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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ____________ to ___________
COMMISSION FILE NO. 0-25842
PG&E GAS TRANSMISSION, NORTHWEST
CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-1512922
(State or other jurisdiction of (I.R.S. employer Identification No.)
incorporation or organization)
2100 SW RIVER PARKWAY, PORTLAND, OR 97201
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 833-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
- -------------------------------------- --------------------------------------
7.10% Senior Notes Due 2005 New York Stock Exchange
7.80% Senior Debentures Due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 14, 1998.
1,000 shares of common stock no par value. (All shares are owned by PG&E Gas
Transmission Corporation.)
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (H) (1) (a) AND
(b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION Page
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Item 1. Consolidated Financial Statements
Statements of Consolidated Income 1
Consolidated Balance Sheets 2
Statements of Consolidated Common Stock Equity 4
Statements of Consolidated Cash Flows 5
Notes to Consolidated Financial Statements 6
Note 1. Basis of Presentation 6
Note 2. PG&E Corporation Reorganization 6
Note 3. Workforce Management Program 7
Note 4. Contingencies 7
Note 5. Other Comprehensive Income 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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PART I: FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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STATEMENTS OF CONSOLIDATED INCOME
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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(IN THOUSANDS) 1998 1997
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OPERATING REVENUES:
Gas transportation $ 47,818 $ 48,540
Gas transportation for affiliates 12,944 12,687
Other 143 126
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TOTAL OPERATING REVENUES 60,905 61,353
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OPERATING EXPENSES:
Administrative and general 7,778 10,037
Operations and maintenance 3,559 4,756
Depreciation and amortization 9,792 10,287
Property and other taxes 3,085 3,068
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TOTAL OPERATING EXPENSES 24,214 28,148
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OPERATING INCOME 36,691 33,205
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OTHER INCOME AND (INCOME DEDUCTIONS):
Investment development - (3,556)
Allowance for equity funds used during construction 139 72
Interest income 93 214
Other - net (106) (145)
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TOTAL OTHER INCOME AND (INCOME DEDUCTIONS) 126 (3,415)
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INTEREST EXPENSE:
Interest on long-term debt 10,633 11,940
Allowance for borrowed funds used during construction (138) (49)
Other interest charges 370 229
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NET INTEREST EXPENSE 10,865 12,120
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INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 25,952 17,670
INCOME TAX EXPENSE 10,201 8,120
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INCOME FROM CONTINUING OPERATIONS 15,751 9,550
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INCOME (LOSS) FROM DISCONTINUED OPERATIONS
BEFORE INCOME TAXES - (542)
INCOME TAX (EXPENSE) BENEFIT - (37)
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NET INCOME $ 15,751 $ 8,971
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OTHER COMPREHENSIVE INCOME, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT - 342
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COMPREHENSIVE INCOME $ 15,751 $ 9,313
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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ASSETS
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MARCH 31, DECEMBER 31,
(IN THOUSANDS) 1998 1997
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PROPERTY, PLANT, AND EQUIPMENT:
Property, plant and equipment in service $ 1,483,511 $ 1,478,735
Accumulated depreciation (454,536) (444,408)
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Net plant in service 1,028,975 1,034,327
Construction work in progress 13,075 13,870
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TOTAL PROPERTY, PLANT & EQUIPMENT - NET 1,042,050 1,048,197
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CURRENT ASSETS:
Cash and cash equivalents 109 48,249
Accounts receivable - gas transportation 17,013 16,701
Accounts receivable - affiliated companies - 4,964
Inventories (at average cost) 13,886 13,270
Prepayments and other current assets 2,340 4,282
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TOTAL CURRENT ASSETS 33,348 87,466
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DEFERRED CHARGES:
Income tax related 25,400 25,482
Deferred charge on reacquired debt 13,353 13,654
Unamortized debt expense 3,917 4,014
Regulatory assets 6,380 6,430
Other - 240
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TOTAL DEFERRED CHARGES 49,050 49,820
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TOTAL ASSETS $ 1,124,448 $ 1,185,483
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
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CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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CAPITALIZATION AND LIABILITIES
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MARCH 31, DECEMBER 31,
(IN THOUSANDS) 1998 1997
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CAPITALIZATION:
Common stock - no par value, 1,000 shares
authorized, issued and outstanding $ 85,474 $ 85,474
Additional paid-in capital 192,717 192,717
Reinvested earnings 59,287 153,536
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Total common stock equity 337,478 431,727
Long-term debt 591,366 563,499
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TOTAL CAPITALIZATION 928,844 995,226
