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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NO. 0-25842
PG&E Gas Transmission, Northwest Corporation
(Exact name of registrant as specified in its charter)
California 94-1512922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
7.10% Senior Notes Due 2005 New York Stock Exchange
7.80% Senior Debentures Due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting stock held by
nonaffiliates of the registrant as of April 2, 2001: $0
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of April 2, 2001. 1,000 shares of common stock, no
par value. (All shares are owned by GTN Holdings LLC.)
Documents Incorporated by Reference:
None
Registrant meets the conditions set forth in General Instruction (I) (1) (a)
and (b) of Form 10-K and is therefore filing this Form 10-K with the reduced
disclosure format.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................... 1
General....................................................... 1
Business...................................................... 1
Employees..................................................... 2
Foreign and Domestic Operations............................... 2
Certain Defined Terms......................................... 3
Transmission System........................................... 4
Interconnection with Other Pipelines.......................... 4
Customers and Services........................................ 5
Competition................................................... 5
Rates and Regulation.......................................... 5
Environmental Matters......................................... 7
Item 2. Properties.................................................... 7
Item 3. Legal Proceedings............................................. 7
Item 4. Submission of Matters to a Vote of Security Holders
(omitted)..................................................... 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 8
Item 6. Selected Financial Data (omitted)............................. 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.... 17
Item 8. Financial Statements and Supplementary Data................... 18
Independent Auditors' Reports................................. 19
Statements of Consolidated Income............................. 21
Consolidated Balance Sheets -- Assets......................... 22
Consolidated Balance Sheets -- Capitalization and
Liabilities................................................... 23
Statements of Consolidated Common Stock Equity................ 24
Statements of Consolidated Cash Flows......................... 25
Notes to Consolidated Financial Statements.................... 26
Quarterly Consolidated Financial Data......................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 38
PART III
Item 10. Directors and Executive Officers of the Registrant (omitted).. 39
Item 11. Executive Compensation (omitted).............................. 39
Item 12. Security Ownership of Certain Beneficial Owners and Management
(omitted)..................................................... 39
Item 13. Certain Relationships and Related Transactions (omitted)...... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................... 40
Signatures.............................................................. 42
i
PART I
ITEM 1. BUSINESS
General
PG&E Gas Transmission, Northwest Corporation (PG&E GTN) was incorporated in
California in 1957 under its former name, Pacific Gas Transmission Company.
PG&E GTN is an interstate natural gas pipeline company regulated by the
Federal Energy Regulatory Commission (FERC or Commission). PG&E 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 utility regulated by the
California Public Utilities Commission, serving Northern and Central
California. PG&E Corporation (PG&E) is the corporate parent for both PG&E NEG
and the Utility.
PG&E GTN and its subsidiaries are referred to collectively as the "Company."
The principal executive offices of PG&E GTN are located at 1400 SW Fifth
Avenue, Suite 900, Portland, Oregon 97201, and its telephone number is (503)
833-4000.
The following information includes forward-looking statements that involve a
number of risks, uncertainties, and assumptions and include statements
regarding the intent, belief or current expectations of PG&E GTN and its
management. 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. Such 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, (i)
changes in government regulation; (ii) increasing competition within our
industry and for natural gas suppliers; (iii) 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.
Business
PG&E GTN owns and operates the interstate segment of a Canada-California
pipeline system, which was originally built between 1960 and 1961 and expanded
in 1981, 1993, and 1998. The Utility owns and operates the portion of this
pipeline system within California. (See "Transmission System" below.) PG&E
GTN's mainline system extends from the British Columbia-Idaho border to the
Oregon-California border, traversing Idaho, Washington and Oregon. Extensions
from the mainline to Coyote Springs in Northern Oregon and to Medford in
Southern Oregon were constructed in 1995. PG&E GTN's gas pipeline facilities
interconnect with the facilities owned by the Utility at the Oregon-California
border, with the facilities owned by Northwest Pipeline Corporation (Northwest
Pipeline) in Northern Oregon and in Eastern Washington, and with the
facilities owned by Tuscarora Gas Transmission Company (Tuscarora) in Southern
Oregon.
PG&E GTN's principal business is the transportation of natural gas,
primarily from supplies in Canada, for customers located in the Pacific
Northwest, Nevada, and California. PG&E GTN's customers are principally local
retail gas distribution utilities, electric generators that utilize natural
gas to generate electricity, natural gas marketing companies that purchase and
resell natural gas to end-use customers and utilities, natural gas producers,
and industrial companies. PG&E GTN's customers are responsible for securing
their own gas supplies and delivering them to PG&E GTN's system. PG&E GTN
transports such supplies directly to customers or to downstream pipelines,
which then transport such supplies to customers. (See "Customers and Services"
below.)
1
Employees
As of December 31, 2000, PG&E GTN had 199 employees, of which 84 were
members of the International Brotherhood of Electrical Workers, Local 1245.
The agreements covering wages, benefits and general provisions are effective
through December 31, 2001.
Foreign and Domestic Operations
During 2000, 1999 and 1998, the Company's operations were confined to the
domestic United States.
2
CERTAIN DEFINED TERMS
The following terms which are commonly used in the natural gas industry, and
which are used herein, are defined as follows:
Demand or reservation The amount paid by firm transportation service
charge: customers to reserve pipeline service. The
reservation charge is payable regardless of the
volumes of gas transported by such customers.
Firm transportation The right to ship a quantity of gas between two
service: points for the term of the applicable contract as
follows:
Long-term firm service contracts are for original
contract terms extending for one year or more.
Short-term firm service contracts are for terms
less than one year.
Hub services: A service allowing customers to park or lend volumes
of gas on PG&E GTN's pipeline for a contracted fee.
Interruptible Transportation of shippers' gas on an as-available
transportation service: basis.
Negotiated Rate: An individually negotiated rate (or rate formula) in
which one or more of the individual components of
such rate may exceed the maximum rate, or be less
than the minimum rate, for such component as set
forth in PG&E GTN's Tariff for the given service.
Open-access: Transportation service provided on a
nondiscriminatory basis pursuant to applicable FERC
rules and regulations.
Order 636: The FERC pipeline service restructuring rule that
guided the industry's transition to unbundled, open-
access pipeline service. Order 636 was issued in
1992 and most pipelines restructured their services
from merchant service to transportation-only service
during 1993. PG&E GTN implemented Order 636 on
November 1, 1993.
Recourse Rate: The applicable maximum rate under PG&E GTN's Tariff
that would apply to a service absent an agreement
between PG&E GTN and a shipper to price the service
under a Negotiated Rate or discount rate.
Shippers: Customers of a pipeline contracting to ship natural
gas over the pipeline's transportation facilities.
Straight fixed -- A cost recovery method for firm service under Order
variable (SFV): 636, which assigns all fixed costs, including return
on equity and related taxes, to the demand or
reservation component of rates.
Tariff: A document filed with the Federal Energy Regulatory
Commission setting forth the rates, terms and
conditions under which an interstate pipeline may
provide transportation service.
Units of Measure: Mcf: One thousand cubic feet
MMcf: One million cubic feet
MMcf/d: One million cubic feet per day
Bcf: One billion cubic feet
Btu: British thermal unit
Therm: One hundred thousand Btus; the amount of heat
energy in approximately 100 cubic feet of
natural gas
MMBtu: One million Btus or one Decatherm (10 therms)
Dt: Decatherm (10 therms) or one MMBtu
MDt: One thousand decatherms or one thousand MMBtus
3
Transmission System
PG&E GTN's mainline system extends for approximately 612 miles from the
vicinity of Kingsgate, British Columbia, where it interconnects with
TransCanada PipeLines Ltd.'s B.C. System and Foothills Pipe Lines South B.C.
Ltd. (Foothills South B.C.), to the vicinity of Malin, Oregon, where it
interconnects with the pipeline facilities of Pacific Gas and Electric Company
and Tuscarora.
PG&E GTN's mainline system is composed of two parallel pipelines with 13
compressor stations totaling approximately 415,900 International Standards
Organization (ISO) installed horsepower and ancillary facilities, including
metering and regulating facilities and a communication system. PG&E GTN's
dual-pipeline system consists of approximately 639 miles of 36-inch diameter
gas transmission line (612 miles of 36-inch diameter pipe and 27 miles of 36-
inch diameter pipeline looping) and approximately 590 miles of 42-inch
diameter pipe.
In addition, in 1995 PG&E GTN constructed two pipeline extensions, the
Coyote Springs Extension to serve Portland General Electric Company and the
Medford Extension to serve Avista Utilities. The Coyote Springs Extension is
composed of approximately 18 miles of 12-inch diameter pipe, originating at a
point on PG&E GTN's system 27 miles south of Stanfield, Oregon and connecting
to Portland General Electric's electric generation facility near Boardman,
Oregon. The Medford Extension consists of approximately 22 miles of 16-inch
diameter pipe and 66 miles of 12-inch diameter pipe and extends from a point
on PG&E GTN's system near Bonanza, in Southern Oregon, to interconnection
points with Avista Utilities at Klamath Falls and Medford, Oregon.
Interconnection with Other Pipelines
Pacific Gas and Electric Company
The Utility's intrastate gas pipeline system, which interconnects with PG&E
GTN's facilities at the Oregon-California border, includes 36-inch and 42-inch
diameter parallel pipelines that extend approximately 300 miles south to a
point near Antioch, California, just east of the San Francisco Bay Area.
There, the system becomes a dual 36-inch and 26-inch diameter gas pipeline
system to Fresno County in Central California. From there on, it becomes a
twin 34-inch diameter pipeline system extending to the California-Arizona
border near Topock, Arizona.
Northwest Pipeline Corporation
PG&E GTN's pipeline facilities interconnect with the facilities of Northwest
Pipeline near Spokane and Palouse, Washington and Stanfield, Oregon. Northwest
Pipeline is an interstate natural gas pipeline with which PG&E GTN both
competes and cooperates for the delivery of natural gas in the Pacific
Northwest and California.
Tuscarora Gas Transmission
PG&E GTN's pipeline facilities interconnect with the facilities of Tuscarora
near Malin, Oregon. Tuscarora is an interstate natural gas pipeline that
transports gas from this interconnection to the Reno, Nevada area.
TransCanada PipeLines Ltd. and Foothills South B.C.
Through the TransCanada PipeLines Ltd. and Foothills South B.C. systems,
PG&E GTN's customers have access to the Western Canadian Sedimentary Basin.
TransCanada's Alberta System delivers gas from production areas to provincial
gas distribution utilities and to all provincial export points, including the
interconnect at the Alberta-British Columbia border to TransCanada's B.C.
System and Foothills South B.C. for delivery south into PG&E GTN's system at
the British Columbia-Idaho border.
4
Customers and Services
PG&E GTN operates an open-access system that transports gas for third-party
shippers on a nondiscriminatory basis. During 2000, 95.7 percent of PG&E GTN's
available long-term capacity was held by customers under long-term firm
transportation service agreements. The long term firm contract terms range
between 2 and 25 years into the future, with an overall average of about 13
years.
Additionally, PG&E GTN offers short-term firm and interruptible
transportation services plus hub services, which allow customers the ability
to park or lend volumes of gas on PG&E GTN's pipeline. PG&E GTN provides
interruptible transportation service when capacity is available. Interruptible
capacity is provided first to shippers offering to pay the maximum rate and,
if necessary, allocated on a pro-rata basis to shippers offering to pay the
maximum rate. If capacity remains after maximum tariff nominations are
fulfilled, discounted and/or negotiated interruptible space will be allocated
on a highest to lowest total revenue (rate x mileage) basis.
During 2000, PG&E GTN provided transportation services for 88 customers, of
which 49 have long-term firm service transportation agreements with PG&E GTN.
The remaining customers shipped under short-term firm, interruptible, hub
service or capacity release contracts. PG&E GTN's customers are principally
local retail gas distribution utilities, electric generators that utilize
natural gas to generate electricity, natural gas marketing companies that
purchase and resell natural gas to utilities and end-use customers, natural
gas producers, and industrial companies.
PG&E GTN's largest customer in 2000 was the Utility, accounting for
approximately $45.6 million, or 19.4 percent, of its transportation revenues.
The primary term of the firm service transportation agreement with the Utility
extends through 2005 and continues year-to-year thereafter unless terminated.
