UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report PURSUANT to section 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _________ to ___________
COMMISSION FILE NO. 0-25842
PG&E Gas Transmission, Northwest Corporation
(Exact name of registrant as specified in its charter)
California 94-1512922
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 SW Fifth Avenue, Suite 900, 97201
Portland, OR (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (503) 833-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 15, 2001.
1,000 shares of common stock no par value. (All shares are owned by GTN Holdings
LLC.)
Registrant meets the conditions set forth in General Instruction (H) (1) (a) and
(b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced
disclosure format.
TABLE OF CONTENTS
- -----------------
PART I. Financial Information Page
- -----------------------------
Item 1. Consolidated Financial Statements
Statements of Consolidated Income 1
Consolidated Balance Sheets 2
Statements of Consolidated Common Stock Equity 4
Statements of Consolidated Cash Flows 5
Notes to Consolidated Financial Statements 6
Note 1. General 6
Note 2. Relationship with PG&E Corporation 7
and the California Energy Crisis
Note 3. Derivative Financial Instruments 8
Note 4. Commitments and Contingencies 8
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
PART II. Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Part I: Financial Information
- ------------------------------
Item 1. Consolidated Financial Statements
---------------------------------
- -------------------------------------------------------------------------------------------
Statements of Consolidated Income
(Unaudited)
- -------------------------------------------------------------------------------------------
Three Months Ended
March 31,
- -------------------------------------------------------------------------------------------
(In Thousands) 2001 2000
- -------------------------------------------------------------------------------------------
OPERATING REVENUES:
Gas transportation $ 56,062 $ 43,829
Gas transportation for affiliates 8,810 12,467
Other 50 390
- -------------------------------------------------------------------------------------------
Total operating revenues 64,922 56,686
- -------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Administrative and general 6,237 7,398
Operations and maintenance 4,784 3,566
Depreciation and amortization 10,351 10,340
Property and other taxes 3,294 2,974
- -----------------------------------------------------------------------------------------
Total operating expenses 24,666 24,278
- -----------------------------------------------------------------------------------------
OPERATING INCOME 40,256 32,408
- -----------------------------------------------------------------------------------------
OTHER INCOME AND (INCOME DEDUCTIONS):
Allowance for equity funds used during construction 26 181
Interest income 1,777 41
Other - net 9 (33)
- -----------------------------------------------------------------------------------------
Total other income and (income deductions) 1,812 189
- -----------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on long-term debt 9,537 10,255
Allowance for borrowed funds used during construction (22) (190)
Other interest charges 560 322
- -----------------------------------------------------------------------------------------
Net interest expense 10,075 10,387
- -----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 31,993 22,210
INCOME TAX EXPENSE 12,480 8,570
- -----------------------------------------------------------------------------------------
NET INCOME $ 19,513 $ 13,640
- -----------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
1
------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(Unaudited)
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ASSETS
------------------------------------------------------------------------------------------------
March 31, December 31,
(In Thousands) 2001 2000
------------------------------------------------------------------------------------------------
PROPERTY, PLANT, and EQUIPMENT:
Property, plant, and equipment in service $ 1,555,081 $ 1,554,088
Accumulated depreciation and amortization (554,372) (544,225)
------------------------------------------------------------------------------------------------
Net plant in service 1,000,709 1,009,863
Construction work in progress 5,028 5,613
------------------------------------------------------------------------------------------------
Total property, plant and equipment - net 1,005,737 1,015,476
------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents 14,031 2,528
Accounts receivable - gas transportation 19,015 16,780
Accounts receivable - transportation imbalances and fuel 7,378 3,210
Accounts receivable - affiliated companies 3,891 8,907
Inventories (at average cost) 8,127 10,446
Notes receivable - parent 75,000 75,000
Price risk management - affiliated company 455 -
Prepayments and other current assets 4,375 4,424
------------------------------------------------------------------------------------------------
Total current assets 132,272 121,295
------------------------------------------------------------------------------------------------
DEFERRED CHARGES:
Income tax related regulatory assets 24,864 25,033
Deferred charge on reacquired debt 9,739 10,040
Unamortized debt expense 2,751 2,848
