PG&E GAS TRANSMISSION NORTHWEST CORP, 10-K405, 1998-03-30

PG&E GAS TRANSMISSION NORTHWEST CORP
10-K405, 1998-03-30
NATURAL GAS TRANSMISSION

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1997
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

COMMISSION FILE NO. 0-25842

PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
(FORMERLY, PACIFIC GAS TRANSMISSION COMPANY)
(Exact name of registrant as specified in its charter)

CALIFORNIA 94-1512922
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation or organization)
2100 SW RIVER PARKWAY, PORTLAND, OR 97201
(Address of principal executive (Zip code)
offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 833-4000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class Name of Exchange on Which Registered
----------------------------------- -----------------------------------
7.10% Senior Notes Due 2005 New York Stock Exchange
7.80% Senior Debentures Due 2025 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---

Indicate 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 30, 1998: $0

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 30, 1998. 1,000 shares of common stock,
no par value. (All shares are owned by PG&E Gas Transmission Corporation.)

Documents Incorporated by Reference: None

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (I) (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

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business............................................................. 1
General............................................................. 1
Foreign and Domestic Operations..................................... 2
Certain Defined Terms............................................... 3
Transmission System................................................. 4
Future Expansions and Business Development.......................... 5
Customers and Services.............................................. 5
Rates and Regulation................................................ 6
Environmental Matters............................................... 8
Item 2. Properties........................................................... 8
Item 3. Legal Proceedings.................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders (omitted)........ 8

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.. 9
Item 6. Selected Financial Data (omitted)...................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 9
Item 8. Financial Statements and Supplementary Data............................ 22
Report of Independent Public Accountants.............................. 23
Statements of Consolidated Income..................................... 24
Consolidated Balance Sheets--Assets................................... 25
Consolidated Balance Sheets--Capitalization and Liabilities........... 26
Statements of Consolidated Common Stock Equity........................ 27
Statements of Consolidated Cash Flows................................. 28
Notes to Consolidated Financial Statements............................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 42

PART III

Item 10. Directors and Executive Officers of the Registrant (omitted)........... 42
Item 11. Executive Compensation (omitted)....................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management
(omitted).............................................................. 42
Item 13. Certain Relationships and Related Transactions (omitted)............... 42

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........ 42
Signatures...................................................................... 45
</TABLE>
<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

CORPORATE STRUCTURE

Effective January 1, 1998, Pacific Gas Transmission Company (PGT),
incorporated in California in 1957, changed its name to PG&E Gas Transmission,
Northwest Corporation (PG&E GT-NW). PG&E GT-NW is an interstate natural gas
pipeline company regulated by the Federal Energy Regulatory Commission (FERC).
PG&E GT-NW is affiliated with, but is not the same company as, Pacific Gas and
Electric Company, the gas and electric company serving Northern and Central
California. PG&E Corporation is the ultimate corporate parent for both PG&E
GT-NW and Pacific Gas and Electric Company. PG&E Corporation is subject to the
informational requirements of the Securities Exchange Act of 1934 and in
accordance therewith, files reports, proxy statements, and other information
with the Securities and Exchange Commission.

During 1997, PG&E Corporation reorganized certain aspects of its corporate
structure and business lines to support its long-term strategic goals.
Consistent with this strategy, on June 30, 1997, PG&E GT-NW distributed all of
the shares of PG&E Energy Trading Corporation, an energy trading entity with
both domestic and Canadian operations, to PG&E GT-NW'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 PG&E GT-NW's Current Report on Form 8-K dated July 11, 1997,
for further discussion and related pro forma financial statements).

On September 26, 1997, PG&E GT-NW sold all of its investments in Australia
to another PG&E Corporation affiliate. The subsidiaries sold included PG&E Gas
Transmission Queensland Pty Limited (PG&E Queensland; formerly, PGT Queensland
Pty Limited), the operator of the PG&E Queensland Gas Pipeline, and PG&E Gas
Transmission Australia Pty Limited (PG&E Australia; formerly, PGT Australia
Pty Limited). PG&E Australia was established to pursue new business
development opportunities in Australia for PG&E GT-NW and to serve as trustee
of the PG&E Queensland Unit Trust (PG&E Qld Trust). The Company also sold its
investment in the PG&E Qld Trust. This trust, which holds the assets of the
PG&E Queensland Gas Pipeline, was beneficially owned by Pacific Gas
Transmission International, Inc. (PGT International), a wholly owned
subsidiary of PG&E GT-NW, and PG&E Queensland. (See PG&E GT-NW's Current
Report on Form 8-K dated October 6, 1997 for further discussion.)

PG&E GT-NW and its subsidiaries are referred to collectively as the
"Company." The principal executive offices of PG&E GT-NW are located at 2100
SW River Parkway, Portland, Oregon 97201, and its telephone number is (503)
833-4000.

The following information includes forward-looking statements that involve a
number of risks, uncertainties, and assumptions. Words such as "estimates,"
"expects," "intends," "anticipates," "plans," and similar expressions identify
those statements which are forward-looking. Those risks and uncertainties
include the ongoing restructuring of the gas industry and other factors which
are described in more detail below. Importantly, the ultimate impact of the
restructuring of the gas industry on future results is uncertain, but is
expected to cause changes in the way the Company conducts its business and to
cause earnings to be more volatile. These outcomes may cause future results to
differ materially from historical results, or from results or outcomes
currently expected or sought by the Company.

BUSINESS

PG&E GT-NW was formed to construct, own, and operate the interstate segment
of a Canadian-California pipeline system, which was originally built between
1960 and 1961 and expanded in 1981 and 1993. PG&E GT-

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NW'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. Pacific Gas and Electric Company
owns and operates the portion of this pipeline system within California. PG&E
GT-NW's gas pipeline facilities interconnect with the facilities owned by
Pacific Gas and Electric Company at the Oregon-California border, with the
facilities owned by Northwest Pipeline Corporation (Northwest Pipeline) in
Northern Oregon and in Eastern Washington, and with the facilities owned by
Tuscarora Gas Transmission Company (Tuscarora) in Southern Oregon. (See
"Transmission System," below.)

PG&E GT-NW's principal business is the transportation of natural gas,
primarily from supplies in Canada, for customers located in the Pacific
Northwest, Nevada, and California. PG&E GT-NW'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. PG&E GT-NW's customers are
responsible for securing their own gas supplies and delivering them to PG&E
GT-NW's system. PG&E GT-NW transports such supplies either to downstream
pipelines, which then transport such supplies to customers, or directly to
customers themselves. (See "Customers and Services," below.)

PG&E GT-NW's natural gas transportation business is subject to regulation by
the 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.) PG&E GT-NW
is also subject to the jurisdiction of the U.S. Department of Transportation,
for safety matters concerning the operation of the pipeline, and the U.S.
Department of Energy, for authorization to import natural gas for its own use
or for resale.

EMPLOYEES

As of December 31, 1997, PG&E GT-NW had 314 employees, of which
approximately 110 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.

FOREIGN AND DOMESTIC OPERATIONS

The following table shows the Company's operating results and assets by
geographic region for 1997 and 1996. Australian operations, which commenced on
July 1, 1996, were sold on September 26, 1997; and the Canadian operations of
PG&E Energy Trading, which began on December 1, 1996, were transferred on June
30, 1997.

<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
UNITED UNITED
STATES AUSTRALIA CANADA STATES AUSTRALIA CANADA
------- --------- ------ ------- --------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Continuing Operations:
Sales..................... 231.8 8.4 -- 259.8 5.7 --
Net income (loss)......... 45.7 (3.7) -- 47.3 (3.9) --
Total assets at December
31....................... 1,185.5 -- -- 1,173.0 139.2 --
Discontinued Operations:
Sales..................... 1,334.2 -- 225.8 239.9 -- 41.4
Net income (loss)......... (6.9) -- (0.8) 0.1 -- (0.4)
Net assets at December 31. -- -- -- 47.5 -- 8.6
</TABLE>

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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 The amount paid by firm transportation service customers to
reservation reserve pipeline service. The reservation charge is payable
charge: regardless of the volumes of gas transported by such customers.

firm The right to ship a quantity of gas between two points for the
transportation term of the applicable contract as follows:
service: Long-term firm service contracts are for original contract
terms extending for one or more years of duration.
Short-term firm service contracts are for terms less than one
year.

gas supply Costs incurred as a result of a pipeline's transition to
restructuring unbundled transportation service under FERC Order 636. The cost
(GSR) costs: of terminating natural gas supply and transportation contracts
tied to the former merchant sales function comprises the
majority of such costs for PG&E GT-NW.

hub A service allowing customers to park or lend volumes of gas on
services: PG&E GT-NW's pipeline for a contracted fee.

incremental Rates charged to shippers based primarily upon the incremental
rates: 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 of shippers' gas on an as-available basis.
transportation
service:

merchant Natural gas aggregated by pipelines, under purchase contracts
sales with natural gas producers, that is transported and resold to
orbundled local distribution gas utility companies or end users at FERC-
service: 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. PG&E GT-NW implemented
Order 636 on November 1, 1993.

rolled-in Rates charged to shippers based upon the average cost of all of
rates: 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 A cost recovery method for firm service under Order 636, which
fixed - assigns all fixed costs, including return on equity and related
variable taxes, to the demand or reservation component of rates.
(SFV):

units of Mcf: One thousand cubic feet
measure: MMcf: One million cubic feet
MMcf/d: One million cubic feet per day
Bcf: One billion cubic feet
Btu: British thermal unit
Therm: One hundred thousand Btus; the amount of heat energy in
approximately 100 cubic feet of natural gas
MMBtu: One million Btus or 10 therms
Dt: Decatherm or one MMBtu
MDt: One thousand decatherms or one thousand MMBtus

3
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TRANSMISSION SYSTEM

PRESENT SYSTEM

PG&E GT-NW'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 Pacific Gas and Electric
Company and Tuscarora. PG&E GT-NW's mainline system is comprised of two
parallel pipelines with 12 compressor stations totaling approximately 402,700
International Standards Organization (ISO) installed horsepower and ancillary
facilities including metering, regulating facilities, and a communication
system. PG&E GT-NW's dual pipeline system consists of approximately 639 miles
of 36-inch diameter gas transmission line (612 miles of single 36-inch
diameter pipe and 27 miles of 36-inch diameter pipeline looping) and
approximately 590 miles of 42-inch diameter pipe.

In addition, in 1995, PG&E GT-NW 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"). The Coyote Springs Extension is comprised of approximately 18
miles of 12-inch diameter pipe, originating at a point on PG&E GT-NW's system
27 miles south of Stanfield, Oregon, connecting to Portland General's electric
generation facility near Boardman, Oregon. The Medford Extension consists of
approximately 22 miles of 16-inch diameter pipe and 66 miles of 12-inch
diameter pipe and extends from a point on PG&E GT-NW's system near Bonanza, in
Southern Oregon, to interconnection points with WP Natural at Klamath Falls
and Medford, Oregon.

INTERCONNECTION WITH OTHER PIPELINES

PACIFIC GAS AND ELECTRIC COMPANY'S PIPELINE FACILITIES

Pacific Gas and Electric Company's intrastate gas pipeline system, which
interconnects with PG&E GT-NW'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

PG&E GT-NW's pipeline facilities are interconnected with the facilities of
Northwest Pipeline near Spokane, Washington and Stanfield, Oregon. Northwest
Pipeline is an interstate natural gas pipeline with which PG&E GT-NW both
competes and cooperates for the delivery of natural gas in the Pacific
Northwest and California.

TUSCARORA

PG&E GT-NW'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 PG&E GT-NW to primarily the
Reno, Nevada area. The pipeline was placed in service in November 1995.

ANG, FOOTHILLS, AND NOVA GAS TRANSMISSION LTD. (NOVA) CANADIAN SYSTEMS

ANG and Foothills currently own pipelines that extend through Southeastern
British Columbia and connect with the pipeline system of NOVA at the Alberta-
British Columbia border near Coleman, British Columbia and with the PG&E GT-NW
pipeline system at the British Columbia-Idaho border near Kingsgate, British
Columbia.

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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 PG&E GT-NW system. Through the ANG, Foothills, and NOVA systems, PG&E
GT-NW's customers have access to the western Canadian gas production basin. On
January 26, 1998, the boards of directors of TransCanada PipeLines Limited
(TransCanada) and NOVA Corporation, the parent company of NOVA Gas
Transmission Ltd., announced an agreement to merge the companies. TransCanada
owns 100 percent of ANG, 49 percent of Foothills, and 50 percent of Tuscarora.

FUTURE EXPANSIONS AND BUSINESS DEVELOPMENT

See "Future Expansion and Business Development," below, in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

CUSTOMERS AND SERVICES

CUSTOMERS

PG&E GT-NW operates an open-access transportation system whereby gas is
transported for third-party shippers on a nondiscriminatory basis.
Transportation services have represented 100 percent of PG&E GT-NW's total
volumes since PG&E GT-NW's merchant sales service to Pacific Gas and Electric
Company was terminated effective November 1, 1993 with the implementation of
Order 636.

All but three percent of PG&E GT-NW's capacity allocated to firm
transportation service is subscribed by customers under long-term firm
transportation service agreements. These agreements have remaining terms
ranging between 4 and 27 years. Additionally, PG&E GT-NW offers short-term
firm and interruptible transportation service plus hub services, which allow
customers the ability to park or lend volumes of gas on PG&E GT-NW's pipeline
for a contracted fee. PG&E GT-NW provides interruptible transportation service
when capacity is available to shippers in the order of the percentage of the
full tariff rate that the shipper agrees to pay. For interruptible
transportation shippers paying equivalent rates, PG&E GT-NW allocates service
based on shippers' respective positions in PG&E GT-NW's first-come, first-
served service queue. During 1997, PG&E GT-NW provided transportation services
for 116 customers; 47 of these customers have long-term firm service
transportation agreements with PG&E GT-NW while the remaining customers
shipped under short-term firm, interruptible service or capacity release
contracts. PG&E GT-NW'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.

