<PAGE>
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ----------- to ------------
COMMISSION FILE NO. 0-25842
Pacific Gas Transmission Company
(Exact name of registrant as specified in its charter)
California 94-1512922
(State or other jurisdiction of (I.R.S. employer Identification
incorporation or organization) No.)
2100 SW River Parkway, Portland,
OR 97201
(Address of principal executive (Zip code)
offices)
Registrant's telephone number, including area code: (503) 833-4000
Securities registered pursuant to
Section 12(g) of the Act: Common
Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 12, 1997.
1,000 shares of common stock no par value. (All shares are owned by PG&E Gas
Transmission Corporation.)
Registrant meets the conditions set forth in General Instruction (H) (1) (a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
<PAGE>
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Statements of Consolidated Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------
(In Thousands) 1997 1996 1997 1996
- ------------------------------------------------------------------------------
OPERATING REVENUES:
Gas transportation $ 45,263 $ 44,746 $ 93,929 $ 93,081
Gas transportation for affiliates 11,914 8,851 24,601 17,833
Gas supply restructuring cost recovery - 7,528 - 14,618
from affiliates
Gas supply restructuring cost recovery - 5,564 - 10,579
- ------------------------------------------------------------------------------
Total operating revenues 57,177 66,689 118,530 136,111
- ------------------------------------------------------------------------------
OPERATING EXPENSES:
Gas supply restructuring costs - 13,092 - 25,197
Administrative and general 8,914 7,211 21,502 16,648
Operations and maintenance 3,560 4,075 8,316 8,462
Depreciation and amortization 10,375 9,236 20,705 18,352
Property and other taxes 2,727 2,892 5,795 5,898
- ------------------------------------------------------------------------------
Total operating expenses 25,576 36,506 56,318 74,557
- ------------------------------------------------------------------------------
OPERATING INCOME 31,601 30,183 62,212 61,554
- ------------------------------------------------------------------------------
OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used during
construction 161 107 233 196
Interest income 351 432 444 1,183
Other - net (3,490) (720) (4,615) (1,159)
- ------------------------------------------------------------------------------
Total other income and
(income deductions) (2,978) (181) (3,938) 220
- ------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on long-term debt 11,754 10,018 23,694 20,327
Allowance for borrowed funds used during
construction (105) (83) (154) (154)
Other interest charges 449 1,047 539 2,030
- ------------------------------------------------------------------------------
Net interest expense 12,098 10,982 24,079 22,203
- ------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 16,525 19,020 34,195 39,571
INCOME TAX EXPENSE 5,432 7,331 13,552 15,631
- ------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 11,093 11,689 20,643 23,940
- ------------------------------------------------------------------------------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS BEFORE INCOME TAXES (11,359) - (11,901) -
INCOME TAX BENEFIT 4,194 - 4,157 -
- ------------------------------------------------------------------------------
NET INCOME $ 3,928 $ 11,689 $ 12,899 $ 23,940
- --------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
Consolidated Balance Sheets
- -----------------------------------------------------------------------------
ASSETS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
(In Thousands) 1997 1996
(Unaudited) Audited
- -----------------------------------------------------------------------------
<S> <C> <C>
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment in service $ 1,589,679 $ 1,586,225
Accumulated depreciation (436,935) (416,190)
- -------------------------------------------------------------------------------
Net plant in service 1,152,744 1,170,035
Construction work in progress 23,488 17,529
- -------------------------------------------------------------------------------
Total property, plant and equipment - net 1,176,232 1,187,564
- -------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 13,293 11,969
Accounts receivable - gas transportation 18,138 22,241
Accounts receivable - affiliated companies 5,829 15,890
Deferred income taxes 2,113 2,478
Inventories (at average cost) 6,943 6,510
Prepayments and other current assets 6,408 12,181
Net assets of Energy Trading (see Note 2) - 56,102
- -------------------------------------------------------------------------------
Total current assets 52,724 127,371
- -------------------------------------------------------------------------------
DEFERRED CHARGES:
Income tax related 25,706 26,016
Deferred charge on reacquired debt 14,257 14,859
Unamortized debt expense 4,908 5,229
Regulatory assets 16,069 15,687
Other 8,171 1,672
- ------------------------------------------------------------------------------
Total deferred charges 69,111 63,463
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 1,298,067 $ 1,378,398
- ------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
(In Thousands) 1997 1996
(Unaudited) Audited
- --------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stock - no par value, 1,000 shares
authorized, issued and outstanding $ 85,474 $ 85,474
Additional paid-in capital 242,000 242,000
