the fourth sentence thereof by inserting after the word "Agent" the
phrase "or the Issuer"; and (v) amending the fifth sentence thereof by (a)
inserting after the word "Agent's" the phrase ", Issuer's", and (b) inserting
after each use of the word "Agent" the phrase ", the Issuer".
X. Section 14.1 of the Credit Agreement is hereby amended by inserting
after the word "Agent" the phrase ", the Issuer".
Y. Section 14.4 of the Credit Agreement is hereby amended by (i)
amending the second sentence thereof by inserting after each use of the word
"Agent" the phrase " and the Issuer"; and (ii) amending the third sentence
thereof by inserting after each use of word "Agent" the phrase ", the Issuer".
Z. Section 14.5 of the Credit Agreement is hereby amended by inserting
after each use of the word "Co-Agents" the phrase ", the Issuer".
AA. Subsection 14.7(a) of the Credit Agreement is hereby amended by
inserting after the word "Agent" the phrase "and the Issuer".
BB. Subsection 14.7(e) of the Credit Agreement is hereby
amended by inserting after each use of the word "Co-Agents" the phrase ", the
Issuer".
CC. Section 14.8 of the Credit Agreement is hereby amended by inserting
after the word "Agent" the phrase ", the Issuer".
DD. Subsection 14.9(ii) of the Credit Agreement is hereby amended by
inserting after the word "Advances" the phrase ", Letter of Credit
Outstandings".
EE. Sections 14.11, 14.19 and 14.20 of the Credit Agreement are hereby
amended by inserting after the word "Agent" the phrase ", the Issuer".
FF. Section 14.21 of the Credit Agreement is hereby amended by (i)
inserting after the first use of the word "Banks" the phrase ", the Issuer"
and (ii) inserting after the second use of the word "Agent" the phrase ", the
Issuer".
GG. Exhibit I to the Credit Agreement is amended in its entirety to read
as provided in Exhibit I hereto. All references in the Credit Agreement to
Exhibit I shall be deemed to refer to Exhibit I hereto.
HH. The Credit Agreement is amended by adding Exhibit L hereto as
Exhibit L to the Credit Agreement. All references in the Credit Agreement to
Exhibit L shall be deemed to refer to Exhibit L hereto.
II. The Credit Agreement is amended by adding Schedule A hereto as
Schedule A to the Credit Agreement. All references in the Credit
Agreement to Schedule A shall be deemed to refer to Schedule A hereto.
SECTION 2. Conditions to Effectiveness. The effectiveness of
this Amendment is conditioned upon receipt by the Agent of all of the
following, each in form and substance satisfactory to the Agent, and in
sufficient number of signed counterparts to provide one for each Co-Agent and
each Bank, (i) counterparts of this Amendment, executed by the Company,
the Banks, the Co-Agents and the Agent and (ii) such other documents as the
Agent may reasonably request.
SECTION 3. Representations and Warranties. To induce the Banks,
the Co-Agents and the Agent to enter into this Amendment, the Company
hereby reaffirms, as of the date hereof, its representations and warranties
contained in Article X of the Credit Agreement and in each other Loan Document
to which it is a party (except to the extent such representations and
warranties relate solely to an earlier date) and additionally represents and
warrants as follows:
A. Authorization; No Conflict. The execution and delivery of this
Amendment and the performance by the Company of its Obligations under this
Amendment, the Credit Agreement as amended by this Amendment, and the other
Loan Documents, are within the Company's powers, have been duly authorized
by all necessary action, have received all necessary governmental approval (if
any shall be required), and do not and will not contravene or conflict
with any provision of law or of the articles of incorporation or bylaws
of the Company, or of any material agreement binding upon the Company.
B. Validity and Binding Nature. This Amendment and the Credit
Agreement as amended by this Amendment are legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms subject as to enforcement only to bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights generally and general principles of
equity.
C. Consents. No action, consent or approval of, or registration or
filing
<PAGE>
with, or any other action by any governmental authority is required in
connection with the execution, delivery and performance by the Company of
this Amendment, the Credit Agreement as amended by this Amendment, or any other
Loan Document or the legality, validity, binding effect or enforceability of
this Amendment, the Credit Agreement as amended by this Amendment, or the
other Loan Documents.
