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 June 30, 2001
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)
1400 SW Fifth Avenue, Suite 900, 97201
Portland, OR (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 833-4000
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 3, 2001.
1,000 shares of common stock no par value. (All shares are owned by GTN Holdings
LLC.)
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.
TABLE OF CONTENTS
- -----------------
PART I. Financial Information Page
- ------------------------------ ----
Item 1. Consolidated Financial Statements 1
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. Organization and Basis of Presentation 6
Note 2. Relationship with PG&E Corporation 6
and the California Energy Crisis
Note 3. Accounting for Price Risk Management Activities 7
Note 4. Derivative Financial Instruments 8
Note 5. Short Term Debt 9
Note 6. Long Term Debt 9
Note 7. Commitments and Contingencies 9
Item 2. Management's Discussion and Analysis of Financial Condition 10
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I: FINANCIAL INFORMATION
- ------------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Statements of Consolidated Income
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------
(In Thousands) 2001 2000 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES:
Gas transportation $ 53,403 $ 43,398 $ 109,465 $ 87,270
Gas transportation for affiliates 10,228 12,583 19,038 25,007
Other 47 358 97 748
- -----------------------------------------------------------------------------------------------------------------------
Total operating revenues 63,678 56,339 128,600 113,025
- -----------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Administrative and general 9,932 7,371 16,169 14,769
Operations and maintenance 4,302 3,629 9,086 7,195
Depreciation and amortization 10,408 10,383 20,759 20,723
Property and other taxes 2,835 2,806 6,129 5,780
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 27,477 24,189 52,143 48,467
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 36,201 32,150 76,457 64,558
- -----------------------------------------------------------------------------------------------------------------------
OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used during construction 62 93 88 274
Interest income 1,753 34 3,530 75
Other - net 1,529 (119) 1,538 (152)
- -----------------------------------------------------------------------------------------------------------------------
Total other income and (income deductions) 3,344 8 5,156 197
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on long-term debt 9,000 9,764 18,537 20,019
Allowance for borrowed funds used during construction (42) (88) (64) (278)
Other interest charges 486 316 1,046 638
- -----------------------------------------------------------------------------------------------------------------------
Net interest expense 9,444 9,992 19,519 20,379
- -----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 30,101 22,166 62,094 44,376
INCOME TAX EXPENSE 11,636 8,635 24,116 17,205
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 18,465 $ 13,531 $ 37,978 $ 27,171
- -----------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
1
- ------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(Unaudited)
- ------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------
June 30, December 31,
(In Thousands) 2001 2000
- ------------------------------------------------------------------------------------------------
PROPERTY, PLANT, and EQUIPMENT:
Property, plant, and equipment in service $ 1,558,430 $ 1,554,088
Accumulated depreciation and amortization (564,901) (544,225)
- ------------------------------------------------------------------------------------------------
Net plant in service 993,529 1,009,863
Construction work in progress 19,972 5,613
- ------------------------------------------------------------------------------------------------
Total property, plant and equipment - net 1,013,501 1,015,476
- ------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 9,959 2,528
Accounts receivable - gas transportation 16,196 16,780
Accounts receivable - transportation imbalances and fuel 2,430 3,210
Accounts receivable - affiliated companies 10,751 8,907
Inventories (at average cost) 6,694 10,446
Notes receivable - parent -- 75,000
Prepayments and other current assets 1,334 4,424
- ------------------------------------------------------------------------------------------------
Total current assets 47,364 121,295
- ------------------------------------------------------------------------------------------------
OTHER NON-CURRENT ASSETS:
Notes receivable - parent 75,000 --
Income tax related regulatory assets 24,720 25,033
Deferred charge on reacquired debt 9,437 10,040
Unamortized debt expense 2,654 2,848
Other regulatory assets 2,686 3,174
Other 3,623 2,775
- ------------------------------------------------------------------------------------------------
Total deferred charges 118,120 43,870
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,178,985 $ 1,180,641
- ------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
2
- ----------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(Unaudited)
- ----------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- ----------------------------------------------------------------------------------------------------
June 30, December 31,
(In Thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------
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 111,548 108,570
- ----------------------------------------------------------------------------------------------------
Total common stock equity 389,739 386,761
Long-term debt 451,400 538,041
- ----------------------------------------------------------------------------------------------------
Total capitalization 841,139 924,802
- ----------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Short-term debt 40,000 --
Long-term debt - current portion 567 543
Accounts payable 18,103 17,440
Accounts payable - affiliated companies 66,905 33,454
Accrued interest 3,392 3,416
Accrued liabilities 1,082 1,989
Accrued taxes 1,038 1,218