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CURRENT LIABILITIES:
Long-term debt - current portion 428 419
Accounts payable - affiliated companies 2,598 -
Accounts payable and other accrued liabilities 28,931 31,208
Accrued taxes 1,812 813
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TOTAL CURRENT LIABILITIES 33,769 32,440
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DEFERRED CREDITS:
Deferred income taxes 149,584 145,727
Other 12,251 12,090
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TOTAL DEFERRED CREDITS 161,835 157,817
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CONTINGENCIES (SEE NOTE 4) - -
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TOTAL CAPITALIZATION AND LIABILITIES $ 1,124,448 $ 1,185,483
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
3
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STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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(IN THOUSANDS) 1998 1997
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BALANCE AT BEGINNING OF PERIOD $ 431,727 $ 510,502
Comprehensive income
Net income 15,751 8,971
Other comprehensive income
Foreign currency translation - 342
Dividend paid to parent company (110,000) -
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BALANCE AT END OF PERIOD $ 337,478 $ 519,815
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
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STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
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(IN THOUSANDS) 1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,751 $ 8,971
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,647 10,950
Discontinued operations - 579
Deferred income taxes 3,939 3,417
Allowance for equity funds used during construction (139) (72)
Changes in operating assets and liabilities:
Accounts receivable (312) 2,162
Accounts payable and other accrued liabilities (2,277) 1,474
Accounts payable to affiliates 7,562 15,333
Accrued taxes 999 12
Other working capital 1,207 1,477
Other - net 570 (1,765)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 37,947 42,538
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment expenditures - (694)
Construction expenditures (3,742) (5,726)
Allowance for borrowed funds used during construction (138) (49)
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NET CASH USED IN INVESTING ACTIVITIES (3,880) (6,469)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (22,000) (33,535)
Long-term debt issued, net of issuance costs 49,793 -
Dividend paid to parent (110,000) -
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NET CASH USED IN FINANCING ACTIVITIES (82,207) (33,535)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (48,140) 2,534
CASH AND CASH EQUIVALENTS AT JANUARY 1 48,249 11,969
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CASH AND CASH EQUIVALENTS AT MARCH 31 $ 109 $ 14,503
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for (received from):
Interest $ 4,271 $ 5,124
Income taxes $ 550 $ (10,307)
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</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1: BASIS OF PRESENTATION
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Effective January 1, 1998, Pacific Gas Transmission Company, 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 unaudited consolidated financial statements, which have been
prepared in accordance with interim period reporting requirements, 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 Ltd (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 are collectively referred to herein as the
"Company." This information should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data, in the Company's Form 10-K
for the fiscal year ended December 31, 1997.
In the opinion of management, the accompanying statements reflect all
adjustments necessary to present a fair statement of the financial position and
results of operations for the interim periods. All material adjustments are of
a normal recurring nature unless otherwise disclosed in this Form 10-Q.
Intercompany accounts and transactions have been eliminated. Prior year's
amounts in the consolidated financial statements have been reclassified where
necessary to conform to the 1998 presentation. Results of operations for
interim periods are not necessarily indicative of results to be expected for a
full year.
NOTE 2: PG&E CORPORATION REORGANIZATION
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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.
6
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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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 filed 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 purpose of cash
flow presentation, this transfer was a noncash transaction.
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 filed 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 owned subsidiary) and PG&E Queensland. The difference between the
sales price and PG&E GT-NW's net investment 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.
NOTE 3: WORKFORCE MANAGEMENT PROGRAM
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In the fourth quarter of 1997, the Company announced a Workforce Management
Program (WMP) 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.
NOTE 4: CONTINGENCIES
- ----------------------
1994 RATE CASE - In September 1996, the Federal Energy Regulatory Commission
(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,
7
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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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.
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. In
April 1998, one shipper filed a new request for rehearing at the FERC. The
opposing shippers also could petition for judicial review by a United States
Court of Appeals. In the event the settlement were to be modified either on
rehearing or 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.
