UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



(Mark One)



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
|- |  | ------------------------------------------------

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

OR

| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
|- |  | -------------------------------------------------

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
 to



COMMISSION FILE NO. 0-25842



Gas Transmission Northwest Corporation

(Exact name of registrant as specified in its charter)



|California                                                     |  | 94-1512922                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|1400 SW Fifth Avenue, Suite 900,                               |  | 97201                               
|Portland, OR                                                   |  | (Zip code)                          
|(Address of principal executive offices)                       |  |                                     



Registrants
telephone number, including area code: (503) 833-4000



Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ̈



Indicate 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 November 7, 2003.



1,000 shares of common stock no par value. (All shares are owned by GTN Holdings LLC, a
wholly owned, indirect subsidiary of PG&E Corporation.)



Registrant meets the conditions set forth in General Instruction (H) (1) (a) and (b) of Form 10-Q

and is therefore filing
this Form 10-Q with the reduced disclosure format.



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TABLE OF CONTENTS



|                                                                                                 |  | Page                                                    
|------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------
|PART I.    Financial Information                                                                 |  |                                                         
|                                                                                                 | 
|Item 1.    Condensed Consolidated Financial Statements                                           |  |                                                         
|                                                                                                 |  |                                                         
|                                                                                                 |  | Statements of Condensed Consolidated Income             
|                                                                                                 |  |                                                         
|                                                                                                 |  | Condensed Consolidated Balance Sheets                   
|                                                                                                 |  |                                                         
|                                                                                                 |  | Statements of Condensed Consolidated Common Stock Equity
|                                                                                                 |  |                                                         
|                                                                                                 |  | Statements of Condensed Consolidated Cash Flows         
|                                                                                                 |  |                                                         
|                                                                                                 |  | Notes to Condensed Consolidated Financial Statements    
|                                                                                                 |  |                                                         
|                                                                                                 |  | Note 1:    General                                      
|                                                                                                 |  |                                                         
|                                                                                                 |  | Note 2:    Long-Term Debt                               
|                                                                                                 |  |                                                         
|                                                                                                 |  | Note 3:    Commitments and Contingencies                
|                                                                                                 | 
|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14                                                      
|                                                                                                 | 
|Item 3.    Quantitative and Qualitative Disclosures About Market Risk                            |  | 23                                                      
|                                                                                                 | 
|Item 4.    Controls and Procedures                                                               |  | 23                                                      
|                                                                                                 | 
|PART II.    Other Information                                                                    |  |                                                         
|                                                                                                 | 
|Item 1.    Legal Proceedings                                                                     |  | 24                                                      
|                                                                                                 | 
|Item 5.    Other Information                                                                     |  | 26                                                      
|                                                                                                 | 
|Item 6.    Exhibits and Reports on Form 8-K                                                      |  | 26                                                      
|                                                                                                 | 
|Signatures                                                                                       |  | 28                                                      



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PART I:    FINANCIAL INFORMATION



ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



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Gas Transmission Northwest Corporation

Statements of Condensed Consolidated Income

(Unaudited)



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|                                                      |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|----------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | -
|                                                     
|(In Thousands)                                        |  | 2003                            |        |   | 2002                           |  
|                                                     
|                                                      |  |                                 |        |  
|OPERATING REVENUES:                                   |  |                                 |        |   |                                |  
|Gas transportation                                    |  | $                               | 44,547 |   |                                | $
|Gas transportation for affiliates                     |  |                                 | 14,049 |   |                                |  
|Other                                                 |  |                                 | 273    |   |                                |  
|                                                     
|Total operating revenues                              |  |                                 | 58,869 |   |                                |  
|                                                     
|                                                      |  |                                 |        |  
|OPERATING EXPENSES:                                   |  |                                 |        |   |                                |  
|Administrative and general                            |  |                                 | 6,456  |   |                                |  
|Operations and maintenance                            |  |                                 | 4,398  |   |                                |  
|Depreciation and amortization                         |  |                                 | 12,915 |   |                                |  
|Property and other taxes                              |  |                                 | 3,484  |   |                                |  
|                                                     
|Total operating expenses                              |  |                                 | 27,253 |   |                                |  
|                                                     
|OPERATING INCOME                                      |  |                                 | 31,616 |   |                                |  
|                                                     
|                                                      |  |                                 |        |  
|OTHER INCOME AND (INCOME DEDUCTIONS):                 |  |                                 |        |   |                                |  
|Allowance for equity funds used during construction   |  |                                 | 86     |   |                                |  
|Interest income                                       |  |                                 | 185    |   |                                |  
|Othernet                                             |  |                                 | (4,115 | ) |                                |  
|                                                     
|Total other income and (income deductions)            |  |                                 | (3,844 | ) |                                |  
|                                                     
|                                                      |  |                                 |        |  
|INTEREST EXPENSE:                                     |  |                                 |        |   |                                |  
|Interest on long-term debt                            |  |                                 | 9,789  |   |                                |  
|Allowance for borrowed funds used during construction |  |                                 | (91    | ) |                                |  
|Other interest charges                                |  |                                 | 60     |   |                                |  
|                                                     
|Net interest expense                                  |  |                                 | 9,758  |   |                                |  
|                                                     
|                                                      |  |                                 |        |  
|INCOME BEFORE INCOME TAXES                            |  |                                 | 18,014 |   |                                |  
|                                                      |  |                                 |        |  
|INCOME TAX EXPENSE                                    |  |                                 | 7,123  |   |                                |  
|                                                     
|NET INCOME                                            |  | $                               | 10,891 |   |                                | $
|                                                     



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these statements.



1



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Gas Transmission Northwest Corporation

Condensed Consolidated Balance Sheets

(Unaudited)



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ASSETS

---

|(In Thousands)                                                                                           |  | September 30,2003 |           |   | December 31,2002 |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | -
|                                                                                                        
|                                                                                                         |  |                  
|PROPERTY, PLANT and EQUIPMENT:                                                                           |  |                   |           |   |                  |  
|Property, plant and equipment in service                                                                 |  | $                 | 1,841,008 |   |                  | $
|Accumulated depreciation and amortization                                                                |  |                   | (655,757  | ) |                  |  
|                                                                                                        
|Net plant in service                                                                                     |  |                   | 1,185,251 |   |                  |  
|Construction work in progress                                                                            |  |                   | 14,384    |   |                  |  
|                                                                                                        
|Total property, plant and equipmentnet                                                                  |  |                   | 1,199,635 |   |                  |  
|                                                                                                        
|                                                                                                         |  |                  
|CURRENT ASSETS:                                                                                          |  |                   |           |   |                  |  
|Cash and cash equivalents                                                                                |  |                   | 25,058    |   |                  |  
|Accounts receivablegas transportation (net of allowance for doubtful accounts of $1,406 in each period) |  |                   | 17,047    |   |                  |  
|Accounts receivabletransportation imbalances and fuel                                                   |  |                   | 1,092     |   |                  |  
|Accounts receivableaffiliated companies                                                                 |  |                   | 8,005     |   |                  |  
|Inventories (at average cost)                                                                            |  |                   | 9,091     |   |                  |  
|Note receivableaffiliated company                                                                       |  |                   | 467       |   |                  |  
|Prepayments and other current assets                                                                     |  |                   | 1,906     |   |                  |  
|                                                                                                        
|Total current assets                                                                                     |  |                   | 62,666    |   |                  |  
|                                                                                                        
|                                                                                                         |  |                  
|OTHER NON-CURRENT ASSETS:                                                                                |  |                   |           |   |                  |  
|Income tax related regulatory assets                                                                     |  |                   | 31,526    |   |                  |  
|Deferred charge on reacquired debt                                                                       |  |                   | 6,727     |   |                  |  
|Unamortized debt expense                                                                                 |  |                   | 3,120     |   |                  |  
|Other regulatory assets                                                                                  |  |                   | 4,569     |   |                  |  
|Other                                                                                                    |  |                   | 12,742    |   |                  |  
|                                                                                                        
|Total other non-current assets                                                                           |  |                   | 58,684    |   |                  |  
|                                                                                                        
|                                                                                                         |  |                  
|TOTAL ASSETS                                                                                             |  | $                 | 1,320,985 |   |                  | $
|                                                                                                        



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these statements.