The Utility's affiliates account for an additional $4.4 million, or 1.9
percent, of the total transportation revenues. The combination of Duke Energy
Fuels, Duke Energy Trading & Marketing and American Natural Gas (an affiliate
of Duke) results in PG&E GTN's second largest customer, with approximately
$26.3 million, or 11 percent of total 2000 transportation revenue. In 1999,
the Utility and its affiliates, and Duke Energy and its affiliates accounted
for approximately $51.8 million, or 23 percent, and $25.1 million, or 11
percent, respectively, of PG&E GTN's transportation revenues. In 1998, the
Utility and affiliates accounted for approximately $51.6 million, or
22 percent, of PG&E GTN's transportation revenues. No other customer accounts
for 10 percent or more of annual transportation revenue.
In 2000, approximately 9.2 percent of PG&E GTN's transportation volumes and
8.7 percent of its transportation revenues were attributable to interruptible
and short-term firm transportation service.
PG&E GTN's total transportation quantities for 1996 through 2000 are set
forth in the following table.
Quantities
Year (MDt)
---- ----------
1996.................. 934,029
1997.................. 969,257
1998.................. 1,003,266
1999.................. 925,118
2000.................. 966,653
Competition
See "Competition," below, in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Rates and Regulation
PG&E GTN is a "natural gas company" operating under the provisions of the
Natural Gas Act of 1938 and the Natural Gas Policy Act of 1978 (NGPA), and as
such, is subject to the jurisdiction of the FERC.
5
The Natural Gas Act of 1938 grants the FERC authority over the construction
and operation of pipelines and related facilities utilized in the
transportation and sale of natural gas in interstate commerce, including the
extension, enlargement, or abandonment of such facilities, as well as the
interstate transportation and wholesale sales of natural gas. PG&E GTN holds
certificates of public convenience and necessity, issued by the FERC,
authorizing it to construct and operate its pipelines and related facilities
now in operation and to transport natural gas in interstate commerce. The FERC
also has authority to regulate rates for natural gas transportation in
interstate commerce.
In addition, actions of the National Energy Board of Canada (NEB), the
Alberta Energy and Utilities Board (AEUB), and Northern Pipeline Agency (NPA)
in Canada can affect the ability of TransCanada and Foothills South B.C. to
construct any future facilities necessary for the transportation of gas to the
interconnection with PG&E GTN's system at the United States-Canadian border.
Further, the NEB and Canadian gas-exporting provinces issue various licenses
and permits for the removal of gas from Canada. These requirements parallel
the process employed by the U.S. Department of Energy for the importation of
Canadian gas. Regulatory actions by the NEB or the U.S. Department of Energy
can have an impact on the ability of PG&E GTN's customers to import Canadian
gas for transportation over the PG&E GTN system.
Under the FERC's current policies, transportation services are classified as
either firm or interruptible, and PG&E GTN's fixed and variable costs are
allocated between these types of service for ratemaking purposes. Firm
transportation service customers pay both a reservation charge and a delivery
charge. The reservation charge is assessed for the customer's right to
transport a specified maximum daily quantity of gas over the term of the
customer's contract, and is payable regardless of the actual volume of gas
transported by the customer. The delivery charge is payable only with respect
to the actual volume of gas transported by the customer. Interruptible
transportation service customers pay only a delivery charge with respect to
the actual volume of gas transported by the customer.
Both firm and interruptible transportation service rates are established
with a ceiling equal to PG&E GTN's total costs (fixed and variable) as
established in PG&E GTN's 1994 rate case allocated to the service and a floor
equal to the variable costs related thereto. The ceiling and floor rates for
each service are set forth in PG&E GTN's Tariff. PG&E GTN is allowed to vary
or discount rates between the ceiling and the floor amounts on a non-
discriminatory basis. PG&E GTN has not discounted long-term firm
transportation service rates, but PG&E GTN at times discounts short-term firm
and interruptible transportation service rates in order to maximize revenue.
PG&E GTN is also authorized to offer firm and interruptible service to
customers under individually negotiated rates. Such rates may be above the
ceiling rate or below the floor rate, may vary from an SFV rate methodology,
and/or may be established with reference to a formula. PG&E GTN is authorized
to offer service at negotiated rates only to the extent that, at the time the
shipper enters into a negotiated rate agreement, that shipper had the option
to receive the same service at the Recourse Rate, which is the maximum rate
for that service under PG&E GTN's Tariff.
Since November 1, 1993, when PG&E GTN adopted FERC Order 636, it has applied
the straight fixed-variable (SFV) rate design method for firm rate schedules.
Under the SFV rate design, a pipeline company's fixed costs, including return
on equity and related taxes, associated with firm transportation service are
collected through the reservation charge component of the pipeline company's
firm transportation service rates. Also as part of Order 636, firm shippers
may release capacity on a temporary or permanent basis in accordance with FERC
regulations. In the case of a capacity release that is not permanent, a
releasing shipper remains responsible to PG&E GTN for the reservation charges
associated with the released capacity. With respect to permanent releases of
capacity, the releasing shipper is no longer responsible for the reservation
charges associated with the released capacity if the replacement shipper meets
the credit-worthiness provisions of PG&E GTN's tariff and agrees to pay the
full reservation fee.
In September 1996, the FERC approved, without modification, the proposed
settlement of PG&E GTN's Section 4 rate proceeding. The rate case was filed on
February 28, 1994 with the proposed settlement filed in March 1996. Following
the Commission's approval and subsequent denial of rehearing, three
petitioner-shippers
6
sought judicial review by the United States Court of Appeals for the District
of Columbia Circuit. On February 1, 2000, the court denied the petitioners'
claims as without merit and upheld the Commission's approval of the settlement
without modification.
Environmental Matters
The following discussion includes certain forward-looking information
relating to the possible future impact of environmental compliance. This
information reflects PG&E GTN's current estimates which are periodically
evaluated and revised. These estimates are subject to a number of assumptions
and uncertainties, including changing laws and regulations, the ultimate
outcome of complex factual investigations, evolving technologies, selection of
compliance alternatives, the nature and extent of required remediation, the
extent of PG&E GTN's responsibility, and the availability of recoveries or
contributions from third parties. Future estimates and actual results may
differ materially from those indicated below.
PG&E GTN is subject to a number of federal, state, and local laws and
regulations designed to protect human health and the environment by imposing
stringent controls with regard to planning and construction activities, land
use, and air and water pollution, and, in recent years, by governing the use,
treatment, storage, and disposal of hazardous or toxic materials. These laws
and regulations affect future planning and existing operations, including
environmental protection and remediation activities. The costs of compliance
with environmental laws and regulations have generally been recovered in
rates.
Management believes that it is in substantial compliance with applicable
existing environmental requirements and that the ultimate amount of costs,
individually or in the aggregate, that will be incurred by the Company in
connection with its compliance and remediation activities will not be material
to its financial position, liquidity or results of operations. See
"Environmental Matters" in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, below, for a general
description of PG&E GTN's environmental compliance.
ITEM 2. PROPERTIES
PG&E GTN's pipeline system consists of approximately 639 miles of 36-inch
diameter gas transmission line (612 miles of 36-inch diameter pipe and 27
miles of 36-inch diameter pipeline looping), approximately 590 miles of 42-
inch diameter pipe, approximately 84 miles of 12-inch diameter pipe, and 22
miles of 16-inch diameter pipe, 13 compressor stations totaling approximately
415,900 ISO installed horsepower, and ancillary facilities including metering,
regulating facilities, and a communications system. (For further information
on PG&E GTN's pipeline system, see the discussion under "Transmission System"
in Item 1, Business, above.)
PG&E GTN leases its corporate headquarters office space in Portland, Oregon
under a 10-year lease terminating in 2010. Payments under the lease are based
on a per square foot, triple net calculation.
PG&E GTN leases an office building in which it previously had its corporate
offices, and payments under this lease approximate the debt service payments
on the debt issued to finance the building, plus operating costs, taxes and
insurance. Effective August 11, 1999, PG&E GTN sublet a majority of the office
building for a base term through November 1, 2005 with extension and expansion
options. Effective October 15, 2000, the Sublessee occupied the entire
building pursuant to its expansion option under the Sublease. The Sublessee
also has an option to purchase the building for the greater of its fair market
value, or the PG&E GTN option costs with reimbursement of certain costs to
PG&E GTN. See Note 4, "Long-term Debt," in the Notes to Consolidated Financial
Statements contained in Item 8, Financial Statements and Supplementary Data,
below.
ITEM 3. LEGAL PROCEEDINGS
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
7
Company's results of operations, financial position, or cash flows. There are
no pending material legal proceedings to which PG&E GTN is a party or to which
any property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Since PG&E GTN meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K, this information is omitted.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PG&E GTN is a wholly-owned subsidiary of GTN Holdings LLC which, in turn, is
an indirect wholly-owned subsidiary of the PG&E National Energy Group and
ultimately of PG&E Corporation. The payment of dividends by PG&E GTN on its
common stock was restricted under the terms of a Credit Agreement which
terminated in May 1999. (See Note 4, "Long-term Debt," in the Notes to
Consolidated Financial Statements contained in Item 8, Financial Statements
and Supplementary Data, below.) As of December 31, 2000, PG&E GTN had no
restrictions on the payment of dividends on its common stock. In 2000, PG&E
GTN paid no cash dividends on its common stock. During 1999 and 1998 PG&E GTN
paid cash dividends of $80 million and $145 million, respectively. (See
"Relationship with PG&E Corporation and the California Energy Crisis"
contained in Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, below.)
ITEM 6. SELECTED FINANCIAL DATA
Since PG&E GTN meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K, this information is omitted.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CORPORATE STRUCTURE
The consolidated financial statements include PG&E Gas Transmission,
Northwest Corporation (PG&E GTN) and its wholly owned subsidiaries, Pacific
Gas Transmission International, Inc., Pacific Gas Transmission Company and its
50% ownership interest in Stanfield Hub Services, LLC.
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 PG&E GTN and its
management. 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. 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, (i) changes in government regulation; (ii) increasing
competition within our industry and for natural gas suppliers; (iii) 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.
The information in this section should be read in conjunction with the
information set forth under Item 1, Business, above, and the Consolidated
Financial Statements and accompanying Notes to Consolidated Financial
Statements in Item 8, Financial Statements and Supplementary Data, below. See
"Certain Defined Terms" in Item 1, Business, for a definition of terms
commonly used in the natural gas industry and herein.
GENERAL
PG&E 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. PG&E GTN's transportation system also provides service to various
delivery points in Idaho, Washington, and Oregon. PG&E 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.
A major expansion of PG&E GTN's system was placed into service on November
1, 1993. Extensions from the mainline to Coyote Springs in Northern Oregon and
to Medford in Southern Oregon were constructed in 1995. In 1998, PG&E GTN
placed in service a modest mainline expansion which increased capacity by 56
MDt/day on an annual basis and an additional 20 MDt/day for winter-only
service. In 1999, PG&E GTN upgraded its interconnect with Northwest Pipeline
at Stanfield, Oregon to provide an additional 130 MDt/day to Pacific Northwest
markets, increasing delivery capacity to 638 MDt/day at that point.
PG&E GTN's customers are principally local retail gas distribution
utilities, electric generators that utilize natural gas to generate
electricity, natural gas marketing companies that purchase and resell natural
gas to utilities and end-use customers, natural gas producers, and industrial
companies. PG&E GTN's largest customer is the Utility, accounting for
approximately $45.6 million, or 19.4 percent, of PG&E GTN's total
transportation revenues in 2000. The Utility's affiliates account for an
additional $4.4 million, or 1.9 percent, of the total transportation revenues.
The combination of Duke Energy Fuels, Duke Energy Trading & Marketing, and
American Natural Gas (an affiliate of Duke) results in PG&E GTN's second
largest customer, with approximately $26.3 million, or 11 percent, and $25.1
million, or 11 percent, of total 2000 and 1999 transportation revenue,
respectively. In 1999 and 1998, the Utility and its affiliates accounted for
approximately
9
$51.8 million, or 23 percent, and $51.6 million, or 22 percent, respectively,
of PG&E GTN's transportation revenues. No other customer accounted for 10
percent or more of annual transportation revenue.