- ----------------------------------------------------------------------------------------------------
Total current liabilities 131,087 58,060
- ----------------------------------------------------------------------------------------------------
NON-CURRENT LIABILITIES:
Deferred income taxes 194,711 189,104
Other 12,048 8,675
- ----------------------------------------------------------------------------------------------------
Total deferred credits 206,759 197,779
- ----------------------------------------------------------------------------------------------------
COMMITMENTS and CONTINGENCIES (Note 7) -- --
- ----------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,178,985 $ 1,180,641
- ----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
3
- -----------------------------------------------------------------------------------------------------
Statements of Consolidated Common Stock Equity
(Unaudited)
- -----------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
- -----------------------------------------------------------------------------------------------------
(In Thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 386,761 $ 328,472
Net income 37,978 27,171
Dividend paid to parent company (35,000) --
- -----------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 389,739 $ 355,643
- -----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
- -----------------------------------------------------------------------------------------------
Statements of Consolidated Cash Flows
(Unaudited)
- -----------------------------------------------------------------------------------------------
Six Months Ended
June 30,
- -----------------------------------------------------------------------------------------------
(In Thousands) 2001 2000
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 37,978 $ 27,171
Adjustments to reconcile net income to net cash provided by
Operations:
Depreciation and amortization 22,438 22,477
Deferred income taxes 5,607 7,052
Allowance for equity funds used during construction (88) (274)
Changes in operating assets and liabilities:
Accounts receivable - gas transportation and other 1,364 9,886
Accounts payable and accrued liabilities (268) (11,399)
Net receivable/payable - affiliates 31,607 8,694
Accrued taxes (180) (46)
Inventory 3,752 (569)
Other working capital 3,090 3,105
Regulatory accruals 3,123 (820)
Other - net 311 (861)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 108,734 64,416
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (18,859) (5,175)
Investment in subsidiaries & affiliated companies (109) --
Allowance for borrowed funds used during construction (64) (278)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (19,032) (5,453)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (92,000) (81,500)
Long-term debt issued, net of issuance costs 44,729 21,754
Cash dividends paid to parent (35,000) --
- -----------------------------------------------------------------------------------------------
Net cash used in financing activities (82,271) (59,746)
- -----------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 7,431 (783)
CASH AND CASH EQUIVALENTS AT JANUARY 1 2,528 2,039
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 9,959 $ 1,256
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 18,437 $ 19,513
Income taxes $ 20 $ --
- -----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
Note 1: Organization and Basis of Presentation
- -----------------------------------------------
PG&E Gas Transmission, Northwest Corporation (GTN) was incorporated in
California in 1957 under its former name, Pacific Gas Transmission Company. GTN
is an indirect wholly-owned subsidiary of PG&E National Energy Group, Inc. (PG&E
NEG) and is affiliated with, but is not the same company as, Pacific Gas and
Electric Company (the Utility), the gas and electric company serving Northern
and Central California. PG&E Corporation is the ultimate corporate parent for
both PG&E NEG and the Utility.
The accompanying unaudited consolidated financial statements, which have
been prepared in accordance with interim period reporting requirements, reflect
the results for GTN and its wholly owned subsidiaries which include Pacific Gas
Transmission Company and Pacific Gas Transmission International, Inc., and a
fifty percent interest in a joint venture known as Stanfield Hub Services, LLC.
GTN 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, 2000.
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 amounts
in the consolidated financial statements have been reclassified where necessary
to conform to the 2001 presentation. Results of operations for interim periods
are not necessarily indicative of results to be expected for a full year.
Note 2: Relationship with PG&E Corporation and the California Energy Crisis
- ----------------------------------------------------------------------------
The Utility, a regulated utility in California and wholly-owned subsidiary
of PG&E Corporation, is experiencing liquidity and credit problems. PG&E
Corporation is also the indirect parent of PG&E NEG, which is GTN's indirect
parent. Under the deregulated wholesale power purchase market scheme in
existence at the time in California, the Utility spent approximately $6.6
billion through December 31, 2000 for purchased power above the amounts provided
for under frozen rates. Because of this situation, PG&E Corporation's credit
rating was downgraded to below investment grade in January 2001, which caused
PG&E Corporation to default on outstanding commercial paper and bank borrowings.
In March 2001, PG&E Corporation refinanced all of its outstanding
commercial paper and bank borrowings, and Standard & Poor's subsequently removed
its below investment grade credit rating since PG&E Corporation no longer had
rated securities outstanding.
In January 2001, PG&E Corporation and PG&E NEG completed a corporate
restructuring of GTN, known as a "ring-fencing" transaction. The ring-fencing
complied with credit rating agency criteria designed to further separate a
subsidiary from its parent and affiliates, which enabled GTN to retain its own
credit rating based on its own creditworthiness.