2



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---

Gas Transmission Northwest Corporation

Condensed Consolidated Balance Sheets

(Unaudited)



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CAPITALIZATION AND LIABILITIES

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|(In Thousands)                                                              |  | September 30,2003 |           | December 31,2002
|--------------------------------------------------------------------------- |  | ----------------- | --------- | ----------------
|                                                                           
|                                                                            |  |                  
|CAPITALIZATION:                                                             |  |                   |           |                 
|Common stockno par value, 1,000 shares authorized, issued, and outstanding |  | $                 | 85,474    |                 
|Additional paid-in capital                                                  |  |                   | 245,417   |                 
|Reinvested earnings                                                         |  |                   | 182,809   |                 
|                                                                           
|Total common stock equity                                                   |  |                   | 513,700   |                 
|Long-term debt                                                              |  |                   | 498,087   |                 
|                                                                           
|Total capitalization                                                        |  |                   | 1,011,787 |                 
|                                                                           
|                                                                            |  |                  
|CURRENT LIABILITIES:                                                        |  |                   |           |                 
|Long-term debtcurrent portion                                              |  |                   |          |                 
|Accounts payable                                                            |  |                   | 11,257    |                 
|Accounts payable to affiliates                                              |  |                   | 13,632    |                 
|Accrued interest                                                            |  |                   | 10,383    |                 
|Accrued liabilities                                                         |  |                   | 6,523     |                 
|Accrued taxes                                                               |  |                   | 4,630     |                 
|                                                                           
|Total current liabilities                                                   |  |                   | 46,425    |                 
|                                                                           
|                                                                            |  |                  
|NON-CURRENT LIABILITIES:                                                    |  |                   |           |                 
|Deferred income taxes                                                       |  |                   | 237,633   |                 
|Other                                                                       |  |                   | 25,140    |                 
|                                                                           
|Total non-current liabilities                                               |  |                   | 262,773   |                 
|                                                                           
|                                                                            |  |                  
|COMMITMENTS and CONTINGENCIES (Note 3)                                      |  |                   |          |                 
|                                                                           
|                                                                            |  |                  
|TOTAL CAPITALIZATION AND LIABILITIES                                        |  | $                 | 1,320,985 |                 
|                                                                           



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these statements.



3



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Gas Transmission Northwest Corporation

Statements of Condensed Consolidated Common Stock Equity

(Unaudited)



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|                                 |  | Nine Months EndedSeptember 30, |        
|-------------------------------- |  | ------------------------------ | -------
|                                
|(In Thousands)                   |  | 2003                           |        
|                                
|                                 |  |                               
|BALANCE AT BEGINNING OF PERIOD   |  | $                              | 473,513
|Net income                       |  |                                | 40,187 
|Dividend to parent company       |  |                                |       
|Contribution from parent company |  |                                |       
|                                
|BALANCE AT END OF PERIOD         |  | $                              | 513,700
|                                



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these statements.



4



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Gas Transmission Northwest Corporation

Statements of Condensed Consolidated Cash Flows

(Unaudited)



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|                                                                        |  | Nine Months EndedSeptember 30, |        
|----------------------------------------------------------------------- |  | ------------------------------ | -------
|                                                                       
|(In Thousands)                                                          |  | 2003                           |        
|                                                                       
|                                                                        |  |                               
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |  |                                |        
|Net income                                                              |  | $                              | 40,187 
|Adjustments to reconcile net income to net cash provided by operations: |  |                                |        
|Depreciation and amortization                                           |  |                                | 38,697 
|Deferred income taxes                                                   |  |                                | 10,810 
|Allowance for equity funds used during construction                     |  |                                | (409   
|Changes in operating assets and liabilities:                            |  |                                |        
|Accounts receivablegas transportation and other                        |  |                                | 922    
|Accounts payable and accrued liabilities                                |  |                                | 636    
|Net receivable/payableaffiliates, income taxes and other               |  |                                | (4,751 
|Accrued taxes, other than income                                        |  |                                | 2,437  
|Inventory                                                               |  |                                | (1,041 
|Other working capital                                                   |  |                                | (650   
|Regulatory accruals                                                     |  |                                | 2,157  
|Othernet                                                               |  |                                | (1,809 
|                                                                       
|Net cash provided by operating activities                               |  |                                | 87,186 
|                                                                       
|                                                                        |  |                               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |  |                                |        
|Construction expenditures                                               |  |                                | (8,536 
|Note receivableparent                                                  |  |                                |       
|Allowance for borrowed funds used during construction                   |  |                                | (297   
|                                                                       
|Net cash used in investing activities                                   |  |                                | (8,833 
|                                                                       
|                                                                        |  |                               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                   |  |                                |        
|Repayment of long-term debt                                             |  |                                | (63,916
|Cash dividends paid to parent                                           |  |                                |       
|Equity contribution from parent                                         |  |                                |       
|                                                                       
|Net cash used in financing activities                                   |  |                                | (63,916
|                                                                       
|                                                                        |  |                               
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |  |                                | 14,437 
|                                                                        |  |                               
|CASH AND CASH EQUIVALENTS AT JANUARY 1                                  |  |                                | 10,621 
|                                                                       
|CASH AND CASH EQUIVALENTS AT SEPTEMBER 30                               |  | $                              | 25,058 
|                                                                       
|                                                                        |  |                               
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                      |  |                                |        
|Cash paid for:                                                          |  |                                |        
|Interest                                                                |  | $                              | 23,035 
|Income taxes paid to parent                                             |  | $                              | 21,606 
|                                                                       



The accompanying Notes to Condensed
Consolidated Financial Statements are an integral part of these statements.



5



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Notes to Condensed Consolidated Financial Statements (Unaudited)



NOTE 1:    GENERAL



Organization



Gas Transmission Northwest
Corporation was incorporated in California in 1957 under the name Pacific Gas Transmission Company and later changed its name to PG&E Gas Transmission, Northwest Corporation. On October 6, 2003, the name was changed to Gas Transmission Northwest
Corporation and its parent, formerly known as PG&E National Energy Group, Inc., changed its name to National Energy & Gas Transmission, Inc. (NEGT). Gas Transmission Northwest Corporation is an indirect wholly owned subsidiary of NEGT and is
affiliated with, but is not the same company as, Pacific Gas and Electric Company (the Utility), the gas and electric company regulated by the California Public Utilities Commission (CPUC), which serves northern and central California. PG&E
Corporation is the ultimate corporate parent for both NEGT and the Utility. Gas Transmission Northwest Corporation and its subsidiaries are collectively referred to herein as the Company.