SECTION 4. Reaffirmation of Credit Agreement. This Amendment
shall be deemed to be an amendment to the Credit Agreement, and the Credit
Agreement, as amended hereby, is hereby ratified, approved and confirmed in each
and every respect. All references to the Credit Agreement in any other
document, instrument, agreement or writing shall hereafter be deemed to
refer to the Credit Agreement as amended hereby.
SECTION 5. Defined Terms. Except as amended hereby or otherwise
indicated, terms defined in the Credit Agreement are used in this Amendment
with the same meaning.
SECTION 6. Section Captions. Section captions used in this
Amendment are for convenience of reference only, and shall not affect the
construction of this Amendment.
SECTION 7. Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE
A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK, AND FOR ALL PURPOSES
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID
STATE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. All obligations of
the Company and rights of the Agent, the Co-Agents, the Banks and any other
holders of the Notes expressed herein or in the Notes shall be in addition to
and not in limitation of those provided by applicable law.
SECTION 8. Execution in Counterparts. This Amendment may be
executed in any number of counterparts and by the different parties on
separate counterparts, and each such counterpart shall be deemed to be an
original, but all such counterparts shall together constitute but one and
the same Amendment.
SECTION 9. Successors and Assigns. This Amendment shall be binding
upon the Company, the Banks, the Co-Agents and the Agent and their
respective successors and assigns, and shall inure to the benefit of the
Company, the Banks, the Co-Agents and the Agent and the respective successors
and assigns of the Banks, the Co-Agent and the Agent; provided, however, that
the Company may not assign or transfer its rights or obligations hereunder
without the prior written consent of all Banks.
SECTION 10. Severability. In case any provision in or obligation
under this Amendment, the Credit Agreement as amended by this Amendment or
any other Loan Document shall be invalid, illegal or unenforceable in any
jurisdiction, the validity,
legality and enforceability of the remaining provisions or obligations,
or of such provision or obligation in any other jurisdiction, shall not
in any way be affected or impaired thereby.
SECTION 11. No Oral Agreements. THIS WRITTEN AMENDMENT TOGETHER WITH
THE OTHER LOAN DOCUMENTS REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. [SIGNATURES
BEGIN ON FOLLOWING PAGE]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed by their respective officers thereunto duly authorized as of the
day and year first above written and shall be effective as of such date.
PACIFIC GAS TRANSMISSION COMPANY
By: /s/ STANLEY C. KARCZEWSKI
-----------------------------
Name: Stanley C. Karczewski
Title: Vice President of Finance, Controller and
Chief Financial Officer
CANADIAN IMPERIAL BANK OF COMMERCE, as Agent for
the Banks
By:/s/ MARYBETH ROSS
--------------------
Name: Marybeth Ross
Title: Authorized Signator
<PAGE>
THE BANK OF NOVA SCOTIA, as Co-Agent for the Banks
By: /s/ M. BROWN
--------------------
Name: M. Brown
Title: Officer
BARCLAYS BANK PLC, as Co-Agent for the
Banks
By: /s/ HELEN L. CALVELLI
--------------------------
Name: Helen Calvelli
Title: Director
THE FIRST NATIONAL BANK OF CHICAGO, as Co-Agent for
the Banks
By: /s/ RICHARD WALDMAN
--------------------------------------
AUTHORIZED AGENT
CIBC INC., as a Bank
By: /s/ MARYBETH ROSS
-----------------
Name: Marybeth Ross
Title: Authorized Signatory
THE BANK OF NOVA SCOTIA, as a Bank
By: /s/ M. BROWN
-----------------
Name: M. Brown
Title: Officer
BARCLAYS BANK PLC, as a Bank
By: /s/ HELEN L. CALVELLI
--------------------------
Name: Helen Calvelli
Title: Director
THE FIRST NATIONAL BANK OF CHICAGO, as a Bank
By: /s/ STEVEN P. CAPOUCH
--------------------------
Name: Steven P. Capouch
Title: First Vice President
BANK OF AMERICA NT & SA, as a Bank
By: /s/ GARY M. TSUYUKI
-----------------------
Name: Gary M. Tsuyuki
Title: Managing Director
<PAGE>
CITIBANK, N.A., as a Bank
By: /s/ SANDIP SEN
----------------
Name: Sandip Sen
Title: Vice President
Attorney-in-Fact
THE FUJI BANK, LIMITED, San Francisco
Agency, as a Bank
By: /s/ KEIICHI OZAWA
---------------------
Name: Keiichi Ozawa
Title: Joint General Manager
SOCIETE GENERALE, a French bank, as a Bank
By: /s/ J. BLAINE SHAUM
------------------------
Name: J. Blaine Shaum
Title: Regional Manager
SWISS BANK CORPORATION, New York Branch,
as a Bank
By: /s/ KAREN MAYROSE
----------------------
Name: Karen Mayrose
Title: Associate Director
Banking Finance Support, N.A.