The largest customer of PG&E GT-NW in 1997 was Pacific Gas and Electric
Company, accounting for approximately $49.1 million, or 20 percent, of its
transportation revenues. There are two firm service transportation agreements
with Pacific Gas and Electric Company which expire in the years 2002 and 2005,
respectively. No other customer accounted for 10 percent or more of PG&E GT-
NW's total revenues during 1997. In 1996, Pacific Gas and Electric Company
accounted for approximately $55.6 million, or 21 percent, of PG&E GT-NW's
transportation revenues.

In 1997, approximately nine percent of PG&E GT-NW's transportation volumes
and three percent of transportation revenues were attributable to
interruptible transportation service.

5
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PG&E GT-NW's total transportation and sales quantities for each of the years
1993 through 1997 are set forth in the following table.

<TABLE>
<CAPTION>
QUANTITIES (MDT)
------------------------------
YEAR TOTAL TRANSPORTATION SALES
---- ------- -------------- -------
<S> <C> <C> <C>
1993................................ 555,668 286,424 269,244
1994................................ 815,627 815,627 --
1995................................ 885,186 885,186 --
1996................................ 934,029 934,029 --
1997................................ 969,257 969,257 --
</TABLE>

COMPETITION

See "Competition," below, in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.

RATES AND REGULATION

GENERAL

PG&E GT-NW 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 the FERC authority 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. PG&E GT-NW 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 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 PG&E GT-NW's customers to import Canadian gas for transportation over the
PG&E GT-NW 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 PG&E GT-NW'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 PG&E GT-NW
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.

Any major rate changes requested by PG&E GT-NW 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

6
<PAGE>

the FERC. Following a final decision by the FERC, PG&E GT-NW, 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 PG&E GT-NW'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 a company is not required to make refunds.

In a rate case, rates are set by dividing PG&E GT-NW'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 PG&E GT-NW's "rate base," which is the
total net value of its tangible and intangible assets. The net value of PG&E
GT-NW'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) PG&E
GT-NW's debt cost; (ii) the return on PG&E GT-NW's preferred stock, if any is
outstanding; and (iii) the allowed return on PG&E GT-NW's common stock. The
FERC is required to set the allowed return on common stock at a level
sufficient to enable PG&E GT-NW 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. PG&E GT-NW
currently provides only gas transportation service. Therefore, the
"functional" allocation of costs does not presently apply to PG&E GT-NW in the
ratemaking context. However, for ratemaking purposes, PG&E GT-NW's plant and
related costs for the existing Oregon Extensions are segregated from PG&E GT-
NW's mainline pipeline.

Under the FERC's current policies, transportation services are classified as
either firm or interruptible, and PG&E GT-NW'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.

Both firm and interruptible transportation service rates are established
with a ceiling equal to PG&E GT-NW's total costs (fixed and variable)
allocated to the service and a floor equal to the variable costs related
thereto. PG&E GT-NW is allowed to vary or discount rates between the ceiling
and the floor amounts on a non-discriminatory basis. PG&E GT-NW has not
discounted long-term firm transportation service rates, but PG&E GT-NW
sometimes discounts short-term firm and interruptible transportation service
rates in order to maximize throughput.

See "Rates and Regulation," below, in Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations for further
discussion concerning the changing regulatory environment and the settlement
of PG&E GT-NW's most recent general rate case.

7
<PAGE>

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. This information reflects PG&E GT-NW's current estimates which
are periodically evaluated and revised. These estimates are subject to a
number of assumptions and uncertainties, including changing laws and
regulations, the ultimate outcome of complex factual investigations, evolving
technologies, selection of compliance alternatives, the nature and extent of
required remediation, the extent of PG&E GT-NW's responsibility, and the
availability of recoveries or contributions from third parties. Future
estimates and actual results may differ materially from those indicated below.

PG&E GT-NW is subject to a number of federal, state, and local laws and
regulations designed to protect human health and the environment by imposing
stringent controls with regard to planning and construction activities, land
use, and air and water pollution, and, in recent years, by governing the use,
treatment, storage, and disposal of hazardous or toxic materials. These laws
and regulations affect future planning and existing operations, including
environmental protection and remediation activities. PG&E GT-NW has undertaken
major compliance efforts with specific emphasis on its purchase, use, and
disposal of hazardous materials, the cleanup or mitigation of historic waste
spill and disposal activities, and the upgrading or replacement of PG&E GT-
NW's bulk waste handling and storage facilities. The costs of compliance with
environmental laws and regulations have generally been recovered in rates.

Management believes that it is in substantial compliance with applicable
existing environmental requirements and that the ultimate amount of costs,
individually or in the aggregate, 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 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, below, for a general
description of PG&E GT-NW's environmental compliance.

ITEM 2. PROPERTIES

PG&E GT-NW's pipeline system consists of approximately 639 miles of 36-inch
diameter gas transmission line (612 miles of single 36-inch diameter pipe and
27 miles of 36-inch diameter pipeline looping), approximately 590 miles of 42-
inch diameter pipe, approximately 84 miles of 12-inch diameter pipe, and 22
miles of 16-inch diameter pipe, twelve compressor stations totaling
approximately 402,700 ISO installed horsepower, and ancillary facilities
including metering, regulating facilities, and a communications system. (For
further information on PG&E GT-NW's pipeline system, see the discussion under
"Transmission System" in Item 1, Business, above.)

PG&E GT-NW 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 4, "Long-term
Debt," in the Notes to Consolidated Financial Statements contained in Item 8,
Financial Statements and Supplementary Data, below.

ITEM 3. LEGAL PROCEEDINGS

For information concerning material legal proceedings, see Note 8,
"Commitments and Contingencies," in the Notes to Consolidated Financial
Statements contained in Item 8, Financial Statements and Supplementary Data,
below.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Since PG&E GT-NW meets the conditions set forth in General Instruction (I)
(1) (a) and (b) of Form 10-K, this information is omitted.

8
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PG&E GT-NW 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 PG&E GT-NW's former parent company,
Pacific Gas and Electric Company as well as PG&E GT-NW's new holding company,
PG&E Gas Transmission Corporation.

The payment of dividends by PG&E GT-NW on its common stock is restricted
under the terms of a Credit Agreement dated May 31, 1995. (See "1995
Refinancing" in Note 4, "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 $106.7 million of PG&E GT-NW's retained earnings was available
for dividends on its common stock as of December 31, 1997. In 1997 and 1996,
PG&E GT-NW paid cash dividends on its common stock of $64 million and $10
million, respectively.

ITEM 6. SELECTED FINANCIAL DATA

Since PG&E GT-NW meets the conditions set forth in General Instruction (I)
(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

CORPORATE STRUCTURE

The consolidated financial statements include PG&E Gas Transmission,
Northwest Corporation (PG&E GT-NW) and its wholly owned subsidiary, Pacific
Gas Transmission International, Inc. (PGT International), and the following
subsidiaries through their respective dates of disposition:

Through June 30, 1997:

PG&E Energy Trading Corporation (PG&E Energy Trading)

Through September 26, 1997:

PG&E Gas Transmission Australia Pty Limited (PG&E Australia)

PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland)

PG&E GT-NW and its subsidiaries collectively are referred to as the
"Company."

Effective January 1, 1998, Pacific Gas Transmission Company (PGT),
incorporated in California in 1957, changed its name to PG&E Gas Transmission,
Northwest Corporation. PG&E GT-NW is an interstate natural gas pipeline
company regulated by the Federal Energy Regulatory Commission (FERC). PG&E GT-
NW is affiliated with, but is not the same company as, Pacific Gas and
Electric Company, the gas and electric company serving Northern and Central
California. PG&E Corporation is the ultimate corporate parent for both PG&E
GT-NW and Pacific Gas and Electric Company.

9
<PAGE>

sole shareholder, PG&E Corporation (see PG&E GT-NW's Current Report on Form 8-
K dated July 11, 1997, for further discussion and related proforma financial
statements).

On September 26, 1997, PG&E GT-NW sold all of its investments in Australia
to another PG&E Corporation subsidiary for $42.0 million. The subsidiaries
sold included PG&E Queensland (formerly, PGT Queensland Pty Limited), the
operator of the PG&E Queensland Gas Pipeline, and PG&E Australia (formerly,
PGT Australia Pty Limited). PG&E Australia was established to pursue new
business development opportunities in Australia for PG&E GT-NW and to serve as
trustee of the PG&E Queensland Unit Trust (PG&E Qld Trust). The Company also
sold its investment in the PG&E Qld Trust. The PG&E Qld Trust, which holds the
assets of the PG&E Queensland Gas Pipeline, was beneficially owned by PGT
International and PG&E Queensland. Since this transaction was between entities
within the PG&E Corporation consolidated group, no gain or loss was recognized
upon disposition. (See PG&E GT-NW's Current Report on Form 8-K dated October
6, 1997 for further discussion.)

The following discussion includes forward-looking statements that involve a
number of risks, uncertainties, and assumptions. When used in Management's
Discussion and Analysis of Financial Condition and Results of Operations,
words such as "estimates," "expects," "intends," "anticipates," "plans," and
similar expressions identify those statements which are forward-looking. Those
risks and uncertainties include the ongoing restructuring of the gas industry
and other factors which are described in more detail below. Importantly, the
ultimate impact of the restructuring of the gas industry on future results is
uncertain, but is expected to cause changes in the way the Company conducts
its business and to cause earnings to be more volatile. These outcomes may
cause future results to differ materially from historical results, or from
results or outcomes currently expected or sought by the Company.

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. See
"Certain Defined Terms" in Item 1, Business, for a definition of terms
commonly used in the natural gas industry and herein.

GENERAL

PG&E GT-NW operates an open-access transportation system whereby gas from
producing fields in Western Canada is transported from the British Columbia-
Idaho border to the Oregon-California border for third-party shippers on a
non-discriminatory basis. PG&E GT-NW's transportation system also provides
service to various delivery points in Idaho, Washington, and Oregon. PG&E GT-
NW's natural gas transportation services are regulated by the FERC, and
various safety issues are subject to the jurisdiction of the United States
Department of Transportation.

A major expansion of PG&E GT-NW's system was placed into service on November
1, 1993, increasing PG&E GT-NW's net utility plant in service from
approximately $150 million to nearly $1 billion. Extensions from the mainline
to Coyote Springs in Northern Oregon and to Medford in Southern Oregon were
constructed in 1995. Pacific Gas and Electric Company owns and operates the
portion of the Canadian-California pipeline system within California.

The largest customer of PG&E GT-NW in 1997 was Pacific Gas and Electric
Company, accounting for approximately $49.1 million, or 20 percent of PG&E GT-
NW's total transportation revenues during 1997. No other customer accounted
for 10 percent or more of PG&E GT-NW's total revenues during 1997. In 1996,
Pacific Gas and Electric Company accounted for approximately $55.6 million, or
21 percent, of PG&E GT-NW's transportation revenues. In 1997, PG&E GT-NW
provided transportation services for 116 customers; 47 of these customers have
long-term firm service transportation agreements with PG&E GT-NW for remaining
terms that range between 4 and 27 years, while the remaining customers shipped
under short-term firm, interruptible service or capacity release contracts.
Additionally, PG&E GT-NW offers hub services, which allow customers the
ability

10
<PAGE>

to park or lend volumes of gas on PG&E GT-NW's pipeline for a contracted fee.
PG&E GT-NW provides interruptible transportation service when capacity is
available to shippers in the order of the percentage of the full tariff rate
that the shipper agrees to pay. For interruptible transportation shippers
paying equivalent rates, PG&E GT-NW allocates service based on shippers'
respective positions in PG&E GT-NW's first-come, first-served service queue.
PG&E GT-NW'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. See "Legal Matters" in Note 8, "Commitments and Contingencies," in
Item 8, Financial Statements and Supplementary Data, below, for a discussion
of the settlement of a litigation filed against PG&E GT-NW by one of its long-
term firm transportation service customers challenging the validity of its
contract.

RATES AND REGULATION

GENERAL

PG&E GT-NW 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. PG&E GT-NW 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.

11
<PAGE>

CHANGING REGULATORY ENVIRONMENT

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 company or
from another gas supplier, and required the termination of all merchant or
bundled sales service. As a result of Order 636, PG&E GT-NW 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. 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 PG&E GT-NW, have requested rehearing of this change in policy.

As required by Order 636, PG&E GT-NW has also implemented a capacity release
program. As a result, by the end of 1997, all of PG&E GT-NW's firm
transportation service customers had 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 PG&E GT-NW
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 PG&E GT-NW's tariff and agrees to pay the full
reservation fee. The capacity release program has affected the number and
types of customers using PG&E GT-NW's system, but has not impacted PG&E GT-
NW's financial results. Capacity release also provides PG&E GT-NW with the
ability to serve more shippers without constructing new facilities.

Since November 1, 1993, when PG&E GT-NW adopted FERC Order 636, PG&E GT-NW
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, PG&E GT-NW 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 PG&E GT-NW's system, regardless of the volumes of gas transported.
Consequently, the volume of gas transported by PG&E GT-NW for firm
transportation service customers does not currently have a significant impact
on PG&E GT-NW's operating results, and PG&E GT-NW'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 PG&E GT-NW believes that the 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 PG&E GT-NW's operating results to be affected by fluctuations in
the volumes of gas transported on its system. Similarly, the extent to which
PG&E GT-NW's cost of service is recovered under long-term contracts also
affects the impact that variations in PG&E GT-NW'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.