Other regulatory assets 2,929 3,174
Other 3,350 2,775
------------------------------------------------------------------------------------------------
Total deferred charges 43,633 43,870
------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,181,642 $ 1,180,641
------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
----------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
(Unaudited)
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CAPITALIZATION AND LIABILITIES
----------------------------------------------------------------------------------------------------
March 31, December 31,
(In Thousands) 2001 2000
----------------------------------------------------------------------------------------------------
CAPITALIZATION:
Common stock - no par value, 1,000 shares authorized,
issued and outstanding $ 85,474 $ 85,474
Additional paid-in capital 192,717 192,717
Accumulated other comprehensive income (7,814) -
Reinvested earnings 128,083 108,570
----------------------------------------------------------------------------------------------------
Total common stock equity 398,460 386,761
Long-term debt 491,519 538,041
----------------------------------------------------------------------------------------------------
Total capitalization 889,979 924,802
----------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Long-term debt - current portion 555 543
Accounts payable 11,920 17,440
Accounts payable - affiliated companies 54,375 33,454
Accrued interest 10,320 3,416
Accrued liabilities 1,048 1,989
Price risk management - affiliated company 13,312 -
Accrued taxes 2,215 1,218
----------------------------------------------------------------------------------------------------
Total current liabilities 93,745 58,060
----------------------------------------------------------------------------------------------------
DEFERRED CREDITS:
Deferred income taxes 186,975 189,104
Other 10,943 8,675
----------------------------------------------------------------------------------------------------
Total deferred credits 197,918 197,779
----------------------------------------------------------------------------------------------------
COMMITMENTS and CONTINGENCIES (Note 4) - -
----------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $ 1,181,642 $ 1,180,641
----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
-----------------------------------------------------------------------------------------------------
Statements of Consolidated Common Stock Equity
(Unaudited)
-----------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------------------------------------------------------------------------------
(In Thousands) 2001 2000
-----------------------------------------------------------------------------------------------------
BALANCE AT BEGINNING OF PERIOD $ 386,761 $ 328,472
Comprehensive income:
Net income 19,513 13,640
Other comprehensive income - Price risk management (7,814) -
-----------------------------------------------------------------------------------------------------
Comprehensive Income 11,699 13,460
-----------------------------------------------------------------------------------------------------
BALANCE AT END OF PERIOD $ 398,460 $ 342,112
-----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
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Statements of Consolidated Cash Flows
(Unaudited)
-----------------------------------------------------------------------------------------------
Three Months Ended
March 31,
-----------------------------------------------------------------------------------------------
(In Thousands) 2001 2000
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,513 $ 13,640
Adjustments to reconcile net income to net cash provided by
Operations:
Depreciation and amortization 11,506 11,157
Deferred income taxes 2,806 3,536
Allowance for equity funds used during construction (26) (181)
Changes in operating assets and liabilities:
Accounts receivable - gas transportation and other (1,387) 1,788
Accounts payable and accrued liabilities 443 1,039
Net receivable/payable - affiliates 20,854 4,662
Accrued taxes 997 801
Inventory 2,319 (142)
Other working capital 49 1,660
Regulatory accruals 1,938 253
Other - net 342 (670)
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 59,354 37,543
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures (693) (2,234)
Allowance for borrowed funds used during construction (22) (190)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (715) (2,424)
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (92,000) (41,439)
Long-term debt issued, net of issuance costs 44,864 6,069
-----------------------------------------------------------------------------------------------
Net cash used in financing activities (47,136) (35,370)
-----------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 11,503 (251)
CASH AND CASH EQUIVALENTS AT JANUARY 1 2,528 2,039
-----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT MARCH 31 $ 14,031 $ 1,788
-----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest $ 2,596 $ 3,296
Income taxes $ - $ -
-----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
Notes to Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------
Note 1: General
- ---------------
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 company serving
Northern and Central California. PG&E Corporation is the ultimate corporate
parent for both PG&E NEG and the Utility.
