NORTHWEST PIPELINE CORP - 10-Q Quarterly Report

Back to GetFilings.com

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 June 30, 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 August 12, 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

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 and 2003 first quarter
report on Form 10-Q.

i

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORTHWEST PIPELINE CORPORATION
CONDENSED STATEMENT OF INCOME
(Thousands of Dollars)
(Unaudited)

See accompanying notes.

1

NORTHWEST PIPELINE CORPORATION
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)

See accompanying notes.

2

NORTHWEST PIPELINE CORPORATION
CONDENSED BALANCE SHEET
(Thousands of Dollars)
(Unaudited)

See accompanying notes.

3

NORTHWEST PIPELINE CORPORATION
CONDENSED STATEMENT OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)

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 $87.0 million,
as of June 30, 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 June 30, 2003, results
of operations for the three and six month periods ended June 30, 2003 and 2002,
and cash flows for the six month periods ended June 30, 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 and 2003 first quarter report on Form 10-Q.

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.

Effective July 1, 2003, Williams and its subsidiaries, including
Pipeline, adopted Financial Accounting Standards board ("FASB") Interpretation
No. 46, "Consolidation of Variable Interest Entities." The Interpretation
defines a variable interest entity ("VIE") as an entity in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
investments or other interests that will absorb portions of the VIE's expected
losses if they occur or receive portions of the VIE's expected residual returns
if they occur are called variable interests. Variable interests may include, but
are not limited to, equity interests, debt instruments, beneficial interests,
derivative instruments and guarantees. The Interpretation requires an entity to
consolidate a VIE if that entity will absorb a majority of the VIE's expected
losses if they occur, receive a majority of the VIE's expected residual returns
if they occur, or both. If no party will absorb a majority of the expected
losses or expected residual returns, no party will consolidate the VIE. The
Interpretation also requires disclosure of significant variable interests in
unconsolidated VIE's. The Interpretation is effective for all new VIE's created
or acquired after January 31, 2003. For VIE's created or acquired prior to
February 1, 2003, the provisions of the Interpretation must be applied for the
first interim or annual period beginning after June 15, 2003. Pipeline does not
have any VIE's as defined by the Interpretation.

5

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

PROPERTY, PLANT AND EQUIPMENT

Subsequent to the implementation of a service delivery system at
Transcontinental Gas Pipe Line Corporation ("Transco"), a subsidiary of WGP, in
the second quarter of 2003 and a determination of the unique and additional
programming requirements that would be needed to complete the system at
Pipeline, management determined that the system would not be implemented at
Pipeline. This resulted in the write-off to expense of $25.5 million of
capitalized software development costs as reflected in the accompanying
statements.

OTHER

Cash payments for interest were $12.8 million and $12.1 million, net of
interest capitalized, for the six month periods ended June 30, 2003 and 2002,
respectively.

Cash payments of $12.3 million and $15.5 million were made to Williams
for income taxes for the six month periods ended June 30, 2003 and 2002,
respectively.

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.

INTERIM RULE (ORDER NO. 634, DOCKET NO. RM02-14-000)

On August 1, 2002, the FERC issued a NOPR that proposed 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
have precluded public utilities, natural gas companies and oil pipeline
companies from participating in such programs unless the parent company and its
FERC-regulated affiliate maintained investment-grade credit ratings and the
FERC-regulated affiliate maintained 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. On June 26, 2003,
the FERC issued an Interim Rule (Order No. 634), which requires FERC-regulated
entities to have their cash management programs in writing and to have all such
programs specify: (i) the duties and responsibilities of administrators and
participants, (ii) the methods for calculating interest and for allocating
interest and expenses, and (iii) restrictions on borrowing from the programs.
The Interim Rule is effective on August 7, 2003. The Interim Rule also seeks
industry comment on new reporting requirements that would require FERC-regulated
entities to file their cash management programs with the FERC and to notify the
FERC when their proprietary capital ratio drops below 30 percent of total
capitalization and when it subsequently

6

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

returns to or exceeds 30 percent. This Interim Rule replaces the earlier NOPR on
cash management described above.