On July 8, 2003, NEGT filed a voluntary petition for relief under the
provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Maryland, Greenbelt Division (Bankruptcy Court) (Case No. 03-30459). In addition, each of the following indirect wholly owned subsidiaries of NEGT
filed a voluntary petition for relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court: NEGT Energy Trading Holdings Corporation (formerly PG&E Energy Trading Holdings Corporation) (Case No.
03-30463), NEGT Energy Trading-Power, L.P. (formerly PG&E Energy Trading-Power, L.P.) (Case No. 03-30461), NEGT Energy TradingGas Corporation (formerly PG&E Energy TradingGas Corporation) (Case No. 03-30464), NEGT ET Investments
Corporation (formerly PG&E ET Investments Corporation) (Case No.03-30462) (collectively, the ET Companies), and USGen New England, Inc. (USGenNE) (Case No. 03-30465). On July 29, 2003, two other NEGT subsidiaries, Quantum Ventures and Energy
Services Ventures, Inc. (formerly PG&E Energy Services Ventures, Inc.), each voluntarily filed petitions in the Bankruptcy Court for protection under Chapter 11 of the U.S. Bankruptcy Code. The Chapter 11 case of USGenNE will be administered
separately from the Chapter 11 cases of NEGT and the other subsidiaries. Pursuant to Chapter 11 of the Bankruptcy Code, NEGT and these subsidiaries retain control of their assets and are authorized to operate their businesses as debtors in
possession while being subject to the jurisdiction of the Bankruptcy Court. Gas Transmission Northwest Corporation has not filed for bankruptcy and does not anticipate doing so.



The Companys immediate parent is GTN Holdings LLC (GTNH). GTNH was established in December 2000 in a
ringfencing action to comply with rating agency criteria to separate a subsidiary from its parent and affiliates. As a result of this ringfencing action, GTNH may not declare or pay dividends unless its Board of Control (including at
least one independent director) has unanimously approved such dividends, and 1) GTN Holdings LLC, on a consolidated basis with the Company, maintains a debt coverage ratio of not less than 2.25:1 and a leverage ratio of not greater than 0.70:1,
after giving effect to the dividend, or 2) the Companys credit rating is at least BBB+ (or its equivalent) with Standard and Poors (S&P) and at least Baa1 with Moodys Investors Service (Moodys). In addition, unanimous
board approval would be required, including that of the independent member(s), to put the Company into bankruptcy.



In conjunction with the NEGT Chapter 11 filing, members of the Boards of Directors of both NEGT and the Company who were employed by PG&E Corporation
have resigned and have been replaced. As disclosed in a recent Company Current Report on Form 8-K, on July 8, 2003, the president of the Company resigned from his position as president and as a director of the Company, and the other directors
resigned as directors of the Company, simultaneously with their resignations from similar posts at NEGT. On that same date, new directors were elected and a new Company president was appointed. Under the proposed plan of reorganization NEGT filed
with the Bankruptcy Court, if confirmed by the Bankruptcy Court and implemented, PG&E Corporation would no longer have any equity interest in NEGT or the Company.



6



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Basis of Presentation



The accompanying unaudited condensed consolidated financial statements, which have been prepared in accordance with interim period reporting requirements,
reflect the results for Gas Transmission Northwest Corporation and its wholly owned subsidiaries which include North Baja Pipeline, LLC; Pacific Gas Transmission Company; Gas Transmission Service Company, LLC (formerly known as PG&E Gas
Transmission Service Company LLC); Pacific Gas Transmission International, Inc.; and a 50 percent interest in a joint venture known as Stanfield Hub Services, LLC.



The accompanying unaudited consolidated financial statements and information disclosed in this Quarterly Report on Form 10-Q
should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data in the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.



In the opinion of
management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary to present a fair statement of the financial position and results of operations for the interim periods. All material adjustments are of a
normal recurring nature unless otherwise disclosed in this Quarterly Report on Form 10-Q. Intercompany accounts and transactions have been eliminated. Prior year amounts in the consolidated financial statements have been reclassified where necessary
to conform to the 2003 presentation. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year.



The acquisition of North Baja Pipeline, LLC during 2002, for reporting purposes, was treated in a manner similar to a pooling of interests as required for
such transactions between affiliates under common control as described in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2002. This Quarterly Report on Form 10-Q accordingly reflects the 2002 statement of
financial position, results of operations and cash flows of the consolidated reporting entity adjusted as necessary to reflect the inclusion of North Baja Pipeline, LLC.



Related Party Transactions



Credit Support for Affiliates



The Companys Board of Directors, in December 2000, authorized the Company to execute and deliver guarantees to support obligations of NEGT Energy
Trading Holdings Corporation and the Company entered into a Credit Support Agreement with NEGT Energy Trading Holdings Corporation. This Credit Support Agreement was terminated on October 18, 2002, although certain guarantees existing prior to
October 18, 2002, as described below, remain in effect.



Guarantees In Support of Trading ActivitiesAt September 30, 2003, guarantees in support of trading activities, on behalf of NEGT Energy Trading Holdings Corporation and certain of its subsidiaries (collectively, the NEGT Energy
Trading Entities), with a face value of $175.7 million were outstanding with an estimated overall net exposure of $12.5 million. At December 31, 2002, guarantees on behalf of the NEGT Energy Trading Entities with a face value of $364.4 million were
outstanding with an estimated overall net exposure of $37.4 million. The estimated net exposure is comprised of the amount of outstanding guarantees directly supporting underlying transactions, net of offsetting positions, cash, and other
collateral.



On July 14, 2003, J. Aron & Company issued a
payment demand to the Company under an existing guarantee on behalf of certain NEGT Energy Trading Entities in an aggregate amount of $1.2 million. On July 16, 2003, Morgan Stanley Capital Group Inc. issued a payment demand to the Company under
an existing guarantee in an aggregate amount of $4.4 million. The Company is evaluating these demands and has recorded a charge for its current estimated liability under the guarantees. To the extent that any payments may ultimately become due under
these guarantees, the Company anticipates it will have a claim against the NEGT Energy Trading Entities to the extent of such payment, but has not recorded a credit for any such claim.



7



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Guarantees in Support of Tolling AgreementsThe Company provided a guarantee to Liberty
Electric Power, LLC (Liberty) which guaranteed certain obligations of NEGT Energy TradingPower, LP (ET Power), a subsidiary of NEGT Energy Trading Holdings Corporation, related to a tolling agreement (the Liberty Toll) between ET Power and
Liberty. The face amount of the guarantee at September 30, 2003 is $140 million, declining by $10 million annually each April. On July 22, 2003, Liberty issued a demand on the Company under the guarantee for $4.4 million, relating to amounts
allegedly owed by ET Power, prior to the bankruptcy filing of ET Power. On August 21, 2003, Liberty issued demands on the Company for $140.0 million, relating to Libertys rejection claim against ET Power for $176.8 million, and for an
additional $1.0 million, allegedly owed by ET Power, prior to the bankruptcy filing of ET Power. The Company has disputed these demands.



On September 11, 2003, Liberty filed two suits against the Company in United States District Court in Texas. For further information regarding the legal
actions in this matter, see Note 3: Commitments and ContingenciesLegal Matters below.



Whether and to the extent either Liberty or ET Power may be found liable for termination payments under the Liberty Toll is subject to dispute. If
liability is established and ET Power is responsible for termination payments to Liberty, the Company will be the primary guarantor for any amounts due to Liberty. If the Company becomes directly liable under the guarantee for substantial
termination payments under the Liberty Toll, such liability could have a material adverse effect on its financial condition, results of operations, or cash flows.



