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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 1-7414
NORTHWEST PIPELINE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 87-0269236
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
295 Chipeta Way
Salt Lake City, Utah 84108
(Address of principal executive offices and Zip Code)
(801) 583-8800
(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since
last report)
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 whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 13, 2003
- -------------------------- ---------------------------
Common stock, $1 par value 1,000 shares
The 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.
NORTHWEST PIPELINE CORPORATION
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements -
Condensed Statement of Income, three months
ended March 31, 2003 and 2002 ................................ 1
Condensed Balance Sheet as of March 31, 2003 and
December 31, 2002 ............................................ 2
Condensed Statement of Cash Flows, three
months ended March 31, 2003 and 2002 ......................... 4
Notes to Condensed Financial Statements ......................... 5
Item 2. Management's Narrative Analysis of the Results of Operations 9
Item 4. Controls and Procedures .................................... 13
PART II. OTHER INFORMATION ............................................ 14
Certain matters discussed in this report, excluding historical information,
include forward-looking statements. Although Northwest Pipeline Corporation
believes such forward-looking statements are based on reasonable assumptions, no
assurance can be given that every objective will be reached. Such statements are
made in reliance on the "safe harbor" protections provided under the Private
Securities Litigation Reform Act of 1995. Additional information about issues
that could lead to material changes in performance is contained in Northwest
Pipeline Corporation's 2002 Annual Report on Form 10-K.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWEST PIPELINE CORPORATION
CONDENSED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
-------- --------
OPERATING REVENUES ..................................... $ 79,624 $ 71,617
-------- --------
OPERATING EXPENSES:
General and administrative .......................... 8,623 11,029
Operation and maintenance ........................... 6,146 8,134
Depreciation ........................................ 15,716 14,752
Taxes, other than income taxes ...................... 3,941 3,668
-------- --------
Total operating costs and expenses ............... 34,426 37,583
-------- --------
Operating income ............................... 45,198 34,034
-------- --------
OTHER INCOME - net ..................................... 1,626 2,300
-------- --------
INTEREST CHARGES:
Interest on long-term debt .......................... 7,579 6,394
Other interest ...................................... 796 680
Allowance for borrowed funds used during construction (613) (278)
-------- --------
Total interest charges ........................... 7,762 6,796
-------- --------
INCOME BEFORE INCOME TAXES ............................. 39,062 29,538
PROVISION FOR INCOME TAXES ............................. 14,756 11,161
-------- --------
NET INCOME ............................................. $ 24,306 $ 18,377
======== ========
See accompanying notes.
- 1 -
NORTHWEST PIPELINE CORPORATION
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 152,829 $ 207
Advances to affiliates ................................. 31,798 17,282
Accounts receivable -
Trade, less reserves of $529 for March 31, 2003 and
$486 for December 31, 2002 ...................... 27,658 30,031
Affiliated companies .............................. 246 775
Materials and supplies ................................. 10,628 10,510
Exchange gas due from others ........................... 9,782 1,995
Deferred income taxes .................................. 2,786 2,768
Excess system gas ...................................... 14,961 14,016
Prepayments and other .................................. 1,154 1,334
------------ ------------
Total current assets ............................... 251,842 78,918
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost .................... 1,988,652 1,937,096
Less - Accumulated depreciation ........................ 851,684 842,355
------------ ------------
Total property, plant and equipment ................ 1,136,968 1,094,741
------------ ------------
OTHER ASSETS:
Deferred charges ....................................... 53,773 49,190
------------ ------------
Total assets ....................................... $ 1,442,583 $ 1,222,849
============ ============
See accompanying notes.
- 2 -
NORTHWEST PIPELINE CORPORATION
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)
March 31, December 31,
2003 2002
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable -
Trade ..................................... $ 21,797 $ 20,502
Affiliated companies ...................... 9,545 7,547
Accrued liabilities -
Income taxes due to affiliate ............. 2,959 12,138
Taxes, other than income taxes ............ 5,814 2,932
Interest .................................. 9,217 3,117
Employee costs ............................ 4,015 8,075
Exchange gas due to others ................ 24,744 16,010
Other ..................................... 890 877
Current maturities of long-term debt .......... 7,500 7,500
------------ ------------
Total current liabilities ................ 86,481 78,698
------------ ------------
LONG-TERM DEBT, LESS CURRENT MATURITIES .......... 535,028 360,023
DEFERRED INCOME TAXES ............................ 177,935 164,818
DEFERRED CREDITS AND OTHER NONCURRENT
LIABILITIES .................................... 24,994 25,471
CONTINGENT LIABILITIES AND COMMITMENTS
COMMON STOCKHOLDER'S EQUITY:
Common stock, par value $1 per share;
authorized and outstanding, 1,000 shares ... 1 1
Additional paid-in capital .................... 262,844 262,844
Retained earnings ............................. 358,514 334,208
Accumulated other comprehensive loss .......... (3,214) (3,214)
------------ ------------
Total common stockholder's equity ........ 618,145 593,839
------------ ------------
Total liabilities and stockholder's equity $ 1,442,583 $ 1,222,849
============ ============
See accompanying notes.