Foreign currency translation adjustment (5,953) (183)
Reinvested earnings 136,835 183,211
- -------------------------------------------------------------------------------
Total common stock equity 458,356 510,502
Long-term debt 655,921 683,049
- -------------------------------------------------------------------------------
Total capitalization 1,114,277 1,193,551
- -------------------------------------------------------------------------------
CURRENT LIABILITIES:
Long-term debt - current portion 401 384
Accounts payable and other accrued 22,403 28,541
liabilities
Accrued taxes 1,634 2,482
- --------------------------------------------------------------------------------
Total current liabilities 24,438 31,407
- --------------------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 141,249 134,635
Other 18,103 18,805
- --------------------------------------------------------------------------------
Total deferred credits 159,352 153,440
- --------------------------------------------------------------------------------
Commitments and contingencies (see Note 3) - -
- --------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,298,067 $ 1,378,398
- --------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
Statements of Consolidated Cash Flows
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,899 $ 23,940
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 21,717 19,398
Discontinued operations 7,744 -
Deferred income taxes 7,289 (3,588)
Gas supply restructuring costs - 24,314
Allowance for equity funds used
during construction (233) (196)
Changes in operating assets & liabilities:
Accounts receivable 4,103 1,634
Accounts payable and other accrued
liabilities (6,138) (9,915)
Accounts receivable-affiliated
companies 10,061 9,959
Accrued taxes (848) (2,440)
Regulatory accruals (382) 7,368
Other working capital 5,340 1,421
Other - net (1,859) (760)
- --------------------------------------------------------------------------------
Net cash provided by operating
activities 59,693 71,135
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment expenditures (3,937) (3,295)
Construction expenditures (17,643) (19,059)
Allowance for borrowed funds used during (154) (154)
construction
- --------------------------------------------------------------------------------
Net cash used in investing
activities (21,734) (22,508)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (26,635) (36,272)
Construction financing - 338
Dividend paid to parent company (10,000) (10,000)
- --------------------------------------------------------------------------------
Net cash used in financing
activities (36,635) (45,934)
- --------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,324 2,693
CASH AND CASH EQUIVALENTS AT JANUARY 1 11,969 9,839
- --------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 13,293 $ 12,532
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for (received from):
Interest $ 22,546 $ 21,652
Income taxes $ (5,238) $ 10,208
- --------------------------------------------------------------------------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
<PAGE>
Note 1: Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements, which have
been prepared in accordance with interim period reporting requirements, reflect
the results for the following entities:
Pacific Gas Transmission Company (PGT)
PGT's wholly owned subsidiaries:
PG&E Gas Transmission Australia Pty Ltd (PG&E Australia) (formerly,
PGT Australia Pty Limited)
Pacific Gas Transmission International, Inc. (PGT International)
PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland)
(formerly, PGT Queensland Pty Limited)
PGT's former wholly owned subsidiary :
PG&E Energy Trading Corporation (Energy Trading) through its date of
disposition effective June 30, 1997 (see Note 2, below)
PGT and its subsidiaries collectively are referred to herein as the
"Company." This information should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data in the Company's Form 10-K
for the fiscal year ended December 31, 1996.
In the opinion of management, the accompanying statements reflect all
adjustments necessary to present a fair statement of the financial position and
results of operations for the interim periods. All material adjustments are of
a normal recurring nature unless otherwise disclosed in this Form 10-Q.
Intercompany accounts and transactions have been eliminated. Prior year's
amounts in the consolidated financial statements have been reclassified where
necessary to conform to the 1997 presentation. Results of operations for
interim periods are not necessarily indicative of results to be expected for a
full year.
It is currently anticipated that prior to year end, PGT's Australian
operations will be transferred by PGT to another PG&E Corporation affiliate.
Note 2: Discontinued Operations
- -----------------------------------
In April 1997, PG&E Corporation announced its intention to reorganize
certain aspects of its corporate structure and business lines to support its
long-term strategic goals. Consistent with this strategy, on June 30, 1997, PGT
distributed all of the shares of Energy Trading to PGT's sole shareholder, PG&E
Gas Transmission Corporation. PG&E Gas Transmission Corporation, in turn
immediately thereafter, distributed these shares to its sole shareholder, PG&E
Corporation (see PGT's Current Report on Form 8-K dated July 11,1997 for further
discussion and related pro forma financial statements).