By: /s/ SABINA WU
-------------------
Name: Sabina Wu
Title: Director
Credit Risk Management, N.A.
UNITED STATES NATIONAL BANK OF OREGON, as a Bank
By: /s/ DEREK RIDGLEY
----------------------
Name: Derek Ridgley
Title: Vice President
<PAGE>
EXHIBIT I Form of Transfer Certificate
To: [Name and address of Transferee]
and
Canadian Imperial Bank of Commerce, as Agent
From: [Name of Transferor Bank and Facility Office]
Date: ___________________, 199____
Re: Transfer Certificate - Credit Agreement, dated as of May 31,
1995 (together with all amendments, if any, from time to time
made thereto, the "Credit Agreement") among Pacific Gas
Transmission Company (the "Company"), the various
financial institutions as are and may become parties thereto (the
"Banks"), The Bank of Nova Scotia, Barclays Bank PLC and The
First National Bank of Chicago, as (the "Co-Agents"), and
Canadian Imperial Bank of Commerce ("CIBC"), as Agent for the
Banks (the "Agent")
Ladies and Gentlemen:
1. [Name of Transferor Bank] (the "Transferor") confirms the accuracy of
the summary of its participation in the Credit Agreement set out in
the schedule attached hereto (the "Schedule") before and after giving
effect to the assignment and transfer herein made. Transferor hereby
assigns and transfers, without recourse, to [Name of Transferee Bank]
(the "Transferee") the rights and obligations of Transferor under the
Credit Agreement specified in the Schedule. Transferee accepts such
assignment and transfer by countersigning and delivering this Transfer
Certificate to Transferor. This assignment is effective as of the date
set forth in the Schedule (the "Transfer Effective Date"). The principal
amount of any outstanding Advances under the Credit Agreement as of
the Transfer Effective Date shall be apportioned between Transferor and
Transferee in accordance with the Schedule and Transferee shall pay
Transferor in immediately available funds on the Transfer Effective Date
or such other date as is agreed to between the Transferor and the
Transferee an amount equal to the principal amount of any outstanding
Advance being assigned and transferred hereunder. All interest and fees
payable under the Credit Agreement shall be apportioned between
Transferor and Transferee proportionately to the periods before and after
the Transfer Effective Date as to which payable.
2. Transferee is also delivering signed counterpart copies hereof to
the Agent at its address for the service of notices specified in the
Credit Agreement. The Agent is requested to make appropriate entries on
its records to reflect the assignment and transfer effected hereby.
3. The Transferee hereby undertakes with the Transferor and each of the
other parties to the Credit Agreement that it will perform in
accordance with their terms all those obligations which by the terms
of the Credit Agreement it will assume upon delivery of this Transfer
Certificate by it. Transferee agrees promptly to deliver to the Company,
the Agent and any other withholding agent specified by the Company, two
copies of a valid Form 1001, a valid Form 4224 or a certificate
substantially in the form of Exhibit I to the Credit Agreement (in
accordance with Sections 8.2 and 14.7(e) of the Credit Agreement).
Transferee agrees promptly to pay to the Agent a transfer registration
fee in the amount of $2,500. By its consent hereto the Company consents
to the transfer herein provided, agrees that Transferee shall be a Bank
under the Credit Agreement and releases the Transferor pro tanto as to the
obligations of Transferor transferred to Transferee hereunder.
