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 September 30, 2000 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 incorporation (I.R.S. Employer Identification No.) 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 November 9, 2000. 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. TABLE OF CONTENTS - ----------------- Page PART I: Financial Information - ------------------------------ 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: Commitments and Contingencies 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II: Other Information - -------------------------------- Item 6. Exhibits and Reports on Form 8-K 11 Signatures 12 PART I: FINANCIAL INFORMATION - -------------------------------- Item 1. CONSOLIDATED FINANCIAL STATEMENTS --------------------------------- - -------------------------------------------------------------------------------- Statements of Consolidated Income (Unaudited) - -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, - ------------------------------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------- OPERATING REVENUES: Gas transportation $ 48,756 $ 42,279 $ 136,026 $ 125,869 Gas transportation for affiliates 13,049 13,291 38,056 38,658 Other 341 139 1,089 420 - ------------------------------------------------------------------------------------------------------------------------- Total operating revenues 62,146 55,709 175,171 164,947 - ------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Administrative and general 7,174 8,165 21,943 21,178 Operations and maintenance 5,582 4,403 12,776 14,139 Depreciation and amortization 10,373 10,346 31,095 30,739 Property and other taxes 2,838 2,844 8,619 8,494 - ------------------------------------------------------------------------------------------------------------------------- Total operating expenses 25,967 25,758 74,433 74,550 - ------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 36,179 29,951 100,738 90,397 - ------------------------------------------------------------------------------------------------------------------------- OTHER INCOME AND (INCOME DEDUCTIONS): Allowance for equity funds used during construction 104 235 377 927 Interest income 32 59 107 140 Other - net (201) 6,170 (352) 5,750 - ------------------------------------------------------------------------------------------------------------------------- Total other income and (income deductions) (65) 6,464 132 6,817 - ------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE: Interest on long-term debt 9,470 10,447 29,489 30,979 Allowance for borrowed funds used during construction (90) (240) (367) (942) Other interest charges 399 326 1,037 1,019 - ------------------------------------------------------------------------------------------------------------------------- Net interest expense 9,779 10,533 30,159 31,056 - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 26,335 25,882 70,711 66,158 INCOME TAX EXPENSE 10,198 9,940 27,403 25,337 - ------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 16,137 $ 15,942 $ 43,308 $ 40,821 - ------------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1 - -------------------------------------------------------------------------------- Consolidated Balance Sheets (Unaudited) - -------------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------------- September 30, December 31, (In Thousands) 2000 1999 - ---------------------------------------------------------------------------------------------- PROPERTY, PLANT and EQUIPMENT: Property, plant and equipment in service $ 1,543,333 $ 1,535,225 Accumulated depreciation and amortization (541,657) (513,234) - ---------------------------------------------------------------------------------------------- Net plant in service 1,001,676 1,021,991 Construction work in progress 21,324 22,274 - ---------------------------------------------------------------------------------------------- Total property, plant and equipment - net 1,023,000 1,044,265 - ---------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 899 2,039 Accounts receivable - gas transportation 17,820 16,469 Accounts receivable - fuel balancing and other 4,046 10,355 Accounts receivable - affiliated companies 4,298 4,159 Inventories (at average cost) 8,728 9,138 Prepayments and other current assets 683 3,557 - ---------------------------------------------------------------------------------------------- Total current assets 36,474 45,717 - ---------------------------------------------------------------------------------------------- DEFERRED CHARGES: Income tax related regulatory assets 25,079 25,413 Deferred charge on reacquired debt 10,341 11,245 Unamortized debt expense 2,946 3,237 Other regulatory assets 3,639 5,035 Other 3,193 1,431 - ---------------------------------------------------------------------------------------------- Total deferred charges 45,198 46,361 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $ 1,104,672 $ 1,136,343 - ---------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 - -------------------------------------------------------------------------------- Consolidated Balance Sheets (Unaudited) - -------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES - -------------------------------------------------------------------------------- September 30, December 31, (In Thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- 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 93,589 50,281 - ---------------------------------------------------------------------------------------------------- Total common stock equity 371,780 328,472 Long-term debt 480,616 550,845 - ---------------------------------------------------------------------------------------------------- Total capitalization 852,396 879,317 - ---------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Long-term debt - current portion 533 31,498 Accounts payable 14,980 15,149 Accounts payable - affiliated companies 22,152 5,527 Accrued interest 10,066 4,101 Accrued liabilities 2,711 9,632 Accrued taxes 3,393 924 - ---------------------------------------------------------------------------------------------------- Total current liabilities 53,835 66,831 - ---------------------------------------------------------------------------------------------------- DEFERRED CREDITS: Deferred income taxes 190,389 180,061 Other 8,052 10,134 - ---------------------------------------------------------------------------------------------------- Total deferred credits 198,441 190,195 - ---------------------------------------------------------------------------------------------------- COMMITMENTS and CONTINGENCIES (Note 2) - - - ---------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,104,672 $ 1,136,343 - ---------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 - ------------------------------------------------------------------------- Statements of Consolidated Common Stock Equity (Unaudited) - ------------------------------------------------------------------------- Nine Months Ended September 30, - ------------------------------------------------------------------------- (In Thousands) 2000 1999 - ------------------------------------------------------------------------- BALANCE AT BEGINNING OF PERIOD $ 328,472 $ 347,009 Net income 43,308 40,821 Dividend paid to parent company - (45,000) - ------------------------------------------------------------------------- BALANCE AT END OF PERIOD $ 371,780 $ 342,830 - ------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 4 - -------------------------------------------------------------------------------- Statements of Consolidated Cash Flows (Unaudited) - -------------------------------------------------------------------------------- Nine Months Ended September 30, - ------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 43,308 $ 40,821 Adjustments to reconcile net income to net cash provided by Operations: Depreciation and amortization 32,959 33,409 Deferred income taxes 10,328 11,270 Allowance for equity funds used during construction (377) (927) Changes in operating assets and liabilities: Accounts receivable - gas transportation and other 4,958 (4,840) Accounts payable and accrued liabilities (1,125) (1,252) Net receivable/payable - affiliates 16,486 2,559 Accrued taxes 2,469 2,412 Inventory 410 938 Other working capital 2,874 2,253 Regulatory accruals (2,448) (105) Other - net 333 302 - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 110,175 86,840 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction expenditures (9,244) (21,042) Allowance for borrowed funds used during construction (367) (942) - ------------------------------------------------------------------------------------------------- Net cash used in investing activities (9,611) (21,984) - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of long-term debt (158,335) (97,138) Long-term debt issued, net of issuance costs 56,631 78,659 Dividend paid to parent - (45,000) - ------------------------------------------------------------------------------------------------- Net cash used in financing activities (101,704) (63,479) - ------------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,140) 1,377 CASH AND CASH EQUIVALENTS AT JANUARY 1 2,039 1,080 - ------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 899 $ 2,457 - ------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for (received from): Interest $ 22,743 $ 23,646 Income taxes $ - $ 9,881 - ------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 5 Notes to Consolidated Financial Statements (Unaudited) - ------------------------------------------------------ Note 1: Basis of Presentation - ------------------------------ PG&E Gas Transmission, Northwest Corporation (GTN), originally incorporated in California in 1957 under the name Pacific Gas Transmission Company, 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 GTN 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 GTN and its wholly owned subsidiaries, Pacific Gas Transmission Company and Pacific Gas Transmission International, Inc. 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, 1999. 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. Subsidiary 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 2000 presentation. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. Note 2: Commitments and Contingencies - -------------------------------------- In the normal course of business, the Company is named as a party in a number of claims and lawsuits. In the past, substantially all of these have been litigated or settled with no significant impact on either the Company's results of operations, financial position, or cash flows. 6 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- GENERAL - ------- The unaudited consolidated financial statements include GTN and its wholly owned subsidiaries. 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, 1999. 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. Actual results may differ materially from those expressed in the forward-looking statements. The important factors that could cause actual results to differ materially from those expressed in the forward-looking statements include, but are not limited to, the ongoing restructuring of the gas industry, changes in future rate- making, increasing competition for natural gas supplies, and the ability of the Company to expand its core pipeline business. GTN'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. 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 or the Commission). Various safety issues are subject to the jurisdiction of the United States Department of Transportation. CHANGING REGULATORY ENVIRONMENT - ------------------------------- 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. GTN will be required to make minor changes to its system to implement the new regulations. FERC also issued a Statement of Policy in September 1999 addressing certification of new interstate natural gas facilities. Among other things, this Statement of Policy has modified on a prospective basis the Commission's guidelines for evaluating the market need and pricing of new pipeline capacity. These regulatory initiatives are not expected to have a material impact on GTN's financial position, liquidity, cash flows or results of operations in the foreseeable future. 