Accordingly, Energy Trading's results are reported as discontinued
operations. For financial reporting purposes, the measurement date applied is
June 30, 1997, the date of disposal. In addition, since the shares of Energy
Trading were transferred at the $49.3 million net book value at the time of
distribution, there was no gain or loss on disposal. For the three and six
<PAGE>
months ended June 30, 1997, Energy Trading's revenues were $637.5 million and
$1,560.0 million, respectively. For the purposes of cash flow presentation,
this transfer was a noncash transaction.
Net assets of Energy Trading at the date of disposal and at December 31,
1996 were as follows:
<TABLE>
<CAPTION>
At Date of December 31,
Disposal 1996
------------ -----------
(in millions)
<S> <C> <C>
Property, plant & equipment - net $ 1.9 $ 1.6
Cash, restricted cash and cash 14.4 31.0
equivalents
Assets from risk management 27.5 16.6
Accounts receivable - net 348.7 386.9
Other current assets 6.0 3.1
Goodwill and other deferred 29.1 23.9
charges
Accounts payable from gas marketing (356.8) (386.6)
Other current liabilities (21.5) (20.4)
----------- ----------
Net assets $ 49.3 $ 56.1
=========== ==========
</TABLE>
Note 3: Contingencies
- ----------------------
1994 Rate Case - In September 1996, the Federal Energy Regulatory
Commission (FERC) approved a settlement of PGT's rate case which was filed in
February 1994. The settlement provided for rolled-in rates effective on
November 1, 1996. To mitigate the impact of the higher rolled-in rates, most of
the firm shippers that paid rates lower than the rolled-in rate are receiving a
reduction from the rolled-in rates for a six-year period, while the 1993
expansion shippers are paying a surcharge in addition to the rolled-in rates to
offset the effect of the mitigation.
Although the FERC approved the settlement without modification, several
shippers have sought rehearing of the FERC's order. PGT does not expect the
FERC to modify the settlement as a result of these requests. Parties that have
sought rehearing may petition the Court of Appeals if the FERC does not grant
their rehearing requests. In the event the FERC does modify the settlement,
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.
Norcen Litigation: On June 27, 1997, PGT and Pacific Gas and Electric
Company (PG&E) entered into a settlement agreement with Norcen Energy Resources
Limited (Norcen Energy) and Norcen Marketing Incorporated (Norcen Marketing)
resolving the litigation filed against PGT and PG&E by Norcen Energy and
Norcen Marketing in the U.S. District Court, Northern District of California, on
March 17, 1994. The settlement of this matter will not have a material adverse
impact on the Company's financial condition, liquidity, or results of
operations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The unaudited consolidated financial statements include:
Pacific Gas Transmission Company (PGT)
PGT's wholly owned businesses:
PG&E Gas Transmission Australia Pty Ltd (PG&E Australia) (formerly,
PGT Australia Pty Limited)
Pacific Gas Transmission International, Inc. (PGT International)
PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland)
(formerly, PGT Queensland Pty Limited)
PGT's former wholly owned subsidiary:
PG&E Energy Trading Corporation (Energy Trading) through its date of
disposition effective June 30, 1997 (see Note 2 "Discontinued
Operations" in the Notes to Consolidated Financial Statements
contained in Item 1, Consolidated Financial Statements, above)
PGT and its subsidiaries collectively are referred to as the "Company."
This information should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in Item 8,
Financial Statements and Supplementary Data in the Company's Form 10-K for the
fiscal year ended December 31, 1996.
The following discussion includes forward-looking statements that involve a
number of risks and uncertainties including, but not limited to, the ongoing
restructuring of the gas industry and the future results of new acquisitions.
When used in Management's Discussion and Analysis of Financial Condition and
Results of Operations, the words "estimates," "expects," "anticipates," "plans,"
and similar expressions are intended to identify forward-looking statements that
involve risks and uncertainties. Importantly, the ultimate impact of the
restructuring of the gas industry and new acquisitions on future results is
uncertain, but is expected to cause changes in the way the Company conducts its
business and to cause earnings to be more volatile. These outcomes may cause
future results to differ materially from historical results or from results or
outcomes currently expected or sought by the Company.