- 3 -
NORTHWEST PIPELINE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
----------------------
2003 2002
--------- ---------
OPERATING ACTIVITIES:
Net income ............................................... $ 24,306 $ 18,377
Adjustments to reconcile to net cash provided by operating
activities -
Depreciation .......................................... 15,716 14,752
Provision for deferred income taxes ................... 13,099 4,785
Amortization of deferred charges and credits .......... 305 190
Allowance for equity funds used during construction ... (1,468) (575)
Reserve for doubtful accounts ......................... 43 108
Changes in:
Accounts receivable and exchange gas due from others (4,928) (2,434)
Materials and supplies .............................. (118) (84)
Other current assets ................................ (765) 2,909
Deferred charges .................................... (917) 1,969
Accounts payable, income taxes due to affiliate and
exchange gas due to others ........................ 10,638 (6,586)
Other accrued liabilities ........................... (4,244) 1,771
Other deferred credits .............................. (68) 2,179
--------- ---------
Net cash provided by operating activities ................ 51,599 37,361
--------- ---------
INVESTING ACTIVITIES:
Property, plant and equipment -
Capital expenditures .................................. (55,980) (19,757)
Proceeds from sales ................................... -- 24
Asset removal cost .................................... (495)
Changes in accounts payable ........................... 1,389 --
Advances to affiliates ................................... (14,516) (23,329)
...................................................... 5,463
--------- ---------
Net cash used by investing activities .................... (69,602) (37,599)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ................. 175,000 --
Debt issuance costs ...................................... (4,375) --
--------- ---------
Net cash provided by financing activities ................ 170,625 --
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 152,622 (238)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 207 443
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 152,829 $ 205
========= =========
See accompanying notes.
- 4 -
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CORPORATE STRUCTURE AND CONTROL
Northwest Pipeline Corporation (Pipeline) is a wholly-owned subsidiary of
Williams Gas Pipeline Company LLC ("WGP"). WGP is a wholly-owned subsidiary of
The Williams Companies, Inc. ("Williams").
BASIS OF PRESENTATION
Pipeline's 1983 acquisition by Williams has been accounted for using the
purchase method of accounting. Accordingly, an allocation of the purchase price
was assigned to the assets and liabilities of Pipeline, based on their estimated
fair values at the time of the acquisition. Williams has not pushed down the
purchase price allocation (amounts in excess of original cost) of $88.1 million,
as of March 31, 2003, to Pipeline as current Federal Energy Regulatory
Commission ("FERC") policy does not permit Pipeline to recover through its rates
amounts in excess of original cost. The accompanying financial statements
reflect Pipeline's original basis in its assets and liabilities.
The condensed financial statements have been prepared from the books and
records of Pipeline. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The condensed unaudited financial statements include all adjustments
both normal recurring and others which, in the opinion of Pipeline's management,
are necessary to present fairly its financial position at March 31, 2003, and
its results of operations and cash flows for the three month periods ended March
31, 2003 and 2002. These condensed financial statements should be read in
conjunction with the financial statements and the notes thereto included in
Pipeline's 2002 Annual Report on Form 10-K.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the condensed
financial statements and accompanying notes. Actual results could differ from
those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2003, Williams and its subsidiaries, including
Pipeline, adopted Statement of Financial Accounting Standards ("SFAS") No. 143,
"Accounting for Asset Retirement Obligations." The Statement requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made, and that the associated asset retirement costs be capitalized as part of
the carrying amount of the long-lived asset. Pipeline has not recorded
liabilities for its pipeline transmission assets, since a reasonable estimate of
the fair value of the retirement obligations for these assets cannot be made, as
the remaining life of these assets is not currently determinable. Accordingly,
the impact of adopting the statement did not have a material effect on
Pipeline's financial position or results of operations. Had the statement been
adopted at the beginning of 2002, the impact to Pipeline's operating income and
net income would have been immaterial.
OTHER
Cash payments for interest were $0.9 million and $1.2 million, net of
interest capitalized, in the three month periods ended March 31, 2003 and 2002,
respectively.