12
<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 (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.

During 1997, the FERC issued several orders to standardize communications
and practices of pipelines, thereby creating a more integrated and efficient
pipeline grid. In the most recent ruling in November 1997, the FERC issued a
NOPR to set standards for electronic communication, nomination and imbalance
procedures. The NOPR proposes, among other items, that by June 1999, all
business transactions will be conducted on the public Internet. Pipeline
companies need to develop connections using internet tools, directory services
and communication protocols to provide non-discriminatory access to all
electronic information.

The FERC also adopted and reaffirmed a new policy that the long-term growth
component of return on equity (ROE) be based on the long-term growth rate of
the economy as a whole. The FERC will consider both the discounted cash flow
(DCF) method for calculating equity returns and individual risk
characteristics of each pipeline to make ROE determinations on a case-by-case
basis.

These regulatory initiatives are not expected to have a material impact on
PG&E GT-NW's financial position, liquidity or results of operations in the
foreseeable future.

SETTLEMENT OF RATE CASE

In September 1996, the FERC approved, without modification, the proposed
settlement of PG&E GT-NW's rate case. The rate case was initially filed on
February 28, 1994, while the proposed settlement 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, most
of the firm shippers that had previously paid rates lower than the rolled-in
rates 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
PG&E GT-NW'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 PG&E GT-NW'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 PG&E GT-NW'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, PG&E GT-NW 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. PG&E GT-NW had established a reserve adequate for its refund
obligation under the settlement.

Although the FERC approved the settlement without modification, several
shippers sought rehearing of the FERC's order. In March 1998, the FERC denied
these requests for rehearing and reaffirmed its approval of the settlement.
The opposing shippers could petition for judicial review by a United States
Court of Appeals. In the event the settlement were to be modified as a result
of an appeal, PG&E GT-NW would be permitted to terminate the settlement and
reinstate the rates contained in its rate case proposal and proceed to a FERC
decision based upon the evidence in the case.

13
<PAGE>

OREGON EXTENSIONS

In 1995, PG&E GT-NW completed the Coyote Springs and the Medford extensions
(the "Oregon Extensions") of its pipeline facilities in Oregon. Portland
General Electric Company (Portland General), PG&E GT-NW's customer on the
Coyote Springs Extension, pays an incremental rate for service 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.

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.

PG&E GT-NW 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, PG&E GT-NW competes with released
capacity offered by shippers holding firm PG&E GT-NW capacity. PG&E GT-NW'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 PG&E GT-NW.

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. PG&E
GT-NW'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 PG&E GT-NW's market areas. The competitive strength of Canadian
gas supplies in Western U.S. markets has been evidenced by consistently high
throughput on the PG&E GT-NW system since Canadian gas prices were deregulated
in the mid-1980's.

PG&E GT-NW'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, PG&E GT-NW's services
face modest competition from fuel oil. Fluctuating levels of throughput caused
by these market conditions only have a minor financial effect on PG&E GT-NW
because 97 percent of PG&E GT-NW's firm transportation service capacity is
currently subscribed under long-term contracts with service billed under the
SFV rate design.

FUTURE EXPANSION AND BUSINESS DEVELOPMENT

On December 30, 1997, PG&E GT-NW filed a certificate application with the
FERC to expand its pipeline capacity by upgrading three compressors on the
northern portion of its mainline system. Approximately 72 percent of the
additional new capacity of 56,000 Dt/day for annual service plus 20,000 Dt/day
for winter service has been contracted with customers for terms ranging from
three to seven years for the annual service and 15 years for the winter
service. PG&E GT-NW expects that the remainder of the capacity will be
subscribed prior to the in-service date of the facilities. The regulatory
review process, which encompasses the environmental impact of the project, is
expected to be completed during the second quarter of 1998. The estimated cost
is $6.0 million, and the facilities are expected to be placed in service by
November 1998.

PG&E GT-NW intends to solicit expressions of interest for additional
capacity, and will consider developing 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,
PG&E GT-NW is

14
<PAGE>

considering opportunities to expand its core pipeline business primarily
within its service territory. Growth prospects are primarily focused on
investing in pipelines, storage, and gathering and processing capabilities.

ACCOUNTING FOR THE EFFECTS OF REGULATION

PG&E GT-NW currently accounts for the 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, PG&E GT-NW has accumulated
approximately $59.6 million of regulatory assets as of December 31, 1997,
including $8.6 million for relocation costs associated with the transfer of
its headquarters from San Francisco, California to Portland, Oregon, and $3.6
million for pension and other postretirement benefits related to PG&E GT-NW's
1997 Workforce Management Program (WMP). (See PG&E GT-NW's Current Report on
Form 8-K dated December 12, 1997 for further discussion.) Although PG&E GT-NW
recorded a reserve against the deferred WMP program costs in 1997 and the
relocation costs in 1996, management intends to seek recovery of these costs
as well as all other regulatory assets through rates charged to customers.

15
<PAGE>

RESULTS OF OPERATIONS

Selected operating results and other data for fiscal years 1997, 1996 and
1995 are as follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------
RESULTS OF OPERATIONS 1997(a) 1996(b) 1995
--------------------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Operating revenues....................................... $240.2 $265.5 $269.2
Operating expenses....................................... 115.4 142.7 147.3
------ ------ ------
Operating income....................................... 124.8 122.8 121.9
Other income and (income deductions)..................... (11.9) (4.9) 7.3
Net interest expense..................................... 46.0 45.6 46.3
------ ------ ------
Income from continuing operations before taxes......... 66.9 72.3 82.9
Income tax expense....................................... 24.8 28.8 31.3
------ ------ ------
Income from continuing operations...................... 42.1 43.5 51.6
Income (loss) from discontinued operations............... (11.9) (0.3) --
Income tax benefit (expense)............................. 4.1 (0.1) --
------ ------ ------
Net Income............................................. $ 34.3 $ 43.1 $ 51.6
====== ====== ======
Ratio of earnings to fixed charges (c)................... 2.4 2.6 2.7
------ ------ ------
</TABLE>
- --------
(a) 1997 results reflect: (i) PG&E Energy Trading's operations as a
discontinued operation from January 1, 1997 through its date of
disposition, June 30, 1997; and (ii) PG&E Australia's and the PG&E
Queensland Gas Pipeline's operations through their date of sale, September
26, 1997.
(b) 1996 results reflect: (i) PG&E Energy Trading's operations as a
discontinued operation from December 1, 1996 through December 31, 1996;
and (ii) the results of the PG&E Queensland Gas Pipeline from July 1, 1996
through December 31, 1996, including $5.7 million in operating revenues
and $3.7 million in operating expenses.
(c) 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.

NET INCOME -- Net income was $34.3 million in 1997, compared with $43.1
million in 1996, and $51.6 million in 1995. PG&E Energy Trading's results of
operations have been reclassified as a discontinued operation. Net losses from
discontinued operations were $7.8 million in 1997 compared to $0.4 million in
1996. During 1997, compared with 1996, transportation revenues, excluding gas
supply restructuring (GSR) cost recovery, increased $6.8 million, or three
percent; and operating expenses, excluding GSR cost amortization, increased
$4.8 million, or four percent, resulting in a $2.0 million, or two percent,
increase in operating income. Included in operating expenses in 1997 is $5.0
million for non-recurring expenses associated with PG&E GT-NW's WMP. The WMP
consisted of a Voluntary Retirement Incentive (VRI) program supplemented by
involuntary severances.

Other income deductions increased $7.0 million during 1997 compared with
1996, primarily due to $5.5 million in higher investment development expenses
and the absence of carrying charges on GSR costs in 1997 compared to the
amount earned in 1996. GSR costs were fully recovered in 1996. The Company
spent $12.7 million in investment development expenses in 1997 compared with
$7.2 million in 1996.

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-

16
<PAGE>

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 PG&E GT-NW's headquarters from San Francisco, California
to Portland, Oregon. Second, and partially offsetting the relocation cost
reserve, was the reversal of $4.2 million for reserves ($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.

OPERATING REVENUES -- The components of total operating revenues are as
follows:

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
--------------------
OPERATING REVENUES 1997 1996 1995
------------------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Gas transportation..................................... $240.2 $233.4 $217.3
Gas supply restructuring (GSR) cost recovery........... -- 32.1 51.9
------ ------ ------
Total operating revenues............................. $240.2 $265.5 $269.2
====== ====== ======
</TABLE>

Gas transportation revenues increased $6.8 million, or three percent, in
1997 compared with 1996 primarily as a result of improved short-term firm
revenues for PG&E GT-NW's pipeline in the Pacific Northwest supplemented by
$2.6 million in higher revenues for the PG&E Queensland Gas Pipeline in
Australia. Since this pipeline was purchased on July 1, 1996 and sold on
September 26, 1997, the results reflect six months of activity during 1996
compared with nine months of activity during 1997. Gas transportation revenues
increased by $16.1 million, or seven percent, in 1996 compared with 1995 as a
result of increased firm and interruptible volumes on PG&E GT-NW's system. In
addition, the increase from 1995 to 1996 reflected a full year of revenue from
the Oregon Extensions and six months of revenues from the PG&E GT-NW
Queensland Gas 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. The FERC approved a total of $168.5
million of GSR costs plus interest for recovery through the TCRM. In 1996,
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>
FOR THE YEAR ENDED
--------------------
OPERATING EXPENSES 1997 1996 1995
------------------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Administrative and general............................. $ 44.1 $ 44.9 $ 38.2
Operations and maintenance............................. 19.3 17.9 20.1
Depreciation and amortization.......................... 40.6 38.9 33.1
Property and other taxes............................... 11.4 8.9 12.4
------ ------ ------
Subtotal............................................. 115.4 110.6 103.8
Gas supply restructuring (GSR) costs................... -- 32.1 43.5
------ ------ ------
Total operating expenses............................. $115.4 $142.7 $147.3
====== ====== ======
</TABLE>

As discussed above, GSR costs were fully amortized during 1996. 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.

Total operating expenses, excluding GSR costs, increased $4.8 million in
1997 compared with 1996. PG&E GT-NW's total operating expenses increased $3.7
million, primarily as a result of higher depreciation and amortization
expenses and increased property and other taxes. The PG&E Queensland Gas
Pipeline's operating expenses increased $1.1 million as its results reflect
nine months of operations in 1997 in contrast to only six months of operations
in 1996. The PG&E Queensland Gas Pipeline was purchased on July 1, 1996, and
sold on September 26, 1997.

17
<PAGE>

Administrative and general expenses decreased $0.8 million in 1997 compared
to 1996. During both years, the Company recognized a major non-recurring
expense. In 1997, $5.0 million was accrued for the cost of the WMP, and in
1996, an $8.4 million reserve was recognized for the cost to relocate the
Company's headquarters from San Francisco, California to Portland, Oregon.
During 1997, the Company also incurred $1.0 million in higher labor expenses,
$1.3 million in increased pension and benefit expenses, and $0.5 million in
incremental additional costs associated with making the Company's computer
systems compliant with Year 2000 requirements (see "Year 2000 Compliance,"
below). Administrative and general expenses increased $6.7 million in 1996
compared to 1995 primarily as a result of the $8.4 million reserve for
relocation expenses.

Operations and maintenance expenses increased by $1.4 million in 1997
compared to 1996 primarily as a result of the nature and timing of compressor
station maintenance on the PG&E GT-NW pipeline. For similar reasons,
operations and maintenance expenses decreased $2.2 million in 1996 compared to
1995.

The $1.7 million increase in depreciation in 1997 compared to 1996 was due
to the combination of higher depreciation of $0.9 million for PG&E GT-NW due
to increased plant in service and $0.8 million for the PG&E Queensland Gas
Pipeline primarily due to an additional three months of operations. The
increase in depreciation and amortization in 1996 compared to 1995 resulted
from increased plant in service, PG&E Queensland Gas Pipeline's depreciation,
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 PG&E GT-NW's 1994 rate case.

The 1996 reversal of a $2.9 million reserve for use tax on compressor fuel
for prior years was the primary reason for the $2.5 million increase in
property and other taxes in 1997 compared to 1996. This reversal was also the
principal reason for the decrease in property and other taxes in 1996 compared
to 1995.

OTHER INCOME AND (INCOME DEDUCTIONS) -- Other income deductions were $7.0
million higher in 1997 compared to 1996 primarily due to $5.5 million in
higher investment development expenses and the absence of carrying charges on
GSR costs in 1997 compared to the amount earned in 1996. GSR costs were fully
recovered in 1996. The Company spent $12.7 million in investment development
expenses in 1997 compared with $7.2 million in 1996. Other income decreased
$12.2 million from 1995 to 1996 principally due to: increased investment
development expenses of $6.5 million; 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 $1.2 million in decreased
equity allowance for funds used during construction (AFUDC) reflecting the
completion of extensions in Oregon on November 1, 1995.

INTEREST EXPENSE -- The Company's interest expense, excluding AFUDC,
increased $0.4 million in 1997 compared to 1996, primarily due to $1.7 million
in additional interest expense incurred by the PG&E Queensland Gas Pipeline
offset, in part, by reduced interest expense for PG&E GT-NW. Interest expense
for the PG&E Queensland Gas Pipeline in 1997 was $5.1 million, based upon an
average interest rate of 7.6 percent applied to an average long-term debt
balance of $90.4 million for nine months. The interest expense for the PG&E
Queensland Gas Pipeline was $3.4 million in 1996 based upon an average
interest rate of 7.5 percent and an average long-term debt balance of $91.7
million for six months. PG&E GT-NW's interest expense on long-term debt
decreased $0.6 million in 1997 compared to 1996, primarily due to a reduction
in average debt to $537.5 million in 1997 from $549.8 million in 1996. The
average interest rate for 1997 was 7.44 percent compared with 7.39 percent for
1996.