7 FUTURE EXPANSION AND BUSINESS DEVELOPMENT - ----------------------------------------- GTN regularly solicits expressions of interest for additional pipeline capacity, and it stands ready to develop additional firm transportation capacity when sufficient demand is demonstrated. In addition to mainline expansion and extensions from its mainline system, GTN is considering opportunities to expand its business into activities related to its existing pipeline facilities. A Limited Liability Company was established which holds an investment in a gas storage project currently in the preliminary stages of development. GTN owns a 50 percent share in the LLC which is reflected as an equity investment on GTN's Consolidated Balance Sheet at September 30, 2000 as a component of Other Deferred Charges. ACCOUNTING FOR THE EFFECTS OF REGULATION - ---------------------------------------- GTN 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 $42.9 million of regulatory assets and $5.9 million of regulatory liabilities as of September 30, 2000. RESULTS OF OPERATIONS - --------------------- Selected operating results and other data are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------- ----------- ---------- ----------- (In Millions) (In Millions) Operating revenues $ 62.1 $ 55.7 $ 175.2 $ 164.9 Operating expenses 26.0 25.8 74.4 74.5 ----------- ----------- ---------- ----------- Operating income 36.1 29.9 100.8 90.4 Other income and (income deductions) - 6.4 .1 6.8 Net interest expense 9.8 10.5 30.2 31.1 ----------- ----------- ---------- ----------- Income before taxes 26.3 25.8 70.7 66.1 Income tax expense 10.2 9.9 27.4 25.3 ----------- ----------- ---------- ----------- Net Income $ 16.1 $ 15.9 $ 43.3 $ 40.8 =========== =========== ========== =========== Net Income - Income for the three and nine month periods ended September 30, 2000 increased $0.2 million and $2.5 million, respectively, compared to the same periods in 1999. The increases in the 2000 periods were primarily the result of higher operating revenues offset by lower Other Income. Operating Revenues - Operating revenues for the three and nine month periods ended September 30, 2000 increased $6.4 million and $10.3 million, respectively, compared to the same periods in 1999. The increases in the three month and nine month periods ended September 2000 reflect greater short-term firm and interruptible service revenues which are largely attributable to increased demand for gas from California power generators during the summer months. The additional increase in the nine months ended September 2000 was due to a refund to customers of $3.9 million in Gas Research Institute (GRI) surcharges in May 1999 as ordered by FERC, effectively reducing both revenues and operating expenses in the 1999 reporting period. 8 Operating Expenses - The components of total operating expenses are as follows: Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------- ------------ ---------- ---------- (In Millions) (In Millions) Administrative and general $ 7.2 $ 8.2 $ 21.9 $ 21.2 Operations and maintenance 5.6 4.4 12.8 14.1 Depreciation and amortization 10.4 10.4 31.1 30.7 Property and other taxes 2.8 2.8 8.6 8.5 ----------- ------------ ---------- ---------- Total operating expenses $ 26.0 $ 25.8 $ 74.4 $ 74.5 =========== ============ ========== ========== For the three and nine month periods ended September 30, 2000, compared with the same periods in 1999, operating expenses increased $0.2 million and decreased $0.1 million, respectively. The increase in the three month period reflects increased operations and maintenance expenses partially offset by lower administrative and general expenses in 2000. Total operating expenses were comparable in the nine month periods ended September 30, 2000 and 1999 as increases in Administrative and general expenses and Depreciation and amortization were offset by reductions in Operations and maintenance costs. The nine month Administrative and general expenses are up $0.7 million due to the $3.9 million credit for GRI surcharges refunded in 1999, partially offset by reduced Y2K and benefit costs in 2000. Interest Expense - Interest expense for the three and nine month periods ended September 30, 2000 decreased $0.7 million and $0.9 million, respectively, compared to the same periods in 1999. The lower average debt balance was somewhat offset by higher interest rates and lower credits for Allowance for Funds Used During Construction interest in the current year. For the three months ended September 30, 2000 and 1999, the average interest rate was approximately 7.6 percent and 7.3 percent, respectively, while the average balance of long-term debt (excluding capital lease obligations) outstanding was $491 million and $570 million, respectively. For the nine months ended September 30, 2000 and 1999, the average interest rate was approximately 7.5 percent and 7.2 percent, respectively, while the average balance of long-term debt (excluding capital lease obligations) outstanding was $522 million and $574 million, respectively. 9 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. Net Cash Provided by Operating Activities - For the nine months ended September 30, 2000, net cash provided by operating activities was $110.2 million, compared with $86.8 million for the same period in 1999. The $23.4 million increase was primarily due to the timing of payment on affiliate balances and additional net income. Net Cash Used in Investing Activities - For the nine months ended September 30, 2000, compared to the same period in 1999, net cash used in investing activities decreased $12.4 million. The decrease primarily reflects lower construction expenditures in 2000. Net Cash Used in Financing Activities - For the nine months ended September 30, 2000, cash used in financing activities was $101.7 million reflecting a net decrease in long-term debt. For the nine months ended September 30, 1999, cash used in financing activities was $63.5 million resulting from a $45.0 million dividend and from a net decrease in long-term debt of $18.5 million. NEW ACCOUNTING STANDARD - ----------------------- SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138, will require the recognition of all derivatives, as defined in the Statement, on the balance sheet at fair value. Derivatives, or any portion thereof, that are not effective hedges must be adjusted to fair value through income. If the derivative is an effective hedge, depending on the nature of the hedge, changes in the fair value of derivatives either will be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or will be recognized in other comprehensive income until the hedged item is recognized in earnings. GTN is currently evaluating the potential impact of SFAS No. 133 and expects to adopt the new Statement no later than January 1, 2001. 10 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. Exhibit 27 - Financial Data Schedule for the nine months ended September 30, 2000. (b) No reports on Form 8-K were issued during the quarter ended September 30, 2000 and through the date hereof. 11 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) November 9, 2000 By: /s/ JOHN R. COOPER --------------------------- Name: John R. Cooper Title: Chief Financial Officer and Treasurer 12