Cash payments of $10.8 million and $9.1 million were made to Williams for
income taxes in the three month periods ended March 31, 2003 and 2002,
respectively.
- 5 -
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2. CONTINGENT LIABILITIES AND COMMITMENTS
RATE AND REGULATORY MATTERS
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM01-10-000)
On September 27, 2001, the FERC issued a Notice of Proposed Rulemaking
("NOPR") proposing to adopt uniform standards of conduct for transmission
providers. The proposed rules define transmission providers as interstate
natural gas pipelines and public utilities that own, operate or control electric
transmission facilities. The proposed standards would regulate the conduct of
transmission providers with their energy affiliates. The FERC proposed to define
energy affiliates broadly to include any transmission provider affiliate that
engages in or is involved in transmission (gas or electric) transactions, or
manages or controls transmission capacity, or buys, sells, trades or administers
natural gas or electric energy or engages in financial transactions relating to
the sale or transmission of natural gas or electricity. Current rules regulate
the conduct of Pipeline and its natural gas marketing affiliates. The FERC
invited interested parties to comment on the NOPR. On April 25, 2002, the FERC
issued its staff analysis of the NOPR and the comments received. The staff
analysis proposes redefining the definition of energy affiliates to exclude
affiliated transmission providers. On May 21, 2002, the FERC held a public
conference concerning the NOPR and the FERC invited the submission of additional
comments. If adopted, these new standards would require the adoption of new
compliance measures by Pipeline, which could result in increased costs to
Pipeline.
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM02-14-000)
On August 1, 2002, the FERC issued a NOPR that proposes restrictions on
various types of cash management programs employed by companies in the energy
industry such as Williams and its subsidiaries, including Pipeline. In addition
to stricter guidelines regarding the accounting for and documentation of cash
management or cash pooling programs, the FERC proposal, if made final, would
preclude public utilities, natural gas companies and oil pipeline companies from
participating in such programs unless the parent company and its FERC-regulated
affiliate maintain investment-grade credit ratings and the FERC-regulated
affiliate maintains stockholder's equity of at least 30 percent of total
capitalization. Williams' and Pipeline's current credit ratings are not
investment grade. Pipeline participated in comments filed in this proceeding on
August 28, 2002 by the Interstate Natural Gas Association of America. On
September 25, 2002, the FERC convened a technical conference to discuss issues
raised in the comments filed by parties in this proceeding and a final rule is
expected to be promulgated by FERC in the next several months.
FERC COMPLIANCE PLAN
On March 13, 2003, Williams and certain subsidiaries entered into a
settlement agreement with the FERC resolving issues resulting from a FERC
investigation into the relationship between Transcontinental Gas Pipe Line
Corporation (Transco), an affiliate of Pipeline, and Transco's marketing
affiliates. Although Pipeline was not involved in the investigation and is not a
party to the settlement agreement, Williams agreed that certain of its
interstate natural gas pipeline subsidiaries, including Pipeline, will be
subject to the terms of a compliance plan designed to ensure compliance with the
terms of the settlement agreement and the FERC's rules governing the
relationship of interstate natural gas pipelines and their marketing affiliates.
LEGAL PROCEEDINGS
In 1998, the United States Department of Justice ("DOJ") informed Williams
that Jack Grynberg, an individual, had filed claims in the United States
District Court for the District of Colorado under the False Claims Act against
Williams and certain of its wholly-owned subsidiaries including Pipeline. Mr.
Grynberg had also filed claims against approximately 300 other energy companies
and alleged that the defendants violated the False Claims Act in connection with
the measurement, royalty valuation and purchase of hydrocarbons. The relief
sought was an unspecified amount of royalties allegedly not paid to the federal
government, treble damages, a civil penalty, attorneys' fees and costs. On April
9, 1999, the DOJ announced that it was declining to intervene in any of the
Grynberg qui tam cases; including the action filed against the Williams entities
in the United States District Court for the District of Colorado. On October 21,
1999, the Panel on Multi-District Litigation transferred all of the Grynberg qui
tam cases, including those filed against Williams to the United States District
Court for the District of Wyoming for pre-trial purposes. On October 9, 2002,
the court granted a motion to dismiss
- 6 -
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Grynberg's royalty valuation claims. Grynberg's measurement claims remain
pending against Williams and the other defendants.