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 $582.3 million in 1995 to $549.8 million in 1996 and a decline in the
average interest rate from 7.69 percent in 1995 to 7.39 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 PG&E GT-NW's corporate office, which was
effective July 1995, and interest expense related to the PG&E Queensland Gas
Pipeline's operations of $3.4 million.

AFUDC increased $0.1 million in 1997 compared with 1996 due to the nature
and timing of capital projects. 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.

18
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

During 1997, the balance of cash and cash equivalents increased $36.3
million compared with 1996. During 1996, the balance of cash and cash
equivalents increased $2.1 million compared with 1995. 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. PG&E GT-NW pays dividends
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 the PG&E Queensland Gas Pipeline and
PG&E Energy Trading during 1996, Pacific Gas and Electric Company, the
Company's former parent company, made capital contributions of $10.0 million
and $50.0 million, respectively.

CASH FLOWS FROM OPERATING ACTIVITIES -- For the year ended December 31,
1997, net cash provided by operating activities was $123.3 million, as
compared with $90.0 million in 1996. The $33.3 million increase primarily
resulted from the non-recurring $31.4 million refund to customers paid in
1996. For the year ended December 31, 1996, net cash provided by operating
activities was $90.0 million, as compared with net cash provided by operating
activities of $137.5 million in 1995. The $47.5 million decrease was also due
primarily to the customer refund paid in 1996 as a result of settlement of the
1994 rate case.

CASH FLOWS FROM INVESTING ACTIVITIES -- During 1997, the Company sold its
Australian subsidiaries to an affiliated company for $42.0 million. During
1996, the Company invested $136.2 million in the PG&E Queensland Gas Pipeline,
$23.2 million in PG&E Energy Trading, and invested $33.7 million in related
working capital. The $233.2 million change in cash flows from investing
activities was primarily a result of these investment activities. The $150.1
million increase in cash used in 1996 compared to 1995 was primarily the
result of investing in the PG&E Queensland Gas Pipeline and PG&E Energy
Trading, offset by $42.1 million in lower construction expenditures during
1996.

CASH FLOWS FROM FINANCING ACTIVITIES -- For the year ended December 31,
1997, cash used in financing activities amounted to $92.8 million as a result
of a net $28.8 million reduction in long-term debt and a $64.0 million
dividend paid to PG&E GT-NW's parent company. For the year ended December 31,
1996, cash provided by financing activities amounted to $139.6 million, which
primarily consisted of financing related to the acquisitions of the PG&E
Queensland Gas Pipeline and PG&E Energy Trading. The Company borrowed $91.7
million in long-term debt for the acquisition of the PG&E Queensland Gas
Pipeline and $10.0 million for the acquisition of PG&E Energy Trading. In
addition, Pacific Gas and Electric Company, PG&E GT-NW's former parent
company, contributed $60.0 million in equity to PG&E GT-NW 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 Pacific Gas
and Electric Company.

CAPITAL REQUIREMENTS

The Company's estimated capital requirements for each of the next five years
are as follows:

<TABLE>
<CAPTION>
CAPITAL REQUIREMENTS 1998 1999 2000 2001 2002
-------------------- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Capital requirements................................ 56.8 37.3 41.0 43.6 35.7
---- ---- ---- ---- ----
</TABLE>

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

19
<PAGE>

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 PG&E GT-NW's capital expenditures are associated with projects aimed
at system expansion or the replacement and enhancement of existing
transmission facilities to improve their efficiency and reliability and to
comply with environmental laws and regulations.

In addition to these capital requirements, the Company has other commitments
as discussed in Note 8, "Commitments and Contingencies," in the Notes to
Consolidated Financial Statements contained in Item 8, Financial Statements
and Supplementary Data, below.

YEAR 2000 COMPLIANCE

PG&E GT-NW has an information system initiative in process that will require
increased expenditures during the next two years to convert certain computer
systems to be Year 2000 compliant. The Year 2000 compliance issue exists
because many computer systems and applications currently use two-digit fields
to designate a year. As the century date change occurs, date-sensitive systems
may either fail or not operate properly unless the underlying programs are
modified or replaced.

PG&E GT-NW is continuing to assess the extent of information system changes
required to address this issue. Although final cost estimates have yet to be
determined for these changes, it is anticipated that such costs will result in
increased expenses being recognized in the next several years. It is not
expected that these expenses will have a material adverse impact on PG&E GT-
NW's financial condition, liquidity, or results of operations.

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.

PG&E GT-NW 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 PG&E GT-NW 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 evolving
regulatory requirements. For 1998, capital requirements for environmental
protection and safety compliance are estimated to be approximately $0.4
million.

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,
individually or in the aggregate, 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.

20
<PAGE>

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 8, "Commitments and Contingencies," in the Notes to Consolidated
Financial Statements contained in Item 8, Financial Statements and
Supplementary Data, below, for a discussion of the settlement of a lawsuit
against the Company involving antitrust and state law contract claims with a
transportation customer of the Company. The settlement of this matter did 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 a material adverse impact on the Company's financial
position, liquidity, or results of operations.

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 these increased costs can directly affect income
through higher operating expenses. The cumulative impact of inflation over a
number of years has resulted in increased costs for current replacement of
PG&E GT-NW's plant and equipment. However, PG&E GT-NW's utility plant is
subject to ratemaking treatment, and the increased cost of replacement plant
is generally recoverable through rates.

21
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial statements of PG&E Gas Transmission, Northwest Corporation and its
subsidiaries:

Report of Independent Public Accountants

Statements of Consolidated Income--for each of the three years ended
December 31, 1997, 1996, and 1995

Consolidated Balance Sheets--as of December 31, 1997 and 1996

Statements of Consolidated Common Stock Equity--for each of the three
years ended December 31, 1997, 1996, and 1995

Statements of Consolidated Cash Flows--for each of the three years
ended December 31, 1997, 1996, and 1995

Notes to Consolidated Financial Statements

22
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholder and the Board of Directors
of PG&E Gas Transmission, Northwest Corporation (formerly, Pacific Gas
Transmission Company):

We have audited the accompanying Consolidated Balance Sheets of PG&E Gas
Transmission, Northwest Corporation (a California corporation) and
subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 PG&E Gas Transmission,
Northwest Corporation and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.

/s/ Arthur Andersen LLP
-------------------------------------
ARTHUR ANDERSEN LLP

Portland, Oregon
January 23, 1998

23
<PAGE>

STATEMENTS OF CONSOLIDATED INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES:
Gas transportation............................... $190,644 $194,881 $174,879
Gas transportation for affiliates................ 49,064 37,726 41,456
Gas supply restructuring cost recovery from
affiliates...................................... -- 17,847 33,942
Gas supply restructuring cost recovery from
others.......................................... -- 14,273 17,962
Other............................................ 458 766 979
-------- -------- --------
Total operating revenues....................... 240,166 265,493 269,218
-------- -------- --------
OPERATING EXPENSES:
Gas supply restructuring costs................... -- 32,120 43,553
Administrative and general....................... 44,067 44,850 38,190
Operations and maintenance....................... 19,336 17,937 20,092
Depreciation and amortization.................... 40,586 38,903 33,046
Property and other taxes......................... 11,378 8,867 12,374
-------- -------- --------
Total operating expenses....................... 115,367 142,677 147,255
-------- -------- --------
OPERATING INCOME................................. 124,799 122,816 121,963
-------- -------- --------
OTHER INCOME AND (INCOME DEDUCTIONS):
Investment development........................... (12,703) (7,230) (761)
Allowance for equity funds used during
construction.................................... 445 241 1,399
Interest income.................................. 725 2,273 6,328
Other-net........................................ (396) (160) 357
-------- -------- --------
Total other income and (income deductions)..... (11,929) (4,876) 7,323
-------- -------- --------
INTEREST EXPENSE:
Interest on long-term debt....................... 45,150 44,072 44,777
Allowance for borrowed funds used during
construction.................................... (309) (256) (1,167)
Other interest charges........................... 1,174 1,846 2,731
-------- -------- --------
Net interest expense........................... 46,015 45,662 46,341
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAX EXPENSE..................................... 66,855 72,278 82,945
INCOME TAX EXPENSE............................... 24,785 28,814 31,338
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS................ 42,070 43,464 51,607
INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE
INCOME TAXES.................................... (11,901) (244) --
INCOME TAX (EXPENSE) BENEFIT..................... 4,157 (75) --
-------- -------- --------
NET INCOME....................................... $ 34,326 $ 43,145 $ 51,607
======== ======== ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.

24
<PAGE>

CONSOLIDATED BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
PROPERTY, PLANT, AND EQUIPMENT:
Property, plant, and equipment in service............... $1,478,735 $1,586,225
Accumulated depreciation................................ (444,408) (416,190)
---------- ----------
Net plant in service.................................... 1,034,327 1,170,035
Construction work in progress........................... 13,870 17,529
---------- ----------
Total property, plant & equipment--net................ 1,048,197 1,187,564
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................... 48,249 11,969
Accounts receivable--gas transportation................. 16,701 22,241
Accounts receivable from affiliates..................... 4,964 15,890
Deferred income taxes................................... -- 730
Inventories (at average cost)........................... 13,270 14,167
Prepayments and other current assets.................... 4,282 4,524
Net assets of PG&E Energy Trading....................... -- 56,102
---------- ----------
Total current assets.................................. 87,466 125,623
---------- ----------
DEFERRED CHARGES:
Income tax related regulatory asset..................... 25,482 26,016
Deferred charge on reacquired debt...................... 13,654 14,859
Unamortized debt expense................................ 4,014 5,229
Other regulatory assets................................. 6,430 7,310
Other................................................... 240 1,672
---------- ----------
Total deferred charges................................ 49,820 55,086
---------- ----------
TOTAL ASSETS............................................ $1,185,483 $1,368,273
========== ==========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.

25
<PAGE>

CONSOLIDATED BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
CAPITALIZATION:
Common stock--no par value; 1,000 shares authorized,
issued and outstanding................................. $ 85,474 $ 85,474
Additional paid-in capital.............................. 192,717 242,000
Foreign currency translation adjustment................. -- (183)
Reinvested earnings..................................... 153,536 183,211
---------- ----------
Total common stock equity............................. 431,727 510,502
Long-term debt.......................................... 563,499 683,049
---------- ----------
Total capitalization.................................. 995,226 1,193,551
---------- ----------
CURRENT LIABILITIES:
Long-term debt--current portion......................... 419 384
Accrued liabilities and other accounts payable.......... 31,208 28,541
Accrued taxes........................................... 813 2,482
---------- ----------
Total current liabilities............................. 32,440 31,407
---------- ----------
DEFERRED CREDITS:
Deferred income taxes................................... 145,727 132,887
Other................................................... 12,090 10,428
---------- ----------
Total deferred credits................................ 157,817 143,315
---------- ----------
Commitments and contingencies (Note 8).................. -- --
---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES.................... $1,185,483 $1,368,273
========== ==========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.

26
<PAGE>

STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY

<TABLE>
<CAPTION>
UNREALIZED TOTAL
ADDITIONAL GAIN (LOSS) COMMON
COMMON PAID-IN REINVESTED ON FOREIGN STOCK
STOCK CAPITAL EARNINGS CURRENCY EQUITY
------- ---------- ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994...................... $85,474 $182,000 $138,459 $ -- $405,933
Net income-1995.......... -- -- 51,607 -- 51,607
Dividend paid to parent
company................. -- -- (40,000) -- (40,000)
------- -------- -------- ------- --------
Balance at December 31,
1995...................... 85,474 182,000 150,066 -- 417,540
Net income-1996.......... -- -- 43,145 -- 43,145
Capital contribution from
parent.................. -- 60,000 -- -- 60,000
Dividend paid to parent
company................. -- -- (10,000) -- (10,000)
Foreign currency
translation............. -- -- -- (183) (183)
------- -------- -------- ------- --------
Balance at December 31,
1996...................... 85,474 242,000 183,211 (183) 510,502
Net income-1997.......... -- -- 34,326 -- 34,326
Return of capital of PG&E
Energy Trading to parent
company................. -- (49,275) -- -- (49,275)
Dividend paid to parent
company................. -- -- (64,000) -- (64,000)
Foreign currency
translation............. -- -- -- (10,447) (10,447)
Contributed capital from
sale of assets to
affiliated company...... -- (8) -- 10,630 10,622
Other.................... -- -- (1) -- (1)
------- -------- -------- ------- --------
BALANCE AT DECEMBER 31,
1997...................... $85,474 $192,717 $153,536 $ -- $431,727
======= ======== ======== ======= ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.

