<PAGE>
FORM 10-Q
Securities Exchange Commission
Washington, D.C. 20549
QUARTELY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transistion period __________________ to _________________
COMMISSION FILE NO. 0-25842
PACIFIC GAS TRANSMISSION COMPANY
(Exact name of registrant as specified in its charter)
California 94-1512922
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation or organization)
2100 S.W. River Parkway, Portland, OR 97201
(Address of principle executive offices) (Zip code)
Registrant's telephone number, including area code: (503) 833-4000
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements in the past 90 days. Yes X No
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 14, 1997.
1,000 shares of common stock no par value. (All shares are owned by PG&E Gas
Transmission Corporation, formerly PG&E Gas Holdings.)
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>
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Consolidated Financial Statements
Statements of Consolidated Income
Consolidated Balance Sheets
Statements of Consolidated Cash Flows
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
Note 2. Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Statements of Consolidated Income (Unaudited)
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<TABLE>
<CAPTION>
Three Months Ended March 31,
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(In Thousands) 1997 1996
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<S> <C> <C>
OPERATING REVENUES:
Gas marketing $ 922,479 $ -
Gas transportation 48,666 48,335
Gas transportation for PG&E 12,687 8,982
Gas supply restructuring cost recovery from PG&E - 7,090
Gas supply restructuring cost recovery - 5,015
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Total operating revenues 983,832 69,422
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OPERATING EXPENSES:
Gas marketing cost of sales 920,203 -
Gas supply restructuring costs - 12,105
Administrative and general 15,245 9,437
Operations and maintenance 4,756 4,387
Depreciation and amortization 10,930 9,116
Property and other taxes 3,068 3,006
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Total operating expenses 954,202 38,051
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OPERATING INCOME 29,630 31,371
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OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used during construction 72 89
Interest income 692 751
Other - net (1,011) (439)
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Total other income and (income deductions) (247) 401
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INTEREST EXPENSE:
Interest on long-term debt 11,940 10,309
Allowance for borrowed funds used during construction (49) (71)
Other interest charges 364 983
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Net interest expense 12,255 11,221
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INCOME BEFORE INCOME TAX EXPENSE 17,128 20,551
INCOME TAX EXPENSE 8,157 8,300
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NET INCOME $ 8,971 $ 12,251
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
(In Thousands) 1997 1996
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<S>
PROPERTY PLANT & EQUIPMENT: <C> <C>
Property, plant and equipment in service $ 1,597,848 $ 1,589,940
Accumulated depreciation (429,050) (418,296)
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Net plant in service 1,168,798 1,171,644
Construction work in progress 16,167 17,529
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Total property, plant & equipment - net 1,184,965 1,189,173
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CURRENT ASSETS:
Cash and cash equivalents 26,652 37,124
Restricted cash - 5,800
Assets from risk management activities 23,703 16,595
Accounts receivable from gas marketing 342,167 388,737
Accounts receivable - gas transportation 19,929 22,241
Allowance for uncollectible accounts (1,524) (1,836)
Deferred income taxes 2,296 2,478
Inventories (at average cost) 10,379 8,968
Prepayments and other current assets 11,296 12,842
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Total current assets 434,898 492,949
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DEFERRED CHARGES:
Income tax related 25,785 26,016
Goodwill, net of amortization 27,403 23,366
Deferred charge on reacquired debt 14,558 14,859
Unamortized debt expense 5,090 5,229
Regulatory assets 15,883 15,687
Other 3,529 2,156
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Total deferred charges 92,248 87,313
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TOTAL ASSETS $ 1,712,111 $ 1,769,435
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES
March 31, December 31,
(In Thousands) 1997 1996
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<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 159 (183)
Reinvested earnings 192,182 183,211
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Total common stock equity 519,815 510,502
Long-term debt 649,671 683,049
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Total capitalization 1,169,486 1,193,551
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CURRENT LIABILITIES:
Long-term debt - current portion 392 384
Accounts payable to PG&E 13,441 3,624
Accounts payable from gas marketing 336,684 386,552
Accounts payable and other accrued liabilities 32,543 28,377
Accrued taxes 2,494 2,646
Other current liabilities 928 861
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Total current liabilities 386,482 422,444