On June 8, 2001, fourteen Williams entities, including Pipeline, were
named as defendants in a nationwide class action lawsuit which has been pending
against other defendants, generally pipeline and gathering companies, for more
than one year. The plaintiffs allege that the defendants, including the Williams
defendants, have engaged in mismeasurement techniques that distort the heating
content of natural gas, resulting in an alleged underpayment of royalties to the
class of producer plaintiffs. In September 2001, plaintiffs' counsel voluntarily
dismissed two of the fourteen Williams entities named as defendants in the
lawsuit. In November 2001, the Williams defendants, along with other
coordinating defendants, filed a motion to dismiss on non-jurisdictional
grounds. In January 2002, most of the Williams defendants, along with a group of
coordinating defendants filed a motion to dismiss for lack of personal
jurisdiction. On August 19, 2002, defendants' motion to dismiss on
non-jurisdictional grounds was denied. On September 17, 2002, the plaintiffs
filed a motion for class certification. The Williams entities joined with other
defendants in contesting certification of the class. On April 10, 2003, the
court denied the plaintiffs' motion for class certification. The motion to
dismiss for lack of personal jurisdiction remains pending.
ENVIRONMENTAL MATTERS
Pipeline is subject to the National Environmental Policy Act and other
federal and state legislation regulating the environmental aspects of its
business. Management believes that Pipeline is in substantial compliance with
existing environmental requirements. Pipeline believes that, with respect to any
capital expenditures required to meet applicable standards and regulations, the
FERC would grant the requisite rate relief so that, for the most part, such
expenditures and a return thereon would be permitted to be recovered. Pipeline
believes that compliance with applicable environmental requirements is not
likely to have a material effect upon Pipeline's earnings or financial position.
SAFETY MATTERS
PROPOSED PIPELINE INTEGRITY REGULATIONS In January 2003, the United States
Department of Transportation Office of Pipeline Safety issued a NOPR entitled
"Pipeline Integrity Management in High Consequence Areas". The proposed rule
incorporates the requirements of the Pipeline Safety Improvement Act of 2002
that was enacted in December 2002. It would require gas pipeline operators to
develop integrity management programs for transmission pipelines that could
affect high consequence areas in the event of pipeline failure, including a
baseline assessment and periodic reassessments to be completed within specified
timeframes. The final rule is expected to be issued in late 2003. Pipeline at
this time cannot predict the exact costs that would be required under the
proposed rule. The costs of the baseline assessment are anticipated to be
incurred over the next ten years. Pipeline considers the costs associated with
compliance with the proposed rule to be prudent costs incurred in the ordinary
course of business and , therefore, recoverable through its rates.
OTHER MATTERS
In addition to the foregoing, various other proceedings are pending
against Pipeline incidental to its operations.
SUMMARY
Litigation, arbitration, regulatory matters and environmental matters are
subject to inherent uncertainties. Were an unfavorable ruling to occur, there
exists the possibility of a material adverse impact on the net income of the
period in which the ruling occurs. Management, including internal counsel,
currently believes that the ultimate resolution of the foregoing matters, taken
as a whole and after consideration of amounts accrued, insurance coverage,
recovery from customers or other indemnification arrangements, will not have a
materially adverse effect upon Pipeline's future financial position.
- 7 -
NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
3. DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT
On March 4, 2003, Pipeline issued $175 million of 8.125 percent senior
notes due 2010. Pipeline intends to use the proceeds for general corporate
purposes, including the funding of capital expenditures.
Williams and certain of its subsidiaries, including Pipeline, are parties
to a revolving credit agreement (Credit Agreement), under which Pipeline can
borrow up to $400 million if the funds available under the Credit Agreement have
not been borrowed by Williams or other subsidiaries. The Credit Agreement
expires in July 2005. Interest rates vary with current market conditions based
on the base rate of Citibank N.A., three-month certificates of deposit of major
United States money market banks, federal funds rate or the London Interbank
Offered Rate. The Credit Agreement contains restrictions, which limit, under
certain circumstances, the issuance of additional debt, the attachment of liens
on any assets and any change of ownership of Pipeline. As a result of the
completion of certain asset sales by Williams, the commitments from
participating banks in the Credit Agreement have been reduced to $400 million as
of March 31, 2003, and with further asset sales could be reduced below that
amount, but Pipeline will continue to have borrowing capacity up to the lesser
of $400 million or the amount that Williams would be able to borrow to the
extent the funds available under the Credit Agreement have not been borrowed by
Williams or other participating subsidiaries or that otherwise would be required
to remain available to Williams. At March 31, 2003, the borrowing capacity
available to Pipeline was $400 million, and Pipeline had no outstanding
borrowings under this agreement. Pipeline's assets have not been pledged to
secure any indebtedness of Williams or its other affiliates, either under the
Credit Agreement or pursuant to any other credit facility of Williams and its
other affiliates.