4. The Transferee confirms that it has received a copy of the Credit
Agreement together with such other documents and information as it has
required in connection with this transaction. Transferee hereby confirms
that it has entered into this assignment and transfer on the basis of its
own independent commercial relationship with the Company and its own
independent investigation and that it has not relied and will not hereafter
rely on the Transferor, the other Banks, the Agent, the Issuer or the Co-
Agents with respect to the due execution, legality, validity,
effectiveness, adequacy, accuracy or enforceability of the Credit
Agreement or any other documents and information or with respect to the
collectibility of any Advance or other amount due under the Credit
Agreement. Transferee further agrees that it has not relied and will not
rely on the Transferor, the other Banks, the Agent, the Issuer or the Co-
Agents to assess or keep under review on its behalf or provide
Transferee, except as expressly required under the terms of the Credit
Agreement, with any information as to the financial condition,
creditworthiness, condition, affairs, status or nature of the Company or
the subsidiaries or of any other party to the Credit Agreement or the
observance by the Company of any of its obligations under the Credit
Agreement or any document relating thereto.
<PAGE>
5. The Transferor makes no representation or warranty and
assumes no responsibility with respect to the legality, validity,
effectiveness, adequacy or enforceability of the Credit Agreement or any
document relating thereto or the collectibility of any Advance or other
amount due under the Credit Agreement and assumes no responsibility
for the financial condition of the Company or any other party to the
Credit Agreement or for the performance and observance by the Company
or any other party of any of its obligations under the Credit Agreement
or any document relating thereto and any and all such conditions and
warranties, whether express or implied by law or otherwise, are hereby
excluded.
6. The Transferee confirms the appointment of the Agent and the
Issuer in accordance with the terms of Article 13 of the Credit
Agreement.
7. This Transfer Certificate shall be governed by and construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the parties hereto have caused this Transfer
Certificate to be duly executed and delivered as of the date first above
written.
[TRANSFEROR]
By
Name:
Title:
"Transferor" [TRANSFEREE]
By
Name:
Title:
"Transferee"
Consented to as of the above date by:
PACIFIC GAS TRANSMISSION COMPANY
By
Name:
Title:
<PAGE>
Receipt acknowledged and Consented to as of the above date:
CANADIAN IMPERIAL BANK OF COMMERCE, as
Agent
By
Name:
Title:
<PAGE>
THE SCHEDULE TO THE TRANSFER CERTIFICATE Details of Transfer
1. Details of Commitments
a. Transferor's Commitment before this Transfer:
b. Amount of Commitment Transferred:
c. Transferor's remaining Commitment:
d. Transferee's Commitment:
e. Transfer Effective Date:
2. Details of Advances
a. Outstanding Advance(s) and Letter of Credit Outstandings of Transferor
to Company prior to Transfer Effective Date:
Type of Principal Drawdown Repayment Interest
Advance Amount Date Date Rate
- -------- ------- ----------- -------------- -----------
b. Principal Amount of Outstanding Advance(s) and Letter of Credit
Outstandings Transferred to Transferee:
Type of Principal Drawdown Repayment Interest
Advance Amount Date Date Rate
----------- ------------- --------- ----------- ------------
<PAGE>
Administrative Details Respecting Transferee
Facility Office for Advances:
Attn:
Address for Notices:
Attn:
Account for Payments:
Telephone:
Telefacsimile:
Telex:
<PAGE>
Issuance Request
Canadian Imperial Bank of Commerce as Agent and as Issuer
425 Lexington Avenue
New York, New York 10017
Attention: [Name]
[Title]
Re: PACIFIC GAS TRANSMISSION COMPANY
Gentlemen and Ladies:
This Issuance Request is delivered to you pursuant to Section 2.8 of
that certain Credit Agreement, dated as of May 31, 1995 (together with all
amendments, if any, from time to time made thereto, the "Credit Agreement"),
among Pacific Gas Transmission Company, a California corporation (the
"Company"), certain financial institutions and Canadian Imperial Bank of
Commerce, as agent the "Agent"). Unless otherwise defined herein or the
context otherwise requires, terms used herein have the meanings provided in the
Credit Agreement.
The Company hereby requests that the Issuer issue a Letter of Credit for
the account of -------------- on [date] in the initial face amount of $-----
- ------- [and in the form attached hereto].(1)
The beneficiary of the requested Letter of Credit will be------------
, and such Letter of Credit will be in support of the [provide description] and
will have a Stated Expiry Date of [date]. The following
documents will be required upon presentation: [provide description].