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DEFERRED CREDITS:
Deferred income taxes 137,639 134,635
Other 18,504 18,805
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Total deferred credits 156,143 153,440
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TOTAL CAPITALIZATION AND LIABILITIES $1,712,111 $1,769,435
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
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<TABLE>
<CAPTION>
Three Months Ended
March 31,
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(In Thousands) 1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,971 $12,251
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,550 9,639
Deferred income taxes 3,417 (1,104)
Gas supply restructuring costs - 11,531
Allowance for equity funds used during
construction (72) (89)
Changes in operating assets and liabilities:
Accounts receivable 47,543 2,496
Restricted cash 5,800 -
Accounts payable and other accrued liabilities (48,533) (1,777)
Accounts payable to PG&E 10,030 7,209
Regulatory accruals - 3,442
Other working capital 1,009 880
Other - net (1,416) 2,517
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Net cash provided by operating activities 38,299 46,995
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition costs (2,189) -
Construction expenditures (5,890) (7,458)
Purchase of risk management assets (7,108) -
Allowance for borrowed funds used during construction (49) (71)
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Net cash used in investing activities (15,236) (7,529)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (33,535) (32,527)
Dividend paid to PG&E - (10,000)
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Net cash used in financing activities (33,535) (42,527)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (10,472) (3,061)
CASH AND CASH EQUIVALENTS AT JANUARY 1 37,124 9,839
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CASH AND CASH EQUIVALENTS AT MARCH 31 $ 26,652 $ 6,778
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for (received from):
Interest $ 5,223 $ 4,356
Income taxes $ (10,307) $ 1,551
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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:
PGT Australia Pty Limited ("PGT Australia")
Pacific Gas Transmission International, Inc. ("PGT International")
PGT Queensland Pty Limited ("PGT Queensland")
PG&E Energy Trading Corporation ("Energy Trading") (formerly, Energy
Source, Inc.)
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 during the second quarter of 1997, PGT's
Australian operations will be transferred by PGT to another PG&E Corporation
affiliate and that Energy Trading will become a direct subsidiary of PG&E
Corporation.
NOTE 2: CONTINGENCIES
- ----------------------
REGULATORY MATTERS
------------------
Pipeline 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 Federal Energy
Regulatory Commission ("FERC" or "Commission") on August 1, 1991, run
parallel to and connect with the existing system and provide additional firm
transportation service capacity of 150,000 Decatherms per day ("Dt/d") to
delivery points in the Pacific Northwest and 766,000 Dt/d to the California
border. Similarly, the California Public Utilities Commission ("CPUC")
authorized Pacific Gas and Electric Company ("PG&E") to expand its gas pipeline
facilities in California to connect with the PGT expansion at the California-
Oregon border. The Company's total cost of the 1993 expansion is currently
estimated to be $852 million.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT.
- --------------------------------------------------
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.
In October 1991, the FERC authorized PGT to commence construction, while
the CPUC reexamined the features of its rate design for PG&E. However, the FERC
conditioned its authorization to construct with a lower penalty rate of return
on equity of 10.13 percent, instead of the previously prescribed 12.5 percent
for the 1993 expansion. The penalty was to remain in effect 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.
In March 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 ("Court").
In addition to PGT's appeal to the Court, a number of parties also sought
judicial review of all of these FERC orders. In June 1993, the Court
consolidated the cases for processing. The consolidated cases were argued in
November 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.
In August 1996, the Court 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. On
January 22, 1997, based on the same issues as raised at the Court, a group of
shippers filed a petition for a writ of certiorari with the U.S. Supreme Court,
which was subsequently denied on April 28, 1997.
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.
1994 RATE CASE - In February 1994, PGT filed an application with the FERC
to increase its rates for transportation services. These rates were based on an
overall cost of service of approximately $217 million, including a return on
equity of 13.00 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT.
- --------------------------------------------------
percent, which the FERC had earlier required to be used to develop initial rates
for PGT's 1993 expansion facilities. (See "Pipeline 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 use of incremental costs to
determine the rates paid by firm shippers. PGT proposed that mainline rates
reflect the rolled-in approach on a prospective basis.