General
-------
PGT is a wholly owned subsidiary of its parent holding company, PG&E Gas
Transmission Corporation, which is wholly owned by PG&E Corporation. Effective
January 1, 1997, PG&E Corporation became the holding company for PGT's former
parent company, Pacific Gas and Electric Company (PG&E)and PG&E's ownership
interest in PGT was transferred to PG&E Corporation.
In April 1997, PG&E Corporation announced its intention to reorganize
certain aspects of its corporate structure and business lines to support its
long-term strategic goals. Consistent with this strategy, on June 30, 1997, PGT
distributed all of the shares of Energy Trading to PGT's sole shareholder, PG&E
Gas Transmission Corporation. PG&E Gas Transmission Corporation, in turn
immediately thereafter, distributed these shares to its sole shareholder, PG&E
Corporation (see PGT's Current Report on Form 8-K dated July 11,1997 for further
discussion and related pro forma financial statements).
Energy Trading primarily consists of the gas marketing operations of Edisto
Resources Corporation in the United States and Canada which were acquired by PGT
in 1996. Energy Trading is engaged in the purchase and resale of natural gas to
a diversified customer base, primarily
<PAGE>
consisting of industrial and commercial companies, local distribution companies,
and industry partners.
During 1996, PGT established the PGT Queensland Unit Trust, to be
renamed the PG&E Queensland Unit Trust (PG&E Qld Trust), to hold all of the
assets of the Queensland State Gas Pipeline. These assets were purchased
effective July 1, 1996, from the Government of the State of Queensland,
Australia. The pipeline is referred to as the PG&E Queensland Gas Pipeline,
formerly the PGT Queensland Gas Pipeline. The PG&E Qld Trust is owned by two
wholly owned subsidiaries of PGT; PGT International, a California corporation,
and PG&E Queensland, an Australian corporation. PG&E Queensland operates the
pipeline. In addition, PGT established another wholly owned subsidiary, PG&E
Australia (formerly PGT Australia Pty Limited), an Australian corporation, to
pursue new business development opportunities in Australia and to serve as
trustee of the PG&E Qld Trust.
In connection with PG&E Corporation's reorganization, it is anticipated
that prior to year end, PGT's Australian operations will be transferred to
another PG&E Corporation affiliate.
PGT's domestic transportation system provides access to natural gas from
producing fields in western Canada and extends from the British Columbia-Idaho
border to the Oregon-California border. PGT's transportation system also
provides service to various delivery points in Idaho, Washington and Oregon.
PGT's natural gas transportation services are regulated by the Federal Energy
Regulatory Commission (FERC). Various safety issues are subject to the
jurisdiction of the United States Department of Transportation.
Changing Regulatory Environment
-------------------------------
Since November 1, 1993, when PGT adopted FERC Order 636, PGT has applied
the straight fixed-variable (SFV) rate design method for firm rate schedules.
Under the SFV rate design, an open access pipeline company's fixed costs,
including return on equity and related taxes, associated with firm
transportation service are collected through the reservation charge component of
the pipeline company's firm transportation service rates.
As a result of the current SFV rate design and based upon the settlement of
its 1994 rate case, PGT is permitted to recover 97 percent of its fixed costs
through reservation charges paid by firm transportation service customers.
These customers pay a reservation charge for firm transportation service on
PGT's system, regardless of the volumes of gas transported. Consequently, the
volume of gas transported by PGT for firm transportation service customers does
not currently have a significant impact on PGT's operating results, and PGT's
operating results are not significantly affected by fluctuating demand for gas
based on the weather or changes in the price of natural gas.
While PGT believes that SFV rate design is likely to continue over the near
term, a departure from SFV rate design (whereby a portion of fixed costs would
be assigned to the commodity or delivery component of rates) could cause PGT's
operating results to be affected by fluctuations in the volumes of gas
transported on its system. Similarly, the extent to which PGT's cost of service
is recovered under long-term contracts also affects the impact that variations
in PGT's throughput would have on its operating results.
In January 1996, the FERC issued a policy statement on alternative methods
for setting rates. The policy statement provides guidelines the FERC will use
in evaluating market-based incentive rate proposals and negotiated rate
proposals by pipeline companies. Of particular note is the negotiated or
recourse rate program which provides a framework to allow negotiated terms
and/or conditions for individual shippers, with the traditional cost of service
rates and tariffs made available to all shippers as a default or recourse.