The undersigned hereby certifies that the following statements are true on
the date hereof, and will be true on the date of the proposed issuance of the
Letter of Credit, before and after giving effect thereto and to the application
of the proceeds therefrom:
(i) the face amount of the proposed Letter of Credit is not more than the
Adjusted Available Facility Amount;
(ii) no Default has occurred and is continuing;
(iii) the representations and warranties contained in Sections 10.1,
10.4, 10.5, 10.6, 10.7 and 10.9 of the Credit Agreement are true and
correct as of the date of such issuance except for changes reflecting
transactions permitted by the Credit Agreement;
(iv) no authorizations, approvals or consents of, and no filings or
renegotiations with, any governmental or regulatory authority or
agency are necessary for the incurring of obligations in
connection with such Advance, other than approvals which have
been duly obtained and are of full force and effect; and
(v) the incurring of obligations in connection with such Advance does
not conflict with or result in a breach of any applicable law or
regulation, or any other, writ, injunction or decree of any court
or regulatory authority.
The Company agrees that if prior to the time of the issuance of the Letter of
Credit requested hereby any matter certified to herein by it will not be true
and correct at such time as if then made, it will immediately so notify the
Agent. Except to the extent, if any, that prior to the time of the Letter
of Credit requested hereby the Agent shall receive written notice to the
contrary from the Company, each matter certified to herein shall be deemed
once again to be certified as true and correct at the date of such Borrowing as
if then made.
IN WITNESS WHEREOF, the Company has caused this Issuance Request to be
executed and delivered, and the certification and warranties contained
herein, by its duly Authorized Signatory this ------ day of------------ , 19
PACIFIC GAS TRANSMISSION COMPANY
By:
Name:
Title:
[Issuance Request to be accompanied by such additional information/documentation
as is mutually acceptable to the Issuer and the Company, consistent with the
terms of the Credit Agreement]
- -----------------------
[FN]
(1) Include where the Borrower is providing the form of Letter of Credit
requested to be issued.
<PAGE>
EXHIBIT 12.1
Pacific Gas Transmission Company
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges 1996 1995 1994 1993 1992
---------------------------------- ----- ----- ------ ------ ------
Earnings:
Income from continuing
operations $43.1 $51.6 $47.7 $6.3 $2.2
Adjustments:
Income taxes 28.9 31.3 30.0 (12.2) (4.0)
Fixed charges
(as below) 46.3 48.2 47.4 27.2 22.8
----- ----- ------ ------ ------
Total adjusted earnings $118.3 $131.1 $125.1 $21.3 $21.0
======= ====== ====== ====== ======
Fixed charges: (a)
Net interest expense $45.7 $46.3 $45.6 $11.7 $4.7
Adjustments:
Interest component of rents 0.3 0.7 0.9 0.8 0.8
AFUDC debt 0.3 1.2 0.9 14.7 17.3
------ ------ ------ ------ ------
Total fixed charges $46.3 $48.2 $47.4 $27.2 $22.8
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 2.6 2.7 2.6 0.8 0.9
====== ====== ====== ====== ======
Deficiency of earnings
to cover fixed charges N/A N/A N/A ($5.9) ($1.8)
====== ====== ====== ====== ======
Years Ended December 31,
Ratio of Earnings Before Net Gas Supply -----------------------------------
Restructuring (GSR) Costs to Fixed Charges 1993 1992
---------------------------------- ------ ------
Total adjusted earnings, as above $21.3 $21.0
GSR costs, net of GSR recoveries 51.0 37.5
------ ------
Total adjusted earnings
before net GSR costs $72.3 $58.5
====== ======
Total fixed charges, as above $27.2 $22.8
====== ======
Ratio of earnings before net
GSR costs to fixed charges 2.7 2.6
====== ======
- ------------------
<FN>
(a) There were no shares of preferred stock issued or outstanding
during any of the five years ended December 31, 1996, and therefore there were
no fixed charges related to preferred stock during these periods.
</FN>
</TABLE> <PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Pacific Gas Transmission Company, a California Corporation, has the following
subsidiaries:
Ownership or
Percentage of State or
Voting Jurisdiction of
Securities Incorporation or
Name of Subsidiary Owned Organization
---------------------------------- --------------- -------------------
Energy Source, Inc. 100% California
PG&E Energy Source Canada, Inc. 100% Canada
PGT Australia Pty Ltd 100% Australia
PGT Nominees Pty Ltd* 100% Australia
PGT Queensland Pty Ltd 100% Australia
PGT Queensland Unit Trust 100% Australia
PGT Victoria Pty Ltd* 100% Australia
PGT Western Australia Pty Ltd* 100% Australia
Pacific Gas Transmission International, Inc. 100% California
* Created in anticipation of future business activities; currently does no
business.