The ring-fencing involved creating a new special purpose entity (SPE),
between PG&E Corporation and GTN, called GTN Holdings LLC, which directly owns
100 percent of the stock
6
of GTN. As part of the ring-fencing, GTN Holdings LLC's charter requires
unanimous approval of its Board of Control, including at least one independent
director, before it can: (a) consolidate or merge with any entity; (b) transfer
substantially all of its assets to any entity; or (c) institute or consent to
bankruptcy, insolvency or similar proceedings or actions. The SPE may not
declare or pay dividends unless such dividends are unanimously approved by the
Board of Control (including the independent director); and GTN Holdings LLC, on
a consolidated basis with GTN, maintains a debt coverage ratio of not less than
2.25:1 and a leverage ratio of not greater than 0.70:1, or an investment grade
credit rating.
The Company has terminated its intercompany borrowing and cash management
programs. As of June 30, GTN has also settled all of its outstanding balances to
or from PG&E Corporation related to those programs. On October 26, 2000, the
Company loaned $75 million to PG&E Corporation pursuant to a promissory note
bearing a floating interest rate tied to PG&E Corporation's external borrowing
rate. This note receivable is payable upon demand but has been recorded as a
noncurrent asset in the accompanying consolidated balance sheet at June 30,
2001, reflecting Company expectations about the timing of repayment.
On April 6, 2001, the Utility filed a voluntary petition for relief under
the provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility retains
control of its assets and is authorized to operate its business as a debtor in
possession while being subject to the jurisdiction of the Bankruptcy Court.
Management believes that the Company would not be substantively consolidated in
any insolvency or bankruptcy proceedings involving PG&E Corporation or the
Utility.
The Utility has been GTN's largest customer, accounting for over 15 percent
of its revenues. In accordance with GTN's Federal Energy Regulatory Commission
(FERC) tariff provision, the Utility has provided assurances either in the form
of cash, an investment grade guarantee, letter of credit, or surety bond to
support its position as a shipper on the GTN pipeline. As a result of the April
6, 2001 filing with the Bankruptcy Court, all amounts owed to GTN on that date,
by the Utility, for transportation services were suspended pending the decision
of the Bankruptcy Court. As of April 6, 2001, the Utility owed GTN $2.9 million.
The Utility is current on all subsequent obligations incurred for the
transportation services provided by GTN and has indicated its intention to
remain current.
Note 3: Accounting for Price Risk Management Activities
- --------------------------------------------------------
Effective January 1, 2001, GTN adopted Statement of Financial Accounting
Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and
Hedging Activities," as amended. This Statement established accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that all derivative instruments be recognized as either assets or
liabilities in the balance sheet and be measured at their fair value. The
Statement requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Changes in the fair value of derivatives that do not qualify for accounting
hedge treatment, as well as the ineffective portion of hedges, must be
recognized in current period earnings. Hedge effectiveness is measured based on
changes in the fair value over time between the derivative contract and the
hedged item.
7
GTN's contracts for the transportation of natural gas are considered
derivative contracts as defined in SFAS No. 133. These transportation service
contracts are transacted in the normal course of business and are subject to the
terms, conditions and rate schedules of the Company's tariff as approved by the
FERC. The contracts include long- and short-term firm, and interruptible
transportation service contracts. At this time, these derivative contracts are
exempt from the requirements of SFAS No. 133, as amended, under the normal
purchases and sales exception, and thus are not recorded on the balance sheet at
fair value. The Derivatives Implementation Group of the Financial Accounting
Standards Board (FASB) has reached a conclusion that, if approved by the FASB,
would change the definition of normal purchases and sales for energy contracts.
As such, certain derivative commodity contracts may no longer be exempt from the
requirements of SFAS No. 133. The Company is evaluating the impact this
implementation guidance would have on its financial statements and will
implement this guidance, as applicable, on a prospective basis.
GTN uses other derivative contracts (i.e., other than the transportation
service contracts), in limited instances and solely for hedging purposes, to
offset price risk associated with certain negotiated rate transportation
contracts. Commodity price risk is the risk that changes in market prices will
adversely affect earnings and cash flows. GTN has exposure to commodity price
risk associated with negotiated rate index price contracts to provide
transportation service. The goal of the hedging program is to effectively
convert a portion of GTN's variable-rate future revenues into fixed-rate
revenues by locking in forward prices on certain volumes through the basis swap
arrangements with its affiliate, PG&E Energy Trading. These hedge contracts are
effective from April through October of 2001. In late June, GTN entered into new
contracts exactly offsetting the initial basis swap arrangements for July
through October. The initial and the offsetting swap contracts are designated as
cash flow hedges and recorded on the balance sheet at fair value, with the
offset in the other comprehensive income section of equity.