Recovery of amounts paid as a result of Credit Support for AffiliatesIn the event the Company ultimately pays
any counterparty as guarantor for obligations of any bankrupt NEGT entity, the Company will have a claim against such NEGT entity, and intends to diligently pursue collection of such claims.



Other Related Party Activity



On April 6, 2001, the Utility filed a voluntary petition for relief under
the provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California. Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility retains control of its assets and is authorized to operate
its business as a debtor-in-possession while being subject to the jurisdiction of the Bankruptcy Court for the Northern District of California.



The Utility and PG&E Corporation initially filed a proposed plan of reorganization for the Utility (the Initial Plan) that entailed separating the
Utility into four distinct businesses. The Initial Plan did not directly affect the Company, except that the Company has executed an agreement to sell to a subsidiary of the Utility approximately 2.66 miles of 42-inch and 36-inch mainline pipe from
the Companys southernmost Oregon meter station to the Oregon-California border, conditioned on approval of the Initial Plan and authorization from the Federal Energy Regulatory Commission (FERC or Commission) requesting approval to effectuate
the sale.



Under a revised proposed plan of reorganization (the
Revised Plan), the Utility would remain a vertically integrated utility subject to the jurisdiction of the CPUC. Under the Revised Plan, the Company will not consummate the sale of pipe to the Utility as contemplated by the Initial Plan. The Revised
Plan does not directly affect the Company.



The Utility is the
Companys largest customer, accounting for approximately 20 percent of its transportation revenues for the past several years. As a result of the Utilitys Chapter 11 filing on April 6, 2001, $2.9 million due from the Utility for
transportation services as of that date remains outstanding pending the implementation of the Revised Plan. In accordance with the Companys FERC Tariff provisions, the Utility has provided assurances in the form of a cash deposit in the amount
of $14.2 million to support its position as a shipper on the Companys pipeline in the Pacific Northwest. The Company accrued $0.1 million in interest expense related to the cash deposit from the Utility during the nine-month periods ended
September 30, 2003 and 2002. The Utility is current on all subsequent obligations incurred for the transportation services provided by the Company and has indicated its intention to remain current. The Revised Plan contemplates that the Utility will
pay all its legitimate debts with interest. The Company anticipates that the Utility will pay the outstanding $2.9 million plus interest at the conclusion of its bankruptcy proceedings.



8



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During the three-month period ended September 30, 2003, the Company provided transportation services to
the Utility and the Companys other affiliates, in the normal course of business, which accounted for $14.0 million of the Companys transportation revenues. On a nine-month basis ending September 30, 2003, the Company provided
transportation services to the Utility and the Companys other affiliates, in the normal course of business, which accounted for $43.1 million of the Companys transportation revenues. During the three-month period ended September 30,
2002, the Company provided transportation services to the Utility and the Companys other affiliates, in the normal course of business, which accounted for $10.7 million of the Companys transportation revenues. On a nine-month basis
ending September 30, 2002, the Company provided transportation services to the Utility and the Companys other affiliates, in the normal course of business, which accounted for $33.0 million of the Companys transportation revenues.



The Company is charged by NEGT and other affiliates for
services such as legal, tax, treasury, human resources, and other administrative functions, and for other costs incurred on the Companys behalf, including, but not limited to, employee benefit costs and property and liability insurance costs.
Previous to the NEGT bankruptcy filing, certain of these costs were also charged to the company by PG&E Corporation. Following NEGTs bankruptcy filing, the only costs charged to the Company by PG&E Corporation are costs incurred on the
Companys behalf for employee benefits costs. The charges for these costs are based on direct assignment to the extent practicable or by using allocation methods that the Company believes are reasonable reflections of the utilization of
services provided to or for the benefits received by the Company. For the three-month period ended September 30, 2003, the Company has reflected $3.1 million in its operating expenses for administrative charges from affiliates. During the comparable
period of 2002 the Company reflected $2.6 million in its operating expenses for administrative charges from affiliates. For the nine-month period ended September 30, 2003, the Company has reflected $9.4 million in its operating expenses for
administrative charges from affiliates. Comparable administrative charges from affiliates reflected in operating expenses during the first nine months of 2002 amounted to $9.1 million.



Adoption of New Accounting Policies



Except as disclosed below, the Company is following the same accounting principles discussed in its 2002 Annual Report on Form 10-K.



Guarantors Accounting and Disclosure Requirements for Guarantees



The Company adopted Financial Accounting Standards
Board (FASB) Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others(FIN 45) in the fourth quarter of 2002. FIN 45 elaborates on
existing disclosure requirements for most guarantees in interim and annual financial statements. It also clarifies that at the time a company issues a guarantee, it must recognize a liability for the fair value of the obligation it assumes under
that guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that specified triggering events or conditions occur. FIN 45s disclosure requirements are effective for periods ending after
December 15, 2002, and the recognition and measurement provisions are to be prospectively applied to guarantees issued or modified after December 31, 2002.



As described in Note 1, the Company issued guarantees related to the trading activities of a related party prior to December 31, 2002. The Companys
disclosures with respect to these outstanding guarantees reflect the FIN 45 disclosure requirements. No guarantees have been issued or modified subsequent to December 31, 2002. Accordingly, the FIN 45 recognition and measurement provisions have had
no impact on the Companys Consolidated Financial Statements.



Accounting for Costs Associated with Exit or Disposal Activities



On January 1, 2003 the Company adopted Statement of Financial Accounting Standard (SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses
accounting for



9



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restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (EITF 94-3). Under EITF 94-3, a liability for an exit cost was recognized at the date of the companys
commitment to an exit plan if certain other criteria were met. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that the
liability initially should be measured and recorded at fair value. The adoption of this Statement did not affect the Companys Consolidated Financial Statement. However, its provision may affect the amount and the timing of recognizing future
restructuring costs.



Accounting for Asset Retirement Obligations



On January 1, 2003, the Company adopted SFAS No. 143,
Accounting for Asset Retirement Obligations.The Statement requires that an asset retirement obligation be recorded at fair value in the period in which it is incurred, if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount of the related long-lived asset. In each subsequent period, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life
of the long-lived asset. Rate-regulated entities may recognize regulatory assets or liabilities as a result of timing differences between the recognition of costs as recorded in accordance with this statement and costs recovered through the
ratemaking process. Regulatory assets and liabilities may be recorded when it is probable that the asset retirement costs will be recovered through the ratemaking process.



The Company has not recognized any asset retirement obligation associated with its gas transmission facilities because a
reasonable estimate of fair value cannot be made regarding the timing of any asset retirements. The Company collects estimated removal costs in rates through depreciation in accordance with regulatory treatment. These amounts do not represent SFAS
No. 143 asset retirement obligations and will continue to be recorded within accumulated depreciation. The Company estimated the related removal costs accrued within accumulated depreciation were approximately $12.0 million on September 30, 2003.



Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity



On July 1, 2003, the
Company adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The Statement addresses concerns of how to measure and classify in the statement of financial position
certain financial instruments that have characteristics of both liabilities and equity. Freestanding financial instruments including mandatorily redeemable financial instruments, obligations to repurchase an issuers equity shares by
transferring assets, and certain obligations to issue a variable number of shares, must be valued and classified as liabilities. Adjustments to the July 1 carrying value of instruments, which were created prior to the issuance date of the Statement,
if any, would be recorded as a cumulative effect of a change in accounting principles. The adoption of SFAS No. 150 had no impact on the Companys Consolidated Financial Statements.