In September 1996, the FERC approved, without modification, a proposed
settlement of PGT's rate case. 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 implementation of rolled-in rates by itself does not change
PGT's total revenue requirement, the settlement did provide for, among other
things, a total cost of service of $206 million and depreciation rates which are
lower than originally requested by PGT, 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 by 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 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 other firm 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.
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: In March 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONT.
- --------------------------------------------------
of approximately 47,000 Dt/d on the PGT 1993 expansion. The annual demand
charges under the contract were approximately $7.8 million, and decreased to
approximately $5.5 million effective in 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 and a breach of an agreement between PGT and a Norcen predecessor
relating to the installation of additional interstate capacity. The complaint
also generally charged PG&E with monopolizing the capacity on the vintage PGT
facilities from Kingsgate to Malin and wrongfully preventing Norcen Energy and
Norcen Marketing from utilizing the vintage intrastate transmission system to
provide gas to customers in northern California.
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.
In September 1994, the U.S. District Court ("District Court"), Northern
District of California, granted PGT's and PG&E's motion to dismiss all federal
antitrust claims in the complaint originally filed in this case, and dismissed
the remaining state law claims for lack of jurisdiction.
In October 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. In July 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, but did not dismiss various state law contract claims,
including claims based on fraudulent inducement and breach of contract.
Plaintiffs have the right to appeal the dismissal of the antitrust claims
to the Court of Appeals. Plaintiffs still seek rescission of 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 matter.
At this stage of litigation, the Company is unable to estimate the outcome
of this matter. Such outcome could have a material adverse impact on the
Company's results of operations in a future reporting period, but the Company
does not believe that it would have a material adverse impact on its financial
position or liquidity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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The unaudited consolidated financial statements include:
Pacific Gas Transmission Company ("PGT")
PGT's wholly owned businesses:
PGT Australia Pty Limited ("PGT Australia")
Pacific Gas Transmission International, Inc. ("PGT International")
PGT Queensland Pty Limited ("PGT Queensland")
PG&E Energy Trading Corporation ("Energy Trading") (formerly,
Energy Source, Inc.)
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, 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.
GENERAL
-------
PGT is a wholly owned subsidiary of its parent holding company, PG&E Gas
Transmission Corporation, which is a direct subsidiary of PG&E Corporation.
Effective January 1, 1997, PG&E Corporation became the holding company for PGT's
former parent company, Pacific Gas and Electric Company ("PG&E"). PG&E's
ownership interest in PGT was transferred to PG&E Corporation.
PGT's 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.
During 1996, PGT developed a business strategy for expanding its core
pipeline business by pursuing domestic and international business development
opportunities which focus on the midstream segment of the natural gas industry.
This strategy includes investing in pipelines, storage, gathering and
processing, and marketing and trading capabilities in targeted geographic areas
both within and outside of the United States. It excludes exploration and
production of natural gas and distribution of natural gas to residential and
commercial customers.
<PAGE>
Consistent with this strategy, during 1996, PGT established the PGT
Queensland Unit Trust ("PGT 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 PGT Queensland Gas Pipeline ("PGTQ Pipeline"). The PGT Trust is
owned by two wholly owned subsidiaries of PGT; PGT International, a California
corporation, and PGT Queensland, an Australian corporation. PGT Queensland
operates the pipeline. In addition, PGT established another wholly owned
subsidiary, 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." which was subsequently renamed PG&E Energy Trading Corporation
("Energy Trading"). Energy Trading has offices in Houston, Calgary, Tulsa,
Pittsburgh and New York with a customer base in the Northeast and Midwest
regions of the United States.
Energy Trading is engaged in the purchase and resale of natural gas to a
diversified customer base, primarily consisting of industrial and commercial
companies, local distribution companies, and industry partners. Energy Trading
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.
In April 1997, PG&E Corporation announced that it will consolidate certain
of the energy trading and support operations of Teco Pipeline Company, which it
acquired in January 1997, into Energy Trading.
PG&E Corporation is in the process of reorganizing certain aspects of its
corporate structure and business lines. As a result of this reorganization, the
pursuit of the midstream gas strategy outlined above will be undertaken by PGT's
parent holding company, PG&E Gas Transmission Corporation, a direct
subsidiary of PG&E Corporation. PGT's business development efforts will be
focused on new and traditional markets in the Pacific Northwest.