4. STOCK-BASED COMPENSATION
Williams' employee stock-based awards are accounted for under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Williams' fixed plan common stock
options generally do not result in compensation expense, because the exercise
price of the stock options equals the market price of the underlying stock on
the date of grant. The following table illustrates the effect on Pipeline's net
income if Pipeline had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation."
Three Months Ended March 31,
----------------------------
2003 2002
-------- --------
(Thousands of Dollars)
Net income, as reported $ 24,306 $ 18,377
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of tax 140 84
-------- --------
Pro forma net income $ 24,166 $ 18,293
======== ========
Pro forma amounts for 2003 include compensation expense from Williams
awards made in 2002 and 2001. Pro forma amounts for 2002 include compensation
expense from Williams awards made in 2002 and 2001 and compensation expense from
certain Williams awards made in 1999.
Since compensation expense from stock options is recognized over the
future years' vesting period for pro forma disclosure purposes and additional
awards are generally made each year, pro forma amounts may not be representative
of future years' amounts.
- 8 -
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis of results of operations, financial
condition and liquidity should be read in conjunction with the financial
statements, notes and management's narrative analysis of the results of
operations contained in Items 7 and 8 of Pipeline's 2002 Annual Report on Form
10-K and with the condensed financial statements and notes thereto contained
within this report.
2003 PIPELINE BREAK NEAR AUBURN, WASHINGTON
On May 1, 2003, a line break occurred on Pipeline's 26-inch gas
transmission line near Auburn, Washington. There were no injuries and no
ignition. Currently, the cause of the line break is unknown although Pipeline
has initiated a comprehensive investigation. On May 2, 2003, the Department of
Transportation issued a Corrective Action Order in response to the line break.
The Order requires that Pipeline maintain an operating pressure in the 26-inch
line between Sumas and Washougal not to exceed 80 percent of the maximum
allowable operating pressure (MAOP) until further written order of the Director,
Western Region, Office of Pipeline Safety. Pipeline complied with the Corrective
Action Order. It is currently meeting all of its contractual obligations to
customers despite the pressure limitation. In the future, and for so long as the
pressure limitation remains in effect, Pipeline's ability to meet its service
obligations may be negatively impacted by changing market conditions. Although
Pipeline will incur costs in connection with its investigation of the line
break, Pipeline has not yet estimated the amount of these costs.
WILLIAMS' RECENT EVENTS
As discussed in Pipeline's Form 10-K for the year ended December 31, 2002,
events in 2002 and the last half of 2001 significantly impacted Williams'
operations, both past and future. On February 20, 2003, Williams outlined its
planned business strategy for the next several years which management believes
to be a comprehensive response to the events, which have impacted the energy
sector and Williams during 2002. The plan focuses on retaining a strong, but
smaller, portfolio of natural gas businesses and bolstering Williams' liquidity
through more asset sales, limited levels of financing at the Williams and
subsidiary levels and additional reductions in its operating costs. The plan is
designed to provide Williams with a clear strategy to address near-term and
medium-term liquidity issues and further de-leverage the company with the
objective of returning to investment grade status by 2005, while retaining
businesses with favorable returns and opportunities for growth in the future. As
part of this plan, Williams expects to generate proceeds, net of related debt,
of nearly $4 billion from asset sales during 2003 and the first quarter of 2004.
During the first quarter of 2003, Williams had received approximately $680
million in net proceeds from the sales of assets and businesses. In April 2003,
Williams announced that it had signed definitive agreements for the sales of
other Williams assets. All of these newly announced sales are expected to close
in the second quarter. Sales anticipated to close in the second quarter are
expected to generate net proceeds of approximately $2.0 billion. As previously
announced, Williams intends to reduce its commitment to its energy marketing and
trading business, which could be realized by entering into a joint venture with
a third party or through the sale of a portion or all of the marketing and
trading portfolio. Williams Energy Marketing and Trading has sold or announced
sales of contracts totaling $215 million.
As of March 31, 2003, Williams has maturing notes payable and long-term
debt through the first-quarter of 2004 totaling approximately $3.5 billion,
which includes certain contractual fees and deferred interest associated with an
underlying debt. Williams anticipates the cash on hand, the asset sales
mentioned above, additional asset sales, and refinancing of a portion of these
obligations will enable Williams to meet its liquidity needs over that period.
RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL RESULTS
This analysis discusses financial results of Pipeline's operations for the
three-month periods ended March 31, 2003 and 2002. Variances due to changes in
price and volume have little impact on revenues,
- 9 -
because under Pipeline's rate design methodology, the majority of overall cost
of service is recovered through firm capacity reservation charges in its
transportation rates.