<PAGE>
EXHIBIT 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our report dated February 10, 1997 included in
Pacific Gas Transmission Company's previously filed Registration Statement
File No. 33-91048. It should be noted that we have not audited any financial
statements of the company subsequent to December 31, 1996 or performed any
audit procedures subsequent to the date of our report.
/s/ Arthur Andersen LLP
-----------------------------
Arthur Andersen LLP
Portland, Oregon
March 27, 1997<PAGE>
<PAGE>
EXHIBIT 24.1
PACIFIC GAS TRANSMISSION COMPANY
BOARD OF DIRECTORS
ACTION BY WRITTEN CONSENT
The Board of Directors of Pacific Gas Transmission Company, a California
corporation, acting by written consent pursuant to the Bylaws of this
corporation and the Corporations Code of California, hereby adopts the
following resolutions:
WHEREAS, the management of the corporation has recommended the
filing of the corporation's Annual Report on Form 10-K of the fiscal
year ending December 31, 1996, with the Securities and Exchange
Commission; and
WHEREAS, the Board finds that it is in the best interests of the
corporation to approve the Annual Report on Form 10-K for fiscal year
ended December 31, 1996 in substantially the form as circulated to the
Board prior to approval;
NOW, THEREFORE, BE IT RESOLVED, that Frank R. Lindh and Vincent
P. Salvi are hereby authorized to sign, on behalf of this corporation
and as attorneys in fact for the President, Vice President and Chief
Financial Officer and Controller of this corporation, the Pacific Gas
Transmission Company Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, required by Section 13 or 15(d) of the
Securities Exchange Act of 1934, and all amendments and other filings
or documents related thereto to be filed with the Securities and
Exchange Commission, and to do any and all acts necessary to satisfy
the requirements of the Securities Exchange Act of 1934 and the
regulations of the Securities and Exchange Commission adopted thereto
with regard to said Annual Report on Form 10-K.
BE IT FURTHER RESOLVED, that this written consent may be signed
in counterparts, the sum of which constitute the entire written
consent.
The undersigned, constituting all of the members of the Board of
Directors, hereby consent to and approve the action described above and direct
the Secretary to file this written consent with the minutes of the proceedings
of the Board of Directors.
Dated this 26th day of March, 1997.
/s/ TONY F. DISTEFANO
----------------------
Tony F. DiStefano
/s/ ROBERT D. GLYNN, JR.
-------------------------
Robert D. Glynn, Jr.
/s/ JACK F. JENKINS-STARK
--------------------------
Jack F. Jenkins-Stark
/s/ STEPHEN P. REYNOLDS
--------------------------
Stephen P. Reynolds
/s/ GORDON R. SMITH
--------------------------
Gordon R. Smith
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,052,412
<OTHER-PROPERTY-AND-INVEST> 136,761
<TOTAL-CURRENT-ASSETS> 498,808
<TOTAL-DEFERRED-CHARGES> 87,313
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,775,294
<COMMON> 85,474
<CAPITAL-SURPLUS-PAID-IN> 242,000
<RETAINED-EARNINGS> 183,028
<TOTAL-COMMON-STOCKHOLDERS-EQ> 510,502
0
0
<LONG-TERM-DEBT-NET> 558,187
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 108,087
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 16,775
<LEASES-CURRENT> 384
<OTHER-ITEMS-CAPITAL-AND-LIAB> 581,359
<TOT-CAPITALIZATION-AND-LIAB> 1,775,294
<GROSS-OPERATING-REVENUE> 546,785
<INCOME-TAX-EXPENSE> 28,889
<OTHER-OPERATING-EXPENSES> 424,235
<TOTAL-OPERATING-EXPENSES> 453,124
<OPERATING-INCOME-LOSS> 93,661
<OTHER-INCOME-NET> (4,854)
<INCOME-BEFORE-INTEREST-EXPEN> 88,807
<TOTAL-INTEREST-EXPENSE> 45,662
<NET-INCOME> 43,145
0
<EARNINGS-AVAILABLE-FOR-COMM> 43,145
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 29,450
<CASH-FLOW-OPERATIONS> 96,301
<EPS-PRIMARY> 43,145
<EPS-DILUTED> 43,145
</TABLE>