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 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 voluntarily
dismissed two of the fourteen Williams entities named as defendants in the
lawsuit. In November 2001, Williams, 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 dismissed. 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. On May 13, 2003, the plaintiffs filed a motion for leave to file a 4th
Amended Petition. On July 29, 2003, the court granted the plaintiffs' motion to
file the 4th Amended Petition. The amended petition removes Pipeline from the
group of defendants.

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. Currently,
Pipeline estimates that the cost to perform required assessments and repairs
will be between $75 million and $100 million over the 2003 to 2012 period.
Developing and implementing the required public education program, including a
process for measuring and evaluating the effectiveness of safety information
distributed to various stakeholder groups, is expected to cost less than $1
million. These cost estimates may change depending on the content of the final
rule. Pipeline considers the costs associated with compliance with the proposed
rule to be prudent costs incurred in the

7

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

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 and safety
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.

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 is using the proceeds for general corporate purposes,
including the funding of capital expenditures.

On June 6, 2003, Williams entered into a two-year $800 million revolving
credit facility, primarily for the purpose of issuing letters of credit.
Williams, Pipeline and Transco, a subsidiary of WGP, have access to all
unborrowed amounts. The facility must be secured by cash and/or acceptable
government securities with a market value of at least 105 percent of the then
outstanding aggregate amount available for drawing under all letters of credit,
plus the aggregate amount of all loans then outstanding. The new credit facility
replaces a $1.1 billion credit line entered into in July 2002 that was comprised
of a $700 million secured revolving credit facility and a $400 million secured
letter of credit facility. The previous agreements were secured by substantially
all of Williams' midstream assets. The new agreement releases these assets as
collateral. The interest rate on the new agreement is variable at the London
Interbank Offered Rate ("LIBOR") plus 0.75 percent. At June 30, 2003, letters of
credit totaling $387 million have been issued by the participating financial
institutions under this facility and no revolving credit loans were outstanding.
At June 30, 2003, the amount of restricted investments securing this facility
was $461.1 million, which collateralized the facility at 119.25 percent.

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."

8

NORTHWEST PIPELINE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

Pro forma amounts for 2003 include compensation expense from Williams
awards made in 2003, 2002 and 2001. Pro forma amounts for 2002 include
compensation expense from certain awards made in 1999 and compensation expense
from awards made in 2002 and 2001.

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.

On May 15, 2003, Williams' shareholders approved a stock option exchange
program. Under this exchange program, eligible Williams employees were given a
one-time opportunity to exchange certain outstanding options for a
proportionately lesser number of options at an exercise price to be determined
at the grant date of the new options. Surrendered options were cancelled June
26, 2003, and replacement options will be granted no earlier than six months and
one day after the cancellation date of each surrendered option. Under APB 25,
Pipeline will not recognize any expense pursuant to the stock option exchange.
However, for purposes of pro forma disclosures, Pipeline will recognize
additional expense related to these new options and the remaining expense on the
cancelled options.

9

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 and Item
2 contained in Pipeline's 2003 first quarter report on Form 10-Q and 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. An independent consultant, performing a metallurgical investigation,
has concluded the cause of the line break was stress corrosion cracking. 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. Pipeline is currently
meeting all of its contractual obligations to customers despite the pressure
limitation. In the future, and as 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 has and will incur
costs in connection with its investigation of the line break, Pipeline has not
yet completed an estimate of these costs, and such costs have not been material
to date.

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. The plan focuses on retaining a strong, but smaller,
portfolio of natural gas businesses and bolstering Williams' liquidity through
additional asset sales, strategic 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, 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 2004. During the first half of 2003,
Williams had received $2.4 billion in net proceeds from the sales of assets and
businesses. As previously announced, Williams intends to reduce its commitment
to its energy marketing and trading business, which may 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. Additionally, through the six month
period ended June 30, 2003, Williams Energy Marketing and Trading has sold
contracts for proceeds totaling approximately $206 million.