27
<PAGE>

STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 34,326 $ 43,145 $ 51,607
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization................. 42,541 42,428 35,058
Discontinued operations....................... 7,744 319 --
Deferred income taxes......................... 13,203 13,812 9,127
Gas supply restructuring costs................ -- 30,531 39,580
Allowance for equity funds used during
construction................................. (445) (241) (1,399)
Changes in operating assets and liabilities
(excluding assets and liabilities acquired,
transferred, or sold):
Accounts receivable........................... 4,103 6,801 (1,206)
Accounts payable and accrued liabilities...... 5,212 983 (2,021)
Receivable from affiliates.................... 12,853 (18,034) (7,487)
Accrued taxes................................. (1,669) (6,164) 1,269
Regulatory accruals........................... 880 (23,201) 20,109
Other working capital......................... (398) (3,907) (1,917)
Other-net....................................... 4,914 3,513 (5,177)
-------- -------- --------
Net cash provided by operating activities... 123,264 89,985 137,543
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of PG&E Queensland Gas Pipeline..... -- (136,227) --
Acquisition of PG&E Energy Trading.............. -- (23,151) --
Sale of subsidiaries to affiliated company...... 42,000 -- --
Investment expenditures......................... (2,891) (33,749) --
Construction expenditures....................... (37,814) (34,054) (76,143)
Sale of fixed assets............................ 4,795 -- --
Allowance for borrowed funds used during
construction................................... (309) (256) (1,167)
-------- -------- --------
Net cash provided by (used in) investment
activities................................. 5,781 (227,437) (77,310)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt..................... (109,382) (51,441) (801,611)
Long-term debt issued........................... 80,617 141,850 715,662
Long-term debt issuance costs................... -- (827) (5,241)
Construction financing.......................... -- -- 10,030
Payments for swap termination................... -- -- (3,898)
Equity contribution from parent................. -- 60,000 --
Dividend paid to parent......................... (64,000) (10,000) (40,000)
-------- -------- --------
Net cash provided by (used in) financing
activities................................. (92,765) 139,582 (125,058)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS......... 36,280 2,130 (64,825)
CASH AND CASH EQUIVALENTS AT JANUARY 1.......... 11,969 9,839 74,664
-------- -------- --------
CASH AND CASH EQUIVALENTS AT DECEMBER 31........ $ 48,249 $ 11,969 $ 9,839
======== ======== ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.

28
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

NOTE 1: SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Effective January 1, 1998, Pacific Gas Transmission Company (PGT),
incorporated in California in 1957, changed its name to PG&E Gas Transmission,
Northwest Corporation (PG&E GT-NW). PG&E GT-NW is affiliated with, but is not
the same company as, Pacific Gas and Electric Company, the gas and electric
company serving Northern and Central California. PG&E Corporation is the
ultimate corporate parent for both PG&E GT-NW and Pacific Gas and Electric
Company.

The accompanying consolidated financial statements, reflect the results for
PG&E GT-NW and its wholly owned subsidiaries including Pacific Gas
Transmission International, Inc. (PGT International) and the following
subsidiaries through their respective dates of disposition (see Note 2, "PG&E
Corporation Reorganization," below):

Through June 30, 1997:

PG&E Energy Trading Corporation (PG&E Energy Trading)

Through September 26, 1997:

PG&E Gas Transmission Australia Pty Limited (PG&E Australia) (formerly,
PGT Australia Pty Limited)

PG&E Gas Transmission Queensland Pty Limited (PG&E Queensland)
(formerly, PGT Queensland Pty Limited)

PG&E GT-NW and its subsidiaries collectively are referred to herein as the
"Company."

All material adjustments are of a normal recurring nature unless otherwise
disclosed in this Form 10-K. 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.

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, liabilities and disclosure of contingencies.
Actual results could differ from these estimates.

BUSINESS -- The Company provides natural gas transmission services.

PG&E GT-NW 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.

PG&E GT-NW's principal business is the transportation of natural gas,
primarily from supplies in Canada for customers located in the Pacific
Northwest, Nevada, and California. PG&E GT-NW'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. PG&E GT-NW's customers are
responsible for securing their own gas supplies which are delivered to PG&E
GT-NW's system. PG&E GT-NW transports such supplies either to downstream
pipelines, which then transport such supplies to their customers, or directly
to customers themselves.

29
<PAGE>

RISK MANAGEMENT -- PG&E Corporation has established an officer-level price
risk management committee and a price risk management policy which is also
applicable to PG&E GT-NW. This committee oversees implementation and
compliance with the policy and approves each price risk management program.

These price risk management activities can 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.

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.

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 -- PG&E GT-NW's rates and charges for its natural gas
transportation business are regulated by the Federal Energy Regulatory
Commission (FERC or Commission). PG&E GT-NW'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 PG&E GT-NW 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 PG&E GT-NW 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 1997, PG&E GT-NW recorded a $3.6 million reserve against its Workforce
Management Program (WMP) costs pending future regulatory treatment of these
deferred assets. During 1996, in compliance with the adoption of this
standard, PG&E GT-NW recorded a reserve of $8.4 million ($5.2 million net of
tax) against deferred relocation costs associated with the transfer of its
corporate headquarters from San Francisco, California to Portland, Oregon.
Management expects to pursue recovery of these costs in future rate
proceedings.

30
<PAGE>

The following regulatory assets and liabilities were reflected in PG&E GT-
NW's Consolidated Balance Sheets:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
REGULATORY ASSETS AND LIABILITIES 1997 1996
--------------------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
REGULATORY ASSETS:
Income tax related......................................... $25,482 $26,016
Deferred charge on reacquired debt......................... 13,654 14,859
Deferred corporate relocation costs........................ 8,590 8,377
Pension costs.............................................. 6,374 4,560
Fuel tracker............................................... 2,939 5,977
Postretirement benefit costs (PBOP)........................ 2,588 2,750
------- -------
Total.................................................... 59,627 62,539
RESERVES:
Deferred corporate relocation costs........................ (8,590) (8,377)
WMP (pension).............................................. (2,531) --
WMP (postretirement benefits other than pension)........... (1,029) --
------- -------
Total.................................................... (12,150) (8,377)
------- -------
Net Regulatory Assets................................... $47,477 $54,162
======= =======
REGULATORY LIABILITIES:
Postretirement benefits other than pension................. $(1,110) $(1,010)
------- -------
Total.................................................... $(1,110) $(1,010)
======= =======
</TABLE>

Excluding the corporate relocation costs, for which a reserve has been
established, substantially all of PG&E GT-NW's net regulatory assets are
provided for in rates charged to customers and are being amortized over future
periods. A reserve has been also established against the deferred WMP costs.

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.

PROPERTY, PLANT AND EQUIPMENT -- Utility plant is stated at original cost.
The costs of utility plant additions for PG&E GT-NW, 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 embedded 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. PG&E
GT-NW's weighted average AFUDC rates were 4.03 percent for borrowed funds and
5.78 percent for equity funds in 1997, 4.23 percent for borrowed funds and
5.54 percent for equity funds in 1996, and 4.49 percent for borrowed funds and
5.33 percent for equity funds in 1995.

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. No gain or loss is recognized upon normal
retirement of utility plant.

For financial reporting purposes, PG&E GT-NW's tangible utility plant in
service is depreciated using a straight-line remaining-life method while its
intangible plant in service is amortized over five years as approved by the
FERC.

31
<PAGE>

The following table sets forth the major classifications of the Company's
property, plant, and equipment and its accumulated provisions for depreciation
and amortization at December 31:

<TABLE>
<CAPTION>
AVERAGE AVERAGE
DEPRECIATION DEPRECIATION
OR OR
AMORTIZATION AMORTIZATION
AMOUNT RATE AMOUNT RATE
---------- ------------ ---------- ------------
PROPERTY, PLANT, AND
EQUIPMENT 1997 1996
-------------------- ------------------------ ------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
PG&E GT-NW:
Transmission............... $1,419,429 2.352% $1,395,513 2.352%
General.................... 28,531 7.303% 26,500 7.303%
Capital lease.............. 17,534 5.000% 17,534 5.000%
Intangible................. 13,241 20.000% 9,665 20.000%
---------- ----------
Utility plant in service.. 1,478,735 1,449,212
Construction work in
progress.................. 13,870 17,529
---------- ----------
Total utility plant....... 1,492,605 1,466,741
Less: accumulated
provisions for:
Depreciation.............. (436,670) (408,015)
Amortization.............. (7,738) (6,314)
---------- ----------
Utility plant net........ 1,048,197 1,052,412
---------- ----------
AUSTRALIAN SUBSIDIARIES:
Transmission............... -- N/A 136,146 2.670%
Other...................... -- N/A 867 11.534%
---------- ----------
Total property, plant, and
equipment................ -- 137,013
Less: accumulated provision
for:
Depreciation.............. -- (1,861)
---------- ----------
Australian subsidiaries--
net..................... -- 135,152
---------- ----------
Property, plant, and
equipment--net.............. $1,048,197 $1,187,564
========== ==========
</TABLE>

UNAMORTIZED DEBT EXPENSE AND GAINS OR LOSSES ON REACQUIRED DEBT -- PG&E GT-
NW'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
PG&E GT-NW's ratemaking treatment.

REVENUES -- PG&E GT-NW's operating revenues are recorded as services are
provided based on rate schedules approved by the FERC (see Note 8,
"Commitments and Contingencies," below).

INCOME TAXES -- The Company is included in the consolidated federal income
tax return filed by PG&E Corporation. For financial reporting purposes, income
taxes are allocated to PG&E GT-NW and its subsidiaries on a modified separate
return basis, to the extent such taxes or tax benefits can be utilized by PG&E
Corporation in the consolidated return.

FOREIGN CURRENCY -- Prior to the sale of its Australian subsidiaries,
financial statements of foreign subsidiaries were 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 was recorded as a component of common stock equity.
Financial statements for the Australian subsidiaries were prepared from
records maintained in Australia.

STATEMENTS OF CONSOLIDATED CASH FLOWS -- Cash paid for interest, net of
amounts capitalized, totaled $38.2, $40.9, and $49.9 million in 1997, 1996,
and 1995, respectively. Cash received from PG&E Corporation for

32
<PAGE>

income taxes totaled $1.2 million in 1997. Payments to Pacific Gas and
Electric Company, PG&E GT-NW's former parent company, for income taxes totaled
$25.6 and $29.8 million in 1996 and 1995, respectively.

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 a material adverse impact on
the Company's financial position, liquidity, or results of operations.

NOTE 2: PG&E CORPORATION REORGANIZATION

In April 1997, PG&E Corporation, PG&E GT-NW's ultimate corporate parent,
announced its intention to reorganize certain aspects of its corporate
structure and business lines to support its long-term strategic goals.
Consistent with this strategy, PG&E GT-NW has transferred ownership of its
subsidiaries other than PGT International to other PG&E Corporation
affiliates.

PG&E ENERGY TRADING:

On June 30, 1997, PG&E GT-NW distributed all of the shares of PG&E Energy
Trading to PG&E GT-NW'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 PG&E GT-NW's
Current Report on Form 8-K dated July 11, 1997 for further discussion and
related proforma financial statements).

Accordingly, PG&E Energy Trading's results are reported as discontinued
operations. For financial reporting purposes, the measurement date applied was
June 30, 1997, the date of disposal. In addition, since the shares of PG&E
Energy Trading were transferred at the $49.3 million net book value at the
time of distribution, there was no gain or loss on disposal. For the six
months ended June 30, 1997, PG&E Energy Trading's revenues were $1,560.0
million, and for the one month ended December 31, 1996, PG&E Energy Trading's
revenues were $281.3 million. For the purposes of cash flow presentation, this
transfer was a noncash transaction. Net assets of PG&E Energy Trading at the
date of disposal and at December 31, 1996 were as follows:

<TABLE>
<CAPTION>
AT DATE OF DECEMBER 31,
NET ASSETS OF PG&E ENERGY TRADING DISPOSAL 1996
--------------------------------- ---------- ------------
(IN MILLIONS)
<S> <C> <C>
Property, plant & equipment-net...................... $ 1.9 $ 1.6
Cash, restricted cash and cash equivalents........... 14.4 31.0
Assets from risk management.......................... 27.5 16.6
Accounts receivable-net.............................. 348.7 386.9
Other current assets................................. 6.0 3.1
Goodwill and other deferred charges.................. 29.1 23.9
Accounts payable from gas marketing.................. (356.8) (386.6)
Other current liabilities............................ (21.5) (20.4)
------ ------
Net Assets......................................... $ 49.3 $ 56.1
====== ======
</TABLE>

PG&E GT-NW'S AUSTRALIAN INVESTMENTS:

On September 26, 1997, PG&E GT-NW sold all of its investments in Australia
to another PG&E Corporation affiliate for $42.0 million (see PG&E GT-NW's
Current Report on Form 8-K dated October 6, 1997). The subsidiaries sold
included PG&E Queensland, the operator of the PG&E Queensland Gas Pipeline,
and PG&E Australia. PG&E Australia was established to pursue new business
development opportunities in Australia for PG&E GT-NW and to serve as trustee
of the PG&E Queensland Unit Trust (PG&E Qld Trust). The Company also sold its
investment in the PG&E Qld Trust. The PG&E Qld Trust, which holds the assets
of the PG&E Queensland Gas Pipeline, was beneficially owned by PGT
International (a PG&E GT-NW wholly

33
<PAGE>

owned subsidiary) and PG&E Queensland. Net assets of PG&E GT-NW's Australian
investments at the date of disposal and at December 31, 1996 were as shown
below. The $8.6 million difference between the sales price of $42.0 million
and PG&E GT-NW's net investment of $33.4 million was credited to stockholders
equity as no gain or loss was recognized upon disposition since this
transaction was between entities within the PG&E Corporation consolidated
group.