The earnings impact of adopting SFAS No. 133, as amended, on January 1,
2001 was immaterial. The effect on other comprehensive income was a decrease of
$5.0 million. Through June 30, 2001 GTN recorded $3.4 million of pre-tax swap
losses reported as an offset against gas transportation revenues. As of June 30,
2001, due to the execution of the new swap contracts, GTN has reflected no
remaining other comprehensive income. As of June 30, 2001 there is no balance
sheet impact of cash flow hedges recorded in relation to SFAS No. 133.
Note 4: Derivative Financial Instruments
- -----------------------------------------
For the three- and six-month periods ended as of June 30, 2001, no
ineffectiveness was recognized in earnings related to the cash flow hedges.
8
The schedule below summarizes the activities affecting accumulated other
comprehensive income (net of related income tax) from derivative instruments.
- -------------------------------------------------------------------------------------------------------------------
(In Thousands) Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
- -------------------------------------------------------------------------------------------------------------------
Beginning accumulated derivative gain (loss) from SFAS 133
included in comprehensive income $(7,814) $ (5,029)
- -------------------------------------------------------------------------------------------------------------------
Net change of current period hedging transactions gain 5,705 2,920
- -------------------------------------------------------------------------------------------------------------------
Net reclassification of realized loss to earnings 2,109 2,109
- -------------------------------------------------------------------------------------------------------------------
Ending accumulated derivative gain (loss) included in comprehensive
income $ 0 $ 0
- -------------------------------------------------------------------------------------------------------------------
Note 5: Short Term Debt
- ------------------------
In May 1999, GTN entered into a three year $100 million revolving credit
facility which supports its commercial paper and LIBOR based programs. GTN had
recorded all instruments supported by the facility as long-term due to the life
of the underlying credit facility. As of June 30, 2001, GTN has classified all
borrowings backed by this facility as short-term to reflect the facility's
current maturity date. At June 30, 2001, $40 million of LIBOR based borrowings
were outstanding.
Note 6: Long Term Debt
- ----------------------
In May 1999, GTN entered into a $50 million revolving 364-Day credit
agreement which could be extended for successive 364-Day periods. This agreement
was extended for one 364-Day period in 2000, but has subsequently been allowed
to expire.
Note 7: Commitments and Contingencies
- --------------------------------------
Legal Matters - In the normal course of business, the Company is named as a
party in a number of claims and lawsuits. Any pending legal proceedings to which
GTN is a party or to which any of its property is subject are not expected to
have a material adverse affect on GTN's financial position, results of
operations, or cash flows.
Credit Support - GTN entered into a credit support agreement, effective
December 22, 2000, with PG&E Energy Trading Holdings Corporation (PG&E ETH),
another wholly-owned subsidiary of PG&E NEG, to provide guarantees and other
credit support in favor of PG&E ETH's operating subsidiaries. GTN has agreed to
provide such credit support in an aggregate amount up to $2.0 billion. At June
30, 2001, $965 million of guarantees were outstanding, with a net exposure of
$134 million on the transactions supported by the guarantees. PG&E ETH has
advised that GTN's exposure to PG&E ETH is more than offset by the underlying
fair market value of PG&E ETH's forward book.
GTN has been authorized by its Board of Directors to execute and deliver
guarantees to support the obligations of North Baja Pipeline, LLC, another
wholly-owned subsidiary of PG&E NEG, in an amount not to exceed $146 million. At
June 30, 2001, a total of $47 million of guarantees were outstanding in favor of
two entities.
Certain Negotiated Rate Transportation Service Contracts - Between March 1,
2001 and June 1, 2001, GTN entered into various contracts with certain shippers
under which the shippers agreed to pay a negotiated rate for service based on
the differentials between spot market gas prices at various points on GTN's
system. In accordance with FERC established procedures, GTN filed tariff sheets
with the Commission outlining the specific transactions. In a series of orders,
the FERC accepted each of these filings and allowed GTN to place the negotiated
rates into effect, subject to refund. At the conclusion of these proceedings,
the Commission may require GTN to refund revenues received under some or all of
these contracts in excess of revenues that would have been received under GTN's
recourse tariff rate. Refunds of up to $10.1 million as of July 31, 2001 may
ultimately be ordered. Management does not expect that such refunds will be
required.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
- -------
PG&E Gas Transmission, Northwest Corporation (GTN) is an indirect
wholly-owned subsidiary of PG&E National Energy Group, Inc. (PG&E NEG) and is
affiliated with, but is not the same company as, Pacific Gas and Electric
Company (the Utility), the gas and electric company serving Northern and Central
California. PG&E Corporation is the ultimate corporate parent for both PG&E NEG
and the Utility.
The consolidated financial statements include GTN and its wholly-owned
subsidiaries, Pacific Gas Transmission International, Inc., Pacific Gas
Transmission Company and its fifty percent ownership interest in a joint venture
known as Stanfield Hub Services, LLC.
GTN 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, 2000.
GTN operates an open-access transportation system that transports primarily
Western Canadian gas from the British Columbia-Idaho border to the
Oregon-California border for third-party shippers on a nondiscriminatory basis.