Determining Whether an Arrangement Contains a Lease



The Company adopted the provisions of EITF 01-8, Determining whether an Arrangement Contains a Lease
(EITF 01-8), effective July 1, 2003. EITF 01-8 establishes criteria to be applied to any new or modified agreement in order to ascertain if such agreement is in effect a lease, and subject to lease accounting treatment and disclosure requirements
principally found in SFAS No. 13, Accounting for Lease (SFAS No. 13). EITF 01-8 is effective for all new or modified arrangements entered into as of July 1, 2003. The adoption of EITF 01-8 had no impact on the Companys
Consolidated Financial Statements.



Amendment of Statement
133 on Derivative Instruments and Hedging Activities



The Company adopted SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS No. 149), effective July 1, 2003. SFAS No. 149 amends and clarifies the accounting and
reporting for derivative instruments, including certain derivatives embedded in other



10



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contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the
characteristics of a derivative according to SFAS No. 133 and when a derivative contains a financing component that warrants special reporting in the statement of cash flows. The provisions of the Statement that relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates.



The adoption of SFAS No. 149 had no impact on the Companys Consolidated Financial Statements.



Accounting Pronouncements Issued But Not Yet Adopted



Changes to Accounting for Certain Derivative Contracts



In June 2003, the FASB issued a new Derivatives Implementation Group (DIG)
interpretation of SFAS No. 133, Issue No. C20,Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature (DIG C20). DIG C20 specifies
additional circumstances under which price adjustment features, such as those based on broad market indices, in a derivative contract would not be an impediment to qualifying for the normal purchases and normal sales scope exception under SFAS No.
133. The adoption of this Issue, which is anticipated to occur in the fourth quarter of 2003, is not expected to impact the Companys Consolidated Financial Statements.



Consolidation of Variable Interest Entities



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities(FIN 46), which expands upon existing accounting guidance addressing when a company should include in its financial statements the assets, liabilities, and activities of another entity or arrangement with which it is involved. A
variable interest entity is an entity that does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties or an entity where equity
investors lack the essential characteristics of a controlling financial interest. The Company is currently assessing the impact, if any, of FIN 46 on its Consolidated Financial Statements.



The consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. There were no new variable interest entities created by the Company between February 1, 2003, and September 30, 2003. The consolidation requirements related to entities or arrangements existing
before February 1, 2003 were originally effective July 1, 2003. However, due to implementation issues, the FASB deferred the implementation until the fourth quarter of 2003. The Company is evaluating the impacts of FIN 46s initial recognition,
measurement, and disclosure provisions on the Consolidated Financial Statements.



NOTE 2:    LONG-TERM DEBT



Credit Ratings



On July 8, 2003, S&P
lowered its senior unsecured debt rating for the Company to CC from CCC and removed the rating from CreditWatch. S&P stated that the Companys rating was lowered to reflect a differential between a rating on a
ring-fenced entity and its parent; in this case, NEGT, which filed for bankruptcy protection. S&P explained that



[w]hile GTN benefits from the legal protection of various structural enhancements that allow Standard & Poors to rate it
primarily on its own merits, it guarantees several obligations of its energy trading affiliate which, if demanded, may be difficult to fund and may result in GTN seeking protection from its creditors.



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On July 9, 2003, Moodys downgraded its senior unsecured debt rating for the Company to
B2 from B1, with a negative outlook. Moodys stated that



the downgrade and negative outlook for GTNs rating incorporate GTNs affiliation with a bankrupt entity and the
contingent liabilities from its guarantees of the trading and tolling obligations of [NEGT] Energy Trading Holdings Corporation (ET), [NEGT]s energy trading subsidiary which is in bankruptcy. However, GTNs ratings also recognize certain
protections provided its creditors by its ring-fenced structure and covenants that limit the level of dividends that can be paid to [NEGT] and require unanimous board approval, including that of an independent member, to put GTN into bankruptcy. GTN
enjoys a sound stand-alone financial profile, and Moodys believes that it has sufficient debt and borrowing capacity to finance a reasonable range of liquidity calls that could materialize out of these guarantees.



At September 30, 2003, the Companys senior unsecured debt rating from
S&P remains at CC and the Companys senior unsecured debt rating from Moodys remains at B2.



These rating changes have not increased the Companys costs to borrow money under its three year $125.0 million corporate credit facility pursuant to
a credit agreement dated as of May 2, 2002 (Credit Agreement).



Debt
Financing



The Company entered into a three-year $125.0
million Credit Agreement dated as of May 2, 2002. The interest rate on the facility is based on the London Interbank Offer Rate plus a credit spread. The credit spread corresponds to a rating issued from time to time by S&P or Moodys on
the Companys senior unsecured long-term debt and was 1.45 percent at September 30, 2003. There were no outstanding borrowings under the Credit Agreement at September 30, 2003.



On June 6, 2002, the Company issued $100.0 million of 6.62 percent Senior Notes due June 6, 2012, pursuant to a Note
Purchase Agreement dated June 6, 2002 (Note Purchase Agreement).



At September 30, 2003, the Company also had outstanding $400.0 million of debt (principal amount exclusive of unamortized discount) that was issued in 1995.



The Credit Agreement and the Note Purchase Agreement each contain a covenant which limits total debt to no greater than 70.0
percent of total capitalization. In addition, certain covenants and conditions contained in the debt agreements are monitored by the Company on an ongoing basis. At September 30, 2003, the total debt to total capitalization ratio, as defined in the
agreements, was 49.2 percent and the Company was in compliance with all terms and conditions of its debt agreements.



NOTE 3:    COMMITMENTS AND CONTINGENCIES



Credit Support



See
Related Party Transactions in Note 1: General above, regarding a credit support agreement and guarantees issued to certain affiliates.



Legal Matters



In addition to the following legal proceeding, the Company is subject to routine litigation incidental to its business.



Liberty MatterThis litigation is the result of two
lawsuits filed against the Company in Federal District Court relating to a guarantee issued by the Company in support of an affiliates obligations under an agreement with Liberty. Specifically, the Company provided a guarantee to Liberty which
guaranteed certain obligations of ET Power related to the Liberty Toll between ET Power and Liberty.



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On July 8, 2003, ET Power filed a motion with the Bankruptcy Court to reject the Liberty Toll. By orders
dated August 6 and August 8, 2003, the Bankruptcy Court granted the motion to reject, and provided a process by which ET Power and Liberty would exchange their respective calculations of any amounts owed between the parties and of the valuation of
the rejected portion of the Liberty Toll. The order also provided that the Bankruptcy Court would retain jurisdiction to hear and determine all matters related to the Agreement.



On July 30, 2003, Liberty sent ET Power a letter with an attachment purporting to show that ET Power owes Liberty $176.8
million as a termination payment for the rejection of the Agreement. Liberty also sent the Company demands under the guarantee for $5.4 million (relating to amounts allegedly owed by ET Power pre-petition) and for $140.0 million (the maximum
guarantee amount relating to Libertys rejection claim against ET Power). The Company responded by letter to Liberty disputing that any amounts are due under the guarantee because (i) the amount due Liberty for the termination payment from ET
Power is in dispute and (ii) ET Powers possible right to setoff pre-petition claims by Liberty against amounts potentially owed by Liberty to ET Power may negate any Liberty pre-petition claims against ET Power. Consequently, the Company has
asserted that, at this time, it has no liability under the guarantee to Liberty.