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.
PG&E GT-NW is not currently named in any litigation that would have a material
adverse impact on the Company's financial condition, liquidity or results of
operations.
8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
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NOTE 5: OTHER COMPREHENSIVE INCOME
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For the three months ended March 31, 1997, PG&E GT-NW's other comprehensive
income was $0.3 million, reflecting foreign currency translation adjustments for
the operations of the PG&E Queensland Gas Pipeline and PG&E Energy Trading. As
stated in Note 2, the PG&E Queensland Gas Pipeline and PG&E Australia were sold
to another PG&E Corporation affiliate on September 26, 1997, and the shares of
PG&E Energy Trading were transferred to PG&E Corporation on June 30, 1997.
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TAX
THREE MONTHS ENDED MARCH 31, 1997 BEFORE-TAX (EXPENSE) NET-OF-TAX
(In Millions) AMOUNT OR BENEFIT AMOUNT
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Foreign currency translation adjustments $ 0.3 $ 0.0 $ 0.3
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ACCUMULATED
FOREIGN OTHER
THREE MONTHS ENDED MARCH 31, 1997 CURRENCY COMPREHENSIVE
(In Millions) ITEMS INCOME
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Beginning Balance $ (0.2) $ (0.2)
Current-period change 0.3 0.3
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Ending Balance $ 0.1 $ 0.1
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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CORPORATE STRUCTURE
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The unaudited 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 are collectively referred to as the
"Company." This information should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data in the Company's Form 10-K
for the fiscal year ended December 31, 1997.
Effective January 1, 1998, Pacific Gas Transmission Company, 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.
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 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 filed 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 filed October 6, 1997 for further
discussion.)
10
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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.
GENERAL
- -------
PG&E GT-NW is a wholly owned subsidiary of its parent holding company, PG&E
Gas Transmission Corporation, which is a direct subsidiary of PG&E Corporation.
Effective January 1, 1997, PG&E Corporation became the holding company for PG&E
GT-NW's former parent company, Pacific Gas and Electric Company. Pacific Gas and
Electric Company's ownership interest in PG&E GT-NW was transferred to PG&E
Corporation.
PG&E GT-NW's transportation system provides access to natural gas from
producing fields in Western Canada and extends from the British Columbia-Idaho
border to the Oregon-California border. 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.
Various safety issues are subject to the jurisdiction of the United States
Department of Transportation.
CHANGING REGULATORY ENVIRONMENT
- -------------------------------
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 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
11
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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.
In July 1996, the FERC adopted a new rule which standardizes technology and
operating procedures for pipelines in order to promote greater integration of
the national gas grid. During the same month, the FERC issued a Notice of
Proposed Rulemaking to improve the efficiency of capacity release procedures and
to allow rates above the cost-based rate cap in markets where pipelines can
demonstrate they lack market power.
During 1997 and 1998, 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 April 1998, the FERC
issued a final rule to set standards for electronic communication, nomination
and imbalance procedures. The rule 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.
In 1997, 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 significant effect on
PG&E GT-NW's financial position, liquidity, or results of operations in the
foreseeable future.
COMPETITION
- -----------
Competition to provide natural gas transportation services has intensified in
recent years. Regulatory changes, such as Order 636, have significantly
increased customers' flexibility, choices and responsibility to directly manage
their gas supplies.
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, by providing
interruptible 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 that 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
12
<PAGE>
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 availability of 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 impact 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 EXPANSIONS 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 of the project 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
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 economic effects of regulation in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a
result of applying the provisions of SFAS No. 71, PG&E GT-NW has accumulated
approximately $58.6 million of regulatory assets as of March 31, 1998, including
$8.6 million for relocation costs associated with the transfer of its
headquarters from San Francisco, California to Portland, Oregon, and $3.5
million for pension and other postretirement benefits related to PG&E GT-NW's
1997 Workforce Management Program (WMP). Although PG&E GT-NW recorded a reserve
against the deferred WMP 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.