GTN's transportation system also provides service to various delivery points in
Idaho, Washington, and Oregon. GTN's natural gas transportation services are
regulated by the Federal Energy Regulatory Commission (FERC), and various safety
issues are subject to the jurisdiction of the U.S. Department of Transportation.
The following information includes forward-looking statements that involve
a number of risks, uncertainties, and assumptions and include statements
regarding the intent, belief or current expectations of GTN and its management.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, events, levels of
activity, performance or achievements. When used in Management's Discussion and
Analysis of Financial Condition and Results of Operations, words such as
"estimates," "expects," "intends," "anticipates," "plans," "projects,"
"believes," "could" and similar expressions identify those statements which are
forward-looking. Actual results may differ materially from those expressed in
the forward-looking statements. Forward-looking statements are not guarantees of
future performance and involve a number of risks and uncertainties that could
materially affect actual results such as, but not limited to:
. the direct and indirect effects of the current California energy crisis,
including the measures adopted and being contemplated by federal and state
authorities to address the crisis;
. the effect of the Utility's bankruptcy proceedings upon PG&E NEG and upon
GTN;
. legislative and regulatory initiatives regarding deregulation and
restructuring of the electric and natural gas industries in the United
States;
. the pace and extent of the restructuring of the electric and natural gas
industries in the United States;
. the extent and timing of the entry of additional competition into the
natural gas transmission markets;
. the pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
10
. the ability to expand its core pipeline business as affected by: (a)
completion of pipeline projects that may be delayed or prevented by
permitting delays or restrictions, shortages of equipment or labor, work
stoppages, adverse weather conditions, unforeseen engineering problems,
adverse environmental conditions or unanticipated cost increases; (b)
refusal or reluctance of connecting pipelines to expand their pipeline
capacity; (c) the ability of new pipeline customers to construct and
operate electric generating facilities; or (d) financing proposed projects
on terms acceptable to the Company;
. restrictions imposed upon PG&E NEG under certain term loans of PG&E
Corporation;
. the extent and timing of pipeline and storage capacity expansion and
retirements by others;
. changes in or application of federal, state and other regulations
affecting the Company;
. changes in or application of environmental and other laws and regulations
affecting the Company;
. political, legal and economic conditions and developments in California
and the Pacific Northwest;
. financial market conditions and changes in interest rates;
. weather and other natural phenomena; and
. the performance of projects undertaken and the success of the Company's
efforts to invest in and develop new opportunities.
RELATIONSHIP WITH PG&E CORPORATION AND THE CALIFORNIA ENERGY CRISIS
- -------------------------------------------------------------------
The Utility, a regulated utility in California and wholly-owned subsidiary
of PG&E Corporation, is experiencing liquidity and credit problems. PG&E
Corporation is also the indirect parent of PG&E NEG, which is GTN's indirect
parent. Under the deregulated wholesale power purchase market scheme in
existence at the time in California, the Utility spent approximately $6.6
billion through December 31, 2000 for purchased power above the amounts provided
for under frozen rates. Because of this situation, PG&E Corporation's credit
rating was downgraded to below investment grade in January 2001, which caused
PG&E Corporation to default on outstanding commercial paper and bank borrowings.
In March 2001, PG&E Corporation refinanced all of its outstanding
commercial paper and bank borrowings, and Standard & Poor's subsequently removed
its below investment grade credit rating since PG&E Corporation no longer had
rated securities outstanding.
In January 2001, PG&E Corporation and PG&E NEG completed a corporate
restructuring of GTN, known as a "ring-fencing" transaction. The ring-fencing
complied with credit rating agency criteria designed to further separate a
subsidiary from its parent and affiliates, which enabled GTN to retain its own
credit rating based on its own creditworthiness.
The ring-fencing involved creating a new special purpose entity (SPE),
between PG&E Corporation and GTN, called GTN Holdings LLC, which directly owns
100 percent of the stock of GTN. As part of the ring-fencing, GTN Holdings LLC's
charter requires unanimous approval of its Board of Control, including at least
one independent director, before it can: (a) consolidate or merge with any
entity; (b) transfer substantially all of its assets to any entity; or (c)
institute or consent to bankruptcy, insolvency or similar proceedings or
actions. The SPE may not declare or pay dividends unless such dividends are
unanimously approved by the Board of Control (including the independent
director); and GTN Holdings LLC, on a consolidated basis with GTN, maintains a
debt coverage ratio of not less than 2.25:1 and a leverage ratio of not greater
than 0.70:1, or an investment grade credit rating.