On September 11, 2003, Liberty filed two suits against the Company in United States District Court in Texas. One suit seeks the Companys payment of $140.0 million to Liberty under the guarantee associated with
Libertys purported rejection damages. The second suit seeks $5.4 million from the Company under the guarantee related to tolling payments that ET Power allegedly failed to make prior to ET Powers bankruptcy. These suits recently were
served on the Company and the Company has not yet filed any answer or responsive pleading.



On September 23, 2003, ET Power provided Liberty its termination payment calculation pursuant to the Agreement and the rejection order. That calculation shows ET Power to be owed approximately $108.0 million under the
Liberty Toll. On the same date, ET Power, along with NEGT and the Company, filed an adversary proceeding against Liberty in Bankruptcy Court. That lawsuit seeks declaratory relief, injunctive relief and damages. The debtors seek (i) a declaration
that the automatic stay of the NEGT bankruptcy extends to stay the actions in the two suits; (ii) an injunction against Liberty enjoining it from pursuing its litigation against the Company until the claims are resolved between ET Power and Liberty;
and (iii) damages of over $100.0 million from Liberty resulting from the rejection of the Agreement. Liberty has not filed any answer or responsive pleadings.



It is not now possible to assess the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Management of the Company
intends to pursue the claims they may have against Liberty in this matter and to vigorously defend against any potential claims asserted by Liberty.



Natural Gas Royalties Complaint



This litigation involves the consolidation of approximately 77 False Claims Act cases filed in various federal district courts by Jack J. Grynberg (called
a relator in the parlance of the False Claims Act) on behalf of the United States of America against more than 330 defendants, including the Company. The cases were consolidated for pretrial purposes in the U.S. District Court, for the District of
Wyoming. The current case grows out of prior litigation brought by the same relator in 1995 that was dismissed in 1998.



Under procedures established by the False Claims Act, the United States (acting through the Department of Justice (DOJ)) is given an opportunity to
investigate the allegations and to intervene in the case and take over its prosecution if it chooses to do so. In April 1999, the DOJ declined to intervene in any of the cases.



The complaints allege that the various defendants (most of which are pipeline companies or their affiliates) mismeasured the
volume and heating content of natural gas produced from federal or Indian leases. As a result, the relator alleges that the defendants underpaid, or caused others to underpay, the royalties that were due to the United States for the production of
natural gas from those leases.



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The complaints do not seek a specific dollar amount or quantify the royalties claim. The complaints seek
unspecified treble damages, civil penalties, and expenses associated with the litigation.



The Company believes the allegations to be without merit and intends to present a vigorous defense. The Company is unable to predict the outcome of this matter.



ITEM 2.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



GENERAL



The accompanying unaudited consolidated financial statements and information disclosed in this Quarterly Report on Form 10-Q should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data, in Gas Transmission Northwest Corporations Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.



The accompanying
unaudited condensed consolidated financial statements, which have been prepared in accordance with interim period reporting requirements, reflect the results for Gas Transmission Northwest Corporation and its wholly owned subsidiaries which include
North Baja Pipeline, LLC; Pacific Gas Transmission Company; Gas Transmission Service Company, LLC (formerly known as PG&E Gas Transmission Service Company LLC); Pacific Gas Transmission International, Inc.; and a 50 percent interest in a joint
venture known as Stanfield Hub Services, LLC. Gas Transmission Northwest Corporation and its subsidiaries are collectively referred to herein as the Company.



In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary
to present a fair statement of the financial position and results of operations for the interim periods. All material adjustments are of a normal recurring nature unless otherwise disclosed in this Quarterly Report on Form 10-Q. Intercompany
accounts and transactions have been eliminated. Prior year amounts in the consolidated financial statements have been reclassified where necessary to conform to the 2003 presentation. Results of operations for interim periods are not necessarily
indicative of results to be expected for a full year.



The
acquisition of North Baja Pipeline, LLC during 2002, for reporting purposes, was treated in a manner similar to a pooling of interests as required for such transactions between affiliates under common control as described in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2002. This Quarterly Report on Form 10-Q accordingly reflects the 2002 statement of financial position, results of operations and cash flows of the consolidated reporting entity
adjusted as necessary to reflect the inclusion of North Baja Pipeline, LLC.



On October 6, 2003, the Company changed its name from PG&E Gas Transmission, Northwest Corporation to Gas Transmission Northwest Corporation. The Company is an indirect wholly owned subsidiary of National Energy
& Gas Transmission, Inc. (NEGT), which on that same date changed its name from PG&E National Energy Group, Inc. The Company is affiliated with, but is not the same company as, Pacific Gas and Electric Company (the Utility), the gas and
electric company regulated by the California Public Utilities Commission, which serves northern and central California. PG&E Corporation is the ultimate corporate parent for both NEGT and the Utility.



On July 8, 2003, NEGT filed a voluntary petition for relief under the
provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Maryland, Greenbelt Division (Bankruptcy Court) (Case No. 03-30459). In addition, each of the following indirect wholly owned subsidiaries of NEGT
filed a voluntary petition for relief under the provisions of Chapter 11 of the U.S. Bankruptcy Code in the Bankruptcy Court: NEGT Energy Trading Holdings Corporation (formerly PG&E Energy Trading Holdings Corporation) (Case No.
03-30463), NEGT Energy Trading-Power, L.P. (formerly PG&E Energy Trading-Power, L.P.) (Case No. 03-30461), NEGT Energy TradingGas Corporation



14



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(formerly PG&E Energy TradingGas Corporation) (Case No. 03-30464), NEGT ET Investments Corporation (formerly PG&E ET Investments Corporation)
(Case No.03-30462) (collectively, the ET Companies), and USGen New England, Inc. (USGenNE) (Case No. 03-30465). On July 29, 2003, two other NEGT subsidiaries, Quantum Ventures and Energy Services Ventures, Inc. (formerly PG&E Energy Services
Ventures, Inc.), each voluntarily filed petitions in the Bankruptcy Court for protection under Chapter 11 of the U.S. Bankruptcy Code. The Chapter 11 case of USGenNE will be administered separately from the Chapter 11 cases of NEGT and the other
subsidiaries. Pursuant to Chapter 11 of the Bankruptcy Code, NEGT and these subsidiaries retain control of their assets and are authorized to operate their businesses as debtors in possession while being subject to the jurisdiction of the Bankruptcy
Court. Gas Transmission Northwest Corporation has not filed for bankruptcy and does not anticipate doing so.



The Companys immediate parent is GTN Holdings LLC (GTNH). GTNH was established in December 2000 in a ringfencing action to comply with
rating agency criteria to separate a subsidiary from its parent and affiliates. As a result of this ringfencing action, GTNH may not declare or pay dividends unless its Board of Control (including at least one independent director) has unanimously
approved such dividends, and 1) GTN Holdings LLC, on a consolidated basis with the Company, maintains a debt coverage ratio of not less than 2.25:1 and a leverage ratio of not greater than 0.70:1, after giving effect to the dividend, or 2) the
Companys credit rating is at least BBB+ (or its equivalent) with Standard and Poors (S&P) and at least Baa1 with Moodys Investors Service (Moodys). In addition, unanimous board approval would be required, including that
of the independent member(s), to put the Company into bankruptcy.