<PAGE>
In July 1996, the FERC adopted a new rule which standardizes technology and
operating procedures for pipelines in order to promote greater integration of
the national gas grid. During the same month, the FERC issued a Notice of
Proposed Rulemaking to improve the efficiency of capacity release procedures and
to allow rates above the cost-based rate cap in markets where pipelines can
demonstrate they lack market power.
Also in July 1996, the United States Court of Appeals for the District of
Columbia Circuit generally affirmed Order 636, but remanded a few issues to FERC
for further explanation. In February 1997, the FERC issued an order on remand
(Order 636C), largely affirming its 636 policies. Order 636C changes the policy
under which a firm shipper may renew its contract at the expiration of the
original contract term. Under this new policy, existing shippers may renew
their contracts if they pay the maximum reservation fee or if they pay the
highest rate offered by other shippers for that capacity based upon a contract
term of five years. A number of parties, including PGT, have requested
rehearing of this change in policy.
These regulatory initiatives are not expected to have a significant effect
on PGT's financial position, liquidity, or results of operations in the
foreseeable future.
Competition
-----------
Competition to provide natural gas transportation services has intensified
in recent years. Regulatory changes, such as Order 636, have significantly
increased customers' flexibility, choices and responsibility to directly manage
their gas supplies.
PGT has in the past, and will in the future, actively compete with other
pipeline companies for transportation customers on the basis of transportation
rates, access to competitively priced gas supply basins, and quality and
reliability of transportation services. In addition, by providing interruptible
and short-term firm transportation service, PGT competes with released capacity
offered by shippers holding firm PGT capacity.
PGT's principal competitor in providing transportation services to the
Pacific Northwest is Northwest Pipeline Corporation. In California, four major
interstate pipeline companies provide transportation services which compete with
the services offered by PGT.
In the current open access environment, the competitiveness of a pipeline
company's transportation services in the market it serves is determined
generally on the basis of delivered natural gas prices, of which transportation
cost is a portion of the total delivered price, but also to some extent on the
quality and reliability of transportation services. PGT's system delivers gas
primarily from western Canada. Gas from this region has been competitively
priced in relation to gas from other supply basins serving PGT's market areas.
The competitive strength of Canadian gas supplies in western U.S. markets has
been evidenced by consistently high throughput on the PGT system since Canadian
gas prices were deregulated in the mid-1980's.
PGT's transportation volumes are affected by market conditions in all
markets it serves. A significant factor is the level of available hydroelectric
generation which, in turn, causes the demand for natural gas as a fuel for
electric generation to fluctuate. In addition, PGT's services face modest
competition from fuel oil.
Fluctuating levels of throughput caused by these market conditions have
only a minor financial effect on PGT because 97 percent of PGT's firm
transportation service capacity is currently subscribed under long-term
contracts with service billed under the SFV rate design.
The PG&E Queensland Gas 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. Another entity has announced a proposal to construct a natural
gas pipeline from Papua New Guinea to Queensland that would
<PAGE>
potentially be in service in 2001. The proposed pipeline may or may not extend
as far as the Gladstone area.
As noted above, it is anticipated that prior to year end, PGT's Australian
operations will be transferred to another PG&E Corporation affiliate.
Future Expansions and Business Development
------------------------------------------
PGT has received preliminary expressions of interest in providing firm
transportation service to parties who cannot be accommodated with PGT's
available firm transportation service capacity and whose needs may not be met
through the release of capacity by PGT's current firm transportation service
customers. PGT 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.
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 $61.7
million of net regulatory assets as of June 30, 1997 including $8.5 million for
relocation costs associated with the transfer of its headquarters from San
Francisco to Portland, Oregon. Although PGT recorded a reserve against these
relocation costs in 1996, management intends to seek recovery of these costs as
well as all other regulatory assets through rates charged to customers.