11
The Company has terminated its intercompany borrowing and cash management
programs. As of June 30, 2001, GTN has also settled all of its outstanding
balances to or from PG&E Corporation related to those programs. On October 26,
2000, the Company loaned $75 million to PG&E Corporation pursuant to a
promissory note bearing a floating interest rate tied to PG&E Corporation's
external borrowing rate. This note receivable is payable upon demand but has
been recorded as a noncurrent asset in the accompanying consolidated balance
sheet at June 30, 2001, reflecting Company expectations about the timing of
repayment.
On April 6, 2001, the Utility filed a voluntary petition for relief under
the provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility retains
control of its assets and is authorized to operate its business as a debtor in
possession while being subject to the jurisdiction of the Bankruptcy Court.
Management believes that the Company would not be substantively consolidated in
any insolvency or bankruptcy proceedings involving PG&E Corporation or the
Utility.
The Utility has been GTN's largest customer, accounting for over 15 percent
of its revenues. In accordance with GTN's FERC tariff provision, the Utility has
provided assurances either in the form of cash, an investment grade guarantee,
letter of credit, or surety bond to support its position as a shipper on the GTN
pipeline. As a result of the April 6, 2001 filing with the Bankruptcy Court, all
amounts owed to GTN on that date, by the Utility, for transportation services
were suspended pending the decision of the Bankruptcy Court. As of April 6,
2001, the Utility owed GTN $2.9 million. The Utility is current on all
subsequent obligations incurred for the transportation services provided by GTN
and has indicated its intention to remain current.
PRICE RISK MANAGEMENT ACTIVITIES
- --------------------------------
PG&E Corporation and PG&E NEG have established officer-level risk
policy/risk management committees, the risk management policies of which are
also applicable to GTN. GTN may only engage in the use of derivatives in
accordance with policies established by the Risk Management Committees of PG&E
Corporation and PG&E NEG. PG&E NEG measures its commodity price risk exposure
using value-at-risk and other methodologies that simulate future price movement
in the energy markets to estimate the size and probability of future potential
losses. Market risk is quantified using the variance/co-variance value-at-risk
model that provides a consistent measure of risk across diverse energy markets
and products. The use of this methodology requires a number of important
assumptions, including the selections of confidence level for losses, volatility
of prices, market liquidity, and holding period.
GTN's contracts for the transportation of natural gas are considered
derivative contracts as defined in Statement of Financial Accounting Standards
No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended. These transportation service contracts are transacted
in the normal course of business and are subject to the terms, conditions and
rate schedules of the Company's tariff as approved by the FERC. The contracts
include long- and short-term firm, and interruptible transportation service
contracts. At this time, these derivative contracts are exempt from the
requirements of SFAS No. 133, as amended, under the normal purchases and sales
exception, and thus are not recorded on the balance sheet at fair value. The
Derivatives Implementation Group of the Financial Accounting Standards Board
(FASB) has reached a conclusion that, if approved by the FASB, would change the
definition of normal purchases and sales for energy contracts. As such, certain
derivative commodity contracts may no longer be exempt from the requirements of
SFAS No. 133. The Company is evaluating the impact this implementation guidance
would have on its financial statements and will implement this guidance, as
applicable, on a prospective basis.
12
GTN uses other derivative contracts (i.e., other than the transportation
service contracts), in limited instances and solely for hedging purposes, to
offset price risk associated with certain negotiated rate transportation
contracts. Commodity price risk is the risk that changes in market prices will
adversely affect earnings and cash flows. GTN has exposure to commodity price
risk associated with negotiated rate index price contracts to provide
transportation service. The goal of the hedging program is to effectively
convert a portion of GTN's variable-rate future revenues into fixed-rate
revenues by locking in forward prices on certain volumes through the basis swap
arrangements with its affiliate, PG&E Energy Trading. These hedge contracts are
effective from April through October of 2001. In late June, GTN entered into new
contracts exactly offsetting the initial basis swap arrangements for July
through October. The initial and offsetting swap hedge contracts are designated
as cash flow hedges and recorded on the balance sheet at fair value, with the
offset in the other comprehensive income section of equity.
The earnings impact of adopting SFAS No. 133, as amended, on January 1,
2001 was immaterial. The effect on other comprehensive income was a decrease of
$5.0 million. Through June 30, 2001 GTN recorded $3.4 million of pre-tax swap
losses reported as an offset against gas transportation revenues. As of June 30,
2001, due to the execution of the new swap contracts, GTN has reflected no
remaining other comprehensive income. As of June 30, 2001, there is no balance
sheet impact of cash flow hedges recorded in relation to SFAS No. 133.