The accompanying unaudited consolidated financial statements, which have
been prepared in accordance with interim period reporting requirements, reflect
the results for PG&E GTN and its wholly owned subsidiaries which include Pacific
Gas Transmission Company and Pacific Gas Transmission International, Inc., and a
fifty percent interest in a joint venture known as Stanfield Hub Services, LLC.
PG&E GTN and its subsidiaries are collectively referred to herein as the
"Company". This information should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data, in the Company's Form 10-K
for the fiscal year ended December 31, 2000.
In the opinion of management, the accompanying statements reflect all
adjustments necessary to present a fair statement of the financial position and
results of operations for the interim periods. All material adjustments are of a
normal recurring nature unless otherwise disclosed in this Form 10-Q.
Intercompany accounts and transactions have been eliminated. Prior year amounts
in the consolidated financial statements have been reclassified where necessary
to conform to the 2001 presentation. Results of operations for interim periods
are not necessarily indicative of results to be expected for a full year.
Accounting for Price Risk Management Activities
- -----------------------------------------------
Effective January 1, 2001, PG&E GTN adopted Statement of Financial
Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities," as amended. This statement established
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that all derivative instruments be recognized as either
assets or liabilities in the balance sheet and be measured at their fair value.
The Statement requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Changes in the fair value of derivatives that do not qualify for accounting
hedge treatment, as well as the ineffective portion of hedges, must be
recognized in current period earnings. Hedge effectiveness is measured based on
changes in the fair value over time between the derivative contract and the
hedged item.
The adoption of Statement No. 133, as amended, could increase volatility in
PG&E GTN's net income and other comprehensive income based on the level of
derivative instruments utilized and the extent of the Company's hedging
activities which are subject to change from time to time based on management's
decision as to the appropriate strategies and PG&E GTN's overall risk exposure
levels.
PG&E GTN's contracts for the transportation of natural gas are considered
derivative contracts as defined in SFAS No. 133. These contracts are transacted
in the normal course of business and are subject to the terms, conditions and
rate schedules of the Company's tariff as approved by the Federal Energy
Regulatory Commission (FERC). The contracts include long- and short-term firm
and interruptible transportation service contracts. At this time, these
derivative contracts are exempt from the requirements of SFAS No. 133, as
amended, under the normal purchases and sales exception, and thus are not
recorded on the balance sheet at fair value.
PG&E GTN is using other derivative contracts (i.e., other than the
transportation service contracts) in limited instances and solely for hedging
purposes to offset price risk associated with certain negotiated rate
transportation contracts. Commodity price risk is the risk that changes in
market prices will adversely affect earnings and cash flows. PG&E GTN has
exposure to commodity price risk associated with several negotiated rate index
price contracts to provide transportation service. The goal of this hedging
program is to effectively convert a portion of GTN's variable-rate future
revenues into fixed-rate revenues by locking in forward prices on certain
volumes through the basis swap arrangements with its affiliate PG&E Energy
Trading. These hedge contracts are effective from April through October of 2001,
and are designated as cash flow hedges and recorded on the balance sheet at fair
value, with the offset in the other comprehensive income section of equity.
The earnings impact of adopting Statement No. 133, as amended, on January
1, 2001 was immaterial. The effect on other comprehensive income was $5.0
million. As of March 31, 2001, PG&E GTN had recorded cash flow hedge derivative
assets of $0.5 million and liabilities of $13.3 million. Included in other
comprehensive income at March 31, 2001 are $7.8 million of losses, net of tax,
which will be reclassified into earnings during 2001 when the forecasted
transactions impact earnings.
6
Note 2: Relationship with PG&E Corporation and the California Energy Crisis
- ---------------------------------------------------------------------------
The Utility, a regulated utility in California and wholly-owned subsidiary
of PG&E Corporation, is experiencing liquidity and credit problems. PG&E
Corporation is also the indirect parent of PG&E 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 provided for under frozen rates. Because of this situation, PG&E
Corporation's credit rating was downgraded to below investment grade in January
2001, which caused PG&E Corporation to default on outstanding commercial paper
and bank borrowings.