In connection with this reorganization, it is anticipated that during the
second quarter of 1997, PGT's Australian operations will be transferred to
another PG&E Corporation affiliate and Energy Trading will become a direct
subsidiary of PG&E Corporation.
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
Corporation, 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. Effective November 1, 1993, PGT implemented the
provisions of Order 636. 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.
<PAGE>
Order 636 authorized PGT to adopt the straight fixed-variable ("SFV") rate
design method for all rate schedules. Under the SFV rate design, a pipeline
company's fixed costs, including return on equity and related taxes,
associated with firm transportation service are collected through the
reservation charge component of the pipeline company's firm transportation
service rates.
As a result of the current SFV rate design and 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.
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.
<PAGE>
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. 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 that would
potentially be in service in 2001. The proposed pipeline may or may not extend
as far as the Gladstone area.
Energy Trading 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 pipeline companies and regional
gas gatherers, and brokers and marketers of varying sizes, financial resources,
and experience.
<PAGE>
This intense competition has placed downward pressure on the gross
margins for Energy Trading's gas sales. As gross margins have decreased, the
market share necessary to compete effectively in the industry has grown.
During 1996, Energy Trading responded to this pressure by increasing its
sales volumes.
As noted above, it is anticipated that during the second quarter of
1997, PGT's Australian operations will be transferred to another PG&E
Corporation affiliate and Energy Trading will become a direct subsidiary of
PG&E Corporation. Accordingly, the financial results of the Australian
operations and of Energy Trading would no longer be reflected in PGT's
financial results.
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.
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 $60.8 million of regulatory assets as of March 31, 1997
including $8.4 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:
Three Months Ended March 31,
-----------------------------
1997 1996
----------- ----------
(In Millions)
Operating revenues $ 983.8 $ 69.4
Operating expenses 954.2 38.0
---------- -------
Operating income 29.6 31.4
Other income and (income deductions) (0.2) 0.4
Net interest expense 12.3 11.2
---------- --------
Income before income tax expense 17.1 20.6
Income tax expense 8.1 8.3
---------- --------
Net income $ 9.0 $ 12.3
=========== ========
Net Income - Net income was $9.0 million for the three months ended
March 31, 1997, compared with $12.3 million for the same period in 1996.
The $3.3 million decrease in the 1997 period was primarily the result of the
timing and level of investment development expenditures incurred by the
Company while pursuing its midstream gas growth strategy.
OPERATING REVENUES - The components of total operating revenues are as
follows:
Three Months Ended March 31,
-------------------------------
1997 1996
------------- ------------
(In Millions)
Gas marketing sales $ 922.5 $ -
Gas transportation 61.3 57.3
Gas supply restructuring (GSR) cost recovery - 12.1
--------- ---------
Total operating revenues $ 983.8 $ 69.4
========= =========
The $922.5 million in gas marketing sales in 1997 represents activity for
Energy Trading, a natural gas marketing company which PGT acquired effective
November 30, 1996. Energy Trading had a related cost of sales of $920.2
million, resulting in a gross margin of $2.3 million. Gas transportation
revenues for the three-month period ended March 31, 1997, increased $4.0
million compared to the same period in 1996. This increase was primarily a
result of $2.8 million in revenues from the PGTQ Pipeline, which was
purchased effective July 1, 1996, and increased firm and interruptible
revenues on PGT's pipeline.
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.
<PAGE>
Operating Expenses - The components of total operating expenses are as
follows:
Three Months Ended March 31,
----------------------------
1997 1996
------------ ------------
(In Millions)
Cost of sales $ 920.2 $ -
Gas supply restructuring (GSR) costs - 12.1
Administrative and general 15.2 9.4
Operations and maintenance 4.8 4.4
Depreciation and amortization 10.9 9.1
Property and other taxes 3.1 3.0
------------ --------
Total operating expenses $ 954.2 $ 38.0
============ ========
As discussed above, the $920.2 million cost of sales for the three
months ended March 31, 1997 represents gas marketing expenses for Energy
Trading that generated a gross margin of $2.3 million. GSR costs, which
were directly offset by related revenues, were fully amortized during 1996.