CHANGING REGULATORY ENVIRONMENT
- -------------------------------
In April 1998, the FERC issued Order 587-G which set standards for
electronic communication, nomination, and imbalance procedures. Order 587-G
requires pipeline companies to develop connections using internet tools,
directory services and communication protocols to provide non-discriminatory
access to specified electronic information. In September 1998, the Commission
issued an order on rehearing clarifying certain aspects of Order 587-G and
deferring the date for processing transactions over the internet from June 1999
to June 2000. GTN received a temporary waiver from the FERC to extend some of
the requirements of Order 587-G for processing transactions over the internet
until August 1, 2001. On July 1, 2001 GTN launched its new web-based customer
interface and capacity release module, E-trans, to replace its dial-up
electronic bulletin board. With the implementation of E-trans, GTN is now fully
compliant with Order 587-G. In Order 587-M, the Commission also required
pipeline companies to migrate from version 1.3 to version 1.4 of the Gas
Industry Standards Board's (GISB) standards applicable to gas pipeline companies
by no later than May 1, 2001. GTN requested and received an extension of this
requirement until August 1, 2001. GTN is continuing to implement the
requirements of GISB version 1.4 and filed a request for an additional extension
of time on August 1, 2001.
In February 2000, FERC issued Order 637 to promote competition in the
short-term transportation market. The order lifted the rate cap for short-term
capacity release transactions for a period of two years and established new
reporting requirements that would increase price transparency for short-term
capacity. The removal of the price cap only applies to capacity release
transactions and is unlikely to provide any material short-term benefits to GTN.
The Order also modified regulations related to certain pipeline system
operations, such as scheduling procedures, capacity segmentation and penalties.
These regulatory initiatives are not expected to have a material impact on
GTN's financial position, cash flows or results of operations in the foreseeable
future.
Between March 1, 2001 and June 1, 2001, GTN entered into various contracts
with certain shippers under which the shippers agreed to pay a negotiated rate
for service based on the differentials between spot market gas prices at various
points on GTN's system. In accordance
13
with FERC established procedures, GTN filed tariff sheets with the Commission
outlining the specific transactions. In a series of orders, the FERC accepted
each of these filings and allowed GTN to place the negotiated rates into effect,
subject to refund. At the conclusion of these proceedings, the Commission may
either require GTN to refund revenues received under some or all of these
contracts in excess of revenues that would have been received under GTN's
recourse tariff rate. Refunds of up to $10.1 million as of July 31, 2001 may
ultimately be ordered. Management does not expect that such refunds will be
required.
FUTURE EXPANSION AND BUSINESS DEVELOPMENT
- -----------------------------------------
GTN plans to expand pipeline capacity by approximately 500 million cubic
feet per day by the end of 2004. The first phase of this expansion,
approximately 220 million decatherms per day, is to be completed by the end of
2002 and to cost approximately $122 million. As a result of an open season
recently completed, GTN intends to complete a second phase of this expansion for
240 million decatherms per day of additional capacity at a cost of approximately
$150 million, to be completed at the end of 2003. GTN expects to fund these
expansions from the issuance of additional debt, available cash or draws on
available lines of credit. GTN has also initiated development of a Washington
lateral pipeline that would originate at the GTN mainline system near Spokane,
Washington and extend approximately 260 miles to western Washington.
ACCOUNTING FOR THE EFFECTS OF REGULATION
- ----------------------------------------
GTN currently accounts for the financial 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, GTN has accumulated
approximately $38.3 million of regulatory assets and $11.5 million of regulatory
liabilities as of June 30, 2001.
14
RESULTS OF OPERATIONS
- ---------------------
Selected operating results and other data are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------- ---------- --------- ----------
(In Millions) (In Millions)
Operating revenues $ 63.7 $ 56.3 $ 128.6 $ 113.0
Operating expenses 27.5 24.2 52.1 48.4
---------- ---------- --------- ----------
Operating income 36.2 32.1 76.5 64.6
Other income and (income deductions), net 3.3 -- 5.1 .2
Net interest expense 9.4 10.0 19.5 20.4
---------- ---------- --------- ----------
Income before taxes 30.1 22.1 62.1 44.4
Income tax expense 11.6 8.6 24.1 17.2
---------- ---------- --------- ----------
Net Income $ 18.5 $ 13.5 $ 38.0 $ 27.2
========== ========== ========= ==========
Net Income - Income for the three- and six-month periods ended June 30,
2001 increased $5.0 million and $10.8 million, respectively, compared to the
same periods in 2000. The increases in income resulted primarily from higher
operating revenues and other income.
Operating Revenues - Operating revenues for the three- and six-month
periods ended June 30, 2001 increased $7.4 million and $15.6 million,
respectively, compared to the same periods in 2000. The increases resulted
primarily from strong pricing fundamentals on gas transportation to the
California and Pacific Northwest gas markets.