In March 2001, PG&E Corporation refinanced all of its outstanding
commercial paper and bank borrowings, and Standard & Poor's subsequently removed
its below investment grade credit rating since PG&E Corporation no longer had
rated securities outstanding.
In January 2001, PG&E Corporation and PG&E NEG undertook a corporate
restructuring of PG&E GTN, known as a "ring-fencing" transaction. The ring-
fencing complied with credit rating agency criteria designed to further separate
a subsidiary from its parent and affiliates, 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 Corporation 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.
On April 6, 2001, the Utility filed a voluntary petition for relief under
the provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility retains
control of its assets and is authorized to operate its business as a debtor in
possession while being subject to the jurisdiction of the Bankruptcy Court.
Management believes that the Company would not be substantively consolidated in
any insolvency or bankruptcy proceedings involving PG&E Corporation or the
Utility.
The Utility has been PG&E GTN's largest customer, accounting for close to
20 percent of its revenues. In accordance with PG&E GTN's Federal Energy
Regulatory Commission tariff provision, 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. As
a result of the April 6, 2001 filing with the Bankruptcy Court, all amounts owed
to PG&E GTN by the Utility for transportation services on that date were
suspended pending the decision of the Bankruptcy Court. As of April 6, 2001, the
Utility owed PG&E GTN $2.9 million. The Utility has indicated its intention to
remain current on all subsequent obligations incurred for the transportation
services provided by PG&E GTN.
7
Note 3: Derivative Financial Instruments
- ----------------------------------------
Below is a table summarizing the quantitative information associated with
the cash flow hedges for the three months ended March 31, 2001 (in thousands).
Net gain (loss) recognized in earnings $ 0
Amount of the hedge's ineffectiveness 0
Component of the derivative instrument's
gain (loss) excluded from assessment
of hedge's ineffectiveness 0
Net gain (loss) to be reclassified into
earnings within 12 months (7,814)
Net gain (loss) reclassified into earnings
because original transaction will not occur 0
The schedule below summarizes the activities affecting accumulated other
comprehensive income from derivative instruments for the three months ended
March 31, 2001 (in thousands).
Beginning Accumulated derivative
gain (loss) from SFAS 133 transition
adjustments at January 1, 2001 $ (5,029)
Net change of current period hedging
transactions gain (loss) (2,785)
Net reclassification to earnings 0
Ending accumulated derivative gain (loss) $ (7,814)
Note 4: Commitments and Contingencies
- -------------------------------------
Legal Matters - In the normal course of business, the Company is named as a
party in a number of claims and lawsuits. Any pending legal proceedings to which
PG&E GTN is a party or to which any of its property is subject are not expected
to have a material adverse affect on PG&E GTN's financial position, results of
operations, or cash flows.
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 wholly-owned subsidiary of PG&E NEG, 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 March 31, 2001, $1.1 billion of guarantees were outstanding, with an
overall exposure of $355.3 million on the transactions supported by the
guarantees. 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.
PG&E GTN has been authorized by its Board of Directors to execute and deliver
guarantees to support the obligations of North Baja Pipeline, LLC, another
wholly-owed subsidiary of PG&E NEG, in an amount not to exceed $146 million. At
March 31, 2001, a total of $47 million of guarantees were outstanding in favor
of two entities.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
- -------
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.
PG&E GTN and its subsidiaries are collectively referred to herein as the
"Company". This information should be read in conjunction with the Consolidated
Financial Statements and Notes to Consolidated Financial Statements included in
Item 8, Financial Statements and Supplementary Data, in the Company's Form 10-K
for the fiscal year ended December 31, 2000.
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.