In conjunction with the NEGT Chapter 11 filing, members of the Boards of Directors of both NEGT and the Company who were employed by PG&E Corporation have resigned and have been replaced. As disclosed in a recent Company Current Report
on Form 8-K, on July 8, 2003, thepresident of the Company resigned from his position as president and as a director of the Company, and the other directors resigned as directors of the Company, simultaneously with their resignations from similar posts at NEGT. On
that same date, new directors were elected and a new Company president was appointed. Under the proposed plan of reorganization NEGT filed with the Bankruptcy Court, if confirmed by the Bankruptcy Court and implemented, PG&E Corporation would no
longer have any equity interest in NEGT or the Company.



PIPELINE
OPERATIONS



Gas Transmission Northwest Corporation is
a natural gas pipeline company that owns and operates two pipeline systemsthe system in the Pacific Northwest, which has been in operation and under control of the Company, or its predecessors, since inception in 1957, referred to herein as
the GTN Pipeline system, or GTN, and the North Baja Pipeline (NBP) system, which is owned by North Baja Pipeline, LLC.



The pipeline systems owned and operated by the Company are interstate, open-access pipeline systems that transport natural gas for third party shippers,
on a nondiscriminatory basis. All natural gas transportation services that the Company provides are regulated by the Federal Energy Regulatory Commission (FERC, or Commission) and aspects of the operations, primarily related to safety, are regulated
by the U.S. Department of Transportation.



GTN PipelineThe
GTN Pipeline system extends from a point near Kingsgate, British Columbia, on the British Columbia-Idaho border, to a point near Malin, Oregon, on the Oregon-California border, traversing Idaho, Washington, and Oregon. The natural gas that is
transported comes primarily from supplies in Canada for customers located in the Pacific Northwest, Nevada, and California. Customers are principally local retail gas distribution utilities, electric generators that utilize natural gas to generate
electricity, natural gas marketing companies that purchase and resell natural gas to utilities and end-use customers, natural gas producers, and industrial companies.



North Baja PipelineThe NBP system extends from a point near Ehrenberg, Arizona to a point near Ogilby, California, on
the CaliforniaBaja California, Mexico border. The natural gas that is transported comes primarily from supplies in the southwestern United States for markets in northern Baja California, Mexico. Customers are principally electric generators
that utilize natural gas to generate electricity.



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RISK FACTORS



The information in this Quarterly Report on Form 10-Q, including this discussion and analysis, contains forward-looking statements that are necessarily
subject to various risks and uncertainties. Use of words like anticipate, estimate, intend, project, plan, expect, will, believe, could, and
similar expressions help identify forward-looking statements. These statements are based on current expectations and assumptions which management believes are reasonable and on information currently available to management. Actual results could
differ materially from those contemplated by the forward-looking statements. Although management believes that the expectations reflected in the forward looking statements are reasonable, future results, events, levels of activity, performance, or
achievements cannot be guaranteed. Although management is not able to predict all the factors that may affect future results, some of the factors that could cause future results to differ materially from those expressed or implied by the
forward-looking statements, or historical results include:



Efforts of
Parent and Affiliates to Reorganize under Chapter 11 of the U.S. Bankruptcy Code.    The Companys future financial condition, results of operations, and cash flows may be affected by:



| |  |  | the outcome of NEGT and certain of its subsidiaries bankruptcy proceedings, and the effect of such actions on the Company; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of the Utility bankruptcy proceedings on the Company.
| | - |  | ----------------------------------------------------------------



Operational Risks.    The Companys future financial condition, results of operations, and cash flows may be affected by:



| |  |  | the extent to which the Companys current or planned development and maintenance of pipeline projects are completed and the pace and cost of that completion, including the
extent to which commercial operations of these development projects are delayed or prevented because of financial or liquidity constraints or by various development and construction risks such as the Companys failure to obtain necessary
permits or equipment, the failure of third-party contractors to perform their contractual obligations, or the failure of necessary equipment to perform as anticipated; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future transportation capacity contract levels which are affected by general economic and financial market conditions and changes in interest rates, among other factors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Current Conditions in the Energy Markets and the
Economy.    The Companys future financial condition, results of operations, and cash flows may be affected by changes in the general economy, wars, embargoes, financial markets, interest rates, other industry
participant failures, the markets perception of energy merchants, and other factors:



| |  |  | the volatility of commodity fuel and electricity prices and the spread between them (which may result from a variety of factors, including: weather; the supply of and demand for
energy commodities; the availability of competitively priced alternative energy sources; the level of production and availability of natural gas, crude oil, and coal; transmission or transportation constraints; federal and state energy and
environmental regulation and legislation; the degree of market liquidity; natural disasters, wars, embargoes, and other catastrophic events); any resulting increases in the cost of producing power and decreases in prices of power sold, and whether
the Companys strategies to manage and respond to such volatility are successful; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent and timing of electric generation, pipeline, and storage expansion and retirement by others.
| | - |  | -------------------------------------------------------------------------------------------------------



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Actions of Counterparties.    The Companys financial condition, results of operations,
and cash flows may be affected by:



| |  |  | the financial condition of affiliates for whom the Company has provided credit support and the extent to which counterparties of such affiliates seek recourse via the credit support
provided by the Company; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which any counterparty defaults on its transportation contracts with GTN or NBP.
| | - |  | ----------------------------------------------------------------------------------------------



Accounting and Risk Management.    The Companys future financial condition, results of operations, and cash
flows may be affected by:



| |  |  | the effect of new accounting pronouncements;
| | - |  | --------------------------------------------



| |  |  | changes in critical accounting policies or estimates;
| | - |  | -----------------------------------------------------



| |  |  | the effectiveness of the Companys risk management policies and procedures; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | heightened rating agency criteria and the impact of changes in the Companys credit ratings and its ability to obtain financing for scheduled debt maturities in 2005 and
planned development projects.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Legislative and Regulatory
Matters.    The Companys business may be affected by:



| |  |  | legislative or regulatory changes affecting the electric and natural gas industries in the United States, including the pace and extent of efforts to restructure the electric and
natural gas industries;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | heightened regulatory and enforcement agency focus on the energy business with the potential for changes in industry regulations and in the treatment of the Company by state and
federal agencies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in or application of federal, state, and local laws and regulations to which the Company and its subsidiaries and the projects in which the Company invests are subject; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in or application of Canadian and Mexican laws, regulations, and policies which may impact the Company.
| | - |  | ---------------------------------------------------------------------------------------------------------------



Pending Litigation and Environmental Matters.    The
Companys future financial condition, results of operations, and cash flows may be affected by:



| |  |  | the effect of compliance with existing and future environmental and safety laws, regulations, and policies, the cost of which could be significant; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the outcome of pending or future litigation and environmental matters.
| | - |  | ----------------------------------------------------------------------



LIQUIDITY AND CAPITAL RESOURCES



As of September 30, 2003 the Company had $25.1 million in cash and cash equivalents. As of December 31, 2002, the comparable cash and cash equivalent
amount was $10.6 million.



Sources of
CapitalHistorically, the Companys capital requirements have been funded primarily from cash provided by operations, external financing, and capital contributions from its parent company. The Company has paid dividends as part of
a balanced approach to managing its capital structure, funding its operations and capital expenditures, and maintaining appropriate cash balances.