THREE MONTHS ENDED MARCH 31, 2003 VS. THREE MONTHS ENDED MARCH 31, 2002
Operating revenues increased $8.0 million, or 11 percent, due primarily to
increased facility charge revenues of $4.2 million from incremental projects
placed in service in late 2002 and higher short term firm and interruptible
transportation revenues of $3.1 million primarily due to favorable basin price
differentials for the first quarter of 2003.
Pipeline's transportation service accounted for 94 percent and 95 percent
of operating revenues for the three-month periods ended March 31, 2003 and 2002,
respectively. Additionally, 3 percent of operating revenues represented gas
storage service in each of the three-month periods ended March 31, 2003 and
2002. Operating expenses decreased $3.2 million, or 8 percent, due primarily to
a $3.0 million reduction in pension expense reflecting a reduction to its
pension accrual and lower labor costs of $1.4 million resulting primarily from
lower staffing levels, partially offset by $1.0 million higher depreciation due
to the increase in property resulting from recent construction projects.
Operating income increased $11.2 million, or 33 percent, due to the higher
revenues and lower operating expenses discussed above.
Interest on long-term debt increased $1.2 million due to the March 4,
2003, $175 million private debt offering of 8.125 percent senior notes due 2010.
The following table summarizes volumes and capacity for the periods
indicated:
Quarter Ended March 31,
2003 2002
--------- ----------
Total Throughput (TBtu) 195 198
Average Daily Transportation Volumes (TBtu) 2.2 2.2
Average Daily Reserved Capacity Under Base
Firm Contracts (TBtu) 2.3 2.3
Average Daily Reserved Capacity Under Short-
Term Firm Contracts (TBtu)(1) 0.7 0.4
- -------
(1) Consists primarily of additional capacity created from time to time
through the installation of new receipt or delivery points or the
segmentation of existing mainline capacity. Such capacity is generally
marketed on a short-term firm basis, because it does not involve the
construction of additional mainline capacity.
CAPITAL RESOURCES AND LIQUIDITY
METHOD OF FINANCING
Pipeline funds its capital requirements with cash flows from operating
activities, by accessing capital markets, by repayments of funds advanced to WGP
and, if required, by borrowings under the Credit Agreement and advances from
WGP.
Pipeline has an effective registration statement on file with the
Securities and Exchange Commission. At March 31, 2003, approximately $150
million of shelf availability remains under this registration statement, which
may be used to issue debt securities. Interest rates and market conditions will
affect amounts borrowed, if any, under this arrangement. Pipeline believes any
additional financing arrangements, if required, can be obtained from the capital
markets on terms that are commensurate with its current credit ratings.
On March 4, 2003, Pipeline issued $175 million of 8.125 percent senior
notes due 2010. Pipeline intends to use the proceeds for general corporate
purposes, including the funding of capital expenditures.
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Williams and certain of its subsidiaries, including Pipeline, are parties
to a revolving credit agreement ("Credit Agreement"), under which Pipeline can
borrow up to $400 million if the funds available under the Credit Agreement have
not been borrowed by Williams or other subsidiaries. The Credit Agreement
expires in July 2005. Interest rates vary with current market conditions based
on the base rate of Citibank N.A., three-month certificates of deposit of major
United States money market banks, federal funds rate or the London Interbank
Offered Rate ("LIBOR"). The Credit Agreement contains restrictions, which limit,
under certain circumstances, the issuance of additional debt, the attachment of
liens on any assets and any change of ownership of Pipeline. As a result of the
completion of certain asset sales by Williams, the commitments from
participating banks in the Credit Agreement have been reduced to $400 million as
of March 31, 2003, and with further asset sales could be reduced below that
amount, but Pipeline will continue to have borrowing capacity up to the lesser
of $400 million or the amount that Williams would be able to borrow to the
extent the funds available under the Credit Agreement have not been borrowed by
Williams or other participating subsidiaries or that otherwise would be required
to remain available to Williams. At March 31, 2003, the borrowing capacity
available to Pipeline was $400 million, and Pipeline had no outstanding
borrowings under this agreement. Pipeline's assets have not been pledged to
secure any indebtedness of Williams or its other affiliates, either under the
Credit Agreement or pursuant to any other credit facility of Williams and its
other affiliates.
As a participant in Williams' cash management program, Pipeline makes
advances to and receives advances from Williams through Pipeline's parent
company, WGP. At March 31, 2003, the advances due Pipeline by WGP totaled $31.8
million. The advances are represented by demand notes. The interest rate on
intercompany demand notes is the LIBOR on the first day of the month plus an
applicable margin based on Pipeline's current credit ratings as determined by
Moody's Investors Service and Standard and Poor's. Due to recent asset sales,
anticipated asset sales in the future and available secured borrowing
facilities, Williams has indicated that it currently believes that it will
continue to have the financial resources and liquidity to repay these advances
made by WGP which in turn allows WGP to repay Pipeline.