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. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
events, levels of activity, performance or achievements. When used in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, words such as "estimates," "expects," "intends," "anticipates,"
"plans," "projects," "believes," "could" and similar expressions identify those
statements which are forward-looking. Actual results may differ materially from
those expressed in the forward-looking statements. Forward-looking statements
8
are not guarantees of future performance and involve a number of risks and
uncertainties that could materially affect actual results such as, but not
limited to:
. the direct and indirect effects of the current California energy crisis,
including the measures adopted and being contemplated by federal and state
authorities to address the crisis;
. the effect of the Pacific Gas and Electric Company (the Utility) bankruptcy
proceedings upon PG&E National Energy Group, Inc. (PG&E NEG) and upon PG&E
GTN;
. legislative and regulatory initiatives regarding deregulation and
restructuring of the electric and natural gas industries in the United
States;
. the pace and extent of the restructuring of the electric and natural gas
industries in the United States;
. the extent and timing of the entry of additional competition into the
natural gas transmission markets;
. the pursuit of potential business strategies, including acquisitions or
dispositions of assets or internal restructuring;
. the ability to expand its core pipeline business as affected by (a)
completion of pipeline projects that may be delayed or prevented by
permitting delays or restrictions, shortages of equipment or labor, work
stoppages, adverse weather conditions, unforeseen engineering problems,
adverse environmental conditions or unanticipated cost increases; (b)
refusal or reluctance of connecting pipelines to expand their pipeline
capacity; (c) the ability of new pipeline customers to construct and
operate electric generating facilities or (d) financing proposed projects
on terms acceptable to the Company;
. restrictions imposed upon PG&E NEG under certain term loans of
PG&E Corporation;
. the extent and timing of pipeline and storage capacity expansion and
retirements by others;
. changes in or application of federal, state and other regulations affecting
the Company;
. changes in or application of environmental and other laws and regulations
affecting the Company;
. political, legal and economic conditions and developments in California and
the Pacific Northwest;
. financial market conditions and changes in interest rates;
. weather and other natural phenomena; and
. the performance of projects undertaken and the success of the Company's
efforts to invest in and develop new opportunities.
RELATIONSHIP WITH PG&E CORPORATION AND THE CALIFORNIA ENERGY CRISIS
- -------------------------------------------------------------------
The Utility, a regulated utility in California and wholly-owned subsidiary
of PG&E Corporation, is experiencing liquidity and credit problems. PG&E
Corporation is also the indirect parent of PG&E NEG which is 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 provided for under frozen rates.
Because of this situation, PG&E Corporation's credit rating was downgraded to
below investment grade in January 2001, which caused PG&E Corporation to default
on outstanding commercial paper and bank borrowings.
In March 2001, PG&E Corporation refinanced all of its outstanding
commercial paper and bank borrowings, and Standard & Poor's subsequently removed
its below investment grade credit rating since PG&E Corporation no longer had
rated securities outstanding.
9
In January 2001, PG&E Corporation 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 designed to further separate
a subsidiary from its parent and affiliates, 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 Corporation 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.
On April 6, 2001, the Utility filed a voluntary petition for relief under
the provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy
Court. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility retains
control of its assets and is authorized to operate its business as a debtor in
possession while being subject to the jurisdiction of the Bankruptcy Court.
Management believes that the Company would not be substantively consolidated in
any insolvency or bankruptcy proceedings involving PG&E Corporation or the
Utility.
The Utility has been PG&E GTN's largest customer, accounting for close to
20 percent of its revenues. In accordance with PG&E GTN's FERC tariff provision,
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. As a result of the April 6, 2001 filing with
the Bankruptcy Court, all amounts owed to PG&E GTN by the Utility for
transportation services on that date were suspended pending the decision of the
Bankruptcy Court. As of April 6, 2001, the Utility owed PG&E GTN $2.9 million.
The Utility has indicated its intention to remain current on all subsequent
obligations incurred for the transportation services provided by PG&E GTN.
PRICE RISK MANAGEMENT ACTIVITIES
- --------------------------------
PG&E Corporation and PG&E NEG have established officer-level risk
management committees and risk management policies which are also applicable to
PG&E GTN. PG&E GTN may only engage in the use of derivatives in accordance with
policies established by the Risk Management Committees of PG&E Corporation and
PG&E NEG. PG&E NEG measures its commodity price risk exposure using value-at-
risk and other methodologies that simulate future price movement in the energy
markets to estimate the size and probability of future potential losses. Market
risk is quantified using the variance/co-variance value-at-risk model that
provides a consistent measure of risk across diverse energy markets and
products. The use of this methodology requires a number of important
assumptions, including the selections of confidence level for losses, volatility
of prices, market liquidity, and holding period.