<PAGE>
Results of Operations
---------------------
Selected operating results and other data are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
(in millions) (in millions)
Operating revenues $ 57.2 $ 66.7 $ 118.5 $ 136.1
Operating expenses (25.6) (36.5) (56.3) (74.6)
- -------------------------------------------------------------------------------
Operating income 31.6 30.2 62.2 61.5
Other income and (income (3.0) (0.2) (3.9) 0.2
deductions)
Net interest expense (12.1) (11.0) (24.1) (22.2)
- --------------------------------------------------------------------------------
Income from continuing
operations before taxes 16.5 19.0 34.2 39.5
Income tax expense (5.4) (7.3) (13.6) (15.6)
- -------------------------------------------------------------------------------
Income from continuing
operations 11.1 11.7 20.6 23.9
Income (loss) from
discontinued operations (11.4) - (11.9) -
Income tax benefit 4.2 - 4.2 -
- --------------------------------------------------------------------------------
Net Income $ 3.9 $ 11.7 $ 12.9 $ 23.9
================================================================================
</TABLE>
Net Income - Net income from continuing operations was $11.1 million and
$20.6 million, respectively for the three and six months ended June 30, 1997,
compared with $11.7 million and $23.9 million for the same periods in 1996. The
$0.6 million and $3.3 million decreases in the 1997 periods, respectively, were
primarily the result of the timing and level of investment development
expenditures incurred by the Company and losses of $0.3 million and $0.7
million, respectively, by the PG&E Queensland Gas Pipeline.
The net losses from discontinued operations of $7.2 million and $7.7
million for the three and six month periods ended June 30, 1997, respectively,
represent the results of Energy Trading's operations prior to disposition.
Operating Revenues - The components of total operating revenues are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Gas transportation $ 57.2 $ 53.6 $ 118.5 $ 110.9
Gas supply restructuring - 13.1 - 25.2
(GSR) cost
- --------------------------------------------------------------------------------
Total Operating Revenues $ 57.2 $ 66.7 $ 118.5 $ 136.1
================================================================================
</TABLE>
Gas transportation revenues for the three and six month periods ended
June 30, 1997, increased $3.6 million and $7.6 million, respectively, compared
to the same periods in 1996. These increases were primarily a result of $2.7
million and $5.5 million in revenues for the three and six month periods ended
June 30, 1997, respectively, from the PG&E Queensland Gas Pipeline, which was
purchased effective July 1, 1996. In addition, firm and interruptible revenues
for the three and six month periods ended June 30, 1997 increased on PGT's
pipeline compared to the same periods in 1996.
<PAGE>
GSR cost recovery revenues reflect the collection from customers through
volumetric surcharges and direct bills of deferred GSR costs over a three-year
period, ending in November 1996, as permitted by the transition cost recovery
mechanism (TCRM) approved by the FERC. These revenues had no effect on income as
they were fully offset by the amortization of like amounts of deferred GSR
costs.
Operating Expenses - The components of total operating expenses are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
- --------------------------------------------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Gas supply restructuring (GSR) costs $ - $ 13.1 $ - $ 25.2
Administrative and general 8.9 7.2 21.5 16.6
Operations and maintenance 3.6 4.1 8.3 8.5
Depreciation and amortization 10.4 9.2 20.7 18.4
Property and other taxes 2.7 2.9 5.8 5.9
- --------------------------------------------------------------------------------
Total Operating Expenses $ 25.6 $ 36.5 $ 56.3 $ 74.6
================================================================================
</TABLE>
As discussed above, GSR costs, which were directly offset by related
revenues, were fully amortized during 1996.
For the three and six month periods ended June 30, 1997 compared with the
same periods in 1996, operating expenses, exclusive of GSR costs, increased $2.2
million and $6.9 million, respectively, as a result of expenses associated with
the operating activities of the PG&E Queensland Gas Pipeline and PG&E Australia.
These entities were not owned or operated by the Company during the first six
months of 1996.
Other Income and (Income Deductions) - Other income deductions for the
three and six months ended June 30, 1997, increased $2.8 million and $4.1
million, respectively, compared to the same periods in 1996 primarily due to
increased investment development expenses and reduced carrying charges on GSR
costs earned in 1997 compared to 1996. The GSR costs were fully recovered
during 1996.
Interest Expense - Net interest expense for the three and six month periods
ended June 30, 1997, increased $1.1 million and $1.9 million, respectively,
compared to the same periods in 1996, primarily due to the interest incurred
by the PG&E Queensland Gas Pipeline. During 1997, interest
expense for the PG&E Queensland Gas Pipeline was $3.4 million which was
partially offset by $1.0 million in lower interest expense associated with PGT's
revenue subject to refund balances which were repaid to customers during 1996.
For both the six months ended June 30, 1997 and 1996, interest on PGT's
long-term debt was approximately $20.3 million, based upon an average interest
rate of 7.4 percent applied to an average balance of $553 million. The
average effective interest rate for the PG&E Queensland Gas Pipeline was 7.6
percent, based upon an average long-term debt balance of $90.6 million.