For the three months ended March 31, 1997, compared with the same period in
1996, the increases in administrative and general expenses, operations and
maintenance expenses, and depreciation and amortization expenses were
primarily a result of the operating activities of Energy Trading, the PGTQ
Pipeline, and PGT Australia. These entities were not owned or operated
by the Company during the first three months of 1996.
Other Income and (Income Deductions) - Other income and income deductions
for the three months ended March 31, 1997, decreased $0.6 million compared
to the same period in 1996 primarily due to carrying charges on GSR costs
earned in 1996 compared to 1997. The GSR costs were fully recovered during
1996.
Interest Expense - Interest expense for the three months ended March 31,
1997, increased $1.1 million compared to the same period in 1996, primarily
due to an increase in debt resulting from financing for new subsidiary
operations. During 1997, interest expense for the PGTQ Pipeline was $1.7
million which was partially offset by $0.5 million in lower interest expense
associated with revenue subject to refund balances which were repaid to
customers during 1996.
Interest on PGT's long-term debt was approximately $10.3 million for both
three month periods ended March 31, 1997 and 1996. The average interest
rate decreased to 7.3 percent in the three months ended March 31, 1997
compared to 7.4 percent during the same period in 1996, while the average
balance of long-term debt outstanding during the three months ended
March 31, 1997, was $567 million compared to $563 million during the same
period in 1996. The average effective interest rate for the PGTQ Pipeline
was 7.4 percent, based upon an average long-term debt balance of $90.8
million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Sources of Capital - The Company's capital requirements are funded from
cash provided by operations and, to the extent necessary, external financing
and capital contributions from its parent company. PGT pays dividends as
part of a balanced approach to managing its capital structure, funding its
operations and capital expenditures and maintaining appropriate cash balances.
Net Cash Provided by Operating Activities - For the three months ended March
31, 1997, net cash provided by operating activities was $38.3 million, as
compared with net cash provided by operating activities of $47.0 million for
the same period in 1996. The $8.7 million reduction is primarily a
result of $11.5 million in GSR collections in 1996 and of cash requirements
for the operating activities of PGT Australia and Energy Trading.
Net Cash Used in Investing Activities - The $7.7 million increase in
expenditures was primarily the result of the purchase of risk management assets
associated with Energy Trading's gas marketing activities. The Company's
expenditures for property, plant and equipment (including the allowance for
borrowed funds used during construction) amounted to $5.9 million and $7.5
million for the three months ended March 1997, and 1996, respectively.
Net Cash Used in Financing Activities - For the three months ended
March 31, 1997, cash used in financing activities amounted to $33.5 million
as a result of a reduction in long-term debt. For the three months ended
March 31, 1996, cash used in financing activities amounted to $42.5 million
and included a net $32.5 million reduction in long-term debt and a $10.0
million dividend paid to PG&E.
LEGAL MATTERS
-------------
In the normal course of business, the Company is named as a party in a
number of claims and lawsuits. In the past, substantially all of these have
been litigated or settled with no significant impact on the Company's
financial position, liquidity, or results of operations.
See Note 2, "Contingencies," in the Notes to Consolidated Financial
Statements contained in Item 1, Consolidated Financial Statements, above,
for a discussion of a lawsuit against the Company involving antitrust and
state law contract claims relating to a 30-year contract with a
transportation customer of the Company. 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.
NEW ACCOUNTING STANDARD
-----------------------
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.
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Information responding to this Item is included in Note 2,
"Contingencies," in the Notes to Consolidated Financial Statements in
Part I, Item 1, Consolidated Financial Statements, above, which information
is incorporated herein by reference.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Reports on Form 8-K during the quarter ended March 31, 1997 and through
the date hereof:
1. January 10, 1997
Item 5. Other Events
- Acquisition of Energy Source Assets
- Holding Company Formation
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PACIFIC GAS TRANSMISSION COMPANY
--------------------------------
(Registrant)
May 14, 1997 By: /s/ STANLEY C. KARCZEWSKI
---------------------------
Name: Stanley C. Karczewski
Title: Vice President of Finance and Controller
and Chief Financial Officer
<PAGE>
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