NOTICE OF PROPOSED RULEMAKING (DOCKET NO. RM02-14-000) On August 1, 2002,
the FERC issued a NOPR that proposes restrictions on various types of cash
management programs employed by companies in the energy industry such as
Williams and its subsidiaries, including Pipeline. In addition to stricter
guidelines regarding the accounting for and documentation of cash management or
cash pooling programs, the FERC proposal, if made final, would preclude public
utilities, natural gas companies and oil pipeline companies from participating
in such programs unless the parent company and its FERC-regulated affiliate
maintain investment-grade credit ratings and the FERC-regulated affiliate
maintains stockholder's equity of at least 30 percent of total capitalization.
Williams' and Pipeline's current credit ratings are not investment grade.
Pipeline participated in comments filed in this proceeding on August 28, 2002 by
the Interstate Natural Gas Association of America. On September 25, 2002, the
FERC convened a technical conference to discuss issues raised in the comments
filed by parties in this proceeding and a final rule is expected to be
promulgated by FERC in the next several months.
CREDIT RATINGS
On May 2, 2003, Fitch Ratings raised Pipeline's credit rating on its
senior unsecured long-term debt from BB- to BB. The ratings given by the other
rating agencies have not changed during 2003 and are as follows:
Moody's Investor's Service B3
Standard and Poor's B+
CAPITAL EXPENDITURES
Pipeline anticipates 2003 capital expenditures will total approximately
$326.7 million, of which approximately $64.8 million will be for maintenance
capital expenditures and other non-expansion related items. Through March 31,
2003, Pipeline has expended $56.0 million for capital additions.
EXPANSION PROJECTS
ROCKIES EXPANSION PROJECT On August 29, 2001, Pipeline filed an application with
the FERC to construct and
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operate an expansion of its pipeline system designed to provide an additional
175,000 dekatherms ("Dth") per day of capacity to its transmission system in
Wyoming and Idaho in order to reduce reliance on displacement capacity. The
Rockies Expansion Project includes the installation of 91 miles of pipeline loop
and the upgrading or modification of six compressor stations for a total
increase of 26,057 horsepower. Pipeline reached a settlement agreement with the
majority of its firm shippers to support roll-in of the expansion costs into its
existing rates. The FERC issued a certificate in September 2002 approving the
project. Pipeline filed an application with the FERC in February 2003 to amend
the certificate to reflect minor facility scope changes. The certificate
amendment was approved at the FERC's April 30, 2003 meeting. Construction is
scheduled to start by mid-May 2003, with a targeted in-service date of November
1, 2003. The current estimated cost of the expansion project is approximately
$140 million, of which approximately $16 million will be offset by settlement
funds to be received from a former customer in connection with a contract
restructuring.
EVERGREEN EXPANSION PROJECT On October 3, 2001, Pipeline filed an application
with the FERC to construct and operate an expansion of its pipeline system
designed to provide 276,625 Dth per day of firm transportation service from
Sumas, Washington to Chehalis, Washington to serve new power generation demand
in western Washington. The Evergreen Expansion Project includes installing 28
miles of pipeline loop, upgrading, replacing or modifying five compressor
stations and adding a net total of 64,160 horsepower of compression. The FERC
issued a certificate on June 27, 2002 approving the expansion and the
incremental rates to be charged to our expansion customers. Pipeline started
construction in October 2002 with completion targeted for October 1, 2003.
Pipeline filed an application with the FERC in January 2003 to amend the
certificate to reflect minor facility scope and schedule changes. The
certificate amendment was approved at the FERC's April 30, 2003 meeting. The
estimated cost of the expansion project is approximately $198 million. The
Evergreen Expansion customers have agreed to pay for the cost of service of this
expansion on an incremental basis. This expansion is based on 15 and 25 year
contracts and is expected to provide approximately $42 million of operating
revenues in its first 12 months of operation.
COLUMBIA GORGE EXPANSION PROJECT Pipeline's October 3, 2001 application with
respect to the Evergreen Expansion Project, which was approved by the FERC on
June 27, 2002, also requested approvals to construct and operate an expansion of
its pipeline system designed to replace 56,000 Dth per day of northflow design
displacement capacity from Stanfield, Oregon to Washougal, Washington. The
Columbia Gorge Project includes upgrading, replacing or modifying five existing
compressor stations and adding a net total of 23,900 horsepower of compression.