PG&E GTN's contracts for the transportation of natural gas are considered
derivative contracts as defined in SFAS No. 133. These contracts are transacted
in the normal course of business and are subject to the terms, conditions and
rate schedules of the Company's tariff as approved by the Federal Energy
Regulatory Commission. The contracts include long- and short-term firm and
interruptible transportation service contracts. At this time, these derivative
contracts are exempt from the requirements of SFAS No. 133 under the normal
purchases and sales exception, and thus are not reflected on the balance sheet
at fair value.
PG&E GTN is using other derivative contracts (i.e., other than the
transportation service contracts) in limited instances and solely for hedging
purposes to offset price risk associated with certain negotiated rate
transportation contracts. Commodity price risk is the risk that changes in
market prices will adversely affect earnings and cash flows. PG&E GTN has
exposure to commodity price risk associated with several negotiated rate index
price contracts to provide transportation service. The goal of this hedging
program is to effectively convert a portion of PG&E GTN's variable-rate future
revenues into fixed-rate revenues by locking in forward prices on certain
volumes through the basis swap arrangements with its affiliate PG&E Energy
Trading. These hedge contracts are effective from April through October of 2001,
and are designated as cash flow hedges and recorded on the balance sheet at fair
value, with the offset in the other comprehensive income section of equity. As
of March 31, 2001, PG&E GTN had recorded cash flow hedge derivative assets of
$0.5 million and liabilities of $13.3 million. Included in other comprehensive
income at March 31, 2001 are $7.8 million of losses, net of tax, which will be
reclassified into earnings during 2001 when the forecasted transactions impact
earnings.
10
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 received a temporary waiver from the FERC to extend some of the requirements
of Order 587-G for processing transactions over the internet until no later than
August 1, 2001, and is in the process of completing programming, testing and
training in order to become fully compliant.
In February 2000, FERC issued Order 637 to promote competition in the
short-term transportation market. The order lifted the rate cap for short-term
capacity release transactions for a period of two years and established new
reporting requirements that would increase price transparency for short-term
capacity. The removal of the price cap only applies to capacity release
transactions and is unlikely to provide any material short-term benefits to PG&E
GTN. The Order also modified regulations related to certain pipeline system
operations, such as scheduling procedures, capacity segmentation and penalties.
PG&E GTN will be required to make minor changes to its system to implement the
new regulations. FERC also issued a Statement of Policy in September 1999
addressing certification of new interstate natural gas facilities. Among other
things, this Statement of Policy has modified, on a prospective basis, the
Commission's guidelines for evaluating the market need and pricing of new
pipeline capacity.
These regulatory initiatives are not expected to have a material impact on
PG&E GTN's financial position, cash flows or results of operations in the
foreseeable future.
FUTURE EXPANSION AND BUSINESS DEVELOPMENT
- -----------------------------------------
Recent market conditions in the Pacific Northwest and California
demonstrate a need for acceleration of an expansion of the PG&E GTN system. In
response to this immediate market demand, PG&E GTN completed an open season for
its proposed 200 thousand decatherms per day (MDt/d) expansion on February 15,
2001. The Company executed binding precedent agreements for long-term firm
capacity transportation for the entire 200 MDt/d of capacity to be fully
operational in the third quarter of 2002. As a result of the high amount of
interest shown by potential customers, PG&E GTN initiated another open season
for additional customers. Depending on the results of the open season, the
second phase, expected to be 300 MDt/d to 500 MDt/d, could be completed by as
early as the end of 2003.
ACCOUNTING FOR THE EFFECTS OF REGULATION
- ----------------------------------------
PG&E GTN currently accounts for the financial effects of regulation in
accordance with the provisions of Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." As a
result of applying the provisions of SFAS No. 71, PG&E GTN has accumulated
approximately $39.5 million of regulatory assets and $9.6 million of regulatory
liabilities as of March 31, 2001.