<TABLE>
<CAPTION>
AT DATE OF DECEMBER 31,
NET ASSETS OF AUSTRALIAN INVESTMENTS DISPOSAL 1996
------------------------------------ ---------- ------------
(IN MILLIONS)
<S> <C> <C>
Property, plant & equipment-net...................... $123.1 $135.2
Current assets....................................... 3.6 3.4
Deferred charges..................................... 0.6 0.8
Long-term debt....................................... (89.8) (90.8)
Current liabilities.................................. (4.0) (2.6)
Deferred credits..................................... (0.1) (0.1)
------ ------
Net assets......................................... $ 33.4 $ 45.9
====== ======
</TABLE>

NOTE 3: RELATED PARTY TRANSACTIONS

The Company invests its available cash balances with, or borrows from, PG&E
Corporation 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 Corporation at December 31, 1997 and 1996 was
$47.9 million and $9.2 million, respectively (included in "Cash and Cash
Equivalents" on the Consolidated Balance Sheets), at an interest rate of 5.5
percent and 5.4 percent, respectively. The interest rate on these cash
investments or borrowings averaged 5.6 percent in 1997, 5.4 percent in 1996,
and 6.6 percent in 1995. The related interest income was $0.3 million in 1997,
$0.3 million in 1996, and $0.9 million (net of $0.6 million interest expense)
in 1995.

Pacific Gas and Electric Company and PG&E Corporation perform certain
administrative services on behalf of PG&E GT-NW for which they have charged
PG&E GT-NW approximately $0.2 million in 1997, $0.2 million in 1996, and $0.3
million in 1995. Such amounts are included in PG&E GT-NW's operating expenses.
In 1997 and 1996, employees of other affiliated companies within PG&E
Corporation provided investment development services of approximately $1.5
million and $0.6 million, respectively, which were expensed by the Company.

Pacific Gas and Electric Company was the largest customer of PG&E GT-NW
during 1997, accounting for approximately $49.1 million, or 20 percent, of its
transportation revenues. There are two firm service transportation agreements
with Pacific Gas and Electric Company which expire in the years 2002 and 2005,
respectively. No other customer accounted for 10 percent or more of PG&E GT-
NW's total revenues during 1997. In 1996, Pacific Gas and Electric Company
accounted for approximately $55.6 million, or 21 percent, of PG&E GT-NW's
transportation revenues.

34
<PAGE>

NOTE 4: LONG-TERM DEBT

Long-term debt at December 31, 1997 and 1996, consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
LONG-TERM DEBT 1997 1996
-------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
PG&E GT-NW 1995 Refinancing:
Senior Unsecured Notes, due 2005.......................... $249,816 $249,792
Senior Unsecured Debentures, due 2025..................... 147,631 147,545
Medium Term Notes, due 2000 to 2003....................... 70,000 70,000
Commercial Paper.......................................... 79,696 108,087
-------- --------
Subtotal................................................ 547,143 575,424
PG&E Australia, due 2001.................................... -- 90,850
PG&E GT-NW Capital Lease Obligation......................... 16,775 17,159
Current Portion of PG&E GT-NW Capital Lease Obligation...... (419) (384)
-------- --------
Long-term debt included in capitalization............... $563,499 $683,049
======== ========
</TABLE>
The following table summarizes the annual maturities of long-term debt for
the next five years:

<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, IN THOUSANDS
------------ ------------
<S> <C>
1998........................................................ $ 419
1999........................................................ $ 457
2000........................................................ $111,511
2001........................................................ $ 543
2002........................................................ $ 33,593
</TABLE>

1995 REFINANCING -- On May 31, 1995, PG&E GT-NW completed the sale of $400
million of debt securities through a $700 million shelf registration under the
Securities Act of 1933. PG&E GT-NW 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 PG&E GT-NW.

On May 31, 1995, PG&E GT-NW also issued $200 million of commercial paper, of
which $79.7 million was outstanding as of December 31, 1997, at an average
rate of 6.33 percent. The average balance during 1997 was $67.5 million at an
average rate of 5.9 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 PG&E GT-NW or its affiliates out of the $200 million. The annual fee for
this facility is $0.2 million plus a fee based on the amount of outstanding
letters of credit. In accordance with the credit agreement, PG&E GT-NW 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. At December 31, 1997, the debt to total capitalization ratio was 57
percent, and tangible net worth was $431.7 million. Letters of credit
outstanding under this agreement at December 31, 1997 were $64.1 million.

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, 1997, PG&E GT-NW 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.

35
<PAGE>

On July 5, 1995, PG&E GT-NW 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 -- PG&E GT-NW secured long-term debt financing from a
consortium of banks pursuant to a loan agreement dated April 30, 1993. Under
the loan agreement, PG&E GT-NW borrowed $673 million to finance the pipeline
expansion and the existing system. The debt was guaranteed by Pacific Gas and
Electric Company. The weighted average rate of interest on this loan during
1995 was 8 percent.

The interest rate on the debt (which ranged from 4 percent to 8.4 percent in
1995) was at a floating rate subject to periodic determination in accordance
with the terms of the loan agreement and varied depending on the nature and
the length of the borrowings, but was generally tied to the banks' 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, PG&E GT-NW 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 PG&E GT-NW 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, PG&E GT-NW 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 -- PG&E GT-NW 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, PG&E GT-NW is obligated to pay operating costs, taxes,
and insurance for the building. PG&E GT-NW 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. PG&E GT-NW must purchase the building at the end of the lease term.

Based on the provisions of the lease agreement, PG&E GT-NW accounts for the
obligation as a capital lease. The total future commitments are $33.4 million
with a principal portion of $16.8 million. The effective interest rate
inherent in the lease is 8.8 percent.

FAIR VALUE -- At December 31, 1997, the Company's primarily fixed rate long-
term debt had a carrying value of $563.9 million and had an estimated fair
market value of $588.5 million. 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. The estimated fair value of
long-term debt was based upon quoted market prices.

NOTE 5: INCOME TAXES

The significant components of income tax expense were:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
INCOME TAX EXPENSE 1997 1996 J1995
------------------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current--Federal..................................... $ 6,460 $13,821 $18,832
-- State.......................................... 1,065 1,282 3,404
------- ------- -------
Total current.................................... 7,525 15,103 22,236
------- ------- -------
Deferred--Federal 11,304 12,314 9,152
-- State.......................................... 1,824 1,497 (25)
------- ------- -------
Total deferred................................... 13,128 13,811 9,127
------- ------- -------
Investment tax credit amortization................... (25) (25) (25)
------- ------- -------
Total income tax expense........................... $20,628 $28,889 $31,338
======= ======= =======
</TABLE>

36
<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>
YEAR ENDED DECEMBER 31,
------------------------
INCOME TAX EXPENSE 1997 1996 1995
------------------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected federal income tax expense................... $19,234 $25,212 $29,031
Increase (decrease) in income tax expense resulting
from:
State income taxes, net of federal benefit.......... 1,948 2,436 2,198
Valuation allowances against certain development
costs.............................................. (1,046) 745 --
Allowance for equity funds used during construction. 246 364 22
Other............................................... 246 132 87
------- ------- -------
Total income tax expense.......................... $20,628 $28,889 $31,338
======= ======= =======
</TABLE>

The significant components of net deferred income tax liabilities were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
DEFERRED INCOME TAXES 1997 1996
--------------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets--current:
Current reserve for regulatory issues................... $ -- $ 730
--------- ---------
Total deferred income tax assets--current............. -- 730
--------- ---------
Deferred income tax liabilities--noncurrent:
Plant in service........................................ (138,809) (126,601)
Debt financing costs.................................... (5,263) (5,725)
Other................................................... (1,655) (561)
--------- ---------
Total deferred income tax liabilities--noncurrent..... (145,727) (132,887)
--------- ---------
Net deferred income taxes........................... $(145,727) $(132,157)
========= =========
</TABLE>

NOTE 6: EMPLOYEE BENEFIT PLANS

RETIREMENT PLAN -- Until January 1, 1996, through participation in Pacific
Gas and Electric Company's multiple-employer defined benefit pension plan,
PG&E GT-NW 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 PG&E GT-NW were
allocated to a new separate PG&E GT-NW defined benefit pension plan. The
benefits under the new PG&E GT-NW plan are substantially the same as those
provided under the Pacific Gas and Electric Company plan.

PG&E GT-NW realized a liability of $3.9 million as a result of the
allocation of plan assets and liabilities from the Pacific Gas and Electric
Company combined plan to the PG&E GT-NW 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. PG&E GT-NW'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 Pacific Gas and Electric Company
consolidated parent company level. As such, PG&E GT-NW does not have requisite
information necessary to present the 1995 disclosures for pension expense as
required by SFAS No. 87, "Employers' Accounting for Pensions."

37
<PAGE>

Using the projected unit credit actuarial cost method, net pension cost
pursuant to SFAS No. 87 and SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," consisted of the following components:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
NET PENSION EXPENSE 1997 1996
------------------- ------- -------
(IN THOUSANDS)
<S> <C> <C>
Service cost................................................. $ 1,668 $ 1,583
Interest cost................................................ 2,027 1,827
Return on plan assets........................................ (6,807) (4,492)
Net amortization and deferral................................ 3,509 1,735
------- -------
Net periodic pension cost.................................. 397 653
Curtailment and special termination benefits resulting from
the WMP..................................................... 2,531 --
------- -------
Total SFAS No. 87 and SFAS No. 88 pension cost............. $ 2,928 $ 653
======= =======
</TABLE>

The following table reconciles the plan's funded status to the pension
liability recorded on the Consolidated Balance Sheet:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
FUNDED STATUS RECONCILED TO PENSION LIABILITY 1997 1996
--------------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Vested benefit obligation..................................... $ 28,322 $ 19,398
======== ========
Accumulated benefit obligation................................ $ 30,514 $ 21,020
======== ========
Funded status as of December 31:
Plan assets at fair value................................... $ 39,653 $ 32,379
Projected benefit obligation for service rendered to date... 34,525 27,259
-------- --------
Funded status............................................. 5,128 5,120
Unrecognized net gain....................................... (12,169) (10,489)
Unrecognized net liability at transition.................... 425 534
Unrecognized prior service costs............................ 242 286
-------- --------
Total pension liability................................... $ (6,374) $ (4,549)
======== ========
Discount rate................................................. 7.50% 7.50%
======== ========
Expected long-term return on plan assets...................... 9.00% 9.00%
======== ========
Rate for compensation increases............................... 5.00% 5.00%
======== ========
</TABLE>

SAVINGS FUND PLAN -- PG&E GT-NW 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

38
<PAGE>

compensation, are eligible for matching by PG&E GT-NW contributions at
specified rates. The cost of PG&E GT-NW's contributions was charged to expense
and to plant in service, and totaled $0.7 million, $0.6 million, and $0.6
million for 1997, 1996, and 1995, respectively.

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- PG&E GT-NW 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 PG&E GT-NW 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 PG&E GT-NW's retirees.

In December 1992, the FERC issued a "Statement of Policy on Post-Employment
Benefits Other Than Pensions" which addressed 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, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," 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.

As required by the Commission's policy, in 1995, PG&E GT-NW 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. When PG&E GT-NW's
rates in the 1994 rate case became final, PG&E GT-NW established irrevocable
trusts for the bargaining and non-bargaining unit plans to fund all benefit
payments based upon a prescribed annual test period allowance of $2.1 million.
To the extent actual SFAS No. 106 accruals differ from the annual funded
amount, a regulatory asset or liability is established to defer the difference
pending treatment in the next general rate case filing. Based upon this
treatment, PG&E GT-NW had overcollected $1.1 million at December 31, 1997 and
$1.0 million at December 31, 1996. The total contributions to the trust were
$2.1 million in 1997 and $4.1 million in 1996, which included the transfer of
funds from the escrow account related to 1995 funding. At December 31, 1997,
plan assets at fair value for the bargaining and non-bargaining unit trusts
were $2.4 million and $4.7 million, respectively. For both trusts, plan assets
consist primarily of common stock, fixed-income securities, and cash
equivalents.

Using the projected unit credit actuarial cost method, PG&E GT-NW's net
postretirement medical and life insurance cost, pursuant to SFAS No. 106,
consisted of:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
POSTRETIREMENT BENEFIT COSTS 1997 1996 1995
---------------------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost........................................ $ 325 $ 346 $ 432
Interest cost....................................... 727 691 770
Return on plan assets............................... (1,087) (1) (9)
Amortization of transition obligation............... 461 461 461
Net amortization and deferral....................... 421 (168) (94)
------- ------- -------
Net postretirement benefit costs.................. 847 1,329 1,560
Curtailment and special termination benefits
resulting from the WMP............................. 1,029 -- --
------- ------- -------
Total postretirement benefit costs................ $ 1,876 $ 1,329 $ 1,560
======= ======= =======
</TABLE>

39
<PAGE>

The following table reconciles the medical and life insurance plans' funded
status to the postretirement benefit liability recorded on the Consolidated
Balance Sheet:

<TABLE>
<CAPTION>
DECEMBER 31,
ACCRUED SFAS NO. 106 POSTRETIREMENT LIABILITY AND ------------------
DEFERRED REGULATORY BALANCES FOR PBOP 1997 1996
------------------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $ (6,428) $ (4,381)
Other fully eligible participants........................ (2,756) (2,065)
Other active plan participants........................... (2,410) (3,594)
-------- --------
Total accumulated postretirement benefit obligation........ (11,594) (10,040)
Plan assets at market value................................ 7,051 4,123
-------- --------
Accumulated postretirement benefit obligation in excess of
plan assets............................................... (4,543) (5,917)
Unrecognized transition obligation......................... 6,283 7,383
Unrecognized net gain...................................... (3,411) (3,467)
-------- --------
Accrued SFAS No. 106 postretirement liability............ $ (1,671) $ (2,001)
======== ========
</TABLE>

In accordance with SFAS No. 106, PG&E GT-NW 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 1997 and 1996 was
based upon a revised estimated transition obligation of $8.3 million.