In 2000, PG&E GTN provided transportation services for 88 customers; 49 of
these customers have long-term firm service transportation agreements with
PG&E GTN for remaining terms that range between 2 and 25 years, resulting in
an average term of approximately 13 years. Approximately 95.7 percent of PG&E
GTN's available long-term capacity was held under long-term contracts during
2000. The remaining volumes were shipped under short-term firm, interruptible,
hub service or capacity release contracts.
PG&E GTN provides interruptible service, when capacity is available, to
shippers in the order of the percentage of the full tariff rate that the
shipper agrees to pay. PG&E GTN allocates interruptible service on a pro-rata
basis to shippers paying maximum tariff rates. If capacity remains after
maximum tariff nominations are fulfilled, discounted and/or negotiated,
interruptible space will be allocated on a highest to lowest total revenue
(rate x mileage) basis. Additionally, PG&E GTN offers hub services, which
allow customers the ability to park or lend volumes of gas on PG&E GTN's
pipeline.
PG&E GTN customers could be affected by the market conditions in California
(see the Relationship with PG&E Corporation and the California Energy Crisis
section, below). Service to such customers is subject to PG&E GTN's FERC
tariff provisions. To the extent any customer fails to meet the credit or
payment requirements as prescribed in the tariff, such customer would be
required to provide assurances either in the form of cash, or an investment
grade guarantee, letter of credit, or surety bond to support its position as a
shipper on the PG&E GTN pipeline. In the event that the customer is unable to
continue to provide such assurances, PG&E GTN can mitigate its risks by open
market capacity sales. Because of the tariff structure, coupled with the
strong demand for natural gas, PG&E GTN expects that it could sell the
capacity at current tariff rates. All customers are current on billings
through March 16, 2001.
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 (PG&E), is experiencing liquidity and credit problems.
PG&E is also the indirect parent of PG&E National Energy Group, Inc. (PG&E
NEG) which is PG&E GTN's indirect parent. Under the current deregulated
wholesale power purchase market scheme in California, the Utility spent
approximately $6.6 billion through December 31, 2000 for purchased power above
the amounts currently provided for under frozen retail rates. Because of this
situation, PG&E's credit rating was downgraded to below investment grade in
January 2001, which caused PG&E to default on outstanding commercial paper and
bank borrowings.
In March 2001, PG&E 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 no longer had rated securities
outstanding.
In January 2001, certain corporate actions were taken to insulate the assets
of PG&E NEG and its direct and indirect subsidiaries, including PG&E GTN, from
any effort to substantively consolidate those assets in an insolvency or
bankruptcy proceeding of PG&E. To protect PG&E GTN from the effects of PG&E's
liquidity and credit situation, PG&E and PG&E NEG undertook a corporate
restructuring of PG&E GTN, known as a "ring-fencing" transaction. The ring-
fencing complied with credit rating agency criteria for establishing
"bankruptcy-remote" entities enabling PG&E 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 and PG&E GTN called GTN Holdings LLC, which directly owns 100% of
the stock of PG&E 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 PG&E 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.
10
Management believes that the PG&E NEG and its direct and indirect
subsidiaries as described above, would not be substantively consolidated with
PG&E in an insolvency or bankruptcy proceeding involving PG&E.
In addition to PG&E GTN's relationship to PG&E as an indirect wholly-owned
subsidiary, the Utility has been PG&E GTN's largest customer, accounting for
close to 20% of its revenues through the periods covered by these financial
statements. In accordance with PG&E GTN's FERC tariff provisions, the Utility
has provided assurances either in the form of cash, or an investment grade
guarantee, letter of credit, or surety bond to support its position as a
shipper on the PG&E GTN pipeline. In the event that the Utility is unable to
continue to provide such assurances, then PG&E GTN can mitigate its risks by
open market capacity sales. Because of the tariff structure, coupled with the
strong demand for natural gas, PG&E GTN expects that it could sell the
capacity at a price at least equal to what the Utility is currently paying.
The Utility is current on all billings through March, 2001, and has
indicated its intention to remain current. The accounts receivable from the
Utility at December 31, 2000 of $3.7 million was collected on January 20,
2001.
RATES AND REGULATION
General
As explained in Item 1, "Rates and Regulation," PG&E GTN is a "natural gas
company" under the Natural Gas Act of 1938 and the Natural Gas Policy Act of
1978, and as such, is subject to the jurisdiction of the FERC.
Since November 1, 1993, when PG&E GTN adopted FERC Order 636, it has applied
the straight fixed-variable (SFV) rate design method for firm service. Under
the SFV rate design, a pipeline company's fixed costs, including return on
equity and related taxes, associated with firm transportation service are
collected through the reservation charge component of the pipeline company's
firm transportation service rates.
As a result of the current SFV rate design and based upon the settlement of
its 1994 rate case, PG&E GTN is permitted to recover 97.0 percent of its fixed
costs through reservation charges on long-term capacity. PG&E GTN currently
has 95.7 percent of available long-term capacity subscribed under long-term
firm contracts. These customers pay a reservation charge for firm
transportation service on PG&E GTN's system, regardless of the volumes of gas
transported. Consequently, the volume of gas transported by PG&E GTN for firm
transportation service customers does not currently have a significant impact
on PG&E GTN's operating results. Because of this, PG&E GTN's operating results
are not significantly affected by fluctuating demand for gas based on the
weather or changes in the price of natural gas, although negotiated rate
authority does offer incremental upside potential which may be driven in part
by changes in the price of natural gas.
Changing Regulatory Environment
In April 1998, the FERC issued Order 587-G which set standards for
electronic communication, nomination, and imbalance procedures. Pipeline
companies need to develop connections using internet tools, directory services
and communication protocols to provide non-discriminatory access to all
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. PG&E
GTN has requested a temporary waiver from the FERC of some of the requirements
of Order 587-G for processing transactions over the internet, and is in the
process of completing programming, testing and training in order to become
fully compliant.
In February 2000, FERC issued Order 637 which, among other things, 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 capacity in the short-term capacity market. The removal of
the price cap only applies to capacity release transactions and is unlikely to
provide any material short-term benefits to PG&E GTN.
These regulatory initiatives are not expected to have a material impact on
PG&E GTN's financial position, cash flows or results of operations in the
foreseeable future.
11
Settlement Of Rate Case
In September 1996, the FERC approved, without modification, the proposed
settlement of PG&E GTN'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. In March and June 1998, the FERC denied requests by several
shippers for rehearing and reaffirmed its approval of the settlement. In May
1998, three shippers petitioned for judicial review of the FERC orders by the
United States Court of Appeals for the District of Columbia Circuit. On
February 1, 2000, the court denied the petitioners' claims as without merit
and upheld the Commission's approval of the settlement without modification.
COMPETITION
PG&E GTN's gas transmission business competes with other pipeline companies
for transportation customers on the basis of transportation rates, access to
competitively priced gas supply, growing markets served by the pipeline and
the quality and reliability of transportation services. The competitiveness of
a pipeline's transportation services to any market is generally determined by
the total delivered natural gas price from a particular supply basin to the
market served by the pipeline. The cost of transportation on the pipeline is
only one component of the total delivered cost.
PG&E GTN's transportation service accesses supplies primarily from Western
Canada and serves markets in the Pacific Northwest, California and Nevada.
PG&E GTN must compete with other pipelines for access to natural gas supplies
in Western Canada. PG&E GTN's major competitors for transportation services
for Western Canadian gas supplies include TransCanada Pipelines, Alliance
Pipeline, Southern Crossing Pipeline and Northern Border Pipeline Company.
The three markets served by PG&E GTN may access supplies from several
competing basins in addition to supplies from Western Canada. In the Pacific
Northwest, customers may also access supplies from the Rocky Mountains, the
Southwest and in certain periods, British Columbia. In Nevada, customers may
also access the Rocky Mountains and British Columbia.
Historically, transportation of natural gas from Western Canada has been
competitively priced on PG&E GTN in relation to gas supplies from the other
supply regions serving these markets. Supplies transported from Western Canada
on PG&E GTN compete in the California market with Rocky Mountain gas supplies
delivered by Kern River Gas Pipeline and Southwest gas supplies delivered by
Transwestern Pipeline Company and El Paso Natural Gas. In the Pacific
Northwest market, supplies transported from Western Canada on PG&E GTN compete
with Rocky Mountain gas supplies delivered by Northwest Pipeline Corporation
and with British Columbia supplies delivered by Westcoast Transmission
Company.
Overall, PG&E GTN's transportation volumes are also affected by other
factors such as the availability and economic attractiveness of other energy
sources. Hydroelectric generation, for example, may become available based on
ample snowfall and displace demand for natural gas as a fuel for electric
generation. Finally, in providing interruptible and short-term transportation
service, PG&E GTN competes with released capacity offered by shippers holding
firm contract capacity on PG&E GTN's pipeline.
Fluctuating levels of throughput caused by these competitive forces
generally are not expected to have a material financial effect on PG&E GTN,
because the Company's transportation service capacity is nearly fully
subscribed under long-term contracts, with a straight fixed variable rate
design.
FUTURE EXPANSION AND BUSINESS DEVELOPMENT
PG&E 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
expansions and extensions from its mainline system, PG&E GTN is considering
opportunities to expand beyond its existing pipeline business.
12
Recent market conditions in the Pacific Northwest and California demonstrate
a need for acceleration of an expansion of the PG&E GTN system. In order to
accommodate this immediate market demand, PG&E GTN is proposing a 200 MDt/d
expansion. PG&E GTN anticipates that limiting the expansion to approximately
200 MDt/d will result in an in-service date prior to November 1, 2002.
PG&E GTN's open season for this capacity from Kingsgate to Malin, or other
receipt and delivery points on the PG&E GTN system closed on February 15,
2001. PG&E GTN, in cooperation with TransCanada PipeLines (TransCanada), is
expected to facilitate customer access to firm transportation from the natural
gas supplies in Alberta to Kingsgate on TransCanada's western Canadian
pipeline systems.
ACCOUNTING FOR THE EFFECTS OF REGULATION
PG&E GTN currently accounts for the effects of regulation in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." As a result of
applying the provisions of SFAS No. 71, PG&E GTN has accumulated approximately
$40.9 million of regulatory assets and $6.4 million of regulatory liabilities
as of December 31, 2000. See Notes to Consolidated Financial Statements, Note
1: Summary of Business and Significant Accounting Policies.
RESULTS OF OPERATIONS
Selected operating results and other data for fiscal years 2000, 1999 and
1998 are as follows:
Results of Operations
For the Year Ended
-----------------------
2000 1999 1998
------- ------- -------
(In Millions)
Operating revenues................................ $ 236.6 $ 241.4 $ 235.3
Operating expenses................................ 102.5 102.0 99.7
------- ------- -------
Operating income................................ 134.1 139.4 135.6
Other income...................................... 2.0 1.4 3.4
Net interest expense.............................. 40.4 41.7 43.0
------- ------- -------
Income before taxes............................. 95.7 99.1 96.0
Income tax expense................................ 37.3 37.6 35.7
------- ------- -------
Net Income...................................... $ 58.4 $ 61.5 $ 60.3
------- ------- -------
Ratio of earnings to fixed charges (a)............ 3.3 3.3 3.2
======= ======= =======
- --------
(a) For purposes of computing the ratio of earnings to fixed charges,
earnings are computed by adding to net income the provision for income
taxes and fixed charges. Fixed charges consist of interest, the
amortization of debt issuance costs and debt discount, and a portion of
rents deemed to be representative of interest. Fixed charges are not
reduced by the allowance for borrowed funds used during construction, but
such allowance is included in the determination of earnings.
Net Income -- Net income was $58.4 million in 2000, compared with $61.5
million in 1999, and $60.3 million in 1998. The decrease in net income in 2000
compared to 1999 is a result of a $4.8 million decrease in the operating
revenues and a small increase in operating expenses offset by a decrease in
interest expense. The $1.2 million increase in net income in 1999 compared
with 1998 is due to higher operating revenues and lower net interest expense
in 1999 offset by higher operating expenses and lower other income.