13
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Selected operating results and other data are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------ ------
(In Millions)
<S> <C> <C>
Operating revenues $ 60.9 $ 61.3
Operating expenses 24.2 28.1
------ ------
Operating income 36.7 33.2
Other income and (income deductions) 0.1 (3.4)
Net interest expense 10.8 12.1
------ ------
Income from continuing operations before taxes 26.0 17.7
Income tax expense 10.2 8.1
------ ------
Income from continuing operations 15.8 9.6
Income (loss) from discontinued operations - (0.6)
------ ------
Net income $ 15.8 $ 9.0
====== ======
</TABLE>
NET INCOME - Income from continuing operations was $15.8 million for the
three months ended March 31, 1998, compared with $9.6 million for the same
period in 1997. The $6.2 million increase in the 1998 period was primarily the
result of higher revenue for PG&E GT-NW's pipeline in the Pacific Northwest,
lower operating expenses principally resulting from the WMP, and lower
investment development expenses.
OPERATING REVENUES - Gas transportation revenues for the three-month period
ended March 31, 1998 decreased $0.4 million compared to the same period in 1997.
The decrease was due to the absence of the PG&E Queensland Gas Pipeline, which
realized $2.8 million of first quarter 1997 revenues. The PG&E Queensland Gas
Pipeline was sold on September 26, 1997. This decrease was partially offset by a
$2.4 million increase in revenues from PG&E GT-NW's pipeline in the Pacific
Northwest primarily resulting from higher short-term firm and interruptible
revenue.
OPERATING EXPENSES - The components of total operating expenses are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------ ------
(In Millions)
<S> <C> <C>
Administrative and general $ 7.8 $ 10.0
Operations and maintenance 3.5 4.8
Depreciation and amortization 9.8 10.3
Property and other taxes 3.1 3.0
------ ------
Total operating expenses $ 24.2 $ 28.1
====== ======
</TABLE>
For the three months ended March 31, 1998, compared with the same period in
1997, operating expenses decreased $3.9 million. This decrease reflects lower
operating expenses of $2.4 million for PG&E GT-NW's pipeline in the Pacific
Northwest and the absence of the PG&E Queensland Gas Pipeline, which incurred
$1.5 million of first quarter 1997 operating expenses.
14
<PAGE>
PG&E GT-NW's operating expenses for the pipeline in the Pacific Northwest
decreased primarily as a result of the WMP.
OTHER INCOME AND (INCOME DEDUCTIONS) - Other income and income deductions for
the three months ended March 31, 1998, increased $3.5 million compared to the
same period in 1997, reflecting lower investment development expenses.
INTEREST EXPENSE - Interest expense for the three months ended March 31,
1998, decreased $1.3 million compared to the same period in 1997 primarily due
to the absence of PG&E Queensland Gas Pipeline, which was sold on September 26,
1997. During the first quarter of 1997, interest expense for the PG&E Queensland
Gas Pipeline was $1.7 million. This decrease was partially offset by $0.4
million of higher PG&E GT-NW 1998 interest expense primarily associated with
higher long-term debt .
Interest on PG&E GT-NW's long-term debt was approximately $10.6 million for
the three-month period ended March 31, 1998 and $10.3 million for the same
period in 1997. The average interest rate was approximately 7.3 percent for the
three months ended March 31, 1998 and 1997, while the average balance of long-
term debt outstanding during the three months ended March 31, 1998, was $591
million compared to $567 million during the same period in 1997. The 1997
average effective interest rate for the PG&E Queensland Gas Pipeline was 7.4
percent, based upon an average long-term debt balance of $90.8 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
SOURCES OF CAPITAL - The Company's capital requirements are funded from cash
provided by operations and, to the extent necessary, external financing and
capital contributions from its parent company. 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.
NET CASH PROVIDED BY OPERATING ACTIVITIES - For the three months ended March
31, 1998, net cash provided by operating activities was $37.9 million, as
compared with net cash provided by operating activities of $42.5 for the same
period in 1997. The $4.6 million decrease was due to a $13.3 million decrease in
the cash provided by the change in working capital which primarily resulted from
a $10.3 million net refund for income taxes in the first quarter of 1997. This
decrease was partially offset by a $6.8 million increase in PG&E GT-NW net
income.
NET CASH USED IN INVESTING ACTIVITIES - For the three months ended March 31,
1998 compared to the same period in 1997, net cash used in investing activities
decreased $2.6 million primarily reflecting lower construction and investment
expenditures.