The actuarial assumptions used in 1997 and 1996 to determine the benefit
obligations and costs for postretirement benefits other than pensions include
a weighted average discount rate of 7.50 percent and 7.25 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 for participants in the health
maintenance plan (HMO) is 5.0 percent for all years. The trend rate for
participants in the preferred provider (PPO) and managed indemnity plans are
age dependent. For participants under age 65, the trend rate is approximately
9.5 percent in 1998, trending down to an ultimate rate in 2005 of
approximately 6.0 percent. For participants age 65 or older, the trend rate is
approximately 8.8 percent in 1998, trending down to 6.0 percent in 2005. 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, 1997, by approximately $1.3 million and the 1997 annual aggregate
service and interest costs by approximately $0.1 million.

NOTE 7: WORKFORCE MANAGEMENT PROGRAM

In the fourth quarter of 1997, the Company announced a Workforce Management
Program to reduce costs through a combination of a Voluntary Retirement
Incentive (VRI) plan, voluntary severance, involuntary severance, and
attrition. The majority of the reductions have occurred through VRI for
employees 49 years of age with at least 5 years of service, or employees 55
years of age or over. The VRI package provided additional age and service
credits towards retirement benefits. The Company also has a Severance Benefit
Plan which provided additional compensation based upon service credit to
employees who were involuntarily severed.

In 1997, PG&E GT-NW expensed $5.0 million for the WMP. These costs included
actuarially determined incremental pension and postretirement benefits for
medical and life insurance premiums, severance payments, professional fees
including outplacement services and lease termination costs. The effects of
the workforce reductions are reflected in the pension and postretirement
benefits other than pension costs in Note 6, "Employee Benefit Plans," above.

40
<PAGE>

NOTE 8: COMMITMENTS AND CONTINGENCIES

OPERATING LEASE COMMITMENTS -- Operating lease expense amounted to $1.3
million in 1997, $0.8 million in 1996, and $1.6 million in 1995. Future
minimum payments for operating leases are:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, (IN THOUSANDS)
------------------------- -------------
<S> <C>
1998...................................................... $ 328
1999...................................................... 325
2000...................................................... 324
2001...................................................... 297
2002...................................................... 185
Thereafter................................................ 284
------
Total future commitments................................ $1,743
======
</TABLE>

1994 RATE CASE -- In September 1996, the FERC approved, without
modification, the proposed settlement of PG&E GT-NW's rate case. The rate case
was initially filed on February 28, 1994, while the proposed settlement 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, most of the firm shippers that had previously paid rates
lower than the rolled-in rates 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.

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 either the
Company's results of operations or financial position.

On June 27, 1997, PG&E GT-NW and Pacific Gas and Electric Company entered
into a settlement agreement with Norcen Energy Resources Limited (Norcen
Energy) and Norcen Marketing Incorporated (Norcen

41
<PAGE>

Marketing) resolving the litigation filed against PG&E GT-NW and Pacific Gas
and Electric Company by Norcen Energy and Norcen Marketing in the U.S.
District Court, Northern District of California, on March 17, 1994. The
settlement of this matter did not have a material adverse impact on the
Company's financial condition, liquidity, or results of operations.

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 PG&E GT-NW meets the conditions set forth in General Instruction (I)
(1) (a) and (b) of Form 10-K, this information is omitted.

ITEM 11. EXECUTIVE COMPENSATION

Since PG&E GT-NW meets the conditions set forth in General Instruction (I)
(1) (a) and (b) of Form 10-K, this information is omitted.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Since PG&E GT-NW meets the conditions set forth in General Instruction (I)
(1) (a) and (b) of Form 10-K, this information is omitted.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Since PG&E GT-NW meets the conditions set forth in General Instruction (I)
(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, 1997, 1996 and 1995

Consolidated Balance Sheets as of December 31, 1997 and 1996

Statements of Consolidated Common Stock Equity for each of the
three years ended December 31, 1997, 1996 and 1995

Statements of Consolidated Cash Flows for each of the three
years ended December 31, 1997, 1996 and 1995

Notes to Consolidated Financial Statements

2. Report of Independent Public Accountants

(b) Exhibits required to be filed by Item 601 of Regulation S-K:

42
<PAGE>

<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation of Pacific Gas Transmission Company
(PGT) effective January 1, 1998, (incorporated by reference to PG&E GT-
NW's Current Report on Form 8-K dated January 1, 1998 as filed on
January 14, 1998 (File No. 0-25842), Exhibit 3.1).
3.2 By-Laws of PG&E Gas Transmission, Northwest Corporation as amended
January 1, 1998 (incorporated by reference to PG&E GT-NW's Current
Report on Form 8-K dated January 1, 1998 as filed on January 14, 1998
(File No. 0-25842), Exhibit 3.2).
4.1 Senior Trust Indenture Between Pacific Gas Transmission Company 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 Pacific Gas Transmission Company
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 Pacific Gas Transmission Company
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 Pacific Gas Transmission
Company 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's Form 10-K for fiscal
year 1993 (File No. 1- 2348), Exhibit 10.4).
10.2 Lease Agreement dated as of April 15, 1994, between Pacific Gas
Transmission Company and GIC Development 94-I, L.L.C. (incorporated by
reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.3).
*10.3 Savings Fund Plan for Employees of Pacific Gas Transmission Company
applicable to management employees, effective January 1, 1995
(incorporated by reference to PGT's Form 10-K for fiscal year 1995
(File No. 0-25842), Exhibit 10.4).
*10.4 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).
*10.5 The Pacific Gas and Electric Company Retirement Plan applicable to non-
union employees, as amended October 15, 1997, effective January 1, 1998
(incorporated by reference to PG&E Corporation's Form 10-K for fiscal
year 1997 (File No. 1-2348), Exhibit 10.8).
*10.6 Supplemental Executive Retirement Plan of the Pacific Gas and Electric
Company, as amended through October 16, 1991 (incorporated by reference
to Pacific Gas and Electric Company's Form 10-K for fiscal year 1991
(File No. 1- 2348), Exhibit 10.11).
*10.7 PG&E Corporation Long-Term Incentive Program, as amended and restated
effective as of January 1, 1998, including the PG&E Corporation Stock
Option Plan, Performance Unit Plan, and Non-Employee Director Stock
Incentive Plan (incorporated by reference to PG&E Corporation's Form
10-K for fiscal year 1997 (File No. 1-2348), Exhibit 10.15).
*10.8 Pacific Gas and Electric Company Executive Flexible Perquisites Program
(incorporated by reference to Pacific Gas and Electric Company's Form
10-K for fiscal year 1993 (File No. 1-2348), Exhibit 10.16).
*10.9 Deferred Compensation Plan of Pacific Gas Transmission Company
(incorporated by reference to PGT's Form 10/A (File No. 0-25842),
Exhibit 10.14).
*10.10 Phantom Stock Plan of Pacific Gas Transmission Company (incorporated by
reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.15).
</TABLE>

43
<PAGE>

<TABLE>
<CAPTION>
<C> <S>
10.11 Credit Agreement among Pacific Gas Transmission Company 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).
10.12 First Amendment to Credit Agreement among Pacific Gas Transmission
Company and the Banks, Co-Agents and Agent named therein, dated as of
September 14, 1995 (incorporated by reference to PGT's 10-K for fiscal
year 1995 (File No. 0-25842), Exhibit 10.19).
10.13 Second Amendment to Credit Agreement among Pacific Gas Transmission
Company and the Banks, Co-Agents and Agent named therein, dated as of
December 24, 1996 (incorporated by reference to PGT's 10-K for fiscal
year 1996 (File No. 0-25842), Exhibit 10-19).
10.14 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).
10.15 Appendix H, an amendment to the Pacific Gas Transmission Company
Retirement Plan applicable to management employees, effective November
13, 1997 (filed herewith).
12.1 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21.0 Since PG&E GT-NW meets the conditions set forth in General Instruction
(I) (1) (a) and (b) of Form 10-K, this information is omitted.
23.1 Consent of Arthur Andersen LLP (filed herewith).
24.1 Resolution of the Board of Directors of PG&E Gas Transmission, Northwest
Corporation authorizing the execution of the Form 10-K (filed herewith).
24.2 Powers of Attorney (filed herewith).
27 Financial Data Schedule (filed herewith).
</TABLE>

- --------
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this report pursuant to Item 14(c) of Form 10-K.

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.

Reports on Form 8-K during the quarter ended December 31, 1997 and through
the date hereof:

1. October 6, 1997

Item 5. Other Events--PG&E GT-NW's sale of its Australian subsidiaries
and interest in the PG&E Queensland Gas Pipeline to another PG&E
Corporation affiliate.

2. December 12, 1997

Item 5. Other Events--Announcement of PG&E GT-NW's Workforce
Management Program.

3. January 14, 1998

Item 5. Other Events--Announcement of name change from Pacific Gas
Transmission Company to PG&E Gas Transmission, Northwest Corporation.

Item 7. Financial Statements and Exhibits

- Restated Articles of Incorporation
- By-Laws as Amended

44
<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 30th
day of March, 1998.

PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
(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.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
A. Principal Executive Officer
Joseph P. Kearney President and Chief
Executive Officer March 30, 1998

B. Principal Financial and Accounting
Officer
Stanley C. Karczewski Vice President of March 30, 1998
Finance and Controller
and Chief Financial
Officer
C. Directors
Joseph P. Kearney Chairman of the Board March 30, 1998
Bruce R. Worthington Director March 30, 1998
M.E. Rescoe Director March 30, 1998
</TABLE>

By: /s/ Frank R. Lindh
-----------------------------
(Frank R. Lindh, Attorney-
in-Fact)

<PAGE>

EXHIBIT 10.15

APPENDIX H

PACIFIC GAS TRANSMISSION COMPANY
RETIREMENT PLAN

VOLUNTARY RETIREMENT INCENTIVE PROGRAM

1. INTRODUCTION

This Appendix H, an amendment to the COMPANY'S RETIREMENT PLAN, adopted by
the COMPANY'S Board of Directors effective as of November 13, 1997, provides for
the Voluntary Retirement Incentive Program ("VRI") for ELIGIBLE EMPLOYEES. The
purpose of the VRI is to provide an opportunity for enhanced early retirement
benefits for employees currently eligible or soon to be eligible for early
retirement under the regular terms of the RETIREMENT PLAN.

The VRI is part of the RETIREMENT PLAN and except as otherwise provided in
this Appendix H shall be administered in accordance with and subject to the
terms of the RETIREMENT PLAN. Terms in all capital letters are defined in the
RETIREMENT PLAN. Terms in boldface type are defined in this Appendix H.

The decision of an ELIGIBLE EMPLOYEE to elect to participate in the VRI is
wholly voluntary, and an election not to participate in the VRI shall in no way
affect benefits under the RETIREMENT PLAN to which an ELIGIBLE EMPLOYEE might
otherwise be entitled.

2. ELIGIBILITY TO PARTICIPATE IN THE VRI

2.1 Subject to 2.2, an ELIGIBLE EMPLOYEE shall be any active management
employee of the COMPANY who, on December 31, 1997, (i) is age 49 or older
(actual age) with 5 YEARS of CREDITED SERVICE, or (ii) is age 55 or older
(actual age).

2.2 For purposes of this VRI only, the term active management employee shall
not include an employee of the COMPANY (i) who, on November 14, 1997, is
presently receiving benefits under Part B of the Group Life Insurance and
Long Term Disability Plan; (ii) who is on a leave of absence, with or
without pay, which began on or prior to November 14, 1997; (iii) who is a
non-management employee of the COMPANY; (iv) who is a former employee on
November 14, 1997, whose last HOUR of CREDITED SERVICE was before November
14, 1997; (v) who has received or is scheduled to receive severance
benefits under the COMPANY's Workforce Management Program adopted November
10, 1997, or under any other written agreement between the COMPANY and the
Employee under which the employee has received or is or will become
entitled to receive benefits in connection with the termination of
employment of the employee, or (vi) who is a former employee who was
terminated for cause.

APPENDIX H - PACIFIC GAS TRANSMISSION COMPANY RETIREMENT PLAN

1
<PAGE>

3. ELECTION TO PARTICIPATE

3.1 An ELIGIBLE EMPLOYEE must elect to participate in the VRI by submitting a
completed and signed VRI enrollment form that is received by a designated
COMPANY representative no later than December 31, 1997.

3.2 An ELIGIBLE EMPLOYEE who fails to submit a timely enrollment form shall be
deemed to have elected not to participate in the VRI.

3.3 The election of an ELIGIBLE EMPLOYEE not to participate in the VRI, whether
through failure to submit a timely VRI election form or otherwise, shall be
conclusive and binding on the employee, and on the employee's spouse,
heirs, and assigns.

4. VRI BENEFIT

4.1 BASIC VRI BENEFIT. An ELIGIBLE EMPLOYEE who elects in a timely manner to
participate in the VRI shall be entitled to receive a BASIC VRI BENEFIT
under the RETIREMENT PLAN equal to the BASIC PENSION BENEFIT formula
calculated under Appendix A of the RETIREMENT PLAN, with the following
adjustments:

4.1-1 Only for purposes of the benefit calculation, 8 Units shall be added
to the formula.

4.1-2 The 8 Units shall be applied first to the employee's age. Up to a
maximum calculation age of 62, up to 8 Units shall be added to the
ELIGIBLE EMPLOYEE'S age to derive a calculation. If less than 8
years are needed to bring the employee's age to 62, any whole or
partial Units remaining shall be added to increase the Eligible
Employee's YEARS of CREDITED SERVICE (YCS). For an employee who has
at least 30 YCS, age 60 shall be substituted for age 62 in the
foregoing sentences of this Section 4.1-2. For an employee who has
less than 15 YCS, age 65 shall be substituted for age 62 in the
first two sentence of this Section 4.1-2.