13
Operating Revenues -- The components of operating revenue are as follows:
Operating Revenues
For the Year Ended
--------------------
2000 1999 1998
------ ------ ------
(In Millions)
Gas transportation revenue........................... $185.3 $170.0 $183.3
Gas transportation revenue for affiliates............ 50.0 51.8 51.3
------ ------ ------
Total gas transportation revenue................. 235.3 221.8 234.6
Other revenue........................................ 1.3 19.6 0.7
------ ------ ------
Total Operating Revenues......................... $236.6 $241.4 $235.3
====== ====== ======
Transportation revenues increased by $13.5 million in 2000 compared to 1999
due primarily to higher short-term firm and interruptible service revenues and
an increase in Gas Research Institute (GRI) fees. Transportation revenues
decreased by $12.7 million or 5 percent in 1999 compared to 1998 due to lower
short-term firm and interruptible volumes and lower GRI surcharges.
The year-to-year changes in other revenues are primarily due to the
recognition of $18.7 million in 1999 resulting from the renegotiation of
several transportation service contracts in connection with the resolution of
commercial issues with certain shippers. Such revenues have been reclassified
from Other income as presented in prior year financial statements.
GRI fees are surcharges billed to customers of FERC-regulated pipelines to
fund the GRI for gas industry research and development activities. These
revenues have no effect on income as the entire amounts collected are paid to
the GRI and are reflected by the Company as Administrative and General
expense. Amounts (net of refunds) collected and paid to the GRI in 2000, 1999
and 1998 were $11.9 million, $8.6 million, and $13.0 million, respectively.
Operating Expenses -- The components of total operating expenses are as
follows:
Operating Expenses
For the Year Ended
-------------------
2000 1999 1998
------ ------ -----
(In Millions)
Administrative and general............................ $ 29.2 $ 29.6 $31.9
Operations and maintenance............................ 20.4 19.8 17.3
Depreciation and amortization......................... 41.4 41.4 39.2
Property and other taxes.............................. 11.5 11.3 11.3
------ ------ -----
Total operating expenses.......................... $102.5 $102.1 $99.7
====== ====== =====
Total operating expenses increased $0.4 million, or less than one percent,
in 2000 compared to 1999, as increased operations and maintenance expenses due
to increased compressor overhaul activity and a minor increase in property and
other taxes were partially offset by reduced administrative and general
expenses. Total operating expenses increased $2.4 million, or two percent, in
1999 compared with 1998, primarily due to higher operation and maintenance and
depreciation and amortizing expense, offset in part by lower administrative
and general expenses due to lower GRI surcharge costs.
Administrative and general expense declined in 2000 compared to 1999 as a
result of reduced expenses for employee and retiree benefits and diminished
expenses for Year 2000 (Y2K) conversion partially offset by an increase in GRI
charges. Compared to 1998, the administrative and general expenses decreased
in 1999 due to lower GRI charges. See Operating Revenues above for a
description of the GRI charges.
Operations and maintenance expense increased $0.6 million, or three percent,
in 2000 compared to 1999 primarily as the result of increased compressor
overhaul activity partially offset by reduced Y2K costs and $2.5 million, or
14 percent, in 1999 compared to 1998 primarily due to higher Y2K costs and
compressor unit overhaul expenses.
14
Depreciation and amortization expense was approximately equal in 2000 and
1999. During 1999 compared to 1998, depreciation and amortization increased
$2.2 million, or six percent, primarily as a result of a $35.1 million
increase in property, plant and equipment in service.
Property and other taxes remained fairly level in 2000 compared to 1999 and
1998.
Other Income -- The variations in other income are primarily related to
year-to-year changes in Allowance for Funds Used During Construction (AFUDC)
and interest income and fees.
Interest Expense -- Net interest expense declined $1.3 million, or three
percent, in 2000 compared to 1999, as a result of the payment of $31.0 million
of medium term notes during the year and a $33.0 million reduction of the
average outstanding commercial paper balance, offset by an increase in the
average commercial paper borrowing rate to 6.67 percent and lower credits for
Allowance for Funds Used During Construction interest in the current year. Net
interest expense declined $1.3 million, or three percent, in 1999 compared to
1998 primarily as a result of lower average outstanding commercial paper
balance by $12.6 million and lower interest rate of 5.47 percent in 1999
compared to 5.83 percent in 1998.
LIQUIDITY AND CAPITAL RESOURCES
During 2000 the balance of cash and cash equivalents increased by $0.5
million compared with 1999. The 1999 balance increased $1.0 million compared
with 1998. A more detailed discussion of the Company's operating, investing
and financing activities follows below.
Sources of Capital -- The Company's capital requirements are funded from
cash provided by operations and, to the extent necessary, external financing
and capital contributions from its parent company. PG&E GTN pays dividends as
part of a balanced approach to managing its capital structure, funding its
operations and capital expenditures and maintaining appropriate cash balances.
Certain corporate actions were taken to insulate the assets of NEG and its
direct and indirect subsidiaries, including PG&E GTN, from an effort to
substantively consolidate those assets in any insolvency or bankruptcy
proceeding of PG&E. As a result of these actions, GTN Holdings LLC, PG&E 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 PG&E 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).
Cash Flows from Operating Activities -- For the year ended December 31,
2000, net cash provided by operating activities was $131.8 million, which was
$18.3 million greater than 1999 primarily as a result of lower payments to
parent company for income taxes offset by lower cash flows from net income.
For the year ended December 31, 1999, net cash provided by operating
activities was $113.5 million which was $9.9 million lower than the 1998
amount of $123.4 million primarily due to change in receivables/payables from
affiliates.
Cash Flows from Investing Activities -- Net cash used in investing
activities in 2000 was $87.5 million compared to $26.6 million in 1999 and
$49.9 million in 1998. The increase in cash used in investing activities from
1999 to 2000 is primarily due to the $75.0 million note to parent offset by
lower construction expenditures. The decrease from 1998 to 1999 resulted from
a decrease in construction expenditures primarily due to the cost of the 1998
expansion project and the investment required to upgrade the Company's
financial systems.
Cash Flows from Financing Activities -- For the year ended December 31,
2000, cash used in financing activities was $43.8 million reflecting a
reduction in the long-term debt outstanding. No cash dividends were paid
during 2000. For the year ended December 31, 1999, cash used in financing
activities was $85.9 million as a result of $80 million in dividends paid to
PG&E GTN's parent company, and a $5.9 million reduction in long-term debt. For
the year ended December 31, 1998, cash used in financing activities was $120.7
million as a result of $145.0 million in dividends paid to PG&E GTN's parent
company, partially offset by a net $24.3 million increase in long-term debt.
PG&E 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. PG&E GTN has retained its stand-alone
investment grade rating.
15
CAPITAL REQUIREMENTS
The Company's estimated capital requirements for each of the next five years
are as follows:
2001 2002 2003 2004 2005
----- ----- ----- ----- ------
(Dollars in Millions)
Capital requirements........................ $91.6 $67.2 $21.6 $73.2 $236.3
The above amounts are forward-looking and involve a number of assumptions
and uncertainties. These estimates are subject to revision and actual amounts
may vary based upon changes in assumptions as to pipeline capacity growth,
rates of inflation, receipt of adequate and timely rate relief, availability
and timing of regulatory approvals, total cost of major projects, availability
and cost of suitable non-regulated investments, and availability and cost of
external sources of capital, as well as the outcome of the ongoing
restructuring in the gas industry.
Most of PG&E GTN's capital expenditures are associated with projects aimed
at system expansion or the replacement and enhancement of existing
transmission facilities to improve their efficiency and reliability and to
comply with environmental laws and regulations.
In addition to these capital requirements, the Company has other commitments
as discussed in Note 6, "Commitments and Contingencies," in the Notes to
Consolidated Financial Statements contained in Item 8, Financial Statements
and Supplementary Data, below.
ENVIRONMENTAL MATTERS
The following discussion includes certain forward-looking information
relating to the possible future impact of environmental compliance. It is
subject to a number of uncertainties, including regulations and the selection
of compliance alternatives.
PG&E GTN is subject to regulation by the FERC in accordance with the
National Environmental Policy Act and other federal and state laws and
regulations governing environmental quality and pollution control. These laws
and regulations require PG&E GTN to take measures to avoid, minimize or
mitigate the effects of its operations on the environment.
The Company's expenditures for environmental protection are subject to
periodic review and revision to reflect changing technology and evolving
regulatory requirements. For 2001, capital requirements for environmental
protection and safety compliance are estimated to be approximately $0.3
million.
On an ongoing basis, the Company assesses measures that may need to be taken
to comply with environmental laws and regulations related to its operations.
Management believes that it is in substantial compliance with applicable
existing environmental requirements and that the ultimate amount of costs,
individually or in the aggregate, that will be incurred by the Company in
connection with its compliance and remediation activities will not be material
to its financial position, cash flows or results of operations.
16
LEGAL MATTERS AND CONTINGENCIES
In the normal course of business, the Company is named as a party in a
number of claims and lawsuits. In the past, substantially all of these have
been litigated or settled with no significant impact on either the Company's
results of operations, financial position or cash flows. There are no pending
material legal proceedings to which PG&E GTN is a party or to which any
property is subject.
PG&E GTN entered into a credit support agreement, effective December 22,
2000, with PG&E Energy Trading -- Power Holdings Corporation (PG&E ET),
another PG&E Corporation wholly-owned subsidiary, to provide guarantees and
other credit support in favor of PG&E ET's operating subsidiaries. PG&E GTN
has agreed to provide such credit support in an aggregate amount up to $2.0
billion. At December 31, 2000, $58.4 million of guarantees were outstanding,
with an overall exposure of $18.4 million on the transactions supported by the
guarantees. At March 16, 2001, PG&E GTN had outstanding an aggregate face
amount of $1.1 billion of guarantees with a gross exposure of $377.8 million
related to underlying transactions. PG&E ET has advised, PG&E GTN's exposure
to PG&E ET is more than offset by the underlying fair market value of PG&E
ET's forward book.
NEW ACCOUNTING STANDARDS
The Company will adopt Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS Nos. 137 and 138, on January 1, 2001. This standard requires
the Company to recognize 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 derivatives
are effective hedges, depending on the nature of the hedges, changes in the
fair value of derivatives either will offset 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 items are recognized
in earnings. The Company has determined that adoption of SFAS No. 133 will not
have a material impact on its financial condition or results of operations.
The Company also has certain derivative contracts for the transportation of
natural gas transacted in the normal course of business. At this time, these
derivative contracts are exempt from the requirements of SFAS No. 133 under
the normal purchases and sales exception, and thus will not be reflected on
the balance sheet at fair value. The Derivative Implementation Group of the
Financial Accounting Standards Board is currently evaluating the definition of
normal purchases and sales. As such, certain derivative contracts may no
longer be exempt from the requirements of SFAS No. 133. When the final
decision regarding this issue is complete, the Company will evaluate the
impact of the implementation guidance on a prospective basis.
EFFECT OF INFLATION
The Company generally has experienced increased costs due to the effect of
inflation on the cost of labor, material and supplies, and plant and
equipment. A portion of these increased costs can directly affect income
through higher operating expenses. The cumulative impact of inflation over a
number of years has resulted in increased costs for current replacement of
PG&E GTN's plant and equipment. However, PG&E GTN's utility plant is subject
to ratemaking treatment, and the increased cost of replacement plant is
generally recoverable through rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PG&E Corporation has established an officer-level risk management committee
and a risk management policy which is also applicable to PG&E GTN. This
committee oversees implementation and compliance with the policy and approves
each risk management program.
The Company also uses a number of other techniques to mitigate its financial
risk, including the purchase of commercial insurance and the maintenance of
internal control systems. The extent to which these techniques
17
are used depends on the risk of loss and the cost to employ such techniques.
These techniques do not eliminate financial risk to the Company.
The majority of the Company's financing is done on a fixed-rate basis,
thereby substantially reducing the financial risk associated with variable
interest rate borrowings.