As of June 30, 2003, Williams has maturing notes payable and long-term
debt through the first quarter of 2004 totaling approximately $1.8 billion.
Williams anticipates that cash on hand, proceeds from additional asset sales and
cash flows from retained businesses will enable Williams to meet its liquidity
needs.

RESULTS OF OPERATIONS

ANALYSIS OF FINANCIAL RESULTS

This analysis discusses financial results of Pipeline's operations for
the six-month periods ended June 30, 2003 and 2002. Variances due to changes in
price and volume have little impact on revenues, 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.

10

SIX MONTHS ENDED JUNE 30, 2003 VERSUS SIX MONTHS ENDED JUNE 30, 2002

Operating revenues increased $16.1 million, or 11 percent, due primarily
to increased facility charge revenues of $9.2 million from incremental projects
placed in service in late 2002 and higher short term firm and interruptible
transportation revenues of $6.0 million primarily due to the execution of
several maximum rate contracts during the second quarter of 2003 with primary
terms that extend through July 2003, October 2003 and April 2004.

Pipeline's transportation service accounted for 94 percent and 95
percent of operating revenues for the six-month periods ended June 30, 2003 and
2002, respectively. Additionally, 3 percent of operating revenues represented
gas storage service in each of the six-month periods ended June 30, 2003 and
2002.

Operating expenses increased $20.2 million, or 25 percent, due primarily
to a $25.5 million charge related to the write-off of capitalized software
development costs associated with a service delivery system for which a decision
was made not to implement. Subsequent to the implementation of this system at
Transco, a subsidiary of WGP, in the second quarter of 2003 and a determination
of the unique and additional programming requirements that would be needed to
complete the system at Pipeline, management determined that the system would not
be implemented. Depreciation increased $2.6 million due primarily to the
increase in property resulting from completion of recent construction projects.
These increases were partially offset by a $6.3 million reduction in pension
expense, due primarily to an accrual in 2002 for an enhanced-benefit early
retirement option offered to certain Williams employee groups, and lower labor
costs of $2.3 million resulting primarily from lower staffing levels.

Other income increased $1.3 million due to a higher allowance for equity
funds used during construction resulting from the increase in capital
expenditures for construction projects.

Interest on long-term debt increased $4.7 million due to the March 4,
2003, $175 million debt offering of 8.125 percent senior notes due 2010.

The following table summarizes volumes and capacity for the periods
indicated:

- ----------

(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 June 30, 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

11

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 is using the proceeds for general corporate purposes,
including the funding of capital expenditures.

On June 6, 2003, Williams entered into a two-year $800 million revolving
credit facility, primarily for the purpose of issuing letters of credit.
Williams, Pipeline and Transco, a subsidiary of WGP, have access to all
unborrowed amounts. The facility must be secured by cash and/or acceptable
government securities with a market value of at least 105 percent of the then
outstanding aggregate amount available for drawing under all letters of credit,
plus the aggregate amount of all loans then outstanding. The new credit facility
replaces a $1.1 billion credit line entered into in July 2002 that was comprised
of a $700 million secured revolving credit facility and a $400 million secured
letter of credit facility. The previous agreements were secured by substantially
all of Williams' midstream assets. The new agreement releases these assets as
collateral. The interest rate on the new agreement is variable at the London
Interbank Offered Rate ("LIBOR") plus 0.75 percent. At June 30, 2003, letters of
credit totaling $387 million have been issued by the participating financial
institutions under this facility and no revolving credit loans were outstanding.
At June 30, 2003, the amount of restricted investments securing this facility
was $461.1 million, which collateralized the facility at 119.25 percent.

As a participant in Williams' cash management program, Pipeline makes
advances to and receives advances from Williams through Pipeline's parent
company, WGP. At June 30, 2003, the advances due Pipeline by WGP totaled $66.5
million. The advances are represented by demand notes. Effective June 2003, the
interest rate on intercompany demand notes is the LIBOR on the first day of the
month plus 0.75%. Due to its current cash balance and anticipated asset sales in
the future, 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.