4.1-3 The EARLY RETIREMENT ADJUSTMENT FACTORS of RETIREMENT PLAN Appendix
D shall apply to any BASIC VRI BENEFIT payable under this Appendix
H, considering the employee's age for pension reduction purposes to
be the age calculated under 4.1-2 above.

4.2 A BASIC VRI BENEFIT shall be payable commencing as of January 1, 1998, or
the first day of the month after an earlier VRI RETIREMENT DATE selected by
the ELIGIBLE EMPLOYEE. Benefit payments shall commence as soon as
practicable after the applicable VRI RETIREMENT DATE, subject to applicable
notice, spousal consent and election periods under the regular provisions
of the RETIREMENT PLAN. ELIGIBLE EMPLOYEES who elect to participate in the
VRI shall not be subject to the age 55 requirement contained in Section
4.01-2(b) of the RETIREMENT PLAN.

APPENDIX H - PACIFIC GAS TRANSMISSION COMPANY RETIREMENT PLAN

2
<PAGE>

4.3 Section 4.08 and related provisions of the RETIREMENT PLAN shall control
the conditions under which other forms of pension may be substituted for
the BASIC VRI BENEFIT. Thus, although a PARTICIPANT is entitled to receive
a BASIC VRI BENEFIT, if the PARTICIPANT is married, Section 4.08-2(f) of
the RETIREMENT PLAN requires that the BASIC VRI BENEFIT be converted to a
contingent annuity in the form stated in 4.08-3(c) with the spouse as
contingent annuitant, unless the PARTICIPANT'S spouse consents to an
alternative form of pension.

4.4 The BASIC VRI BENEFIT payable under this Appendix H shall be in lieu of any
benefit which might otherwise be payable under the RETIREMENT PLAN, subject
to all generally applicable benefit limitations.

4.5 The first available BENEFIT MONTH under the VRI shall be January 1998. At
any time during the period from November 14, 1997, up to and including
February 13, 1998, participant may submit a completed benefit application
and select a form of benefit payments beginning with January 1998. This
extended period for application for benefits does not extend the December
31, 1997, deadline for electing to participate in the VRI. If a
participant in the VRI who is younger than age 65 submits an application
for benefits after February 13, 1998, the amount and form of benefit shall
be calculated for the first benefit month starting at least 30 days after
the date the application is received. Except as provided in the first two
sentences of this Section 4.5, no retroactive benefit payments shall be
made.

4.6 If an ELIGIBLE EMPLOYEE elects to participate by submitting the enrollment
form under 3.1 and dies while married before the applicable BENEFIT
STARTING DATE, 5.01 shall be applied by taking into account the VRI benefit
enhancements.

5. VRI RETIREMENT DATES

5.1 At such time as an employee elects to participate in the VRI, the employee
shall select a VRI RETIREMENT DATE. The VRI RETIREMENT DATE selected shall
also be the date as of which an ELIGIBLE EMPLOYEE ceases to be an employee
of the COMPANY.

5.2 For purposes of this Appendix H, a VRI RETIREMENT DATE shall mean one of
the following:

5.2-1 December 31, 1997; or

5.2-2 Any date during the period commencing with November 14, 1997, and
ending with and including December 31, 1997; or

5.2-3 Any date during the period commencing with January 1, 1998, and
ending with and including December 31, 1998. This clause 5.2-3 shall
only apply

APPENDIX H - PACIFIC GAS TRANSMISSION COMPANY RETIREMENT PLAN

3
<PAGE>

in the event that the COMPANY has a demonstrated business
need which requires the retention of the ELIGIBLE EMPLOYEE for a
limited period of time no longer than 12 months with respect to work
under way or scheduled by December 15, 1997 to take place before the
end of the 12 month period. The selection of any such VRI RETIREMENT
DATE subsequent to December 31, 1997, can be made only with written
approval provided on or before December 15, 1997 by the chief
executive officer of PG&E Corporation or by an executive officer of
the COMPANY designated by the chief executive officer of PG&E
Corporation for this purpose.

6. REVOCATION OF ELECTION

An ELIGIBLE EMPLOYEE who has elected to participate in the VRI may revoke
the election, provided, however, that any such revocation shall only be
effective if received by the COMPANY on or before the seventh calendar day after
the ELIGIBLE EMPLOYEE'S submission of the completed and signed VRI Enrollment
Form under Section 3 of this Appendix H.

7. DEFINITIONS

7.1 BASIC VRI BENEFIT: The benefit calculated under Section 4 of this Appendix
H.

7.2 ELIGIBLE EMPLOYEE: An employee of the COMPANY who has met the eligibility
criteria as set forth in Section 2.

7.3 VRI: The COMPANY'S Voluntary Retirement Incentive program as set forth in
this Appendix H.

7.4 VRI RETIREMENT DATE: The date selected by an ELIGIBLE EMPLOYEE under
Section 5 of this Appendix H.

APPENDIX H - PACIFIC GAS TRANSMISSION COMPANY RETIREMENT PLAN

<PAGE>

EXHIBIT 12.1

PG&E GAS TRANSMISSION NORTHWEST CORPORATION
Computation of Ratio of Earnings to Fixed Charges
(Dollars in Millions)

<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
Ratio of Earnings to Fixed Charges 1997 1996 1995 1994 1993
- ---------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Income from continuing operations $ 42.1 $ 43.5 $ 51.6 $ 47.7 $ 6.3
Adjustments:
Income taxes 24.8 28.8 31.3 30.0 (12.2)
Fixed charges (as below) 46.7 46.3 48.2 47.4 27.2
------ ------- ------ ------ ------
Total adjusted earnings $113.6 $118.6 $131.1 $125.1 $ 21.3
====== ======= ====== ====== ======
Fixed charges: (a)
Net interest expense $ 46.0 $ 45.7 $ 46.3 $ 45.6 $ 11.7
Adjustments:
Interest component of rents 0.4 0.3 0.7 0.9 0.8
AFUDC debt 0.3 0.3 1.2 0.9 14.7
------ ------ ------ ------ ------
Total fixed charges $ 46.7 $ 46.3 $ 48.2 $ 47.4 $ 27.2
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 2.4 2.6 2.7 2.6 0.8
====== ====== ====== ====== ======
Deficiency of earnings
to cover fixed charges N/A N/A N/A N/A ($5.9)
====== ====== ====== ====== ======

Year Ended December 31,
-----------------------------------------------------------
Ratio of Earnings Before Net Gas
Supply Restructuring (GSR) Costs to
Fixed Charges 1993
------
Total adjusted earnings, as above $ 21.3
GSR costs, net of GSR recoveries 51.0
------
Total adjusted earnings before net GSR
costs $ 72.3
======
Total fixed charges, as above $ 27.2
======
Ratio of earnings before net
GSR costs to fixed charges 2.7
======
</TABLE>

(a) There were no shares of preferred stock issued or outstanding during any of
the five years ended December 31, 1997, and therefore there were no fixed
charges related to preferred stock during these periods.

<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 January 23, 1998 included in
PG&E Gas Transmission, Northwest Corporation's (formerly, Pacific Gas
Transmission Company) 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, 1997 or performed any audit procedures
subsequent to the date of our report.

/s/ Arthur Andersen LLP
-------------------------------
Arthur Andersen LLP

Portland, Oregon
March 30, 1998

<PAGE>

EXHIBIT 24.1

PG&E GAS TRANSMISSION, NORTHWEST CORPORATION

BOARD OF DIRECTORS

ACTION BY WRITTEN CONSENT

The Board of Directors of PG&E Gas Transmission, Northwest Corporation, a
California corporation (the "Corporation"), acting by written consent pursuant
to the Bylaws of this Corporation and pursuant to Section 307 of the California
Corporations Code, hereby takes the following action:

WHEREAS, the management of the Corporation has recommended the filing
of the Corporation's Annual Report on Form 10-K for the fiscal year ending
December 31, 1997, 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, 1997, in substantially the form as circulated to the Board
prior to approval.

NOW, THEREFORE, BE IT RESOLVED, that Frank R. Lindh and Linda Y.H.
Cheng are hereby authorized to sign, on behalf of this Corporation and as
attorneys in fact for the Chief Executive Officer and for the Vice
President, Chief Financial Officer and Controller of this Corporation, the
Annual Report on Form 10-K for PG&E Gas Transmission, Northwest Corporation
(formerly Pacific Gas Transmission Company) for the fiscal year ended
December 31, 1997, 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; and

BE IT FURTHER RESOLVED, that this written consent may be signed in
counterparts, the sum of which constitute the entire written consent.

PAGE 1 - ACTION BY WRITTEN CONSENT
<PAGE>

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.

Effective the 20th day of March 1998.

/s/ Joseph P. Kearney
-----------------------------------
Joseph P. Kearney

/s/ M.E. Rescoe
-----------------------------------
M. E. Rescoe

/s/ Bruce R. Worthington
-----------------------------------
Bruce R. Worthington

PAGE 2 - ACTION BY WRITTEN CONSENT

<PAGE>

EXHIBIT 24.2

POWER OF ATTORNEY

Each of the undersigned Directors of PG&E Gas Transmission, Northwest
Corporation (formerly Pacific Gas Transmission Company) hereby constitutes and
appoints LINDA Y.H. CHENG and FRANK R. LINDH, and each of them, as his or her
attorneys in fact with full power of substitution to sign and file with the
Securities and Exchange Commission in his or her capacity as such Director of
said corporation the Form 10-K Annual Report for the year ended December 31,
1997, required by Section 13 or 15(d) of the Securities Exchange Act of 1934,
and any and all amendments and other filings or documents related thereto, and
hereby ratifies all that said attorneys in fact or any of them may do or cause
to be done by virtue hereof.

This document may be signed in counterparts.

IN WITNESS WHEREOF, we have signed these presents this 20th day of March,
1998.

/s/ Joseph P. Kearney
----------------------------------
Joseph P. Kearney

/s/ M.E. Rescoe
----------------------------------
M.E. Rescoe

/s/ Bruce R. Worthington
----------------------------------
Bruce R. Worthington

Power of Attorney

1
<PAGE>

EXHIBIT 24.2

POWER OF ATTORNEY

JOSEPH P. KEARNEY, the undersigned, Chairman of the Board and Chief
Executive Officer of PG&E Gas Transmission, Northwest Corporation, hereby
constitutes and appoints LINDA Y.H. CHENG and FRANK R. LINDH, and each of them,
as his attorneys in fact with full power of substitution to sign and file with
the Securities and Exchange Commission in his capacity as Chairman of the Board
and Chief Executive Officer (principal executive officer) of said corporation
the Form 10-K Annual Report for the year ended December 31, 1997, required by
Section 13 or 15(d) of the Securities Exchange Act of 1934, and any and all
amendments and other filings or documents related thereto, and hereby ratifies
all that said attorneys in fact or any of them may do or cause to be done by
virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 20th day of
March, 1998.

/s/ Joseph P. Kearney
---------------------------
Joseph P. Kearney

Power of Attorney

2
<PAGE>

EXHIBIT 24.2

POWER OF ATTORNEY

STANLEY C. KARCZEWSKI, the undersigned, Vice President, Finance, and
Controller and Chief Financial Officer of PG&E Gas Transmission, Northwest
Corporation, hereby constitutes and appoints LINDA Y.H. CHENG and FRANK R.
LINDH, and each of them, as his attorneys in fact with full power of
substitution to sign and file with the Securities and Exchange Commission in his
capacity as Vice President, Finance, and Controller and Chief Financial Officer
(principal financial officer) of said corporation the Form 10-K Annual Report
for the year ended December 31, 1997, required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 and any and all amendments and other filings or
documents related thereto, and hereby ratifies all that said attorneys in fact
or any of them may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 20th day of
March, 1998.

/s/ Stanley C. Karczewski
--------------------------------
Stanley C. Karczewski

Power of Attorney

<PAGE>

<ARTICLE> UT
<LEGEND>
THIS SECTION OF THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,048,197
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 87,466
<TOTAL-DEFERRED-CHARGES> 49,820
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,185,483
<COMMON> 85,474
<CAPITAL-SURPLUS-PAID-IN> 192,717
<RETAINED-EARNINGS> 153,536
<TOTAL-COMMON-STOCKHOLDERS-EQ> 431,727
0
0
<LONG-TERM-DEBT-NET> 467,447
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 79,696
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 16,356
<LEASES-CURRENT> 419
<OTHER-ITEMS-CAPITAL-AND-LIAB> 189,838
<TOT-CAPITALIZATION-AND-LIAB> 1,185,483
<GROSS-OPERATING-REVENUE> 240,166
<INCOME-TAX-EXPENSE> 24,785
<OTHER-OPERATING-EXPENSES> 115,367
<TOTAL-OPERATING-EXPENSES> 140,152
<OPERATING-INCOME-LOSS> 100,014
<OTHER-INCOME-NET> (19,673)
<INCOME-BEFORE-INTEREST-EXPEN> 80,341
<TOTAL-INTEREST-EXPENSE> 46,015
<NET-INCOME> 34,326
0
<EARNINGS-AVAILABLE-FOR-COMM> 34,326
<COMMON-STOCK-DIVIDENDS> 64,000
<TOTAL-INTEREST-ON-BONDS> 29,443
<CASH-FLOW-OPERATIONS> 123,264
<EPS-PRIMARY> 34,326
<EPS-DILUTED> 34,326

</TABLE>