The following table summarizes the annual maturities (including unamortized
debt discount) and fair value of long-term debt at December 31, 2000:
Annual Maturities of Debt
------------------------------------------------------
Avg. Fair
Interest 2001 2002 2003 2004 2005 Thereafter Total Value
-------- ---- -------- ------ ---- -------- ---------- -------- --------
(Dollars in Thousands)
Senior Unsecured Notes,
due 2005............... 7.10% $-- $ -- $ -- $-- $249,891 $ -- $249,891 $255,150
Senior Unsecured
Debentures, due 2025... 7.80% -- -- -- -- -- 147,890 147,890 147,990
Medium Term Notes, due
2002 to 2003........... 6.85% -- 33,000 6,000 -- -- -- 39,000 39,331
Commercial Paper........ 6.67% -- 86,402 -- -- -- -- 86,402 86,402
Capital Lease........... 8.79% 543 593 647 705 769 12,144 15,401 15,401
---- -------- ------ ---- -------- -------- -------- --------
Total long-term
debt................ $543 $119,995 $6,647 $705 $250,660 $160,034 $538,584 $544,274
==== ======== ====== ==== ======== ======== ======== ========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements of PG&E Gas Transmission, Northwest Corporation and its
subsidiaries:
Independent Auditors' Reports
Statements of Consolidated Income -- for each of the three years ended
December 31, 2000, 1999, and 1998
Consolidated Balance Sheets -- as of December 31, 2000 and 1999
Statements of Consolidated Common Stock Equity -- for each of the three
years ended December 31, 2000, 1999, and 1998
Statements of Consolidated Cash Flows -- for each of the three years
ended December 31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements
Quarterly Consolidated Financial Data for 2000 and 1999 (Unaudited)
18
INDEPENDENT AUDITORS' REPORT
To the Shareholder and the Board of Directors
of PG&E Gas Transmission, Northwest Corporation:
We have audited the accompanying Consolidated Balance Sheets of PG&E Gas
Transmission, Northwest Corporation and subsidiaries as of December 31, 2000
and 1999, and the related Statements of Consolidated Income, Consolidated
Common Stock Equity, and Consolidated Cash Flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of PG&E Gas Transmission, Northwest
Corporation and subsidiaries as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States
of America.
See Note 1 of the consolidated financial statements for discussion of the
liquidity matters of an affiliated company.
/s/ DELOITTE & TOUCHE LLP
-----------------------------
DELOITTE & TOUCHE LLP
Portland, Oregon
March 16, 2001
19
INDEPENDENT AUDITORS' REPORT
To the Shareholder and the Board of Directors
of PG&E Gas Transmission, Northwest Corporation:
We have audited the accompanying Statements of Consolidated Income, Common
Stock Equity and Cash Flows of PG&E Gas Transmission, Northwest Corporation (a
California corporation) and subsidiaries for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis of our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of PG&E Gas
Transmission, Northwest Corporation and subsidiaries for the year ended
December 31, 1998 in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
ARTHUR ANDERSEN LLP
Portland, Oregon
February 8, 1999
20
STATEMENTS OF CONSOLIDATED INCOME
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
OPERATING REVENUES:
Gas transportation........................... $ 185,309 $ 169,994 $ 183,314
Gas transportation for affiliates............ 49,974 51,804 51,240
Other........................................ 1,293 19,649 698
--------- --------- ---------
Total operating revenues................. 236,576 241,447 235,252
--------- --------- ---------
OPERATING EXPENSES:
Administrative and general................... 29,231 29,637 31,884
Operations and maintenance................... 20,416 19,805 17,277
Depreciation and amortization................ 41,392 41,361 39,160
Property and other taxes..................... 11,491 11,277 11,345
--------- --------- ---------
Total operating expenses................. 102,530 102,080 99,666
--------- --------- ---------
OPERATING INCOME............................. 134,046 139,367 135,586
--------- --------- ---------
OTHER INCOME:
Allowance for equity funds used during
construction................................ 462 1,103 971
Other -- net................................. 1,595 309 2,423
--------- --------- ---------
Total other income....................... 2,057 1,412 3,394
--------- --------- ---------
INTEREST EXPENSE:
Interest on long-term debt................... 39,453 41,523 42,472
Allowance for borrowed funds used during
construction................................ (439) (1,123) (996)
Other interest charges....................... 1,410 1,339 1,483
--------- --------- ---------
Net interest expense..................... 40,424 41,739 42,959
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE............. 95,679 99,040 96,021
INCOME TAX EXPENSE........................... 37,316 37,577 35,739
--------- --------- ---------
NET INCOME................................... $ 58,363 $ 61,463 $ 60,282
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
21
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
------------------------
2000 1999
----------- -----------
(In Thousands)
PROPERTY, PLANT, and EQUIPMENT:
Property, plant, and equipment in service........... $ 1,554,088 $ 1,535,225
Accumulated depreciation and amortization........... (544,225) (513,234)
----------- -----------
Net plant in service............................ 1,009,863 1,021,991
Construction work in progress....................... 5,613 22,274
----------- -----------
Total property, plant, and equipment -- net..... 1,015,476 1,044,265
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents........................... 2,528 2,039
Accounts receivable -- gas transportation........... 17,051 16,469
Accounts receivable -- transportation imbalances and
fuel............................................... 2,939 10,355
Accounts receivable -- affiliated companies......... 8,907 4,159
Inventories (at average cost)....................... 10,446 9,138
Notes receivable -- parent.......................... 75,000 --
Prepayments and other current assets................ 4,424 3,557
----------- -----------
Total current assets............................ 121,295 45,717
----------- -----------
DEFERRED CHARGES:
Income tax related regulatory asset................. 25,033 25,413
Deferred charge on reacquired debt.................. 10,040 11,245
Unamortized debt expense............................ 2,848 3,237
Other regulatory assets............................. 3,174 5,035
Other............................................... 2,775 1,431
----------- -----------
Total deferred charges.......................... 43,870 46,361
----------- -----------
TOTAL ASSETS........................................ $ 1,180,641 $ 1,136,343
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
22
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
December 31,
-----------------------
2000 1999
----------- -----------
(In Thousands)
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.................................... 108,570 50,281
----------- -----------
Total common stock equity.......................... 386,761 328,472
Long-term debt......................................... 538,041 550,845
----------- -----------
Total capitalization............................... 924,802 879,317
----------- -----------
CURRENT LIABILITIES:
Long-term debt -- current portion...................... 543 31,498
Accounts payable....................................... 17,440 15,149
Accounts payable to affiliates......................... 33,454 5,527
Accrued interest....................................... 3,416 4,101
Accrued liabilities.................................... 1,989 9,632
Accrued taxes.......................................... 1,218 924
----------- -----------
Total current liabilities.......................... 58,060 66,831
----------- -----------
DEFERRED CREDITS:
Deferred income taxes.................................. 189,104 180,061
Other.................................................. 8,675 10,134
----------- -----------
Total deferred credits............................. 197,779 190,195
----------- -----------
Commitments and contingencies (Note 6)................. -- --
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES................... $ 1,180,641 $ 1,136,343
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
23
STATEMENTS OF CONSOLIDATED COMMON STOCK EQUITY
Additional Total
Common Paid-in Reinvested Common
Stock Capital Earnings Stock Equity
-------- ---------- ---------- ------------
(In Thousands)
Balance at December 31, 1997........ $ 85,474 $ 192,717 $ 153,536 $ 431,727
Net income........................ -- -- 60,282 60,282
Dividend paid to parent company... -- -- (145,000) (145,000)
-------- --------- --------- ---------
Balance at December 31, 1998........ 85,474 192,717 68,818 347,009
Net income........................ -- -- 61,463 61,463
Dividend paid to parent company... -- -- (80,000) (80,000)
-------- --------- --------- ---------
Balance at December 31, 1999........ 85,474 192,717 50,281 328,472
Net income........................ -- -- 58,363 58,363
Distribution to parent company.... -- -- (74) (74)
-------- --------- --------- ---------
Balance at December 31, 2000........ $ 85,474 $ 192,717 $ 108,570 $ 386,761
======== ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
24
STATEMENTS OF CONSOLIDATED CASH FLOWS
Years Ended December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 58,363 $ 61,463 $ 60,282
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization.............. 43,379 42,863 42,759
Deferred income taxes...................... 9,423 16,215 18,119
Allowance for equity funds used during
construction.............................. (462) (1,103) (971)
Changes in operating assets and
liabilities:
Accounts receivable -- gas transportation
and other............................... 2,086 (697) (2,679)
Accounts payable and accrued
liabilities............................. (6,036) (2,694) 372
Net receivable/payable -- affiliates..... (696) (1,130) 11,760
Net receivable/payable to parent for
taxes................................... 27,731 (690) (3,609)
Accrued taxes............................ 293 145 (34)
Inventory................................ (1,309) (1,188) (1,427)
Other working capital.................... (48) (12) 734
Regulatory accruals...................... 7 696 768
Other -- net............................. (948) (417) (2,730)
--------- --------- ---------
Net cash provided by operating
activities............................ 131,783 113,451 123,344
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures.................... (12,023) (25,474) (48,857)
Note receivable -- parent.................... (75,000) -- --
Allowance for borrowed funds used during
construction................................ (439) (1,123) (996)
--------- --------- ---------
Net cash used in investing activities.. (87,462) (26,597) (49,853)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt.................. (173,370) (134,438) (65,640)
Long-term debt issued, net of issuance
costs....................................... 129,538 128,543 89,980
Cash dividends paid to parent................ -- (80,000) (145,000)
--------- --------- ---------
Net cash used in financing activities.. (43,832) (85,895) (120,660)
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS...... 489 959 (47,169)
CASH AND CASH EQUIVALENTS AT JANUARY 1....... 2,039 1,080 48,249
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT DECEMBER 31..... $ 2,528 $ 2,039 $ 1,080
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
25
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2000, 1999 and 1998
Note 1: Summary of Business and Significant Accounting Policies
Basis of Presentation -- PG&E Gas Transmission, Northwest Corporation (PG&E
GTN) was incorporated in California in 1957 under its former name, Pacific Gas
Transmission Company. PG&E 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 utility regulated by the California Public Utilities Commission,
serving Northern and Central California. PG&E Corporation (PG&E) is the
corporate parent for both PG&E NEG and the Utility.
The accompanying consolidated financial statements reflect the results for
PG&E GTN and its wholly owned subsidiaries which include Pacific Gas
Transmission International, Inc., Pacific Gas Transmission Company, and a
fifty percent interest in a joint venture known as Stanfield Hub Services,
LLC.
PG&E GTN and its subsidiaries collectively are referred to herein as the
"Company."
All material adjustments are of a normal recurring nature unless otherwise
disclosed. Intercompany accounts and transactions have been eliminated. Prior
years' amounts in the consolidated financial statements have been reclassified
where necessary to conform to the 2000 presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (generally
accepted accounting principles) requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
revenues, expenses, assets, liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
Business -- PG&E GTN is a natural gas pipeline company which owns and
operates an interstate pipeline system which extends from the British
Columbia-Idaho border to the Oregon-California border, traversing Idaho,
Washington, and Oregon.
PG&E GTN operates in one business segment, the transportation of natural
gas, primarily from supplies in Canada for customers located in the Pacific
Northwest, Nevada, and California. PG&E GTN's customers are principally local
retail gas distribution utilities, electric generators that utilize natural
gas to generate electricity, natural gas marketing companies that purchase and
resell natural gas to end-use customers and utilities, natural gas producers,
and industrial companies. PG&E GTN's customers are responsible for securing
their own gas supplies which are delivered to PG&E GTN's system. PG&E GTN
transports such supplies directly to customers or to downstream pipelines,
which then transport such supplies to their customers.
Relationship with PG&E Corporation and the California Energy Crisis -- The
Utility, a regulated utility in California and wholly-owned subsidiary of
PG&E, is experiencing liquidity and credit problems. PG&E is also the indirect
parent of PG&E NEG which is PG&E GTN's indirect parent. Under the current
deregulated wholesale power purchase market scheme in California, the Utility
spent approximately $6.6 billion through December 31, 2000 for purchased power
above the amounts currently provided for under frozen retail rates. Because of
this situation, PG&E's credit rating was downgraded to below investment grade
in January 2001, which caused PG&E to default on outstanding commercial paper
and bank borrowings.
In March 2001, PG&E 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 no longer had rated securities
outstanding.
26
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
In January 2001, certain corporate actions were taken to insulate the assets
of PG&E NEG and its direct and indirect subsidiaries, including PG&E GTN, from
any effort to substantively consolidate those assets in an insolvency or
bankruptcy proceeding of PG&E. To protect PG&E GTN from the effects of PG&E's
liquidity and credit situation, PG&E and PG&E NEG undertook a corporate
restructuring of PG&E GTN, known as a "ring-fencing" transaction. The ring-
fencing complied with credit rating agency criteria for establishing
"bankruptcy-remote" entities enabling PG&E 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 and PG&E GTN called GTN Holdings LLC, which directly owns 100% of
the stock of PG&E 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 PG&E 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.