Operating Expenses - The components of total operating expenses are as
follows:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------- ---------- --------- ----------
(In Millions) (In Millions)
Administrative and general $ 9.9 $ 7.4 $ 16.1 $ 14.7
Operations and maintenance 4.3 3.6 9.1 7.2
Depreciation and amortization 10.4 10.4 20.8 20.7
Property and other taxes 2.9 2.8 6.1 5.8
---------- ---------- --------- ----------
Total operating expenses $ 27.5 $ 24.2 $ 52.1 $ 48.4
========== ========== ========= ==========
For the three- and six-month periods ended June 30, 2001, compared with the
same periods in 2000, operating expenses increased $3.3 million and $3.7
million, respectively. The increases reflect increased administrative and
general expense allocations, additional compressor overhaul activity and higher
compressor fuel use tax as a result of higher natural gas prices, partially
offset by a decrease in the Gas Research Institute fees and lower labor costs.
Other income and (income deductions)- The increase is due primarily to
interest income in the amount of $3.0 million earned on the $75 million note
receivable from PG&E Corporation.
Interest Expense - Interest expense for the three- and six-month periods
ended June 30, 2001 decreased $0.6 million and $0.9 million respectively,
compared to the same periods in 2000 due primarily to a lower average debt
balance. For the three months ended June 30, 2001 and 2000, the average interest
rate was approximately 7.5 percent and 7.6 percent, respectively, while the
average balance of long-term debt outstanding (excluding capital lease
obligations) was $479 million and $522 million, respectively. For the six months
ended June 30, 2001 and 2000, the
15
average interest rate was approximately 7.5 percent, while the average balance
of long-term debt (excluding capital lease obligations) outstanding was $495
million and $538 million, respectively.
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. GTN has paid dividends as part of
a balanced approach to managing its capital structure, funding its operations
and capital expenditures, and maintaining appropriate cash balances. PG&E
Corporation and PG&E NEG completed a corporate restructuring of GTN, known as a
ring-fencing transaction. The ring-fencing complied with credit rating agency
criteria designed to further separate a subsidiary from its parent and
affiliates, which enabled GTN to retain its own credit rating based on its own
creditworthiness. GTN Holdings LLC, GTN's immediate parent, may not declare or
pay dividends unless its Board of Control (including at least one independent
director) has unanimously approved such dividends, and GTN Holdings LLC, on a
consolidated basis with GTN, meets specified financial requirements (i.e., it
maintains a debt coverage ratio of not less than 2.25:1 and a leverage ratio of
not greater than 0.70:1, or an investment grade credit rating).
Net Cash Provided by Operating Activities - For the six months ended June
30, 2001, net cash provided by operating activities was $108.7 million, compared
with $64.4 million for the same period in 2000. The $44.3 million increase was
primarily due to the change in receivables/payables from affiliates and greater
net income.
Net Cash Used in Investing Activities - For the six months ended June 30,
2001 compared to the same period in 2000, net cash used in investing activities
increased by $13.6 million. The increase primarily reflects higher construction
expenditures in 2001.
Net Cash Used in Financing Activities - For the six months ended June 30,
2001, cash used in financing activities was $82.3 million reflecting the net
reduction in long-term debt and the payment of a $35.0 million dividend to the
parent. For the six months ended June 30, 2000 cash used in financing activities
was $59.7 million, also reflecting a reduction in long-term debt.
GTN believes that its ability to finance or to fully comply with all of the
terms of its existing debt covenants is unaffected by the financial situation of
any of its affiliates. GTN has retained its stand-alone investment grade rating.
NEW ACCOUNTING STANDARDS
- ------------------------
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". This
Standard, which applies to all business combinations accounted for under the
purchase method completed after June 30, 2001, prohibits the use of
pooling-of-interests method of accounting for business combinations and provides
a new definition of intangible assets. The Company does not expect that
implementation of this Standard will have a significant impact on its financial
statements.
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This Standard eliminates the amortization of goodwill, and
requires that goodwill be reviewed annually for impairment. This Standard also
requires that the useful lives of previously recognized intangible assets be
reassessed and the remaining amortization periods to be adjusted accordingly.
This Standard is effective for fiscal years beginning after December 15, 2001,
and affects all goodwill and other intangible assets recognized on the Company's
statement of financial position at that date, regardless of when the assets were
initially recognized. The
16
Company does not expect that implementation of this Standard will have a
significant impact on its financial statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This Standard is effective for fiscal years beginning
after June 15, 2002, and provides accounting requirements for asset retirement
obligations associated with tangible long-lived assets. The Company has not yet
determined the effects of this Standard on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
See Risk Management Activities included in Management's Discussion and
Analysis above.
17
PART II: OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
(b) No reports on Form 8-K were issued during the quarter ended June 30,
2001 and through the date hereof.
18
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)
August 3, 2001 By: /s/ John R. Cooper
---------------------------
Name: John R. Cooper
Title: Chief Financial Officer & Treasurer
19
EXHIBIT INDEX
Exhibit No.: Description of Exhibit
12 Computation of Ratio of Earnings to Fixed Charges
20