NET CASH USED IN FINANCING ACTIVITIES - For the three months ended March 31,
1998, cash used in financing activities was $82.2 million reflecting a $110.0
million dividend paid to PG&E GT-NW's parent company, partially offset by a
$27.8 million net increase in long-term debt. For the three months ended March
31, 1997, cash used in financing activities was $33.5 million as a result of a
reduction in long-term debt.
15
<PAGE>
YEAR 2000 COMPLIANCE
- --------------------
PG&E GT-NW will require increased expenditures during 1998 and 1999 in order
to assess its Year 2000 compliance status and to remediate non-compliant
systems. The Year 2000 compliance issue exists because many computer systems,
applications, and embedded technologies 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 they are modified or replaced.
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 near future. 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.
PG&E GT-NW is continuing to assess the extent of information system changes
required to address this issue. Systems subject to failure include computer
hardware and software, as well as electronic monitoring and control systems that
contain embedded computer circuitry. In addition to its internal systems, the
Company is dependent upon various external parties for goods or services which
also have the potential for adversely impacting PG&E GT-NW's operations if they
are not Year 2000 compliant. Although PG&E GT-NW believes its initiative to
achieve Year 2000 compliance is adequate, if internal systems or the systems of
external parties fail, PG&E GT-NW's results of operations could be adversely
affected.
LEGAL MATTERS
- -------------
In the normal course of business, the Company is named as a party in a number
of claims and lawsuits. In the past, substantially all of these have been
litigated or settled with no significant impact on the Company's financial
position, liquidity, or results of operations.
PG&E GT-NW is not currently named in any litigation that would have a material
adverse impact on the Company's financial condition, liquidity or results of
operations.
NEW ACCOUNTING STANDARD
- -----------------------
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of SFAS No. 130 did not have an adverse
impact on the Company's financial position, liquidity, or results of operations.
16
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
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.
PG&E GT-NW is not currently named in any litigation that would have a material
adverse impact on the Company's financial condition, liquidity or results of
operations.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibit 27 - Financial Data Schedule for the three months ended
March 31, 1998.
(b) Reports on Form 8-K during the quarter ended March 31, 1998 and
through the date hereof:
1. January 14, 1998
Item 5. Other Events - name change from Pacific Gas Transmission
Company to PG&E Gas Transmission, Northwest Corporation
Item 7. Financial Statements and Exhibits - restated Articles of
Incorporation and Bylaws to reflect name change
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
---------------------------------------------
(Registrant)
May 14, 1998 By: /s/ STANLEY C. KARCZEWSKI
----------------------------------
Name: Stanley C. Karczewski
Title: Vice President of Finance and Controller
and Chief Financial Officer
18
<TABLE> <S> <C>
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,042,050
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 33,348
<TOTAL-DEFERRED-CHARGES> 49,050
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 1,124,448
<COMMON> 85,474
<CAPITAL-SURPLUS-PAID-IN> 192,717
<RETAINED-EARNINGS> 59,287
<TOTAL-COMMON-STOCKHOLDERS-EQ> 337,478
0
0
<LONG-TERM-DEBT-NET> 467,475
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 107,650
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 16,241
<LEASES-CURRENT> 428
<OTHER-ITEMS-CAPITAL-AND-LIAB> 195,176
<TOT-CAPITALIZATION-AND-LIAB> 1,124,448
<GROSS-OPERATING-REVENUE> 60,905
<INCOME-TAX-EXPENSE> 10,201
<OTHER-OPERATING-EXPENSES> 24,214
<TOTAL-OPERATING-EXPENSES> 34,415
<OPERATING-INCOME-LOSS> 26,490
<OTHER-INCOME-NET> 126
<INCOME-BEFORE-INTEREST-EXPEN> 26,616
<TOTAL-INTEREST-EXPENSE> 10,865
<NET-INCOME> 15,751
0
<EARNINGS-AVAILABLE-FOR-COMM> 15,751
<COMMON-STOCK-DIVIDENDS> 110,000
<TOTAL-INTEREST-ON-BONDS> 7,262
<CASH-FLOW-OPERATIONS> 37,947
<EPS-PRIMARY> 15,751
<EPS-DILUTED> 15,751
</TABLE>