Management believes that PG&E NEG and its direct and indirect subsidiaries
as described above, would not be substantively consolidated with PG&E in an
insolvency or bankruptcy proceeding involving PG&E.
In addition to PG&E GTN's relationship to PG&E as an indirect wholly-owned
subsidiary, the Utility has been PG&E GTN's largest customer, accounting for
close to 20% of its revenues through the periods covered by these financial
statements. In accordance with PG&E GTN's FERC tariff provisions, the Utility
has provided assurances either in the form of cash, or an investment grade
guarantee, letter of credit, or surety bond to support its position as a
shipper on the PG&E GTN pipeline. In the event that the Utility is unable to
continue to provide such assurances, then PG&E GTN can mitigate its risks by
open market capacity sales. Because of the tariff structure, coupled with the
strong demand for natural gas, PG&E GTN expects that it could sell the
capacity at a price at least equal to what the Utility is currently paying.
The Utility is current on all billings through March 16, 2001, and has
indicated its intention to remain current. The accounts receivable from the
Utility at December 31, 2000 of $3.7 million was collected on January 20,
2001.
Risk Management -- PG&E Corporation has established an officer-level risk
management committee and a risk management policy which is also applicable to
PG&E GTN. This committee oversees implementation and compliance with the
policy and approves each risk management program.
The majority of the Company's financing is done on a fixed-rate basis;
thereby substantially reducing the financial risk associated with variable
interest rate borrowings. The Company also uses a number of other techniques
to mitigate its financial risk, including the purchase of commercial insurance
and the maintenance of internal control systems. The extent to which these
techniques are used depends on the risk of loss and the cost to employ such
techniques. These techniques do not eliminate financial risk to the Company.
Regulation -- PG&E GTN's rates and charges for its natural gas
transportation business are regulated by the Federal Energy Regulatory
Commission (FERC or Commission). PG&E GTN's consolidated financial statements
reflect the ratemaking policies of the Commission in conformity with generally
accepted accounting principles for rate-regulated enterprises in accordance
with Statement of Financial Accounting Standards (SFAS)
27
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
No. 71, "Accounting for the Effects of Certain Types of Regulation." This
statement allows PG&E GTN to record certain regulatory assets and liabilities
which will be included in future rates and would not be recorded under
generally accepted accounting principles for nonregulated entities. Regulatory
assets and liabilities represent future probable increases or decreases,
respectively, in revenues to be recorded by PG&E GTN associated with certain
costs to be collected from customers or amounts to be refunded to customers,
respectively, as a result of the ratemaking process.
The Company applies SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which prescribes
general standards for the recognition and measurement of impairment losses. In
addition, it requires that regulatory assets continue to be probable of
recovery in rates, rather than only at the time the regulatory asset is
recorded. Regulatory assets currently recorded would be written off or
reserved against if recovery is no longer probable.
The following regulatory assets and liabilities were reflected in PG&E GTN's
Consolidated Balance Sheets as of the dates noted:
December 31,
---------------
Regulatory Assets and Liabilities 2000 1999
--------------------------------- ------- -------
(In Thousands)
Regulatory Assets:
Income tax related...................................... $25,033 $25,413
Deferred charge on reacquired debt...................... 10,040 11,245
Pension costs........................................... 1,071 2,771
Postretirement benefit costs other than pensions........ 2,102 2,264
Fuel tracker............................................ 2,692 3,786
------- -------
Total Regulatory Assets............................... $40,938 $45,479
======= =======
Regulatory Liabilities:
Postretirement benefits other than pension.............. $ 6,301 $ 4,031
Unamortized ITC......................................... 132 173
------- -------
Total Regulatory Liabilities.......................... $ 6,433 $ 4,204
======= =======
Substantially all of PG&E GTN's regulatory assets are provided for in rates
charged to customers and are being amortized over future periods. The Company
does not earn a return on regulatory assets on which it does not incur a
carrying cost. The Company does not earn a return nor does it incur a carrying
cost on regulatory assets related to income taxes, pension costs,
postretirement benefit costs or fuel tracker.
Cash Equivalents -- Cash equivalents (stated at cost, which approximates
market) include working funds and short-term investments with maturities of
three months or less at date of acquisition.
Property, Plant, and Equipment -- Utility plant is stated at original cost.
The costs of utility plant additions, including replacements of plant retired,
are capitalized. Costs include labor, materials, construction overhead, and an
allowance for funds used during construction (AFUDC). AFUDC is the estimated
cost of debt and equity funds used to finance regulated plant additions. AFUDC
rates, calculated in accordance with FERC authorizations, are based upon the
last approved equity rate and an embedded rate for borrowed funds. The equity
component of AFUDC is included in other income and the borrowed funds
component is recorded as a reduction of interest expense.
28
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Costs of repairing property and replacing minor items of property are
charged to maintenance expense. The original cost of plant retired plus
removal costs, less salvage, is charged to accumulated depreciation upon
retirement of plant in service. No gain or loss is recognized upon normal
retirement of utility plant.
PG&E GTN's tangible utility plant in service is depreciated using a
straight-line remaining-life method while its intangible plant in service is
amortized over periods of five to seven years.
The following table sets forth the major classifications of the Company's
property, plant, and equipment and its accumulated provisions for depreciation
and amortization at December 31 for the periods noted.
Average Average
Depreciation/ Depreciation/
Property, Plant, and Amortization Amortization
Equipment Amount Rate Amount Rate
-------------------- ---------- ------------- ---------- -------------
2000 1999
------------------------- -------------------------
(In Thousands)
Transmission............ $1,476,972 2.4% $1,461,422 2.4%
General................. 37,915 7.3% 32,114 7.3%
Capital lease........... 17,534 5.1% 17,534 5.0%
Intangible -- Computer
software & other....... 21,667 16.0% 24,155 16.4%
---------- ----------
Plant in service...... 1,554,088 1,535,225
Construction work in
progress............... 5,613 22,274
---------- ----------
Total property, plant
and equipment........ 1,559,701 1,557,499
Less accumulated
provisions for:
Depreciation.......... (533,920) (502,744)
Amortization.......... (10,305) (10,490)
---------- ----------
Property, plant, and
equipment -- net....... $1,015,476 $1,044,265
========== ==========
Accounts Receivable -- Transportation Imbalances and Fuel -- include the
following:
December 31,
--------------
2000 1999
------ -------
(In Thousands)
Gas Imbalances............... $ 247 $ 6,569
Fuel Tracker................. 2,692 3,786
------ -------
Total.................... $2,939 $10,355
====== =======
Gas imbalances represent the value of gas due from connecting pipelines for
operating imbalances, and gas due from customers based on their nominations
versus their deliveries into PG&E GTN's pipeline. Operator imbalances are
settled volumetrically. Customer imbalances are settled volumetrically in
accordance with the Company's tariff.
The Fuel Tracker represents the difference between the value of "in-kind"
gas received from customers for compressor fuel use and line gain/loss versus
the actual amount incurred by the pipeline. PG&E GTN's fuel tracker mechanism,
as approved by the FERC, provides for 100% recovery of such gas. To the extent
that actual compressor fuel and line loss/gain differ from amounts collected
through the fuel rates then in effect, the value of such differences is
reflected as a regulatory asset or liability. Fuel tracker rates are updated
semi-annually to include these differences with fuel estimates for the
upcoming six months.
29
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Unamortized Debt Expense and Gains or Losses on Reacquired Debt -- PG&E
GTN's debt issuance costs are amortized over the lives of the issues to which
they pertain. Unamortized debt cost and gains or losses associated with
refinanced debt are amortized over the life of the new debt consistent with
PG&E GTN's ratemaking treatment.
Revenues -- PG&E GTN's transportation revenues including the reservation and
the volumetric charge components, are recorded as services are provided, based
on rate schedules approved by the FERC. The reservation charge component is
recorded in the months in which it applies. The volumetric charge component is
recorded when volumes are delivered.
Other revenues include sublease rental income on the Company's former
headquarters building, miscellaneous service revenues and in 1999, revenues of
$18.7 million resulting from the renegotiation of several transportation
contracts in connection with the resolution of commercial issues with certain
shippers.
PG&E GTN's largest customer in 2000 was the Utility, accounting for
approximately $45.6 million, or 19.4 percent, of its transportation revenues.
The primary term of the firm service transportation agreement with the Utility
extends through 2005 and continues year-to-year thereafter unless terminated.
The Utility's affiliates account for an additional $4.2 million, or 1.8
percent, of the total transportation revenues. The combination of Duke Energy
Fuels, Duke Energy Trading & Marketing, and American Natural Gas (an affiliate
of Duke) results in PG&E GTN's second largest customer, with approximately
$25.3 million, or 11 percent, of total 2000 transportation revenue. In 1999,
the Utility and affiliates and Duke Energy and affiliates accounted for
approximately $51.8 million (23 percent) and $25.0 million (11 percent)
respectively, of PG&E GTN's transportation revenues. In 1998, the Utility and
affiliates accounted for approximately $51.6 million (22 percent) of PG&E
GTN's transportation revenues. No other customer accounts for 10 percent or
more of annual transportation revenue.
PG&E GTN customers could be affected by the market conditions in California
(see the Relationship with PG&E Corporation and the California Energy Crisis
section, above). Service to such customers is subject to PG&E GTN's FERC
tariff provisions. To the extent any customer fails to meet the credit or
payment requirements as prescribed in the tariff, such customer would be
required to provide assurances either in the form of cash, or an investment
grade guarantee, letter of credit, or surety bond to support its position as a
shipper on the PG&E GTN pipeline. In the event that the customer is unable to
continue to provide such assurances, PG&E GTN can mitigate its risks by open
market capacity sales. Because of the tariff structure, coupled with the
strong demand for natural gas, PG&E GTN expects that it could sell the
capacity at current tariff rates. All customers are current on billings
through March 16, 2001.
Income Taxes -- The Company is included in the consolidated federal income
tax return filed by PG&E. For financial reporting purposes, income taxes are
allocated to PG&E GTN and its subsidiaries on a modified separate return
basis, to the extent such taxes or tax benefits are realized by PG&E in the
consolidated return.
Other Income -- The components of Other-net include interest income and fees
and other miscellaneous non-operating income items.
Comprehensive Income -- For the years ended December 31, 2000, 1999 and
1998, PG&E GTN did not have any current or accumulated other comprehensive
income, thus net income equaled comprehensive income for all periods.
30
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Statements of Consolidated Cash Flows -- Cash paid for interest, net of
amounts capitalized, totaled $39.7 million, $39.9 million and $35.8 million in
2000, 1999 and 1998, respectively. Cash paid for income taxes totaled $0.2
million in 2000, $21.6 million in 1999 and $20.1 million in 1998.
New Accounting Standards -- The Company will adopt Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS Nos. 137 and 138, on January 1, 2001.
This standard requires the Company to recognize 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 derivatives are effective hedges, depending on the nature of the
hedges, changes in the fair value of derivatives either will offset 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
items are recognized in earnings. The Company has determined that adoption of
SFAS No. 133 will not have a material impact on its financial condition or
results of operations. The Company also has certain derivative contracts for
the transportation of natural gas transacted in the normal course of business.
At this time, these derivative contracts are exempt from the requirements of
SFAS No. 133 under the normal purchases and sales exception, and thus will not
be reflected on the balance sheet at fair value. The Derivative Implementation
Group of the Financial Accounting Standards Board is currently evaluating the
definition of normal purchases and sales. As such, certain derivative
contracts may no longer be exempt from the requirements of SFAS No. 133. When
the final decision regarding this issue is complete, the Company will evaluate
the impact of the implementation guidance on a prospective basis.
Note 2: Related Party Transactions
The Company invested its available cash balances with, or borrowed from,
PG&E pursuant to a pooled cash management arrangement through December 27,
2000, at which time the arrangement was terminated. The principal amount of
the investment with PG&E was payable upon demand. The interest rate on these
cash investments or borrowings averaged 6.2 percent in 2000, 5.0 percent in
1999 and 5.4 percent in 1998. The related interest income was $0.3 million in
2000, $0.1 million in 1999, and $0.1 million in 1998. The Company now holds
and invests its available cash balances on its own.