INTERIM RULE (ORDER NO. 634, DOCKET NO. RM02-14-000) On August 1, 2002,
the FERC issued a NOPR that proposed 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 have precluded
public utilities, natural gas companies and oil pipeline companies from
participating in such programs unless the parent company and its FERC-regulated
affiliate maintained investment-grade credit ratings and the FERC-regulated
affiliate maintained 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. On June 26, 2003,
the FERC issued an Interim Rule (Order No. 634), which requires FERC-regulated
entities to have their cash management programs in writing and to have all such
programs specify: (i) the duties and responsibilities of administrators and
participants, (ii) the methods for calculating interest and for allocating
interest and expenses, and (iii) restrictions on borrowing from the programs.
The Interim Rule is effective on August 7, 2003. The Interim Rule also seeks
industry comment on new reporting requirements that would require FERC-regulated
entities to file their cash management programs with the FERC and to notify the
FERC when their proprietary capital ratio drops below 30% of total
capitalization and when it subsequently returns to or exceeds 30%. This Interim
Rule replaces the earlier NOPR on cash management described above.

CREDIT RATINGS

In the second quarter of 2003, Moody's Investors Services and Fitch
Ratings raised Pipeline's credit rating on its senior unsecured long-term debt
as shown below. The rating given by Standard and Poor's is B+ and has not
changed during 2003.

Moody's Investors Services B3 to B1
Fitch Ratings BB- to BB

CAPITAL EXPENDITURES

Pipeline anticipates 2003 capital expenditures will total approximately
$292.5 million, of which approximately $53.7 million will be for maintenance
capital expenditures and other non-expansion related items. Through June 30,
2003, Pipeline has expended $107.6 million for capital additions.

12

EXPANSION PROJECTS

ROCKIES EXPANSION PROJECT On August 29, 2001, Pipeline filed an application with
the FERC to construct and 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 issued by the FERC on May 7, 2003.
Construction started May 20, 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 issued by the FERC on May 7, 2003. 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 on May 7, 2003, also reflected minor facility scope
changes for the Columbia Gorge Expansion Project. Pipeline started construction
on May 8, 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.

13

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-15(e) and
15(d)-(e) of the Securities Exchange Act) ("Disclosure Controls") was performed
as of the end of the period covered by 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, subject to the limitations noted below,
these Disclosure Controls and procedures are effective.

Pipeline's management, including its Principal Executive Officer and
Principal Financial Officer, does not expect that Pipeline's Disclosure Controls
or its internal controls over financial reporting ("Internal Controls") will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Pipeline
monitors its Disclosure Controls and Internal Controls and makes modifications
as necessary; Pipeline's intent in this regard is that the Disclosure Controls
and the Internal Controls will be maintained as systems change and conditions
warrant.

There has been no change in Pipeline's Internal Controls that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, Pipeline's Internal Controls.

14

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 U.S. $800,000,000 Credit Agreement dated as of June
6, 2003, among The Williams Companies, Inc.,
Northwest Pipeline Corporation, Transcontinental
Gas Pipe Line Corporation, as Borrowers, Citibank,
N.A., as Administrative Agent and Collateral Agent,
Bank of America, N.A., as Syndication Agent,
JPMorgan Chase Bank, as Documentation Agent,
Citibank, N.A. and Bank of America, N.A. as Issuing
Banks, the banks named therein as Banks and
Citigroup Global Markets Inc. and Banc of America
Securities LLC as Joint Lead Arrangers and Joint
Book Runners. (filed as Exhibit 10.3 to The
Williams Companies, Inc. Form 10-Q for the
quarterly period ended June 30, 2003, Commission
File Number 1-4174).

(31) Section 302 Certifications

- 1 Certification of Principal Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of
1934, as amended and Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.

- 2 Certification of Principal Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of
1934, as amended, and Item 601(b)(31) of Regulation
S-K, as adopted pursuant to Section 302 of The
Sarbanes-Oxley Act of 2002.

(32) Section 906 Certification

- 1 Certification of Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

None.

15

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: August 12, 2003

16

EXHIBIT INDEX