RESULTS OF OPERATIONS
- ---------------------
Selected operating results and other data are as follows:
Three Months Ended
March 31,
2001 2000
------- -------
(In Millions)
Operating revenues $ 64.9 $ 56.7
Operating expenses 24.7 24.3
------- -------
Operating income 40.2 32.4
Other income and (income deductions), net 1.8 0.2
Net interest expense 10.0 10.4
------- -------
Income before taxes 32.0 22.2
Income tax expense 12.5 8.6
------- -------
Net Income $ 19.5 $ 13.6
======= =======
11
Net Income - Income for the three months ended March 31, 2001 increased
$5.9 million compared to the same period in 2000. The increase in income
resulted primarily from higher operating revenues and other income.
Operating Revenues - Operating revenues for the three months ended March
31, 2001 increased $8.2 million compared to the same period in 2000. The
increase resulted from strong pricing fundamentals on gas transportation to the
California and Pacific Northwest gas markets.
Operating Expenses - The components of total operating expenses are as
follows:
Three Months Ended
March 31,
2001 2000
-------- ---------
(In Millions)
Administrative and general $ 6.2 $ 7.4
Operations and maintenance 4.8 3.6
Depreciation and amortization 10.4 10.3
Property and other taxes 3.3 3.0
-------- ---------
Total operating expenses $ 24.7 $ 24.3
======== =========
For the three months ended March 31, 2001, compared with the same period in
2000, operating expenses increased $0.4 million. The increase reflects
additional compressor overhaul activity and higher compressor fuel use tax as a
result of higher natural gas prices, partially offset by a decrease in the Gas
Research Institute fees and lower labor costs.
Other income and (income deductions) - The increase is due primarily to
interest income in the amount of $1.5 million earned on the $75 million note
receivable from PG&E Corporation.
Interest Expense - Interest expense for the three months ended March 31,
2001 was $0.4 million less than interest expense for the same period in 2000.
The lower average debt balance served to reduce interest expense. For the three
months ended March 31, 2001 and 2000, the average interest rate was
approximately 7.5 percent and 7.4 percent, respectively, while the average
balance of long-term debt outstanding (excluding capital lease obligations) was
$511 million and $553 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Sources of Capital - The Company's capital requirements are funded from
cash provided by operations and, to the extent necessary, external financing and
capital contributions from its parent company. PG&E GTN has paid dividends as
part of a balanced approach to managing its capital structure, funding its
operations and capital expenditures, and maintaining appropriate cash balances.
PG&E Corporation and PG&E NEG undertook a corporate restructuring of PG&E GTN,
known as a ring-fencing transaction. The ring-fencing complied with credit
rating agency criteria designed to further separate a subsidiary from its parent
and affiliates, enabling PG&E GTN to retain its own credit rating based on its
own creditworthiness. 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).
12
Net Cash Provided by Operating Activities - For the three months ended
March 31, 2001, net cash provided by operating activities was $59.4 million,
compared with $37.5 million for the same period in 2000. The $21.9 million
increase was primarily due to the change in receivables/payables from
affiliates.
Net Cash Used in Investing Activities - For the three months ended March
31, 2001 compared to the same period in 2000, net cash used in investing
activities decreased by $1.7 million. The decrease primarily reflects lower
construction expenditures in 2001.
Net Cash Used in Financing Activities - For the three months ended March
31, 2001, cash used in financing activities was $47.1 million reflecting the
reduction in long-term debt. For the three months ended March 31, 2000 cash used
in financing activities was $35.4 million, also reflecting a reduction 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
See Risk Management Activities included in Management's Discussion and
Analysis above.
13
PART II: Other Information
---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
(b) No reports on Form 8-K were issued during the quarter ended March 31, 2001
and through the date hereof.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PG&E GAS TRANSMISSION, NORTHWEST CORPORATION
--------------------------------------------
(Registrant)
May 15, 2001 By: /s/ John R. Cooper
------------------
Name: John R. Cooper
Title: Chief Financial Officer & Treasurer
15
EXHIBIT INDEX
Exhibit No.: Description of Exhibit
12 Computation of Ratio of Earnings to Fixed Charges
16