Sources of Capital - The Company's capital requirements are funded from
cash provided by operations and, to the extent necessary, external financing and
capital contributions from its parent company. PGT pays dividends as part of a
balanced approach to managing its capital structure, funding its operations and
capital expenditures and maintaining appropriate cash balances.
<PAGE>
Net Cash Provided by Operating Activities - For the six months ended June
30, 1997, net cash provided by operating activities was $59.7 million, as
compared with net cash provided by operating activities of $71.1 million for the
same period in 1996. The $11.4 million reduction is primarily a result of $24.3
million in GSR collections in 1996 offset, in part, by deferred taxes on
revenues which were refunded to customers during 1996.
Net Cash Used in Investing Activities - The Company's expenditures for
property, plant and equipment (including the allowance for borrowed funds used
during construction) amounted to $17.8 million and $19.2 million for the six
months ended June 30, 1997 and 1996, respectively.
Net Cash Used in Financing Activities - For the six months ended June 30,
1997, cash used in financing activities amounted to $36.6 million as a result of
a reduction in long-term debt and a $10.0 million dividend paid to PGT's parent
company. For the six months ended June 30, 1996, cash used in financing
activities amounted to $45.9 million and included a net $36.3 million reduction
in long-term debt and a $10.0 million dividend.
Legal Matters
-------------
In the normal course of business, the Company is named as a party in a
number of claims and lawsuits. In the past, substantially all of these have
been litigated or settled with no significant impact on the Company's financial
position, liquidity, or results of operations.
On June 27, 1997, PGT and Pacific Gas and Electric Company (PG&E) entered
into a settlement agreement with Norcen Energy Resources Limited (Norcen
Energy) and Norcen Marketing Incorporated (Norcen Marketing) resolving the
litigation filed against PGT and PG&E by Norcen Energy and Norcen
Marketing in the U.S. District Court, Northern District of California, on
March 17, 1994. The settlement of this matter will not have a material adverse
impact on the Company's financial condition, liquidity or results of operations.
New Accounting Standards
------------------------
Effective January 1, 1997, the Company adopted the provisions of the
American Institute of Certified Public Accountants' Statement of Position
("SOP") 96-1, "Environmental Remediation Liabilities." This SOP provides
authoritative guidance for recognition, measurement, display, and disclosure of
environmental remediation liabilities in financial statements. The adoption of
SOP 96-1 did not have an adverse impact on the Company's financial position,
liquidity, or results of operations.
During 1997, the Financial Accounting Standards Board has adopted the
following new accounting statements:
SFAS
Number Description
------------------------------------------------------------------------
128 Earnings per Share
129 Disclosure of Information about Capital Structure
130 Reporting Comprehensive Income
131 Disclosures about Segments of an Enterprise and Related Information
These statements primarily establish standards for financial statement
presentation and disclosure requirements. Both SFAS No. 128 and 129 are
effective for financial statements issued for periods ending after December 15,
1997 while SFAS No. 130 is effective for fiscal
<PAGE>
years beginning after December 15, 1997 and SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of these
statements will not have any effect on PGT's financial condition, liquidity, or
results of operations.
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On June 27, 1997, PGT and Pacific Gas and Electric Company (PG&E) entered
into a settlement agreement with Norcen Energy Resources Limited (Norcen Energy)
and Norcen Marketing Incorporated (Norcen Marketing) resolving the litigation
filed against PGT and PG&E by Norcen Energy and Norcen Marketing in the
U.S. District Court, Northern District of California, on March 17, 1994.
The settlement of this matter will not have a material adverse impact on
the Company's financial condition, liquidity, or results of operations.
ITEM 5. OTHER INFORMATION
- --------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibit 27 - Financial Data Schedule for the six months ended June
30, 1997
(b) Reports on Form 8-K during the quarter ended June 30, 1997 and through
the date hereof:
1. June 11, 1997
Item 5. Other Events - Litigation Settlement
2. July 11, 1997
Item 2. Disposition of Assets - Distribution of all of the shares of
PG&E Energy Trading Company to PG&E Gas Transmission Company
Item 7. Pro Forma Financial Information - Pro Forma Financial
Statements reflecting the disposition of PG&E Energy Trading Company
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GAS TRANSMISSION COMPANY
--------------------------------
(Registrant)
August 12, 1997 By: /s/ STANLEY C. KARCZEWSKI
----------------------------------
Name: Stanley C. Karczewski
Title: Vice President of Finance and Controller
and Chief Financial Officer
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