Pipeline reached a settlement with the majority of its firm shippers to support
roll-in of approximately 84 percent of the expansion costs into the existing
rates with the remainder to be allocated to the incremental Evergreen Expansion
customers. Pipeline's January 2003 application to amend the certificate, which
was approved by the FERC at its April 30, 2003 meeting, also reflected minor
facility scope changes for the Columbia Gorge Expansion Project. Pipeline plans
to start construction by mid-May 2003, with a targeted in-service date of
November 1, 2003. The estimated cost of the expansion project is approximately
$43 million.
OTHER
REGULATORY AND LEGAL PROCEEDINGS
Reference is made to Note 2 of the Notes to Financial Statements for
information about regulatory, judicial and business developments, which cause
operating and financial uncertainties.
CONCLUSION
Although no assurances can be given, Pipeline currently believes that the
aggregate of cash flows from operating activities, the recent issuance of $175
million of senior notes on March 4, 2003, supplemented, when necessary, by
repayments of funds advanced to WGP, advances or capital contributions from
Williams and borrowings under the Credit Agreement will provide Pipeline with
sufficient liquidity to meet its capital requirements. When necessary, Pipeline
also expects to access public and private markets on terms commensurate with its
current credit ratings to finance its capital requirements.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation of the effectiveness of the design and operation of
Pipeline's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d -14(c) of the Securities Exchange Act) was performed within the 90 days
prior to the filing date of this report. This evaluation was performed under the
supervision and with the participation of Pipeline's management, including
Pipeline's Senior Vice President and Vice President and Treasurer. Based upon
that evaluation, Pipeline's Senior Vice President and Vice President and
Treasurer concluded that these disclosure controls and procedures are effective.
There have been no significant changes in Pipeline's internal controls or
other factors that could significantly affect internal controls since the
certifying officers' most recent evaluation of those controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See discussion in Note 2 of the Notes to Condensed Financial Statements
included herein.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
The following instruments are included as exhibits to this report.
Those exhibits below incorporated by reference herein are indicated
as such by the information supplied in the parenthetical thereafter.
If no parenthetical appears after an exhibit, copies of the
instrument have been included herewith.
(4) Instruments defining the rights of holders
- 1 Indenture dated March 4, 2003, between Pipeline
and JP Morgan Chase Bank, as Trustee (filed as
Exhibit 4.1 to The Williams Companies, Inc. Form
10-Q for the quarter ended March 31, 2003,
Commission File Number 1-4174).
(10) Material contracts
- 1 Amendment dated March 28, 2003 to the First
Amended and Restated Credit Agreement dated
October 31, 2002, as modified by the Consent and
Waiver dated as of January 22, 2003, among
Williams, Pipeline, and certain affiliated
companies, the financial institutions and other
Persons from time to time party thereto, JPMorgan
Chase Bank (f/k/a The Chase Manhattan Bank) and
Commerzbank AG, as Co-Syndication Agents, Credit
Lyonnais New York Branch, as Documentation Agent,
and Citicorp USA, Inc., as Agent (filed as Exhibit
10.4 to The Williams Companies, Inc. Form 10-Q for
the quarter ended March 31, 2003, Commission File
Number 1-4174).
(99) Additional Exhibits
- 1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002 by J. Douglas
Whisenant, Senior Vice President (Principal
Executive Officer) of Northwest Pipeline
Corporation
- 2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002 by Richard D. Rodekohr,
Vice President and Treasurer (Principal Financial
Officer) of Northwest Pipeline Corporation
(b) Reports on Form 8-K.
During the first quarter of 2003, Pipeline filed Forms 8-K on
February 20, 2003; February 26, 2003; February 28, 2003; and March
6, 2003, which reported significant events under Item 5 of the Form
and included the Regulation FD disclosures.
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SIGNATURE
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.
NORTHWEST PIPELINE CORPORATION
Registrant
By: /s/ Jeffrey P. Heinrichs
------------------------------------
Jeffrey P. Heinrichs
Controller
(Duly Authorized Officer and
Chief Accounting Officer)
Date: May 13, 2003
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Certifications
I, J. Douglas Whisenant, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest
Pipeline Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 13, 2003 By /s/ J. Douglas Whisenant
--------------------------------------
J. Douglas Whisenant
Senior Vice President
(Principal Executive Officer)
Certifications
I, Richard D. Rodekohr, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest
Pipeline Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: May 13, 2003 By /s/ Richard D. Rodekohr
---------------------------------
Richard D. Rodekohr
Vice President and Treasurer
(Principal Financial Officer)
EXHIBIT INDEX
Exhibit
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99.1 Principal Executive Officer Certificate
99.2 Principal Financial Officer Certificate