On October 26, 2000 the Company loaned $75.0 million to PG&E pursuant to a
promissory note. The principal amount of this investment is payable upon
demand and is reflected as a Note receivable --parent company on the
Consolidated Balance Sheet. The balance invested with PG&E at December 31,
2000 is $75.0 million, at an interest rate of 6.9 percent. The interest rate
on this cash investment averaged 6.8 percent in 2000.
The Company is charged by PG&E, PG&E NEG, and other affiliates for services,
such as legal, tax, treasury, human resources, and other administrative
functions, and for other costs incurred on PG&E GTN's behalf, including
employee benefit costs, insurance and other related costs.
The charges for these costs are based on direct assignment to the extent
practicable and on allocations using allocation methods that the Company
believes are reasonable reflections of the utilization of services provided to
or for the benefits received by the Company. For the years ended December 31,
2000, 1999, and 1998, PG&E GTN has reflected $5.1 million, $4.5 million, and
$3.5 million respectively in its operating expenses.
In 2000, 1999 and 1998, Pacific Gas and Electric Company and its affiliates,
accounted for approximately $50.0 million, (21 percent), $51.8 million (23
percent) and $51.6 million (22 percent), respectively, of PG&E GTN's
transportation revenues.
See Note 6: Commitments and Contingencies, regarding credit support for
affiliates.
31
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Note 3: Long-term Debt
Long-term debt at December 31, 2000 and 1999, consisted of the following:
December 31,
------------------
2000 1999
-------- --------
(In Thousands)
Long-Term Debt
Senior Unsecured Notes, due 2005...................... $250,000 $250,000
Senior Unsecured Debentures, due 2025................. 150,000 150,000
Medium Term Notes, due 2000 to 2003................... 39,000 70,000
Commercial Paper*..................................... 87,000 99,335
-------- --------
Subtotal............................................ 526,000 569,335
Capital Lease Obligation.............................. 15,401 15,899
Unamortized Debt Discount............................. (2,817) (2,891)
Current Portion of Long-Term Debt and Capital Lease... (543) (31,498)
-------- --------
Long-term debt included in capitalization........... $538,041 $550,845
======== ========
The following table summarizes the annual maturities of long-term debt for
the next five years:
2001 2002 2003 2004 2005
---- -------- ------ ---- --------
(Dollars in Thousands)
Annual Maturities of Long-Term Debt*.... $543 $119,994 $6,647 $705 $250,769
==== ======== ====== ==== ========
- --------
* Commercial paper is included as long-term debt, and is backed by revolving
bank credit agreements
On May 31, 1995, PG&E GTN completed the sale of $400 million of debt
securities through a $700 million shelf registration. PG&E GTN issued $250
million of 7.10 percent 10-year senior unsecured notes due June 1, 2005, and
$150 million of 7.80 percent 30-year senior unsecured debentures due June 1,
2025. The 10-year notes were issued at a discount to yield 7.11 percent and
the 30-year debentures were issued at a discount to yield 7.95 percent. At
December 31, the unamortized debt discount balance for the notes and
debentures were $0.1 million and $2.1 million respectively. The 30-year
debentures are callable after June 1, 2005, at the option of PG&E GTN.
In addition, during 1995, $70 million of medium term notes were issued at
face values ranging from $1 million to $17 million. During 2000, $31 million
in medium term notes matured and were accordingly extinguished. The maturity
of the remaining notes and the average interest rates are as follows:
Current Average
Amount Interest Rate
-------- -------------
(In thousands)
Due 2002.............................................. $ 33,000 6.83%
Due 2003.............................................. 6,000 6.96%
-------- -----
Total............................................... $ 39,000 6.85%
======== =====
On May 24, 1999, PG&E GTN entered into a three-year noncancelable revolving
credit agreement in the amount of $100 million. On the same date, the Company
entered into a revolving 364-Day credit agreement in the amount of $50
million, collectively the "Credit Facilities". The three-year revolving credit
agreement may
32
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
be extended for successive one-year periods. The revolving 364-Day credit
agreement may be extended for successive 364-Day periods. The Credit
Facilities contain a covenant which limits total debt to 70 percent of total
capitalization. At December 31, 2000 the total debt to total capitalization
ratio was 58 percent.
These Credit Facilities support PG&E GTN's $150 million commercial paper
program. At December 31, 2000 and 1999, $86.4 million (net of related $0.6
million discounts) and $98.8 million (net of related $0.6 million discounts),
of commercial paper was outstanding at an average interest rate of 7.24 and
6.32 percent, respectively. The average balance during 2000 was $65.5 million
at an average rate of 6.67 percent. The average balance during 1999 was $98.5
million at an average rate of 5.47 percent. At December 31, 2000, PG&E GTN was
in compliance with all terms and conditions of the Credit Facilities and other
debt agreements.
Capital Lease Obligation -- PG&E GTN leases an office building in Portland,
Oregon under a 20-year lease terminating in the year 2015. Payments under the
lease total $1.9 million per year and approximate the debt service payments on
the debt issued to finance the $17.5 million cost of the building. In
addition, PG&E GTN is obligated to pay operating costs, taxes, and insurance
for the building. PG&E GTN does not have the option to extend the lease beyond
20 years but may at any time purchase the building for approximately the
balance of the debt outstanding used to finance the building. PG&E GTN must
purchase the building at the end of the lease term.
Based on the provisions of the lease agreement, PG&E GTN accounts for the
obligation as a capital lease. The historical asset value of the capital lease
is $17.5 million; accumulated depreciation through December 31, 2000 is $4.3
million. The total future commitments are $27.5 million with a principal
portion of $15.4 million. The effective interest rate inherent in the lease is
8.8 percent. Effective August 11, 1999, PG&E GTN subleased a majority of the
office building for a base term through November 1, 2005 with extension and
expansion options. Effective October 15, 2000, the Sublessee occupied the
entire building pursuant to its expansion option under the Sublease. The
Sublessee also has an option to purchase the building for the greater of its
fair market value or the PG&E GTN option costs with reimbursement of certain
costs to PG&E GTN.
The minimum lease payments for the next five years are as follows:
Minimum Lease Payment
Year Total Interest Principal
---- ------ -------- ---------
(In Thousands)
2001............................................. $1,871 $1,328 $ 543
2002............................................. 1,871 1,278 593
2003............................................. 1,871 1,224 647
2004............................................. 1,871 1,166 705
2005............................................. 1,871 1,102 769
------ ------ ------
Total.......................................... $9,355 $6,098 $3,257
====== ====== ======
The total of minimum sublease rentals to be received in the future is $12.7
million.
Fair Value -- At December 31, 2000, the Company's primarily fixed rate debt
had a carrying value of $538.6 million and had an estimated fair market value
of $544.3 million. At December 31, 1999, the Company's primarily fixed rate
debt had a carrying value of $582.3 million and had an estimated fair market
value of $569.7 million. The estimated fair value of the notes and debentures
were based upon quoted market prices. The carrying value for both commercial
paper and the capital lease approximate fair value.
The carrying amounts of cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, and accrued liabilities approximate fair value
because of the short-term maturity of these items.
33
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Note 4: Income Taxes
The significant components of income tax expense were:
Year Ended December 31,
-------------------------
2000 1999 1998
------- ------- -------
Income Tax Expense (In Thousands)
Current -- Federal................................ $24,028 $18,780 $15,311
Current -- State.................................. 3,890 2,607 2,334
------- ------- -------
Total current................................. 27,918 21,387 17,645
------- ------- -------
Deferred -- Federal............................... 8,032 14,097 15,877
Deferred -- State................................. 1,391 2,118 2,242
------- ------- -------
Total deferred................................ 9,423 16,215 18,119
------- ------- -------
Investment tax credit amortization................ (25) (25) (25)
------- ------- -------
Total income tax expense...................... $37,316 $37,577 $35,739
======= ======= =======
The differences between reported income taxes and tax amounts determined by
applying the federal statutory rate of 35 percent to income before income tax
expense were:
Year Ended December 31,
------------------------
2000 1999 1998
------- ------- -------
Income Tax Expense (In Thousands)
Expected federal income tax expense............ $33,462 $34,664 $33,607
Increase (decrease) in income tax expense
resulting from:
State income taxes, net of federal benefit... 3,314 3,349 2,974
Allowance for equity funds used during
construction................................ 252 (7) 50
Other........................................ 288 (429) (892)
------- ------- -------
Total income tax expense................... $37,316 $37,577 $35,739
======= ======= =======
The significant components of net deferred income tax liabilities were as
follows:
December 31,
-----------------
2000 1999
-------- --------
Deferred Income Taxes (In Thousands)
Plant in service........................................ $180,192 $170,775
Debt financing costs.................................... 3,854 4,316
Regulatory accounts..................................... 2,189 2,904
Other................................................... 2,869 2,066
-------- --------
Net deferred income taxes............................. $189,104 $180,061
======== ========
Note 5: Employee Benefit Plans
Retirement Plan -- PG&E GTN provides a noncontributory defined benefit
pension plan covering substantially all employees. The retirement benefits
under this plan are based on years of service and the employee's base salary.
In conformity with accounting for rate-regulated enterprises, regulatory
adjustments have
34
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
been recorded for the difference between pension cost determined for
accounting purposes and that for ratemaking, which is based on a funding
approach. PG&E GTN's policy is to fund each year not more than the maximum
amount deductible for federal income tax purposes and not less than the
minimum legal funding requirement. Plan assets consist primarily of common
stock, fixed-income securities, and cash equivalents.
Postretirement Benefits Other Than Pensions -- PG&E GTN provides a
contributory defined benefit medical plan for retired employees and their
eligible dependents and a noncontributory defined benefit life insurance plan
for retired employees referred to collectively as "Other Benefits".
Substantially all employees retiring at or after age 55 who began employment
with PG&E GTN prior to January 1, 1994, are eligible for these benefits. The
medical benefits are provided through plans administered by an insurance
carrier or a health maintenance organization. Certain retirees are responsible
for a portion of the cost based on years of service.
The FERC's ratemaking policy with regard to Other Benefits provides for the
recognition, as a component of cost-based rates, of allowances for prudently
incurred costs of such benefits when determined on an accrual basis that is
consistent with the accounting principles set forth in SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
subject to certain funding conditions.
As required by the Commission's policy, PG&E GTN established irrevocable
trusts to fund all benefit payments based upon a prescribed annual test period
allowance of $2.1 million. To the extent actual SFAS No. 106 accruals differ
from the annual funded amount, a regulatory asset or liability is established
to defer the difference pending treatment in the next general rate case
filing. Based upon this treatment, PG&E GTN had overcollected $6.3 million at
December 31, 2000 and $4.0 million at December 31, 1999. Plan assets consist
primarily of common stock, fixed-income securities, and cash equivalents.
PG&E GTN adopted SFAS No. 106 effective January 1, 1993 and elected to
amortize the resulting estimated transition obligation at January 1, 1993, of
approximately $11.2 million over 20 years beginning in 1993. The amortization
in 2000, 1999 and 1998 was based upon a revised estimated transition
obligation of $8.3 million.
The assumed health care cost trend rate for participants in the health
maintenance plan (HMO) is 5.0 percent for all years. The trend rate for
participants in the preferred provider (PPO) and managed indemnity plans are
age dependent. For participants under age 65, the trend rate is approximately
8.5 percent in 2000, trending down to an ultimate rate in 2005 of
approximately 6.0 percent. For participants age 65 or older, the trend rate is
approximately 8.0 percent in 2000, trending down to 6.0 percent in 2005. The
effect of a one-percentage-point increase in the assumed health care cost
trend rate would increase the accumulated postretirement benefit obligation at
December 31, 2000, by approximately $1.1 million and the 2000 annual aggregate
service and interest costs by approximately $0.1 million.
35
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
The following table reconciles the plans' funded status (the difference
between fair value of plan assets and the related benefit obligation) to the
prepaid or (accrued) cost recorded on the consolidated balance sheet:
Pension
Benefits Other Benefits
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
(In Thousands)
Change in Benefit Obligation
Benefit obligation at January 1...... $35,539 $36,405 $11,681 $12,280
Service cost......................... 1,046 1,336 169 235
Interest cost........................ 2,560 2,599 761 835
Plan participant contributions....... -- -- 66 --
Actuarial gain....................... (1,504) (2,451) (1,607) (1,058)
Expenses paid........................ (86) (140) -- --
Benefits paid........................ (1,499) (2,210) (481) (611)
------- ------- ------- -------
Benefit obligation at December 31.. $36,056 $35,539 $10,589 $11,681
======= ======= ======= =======
Change in Plan Assets
Fair value of plan assets at January
1................................... $49,418 $43,130 $13,303 $10,214
Actual return on plan assets......... (667) 8,638 (295) 1,528
Company contribution................. -- -- 2,117 2,173
Plan participant contribution........ -- -- 66 --
Expenses paid........................ (86) (140) (31) (3)
Benefits paid........................ (1,499) (2,210) (481) (609)
------- ------- ------- -------
Fair value of plan assets at
December 31....................... $47,166 $49,418 $14,679 $13,303
======= ======= ======= =======
Plan Assets in Excess of Benefit
Obligation
Funded status of plan at December
31.................................. $11,109 $13,880 $ 4,090 $ 1,622
Unrecognized actuarial gain.......... (15,122) (19,678) (5,085) (5,409)
Unrecognized prior service cost...... 182 202 -- --
Unrecognized net transition
obligation.......................... 229 294 5,027 5,446
------- ------- ------- -------
Accrued benefit (liability)/asset.. $(3,602) $(5,302) $ 4,032 $ 1,659
======= ======= ======= =======
Net benefit cost (income) was as follows:
Pension Benefits Other Benefits
------------------------- ---------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ----- -----
(In Thousands)
Components of Net
Periodic Benefit Cost
Service cost for
benefits earned...... $ 1,046 $ 1,336 $ 1,159 $ 169 $ 235 $ 246
Interest cost......... 2,560 2,599 2,450 761 835 825
Expected return on
plan assets.......... (4,188) (3,918) (3,526) (1,194) (881) (662)
Prior service cost
amortization......... 20 20 20 -- -- --
Actuarial gain
recognized........... (1,203) (648) (694) (411) (207) (212)
Transition amount
amortization......... 65 65 65 419 419 419
------- ------- ------- ------- ----- -----
Total net benefit cost
(income)............. $(1,700) $ (546) $ (526) $ (256) $ 401 $ 616
======= ======= ======= ======= ===== =====
36
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
The following actuarial assumptions were used in determining the plans'
funded status and net benefit cost (income). Year-end assumptions are used to
compute funded status, while prior year-end assumptions are used to compute
net benefit cost (income).
Pension Other
Benefits Benefits
----------- -----------
2000 1999 2000 1999
----- ----- ----- -----
Assumptions as of December 31
Discount rate...................................... 7.50% 7.50% 7.50% 7.50%
Expected rate of return on plan assets............. 8.50% 8.50% 8.50% 8.00%
Rate of future compensation increase............... 5.00% 5.00% 2.90% 2.90%
===== ===== ===== =====
Savings Fund Plan -- PG&E GTN employees are eligible to participate in one
of two Savings Fund Plans. Participating employees can elect to contribute up
to 16 percent of their covered compensation on a pretax or after-tax basis.
Employee contributions, up to a maximum of 6 percent of covered compensation,
are eligible for matching by PG&E GTN at specified rates after the employee
completes one year of service. The cost of PG&E GTN's contributions was
charged to expense and to plant in service, and totaled $0.4 million, $0.5
million and $0.5 million, for 2000, 1999 and 1998, respectively.
Note 6: Commitments and Contingencies
Operating Lease Commitments -- Operating lease expense amounted to $0.4
million in 2000, $0.6 million in 1999 and $0.3 million in 1998. Future minimum
payments for operating leases are:
Future Commitments
----------------------
(Dollars in Thousands)
Years Ending December 31,
2001................................................ $ 901
2002................................................ 827
2003................................................ 830
2004................................................ 832
2005................................................ 857
Thereafter.......................................... 4,609
------
Total future commitments.......................... $8,856
======
Credit Support -- PG&E GTN entered into a credit support agreement,
effective December 22, 2000, with PG&E Energy Trading--Power Holdings
Corporation (PG&E ET), another PG&E Corporation wholly-owned subsidiary, to
provide guarantees and other credit support in favor of PG&E ET's operating
subsidiaries. PG&E GTN has agreed to provide such credit support in an
aggregate amount up to $2.0 billion. At December 31, 2000, $58.4 million of
guarantees were outstanding, with an overall exposure of $18.4 million on the
transactions supported by the guarantees. At March 16, 2001, PG&E GTN had
outstanding an aggregate face amount of $1.1 billion of guarantees with a
gross exposure of $377.8 million related to underlying transactions. PG&E ET
has advised, PG&E GTN's exposure to PG&E ET is more than offset by the
underlying fair market value of PG&E ET's forward book.
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, financial position, or cash flows. There are
no pending material legal proceedings to which PG&E GTN is a party or to which
any property is subject.
37
SUPPLEMENTARY DATA
Quarterly Consolidated Financial Data
for 2000 and 1999
(Unaudited)
Quarter Ended
-----------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Total
------- ------- -------- ------- --------
(In Thousands)
2000
Operating Revenues................. $56,686 $56,339 $62,146 $61,405 $236,576
Operating Income................... 32,408 32,150 36,179 33,309 134,046
Net Income......................... 13,640 13,531 16,137 15,055 58,363
1999
Operating Revenues................. $57,636 $51,602 $61,909 $70,300 $241,447
Operating Income................... 31,231 29,215 36,151 42,770 139,367
Net Income......................... 13,111 11,769 15,942 20,641 61,463
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Since PG&E GTN meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K, this information is omitted.
ITEM 11. EXECUTIVE COMPENSATION
Since PG&E GTN meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K, this information is omitted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Since PG&E GTN meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K, this information is omitted.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since PG&E GTN meets the conditions set forth in General Instruction (I) (1)
(a) and (b) of Form 10-K, this information is omitted.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
1. The following Financial Statements are filed herewith as part of
Item 8, Financial Statements and Supplementary Data:
Statements of Consolidated Income for each of the three years ended
December 31, 2000, 1999 and 1998
Consolidated Balance Sheets as of December 31, 2000 and 1999
Statements of Consolidated Common Stock Equity for each of the three
years ended December 31, 2000, 1999 and 1998
Statements of Consolidated Cash Flows for each of the three years
ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Quarterly Consolidated Financial Data for 2000 and 1999 (Unaudited)
2. Independent Auditors' Reports
(b) Exhibits required to be filed by Item 601 of Regulation S-K:
No. Description
---- -----------
3.1 Restated Articles of Incorporation of Pacific Gas Transmission Company
(PGT) effective January 1, 1998, (incorporated by reference to PG&E
GTN's Current Report on Form 8-K dated January 1, 1998 as filed on
January 14, 1998 (File No. 0-25842), Exhibit 3.1).
3.2 By-Laws of PG&E Gas Transmission, Northwest Corporation as amended June
1, 1999 (incorporated by reference to PG&E GTN's Current Report on Form
8-K dated August 13, 1999 (File No. 0-25842) Exhibit 3).
4.1 Senior Trust Indenture Between Pacific Gas Transmission Company and The
First National Bank of Chicago, as Trustee (Senior Debt), dated as of
May 22, 1995, (incorporated by reference to PGT's Current Report on Form
8-K dated June 21, 1995 (File No. 0-25842), Exhibit 4.2).
4.2 First Supplemental Indenture Between Pacific Gas Transmission Company and
The First National Bank of Chicago, as Trustee (Senior Debt), dated as
of May 30, 1995, (incorporated by reference to PGT's Current Report on
Form 8-K dated June 21, 1995 (File No. 0-25842), Exhibit 4.3).
4.3 Second Supplemental Indenture Between Pacific Gas Transmission Company
and The First National Bank of Chicago as Trustee (Senior Debt), dated
as of June 23, 1995 (incorporated by reference to PGT's Current Report
on Form 8-K dated July 6, 1995 (File No. 0-25842), Exhibit 4.2).
10.1 Firm Transportation Service Agreement between Pacific Gas Transmission
Company and Pacific Gas and Electric Company dated October 26, 1993,
Rate Schedule FTS-1, and general terms and conditions (incorporated by
reference to Pacific Gas and Electric Company's Form 10-K for fiscal
year 1993 (File No. 1-2348), Exhibit 10.4).
10.2 Lease Agreement dated as of April 15, 1994, between Pacific Gas
Transmission Company and GIC Development 94-I, L.L.C. (incorporated by
reference to PGT's Form 10/A (File No. 0-25842), Exhibit 10.3).
40
No. Description
---- -----------
10.3 Sublease between PG&E Gas Transmission, Northwest Corporation and Enron
Communications, Inc., dated as of August 11, 1999, to the Lease
Agreement dated as of April 15, 1994, between Pacific Gas Transmission
Company (now PG&E Gas Transmission, Northwest Corporation) and GIC
Development 94-I, L.L.C. (incorporated by reference to PG&E GTN's Form
10-Q dated November 12, 1999 (File No. 0-25842) (Exhibit 10.1)).
10.4 Amended and Restated Credit Agreement dated as of May 24, 1999, among
PG&E Gas Transmission, Northwest Corporation and certain commercial
institutions (incorporated by reference to PG&E GTN's Form 10-Q dated
November 12, 1999 (File No. 0-25842) (Exhibit 10.2)).
10.5 364-Day Credit Agreement dated as of May 24, 1999, among PG&E Gas
Transmission, Northwest Corporation and certain commercial institutions
(incorporated by reference to PG&E GTN's Form 10-Q dated November 12,
1999 (File No. 0-25842) (Exhibit 10.3)).
10.6 Pacific Gas Transmission Company Retirement Plan applicable to management
employees, effective July 1, 1995 (incorporated by reference to PGT's
10-K for fiscal year 1995 (File No. 0-25842), Exhibit 10.20).
10.7 Appendix H, an amendment to the Pacific Gas Transmission Company
Retirement Plan applicable to management employees, effective November
13, 1997 (incorporated by reference to PG&E GTN's 10-K for fiscal year
1997 (File No. 0-25842), Exhibit 10.15).
12 Computation of Ratio of Earnings to Fixed Charges (filed herewith).
21 Since PG&E GTN meets the conditions set forth in General Instruction (I)
(1) (a) and (b) of Form 10-K, this information is omitted.
23.1 Consent of Deloitte & Touche LLP (filed herewith).
23.2 Consent of Arthur Andersen LLP (filed herewith).
24.1 Resolution of the Board of Directors of PG&E Gas Transmission, Northwest
Corporation authorizing the execution of the Form 10-K (filed herewith).
24.2 Powers of Attorney (filed herewith).
The exhibits filed herewith are attached hereto (except as noted) and those
indicated above which are not filed herewith were previously filed with the
Commission as indicated and are hereby incorporated by reference. Exhibits
will be furnished to security holders of the Company upon written request and
payment of a fee of $0.30 per page, which fee covers only the Company's
reasonable expenses in furnishing such exhibits. The Company agrees to furnish
to the Securities and Exchange Commission upon request a copy of any
instrument defining the rights of long-term debt holders not otherwise
required to be filed hereunder.
(c) Reports on Form 8-K
Reports on Form 8-K during the quarter ended December 31, 2000 and
through the date hereof:
None
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Portland, County of Multnomah, Oregon, on the 2nd
day of April 2001.
PG&E GAS TRANSMISSION, NORTHWEST
CORPORATION (Registrant)
/s/ Robert T. Howard
By: _________________________________
(Robert T. Howard, Attorney-in-
Fact)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
A. Principal Executive Officer
Thomas B. King* President and Chief Operating Officer April 2, 2001
B. Principal Financial and Accounting
Officer
John R. Cooper* Chief Financial Officer & Treasurer April 2, 2001
C. Directors
Thomas B. King* Chairman of the Board April 2, 2001
Bruce R. Worthington* Director April 2, 2001
Peter A. Darbee* Director April 2, 2001
/s/ Robert T. Howard
*By: ______________________________________
(Robert T. Howard, Attorney-in-Fact)
42