The Company has $125.0 million of borrowing capacity available under a three-year corporate credit facility pursuant to a credit agreement dated as of May
2, 2002 (Credit Agreement). The interest rate on the facility is based on the London Interbank Offer Rate plus a credit spread of currently 1.45 percent. The credit spread corresponds to a rating issued from time to time by S&P or Moodys
on the Companys senior unsecured long-term debt. At September 30, 2003, there were no outstanding borrowings under the Credit Agreement.



17



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Net Cash Provided by Operating ActivitiesFor the nine months ended September 30,
2003, net cash provided by operating activities was $87.2 million, compared with $93.5 million for the same period in 2002. During 2003, the Company made payments to affiliates for accrued income taxes in the amount of $21.6 million, compared to
$16.5 million in 2002. While net income was $16.1 million lower in 2003 than 2002, depreciation expense increased $4.8 million and Allowance for Funds Used During Construction (AFUDC) equity income, a credit to income, decreased by $9.4 million,
year over year. Higher levels of depreciable assets in service in 2003 resulted from the completion of the 2002 expansion. The reduction of AFUDC was due to the completion of the North Baja Pipeline construction that occurred during 2002. The
increase in an income tax related regulatory asset related to AFUDC equity on NBP during 2002 contributed $4.0 million to the changes in regulatory assets and liabilities providing $6.6 million more in cash flow in 2003 than in 2002. Lower income
tax liabilities and higher income taxes paid to affiliates in 2003 have caused a net year over year decline of $11.3 million in cash flow from net receivables/payable  affiliates for income taxes and other.



Net Cash Used in Investing ActivitiesFor the nine months
ended September 30, 2003, compared to the same period in 2002, net cash used in investing activities decreased by $68.9 million. During 2002 the Company had two significant expansion projects underway which are now fully completed: the 2002
expansion project on GTN and the North Baja Pipeline project. AFUDC on borrowed funds decreased in 2003, when compared to 2002, as a result of the lower levels of construction activity underway in 2003. In the second quarter of 2002, the Company
received payment of $75.0 million that was previously loaned to PG&E Corporation.



System Expansion and Business DevelopmentThe Company regularly solicits expressions of interest for the acquisition or development of additional pipeline capacity and may
develop additional firm transportation capacity as sufficient demand is demonstrated. The Company has initiated preliminary assessments of lateral pipelines that would originate on the GTN mainline system and would extend to metropolitan areas in
the Pacific Northwest. The Company also has initiated preliminary assessments of an expansion of the NBP system to facilitate the delivery of gas that may be supplied by liquefied natural gas (LNG) terminals proposed for development in
Baja California, Mexico, as well as lateral pipelines to markets not currently served by the NBP system, including an extension into the Phoenix area.



Net Cash Provided by (Used in) Financing ActivitiesFor the nine months ended September 30, 2003, cash used in
financing activities was $63.9 million reflecting the paydown of amounts owed under the Credit Agreement and the payment of the $6.0 million Medium Term Note. No new debt was issued, no dividends were paid, nor were any capital contributions
received during the first nine months of 2003. For the nine months ended September 30, 2002, cash used for financing activities was $8.4 million, reflecting a net borrowing of $18.0 million under the revolving credit agreement or the subsequent
Credit Agreement which were in place in the first nine months of 2002, along with $117.5 million in capital contributions received from parent, less dividend payments of $108.0 million. See Note 2: Long-Term Debt included in Item
1. Condensed Consolidated Financial Statements above, for a further discussion of financing activities.



Credit Rating ChangesDuring 2003, changes have occurred in the credit ratings issued by both S&P and Moodys for the Company.
See Note 2. Long-Term Debt included in Item 1. Condensed Consolidated Financial Statements above, for further information regarding recent credit rating changes.



GuaranteesThe Companys Board of Directors, in
December 2000, authorized the Company to execute and deliver guarantees to support obligations of NEGT Energy Trading Holdings Corporation, a wholly owned subsidiary of NEGT, and the Company entered into a Credit Support Agreement with NEGT Energy
Trading Holdings Corporation. This Credit Support Agreement was terminated on October 18, 2002, although certain guarantees existing prior to October 18, 2002, as described below, remain in effect.



Guarantees In Support of Trading ActivitiesAt September 30,
2003, guarantees in support of trading activities, on behalf of NEGT Energy Trading Holdings Corporation and certain of its subsidiaries (collectively, the NEGT Energy Trading Entities), with a face value of $175.7 million were outstanding



18



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with an estimated overall net exposure of $12.5 million. At December 31, 2002, guarantees on behalf of the NEGT Energy Trading Entities with a face value of
$364.4 million were outstanding with an estimated overall net exposure of $37.4 million. The estimated net exposure is comprised of the amount of outstanding guarantees directly supporting underlying transactions, net of offsetting positions, cash,
and other collateral.



On July 14, 2003, J. Aron & Company
issued a payment demand to the Company under an existing guarantee on behalf of certain NEGT Energy Trading Entities in an aggregate amount of $1.2 million. On July 16, 2003, Morgan Stanley Capital Group Inc. issued a payment demand to the Company
under an existing guarantee in an aggregate amount of $4.4 million. The Company is evaluating these demands and has recorded a charge for its current estimated liability under the guarantees. To the extent that any payments may ultimately become due
under these guarantees, the Company anticipates it will have a claim against the NEGT Energy Trading Entities to the extent of such payment, but has not recorded a credit for any such claim.



Guarantees in Support of Tolling AgreementsThe Company provided
a guarantee to Liberty Electric Power, LLC (Liberty) which guaranteed certain obligations of NEGT Energy TradingPower, LP (ET Power), a subsidiary of NEGT Energy Trading Holdings Corporation, related to a tolling agreement (the Liberty Toll)
between ET Power and Liberty. The face amount of the guarantee at September 30, 2003 is $140.0 million, declining by $10.0 million annually each April. On July 22, 2003, Liberty issued a demand on the Company under the guarantee for $4.4 million,
relating to amounts allegedly owed by ET Power, prior to the bankruptcy filing of ET Power. On August 21, 2003, Liberty issued demands on the Company for $140.0 million, relating to Libertys rejection claim against ET Power for $176.8 million,
and for an additional $1.0 million, allegedly owed by ET Power, prior to the bankruptcy filing of ET Power. The Company has disputed these demands.



On September 11, 2003, Liberty filed two suits against the Company in United States district court in Texas. For further information regarding the legal
actions in this matter, see Note 3: Commitments and ContingenciesLegal Matters included in Item 1. Condensed Consolidated Financial Statements above.



Whether and to the extent either Liberty or ET Power may be found liable for termination payments under the Liberty Toll is
subject to dispute. If liability is established and ET Power is responsible for termination payments to Liberty, the Company will be the primary guarantor for any amounts due to Liberty. If the Company becomes directly liable under the
guarantee for substantial termination payments under the Liberty Toll, such liability could have a material adverse effect on its financial condition, results of operations, or cash flows.



Recovery of amounts paid as a result of Credit Support for
AffiliatesIn the event the Company ultimately pays any counterparty as guarantor for obligations of any bankrupt NEGT entity, the Company will have a claim against such entity, and intends to diligently pursue collection of such claims.



CREDIT AND MARKET RISK MANAGEMENT ACTIVITIES



Credit RiskCredit risk is the risk of loss that the
Company would incur if counterparties fail to perform their contractual obligations. The Company conducts business primarily with customers in the energy industry, and this concentration of counterparties may impact the overall exposure to credit
risk in that its counterparties may be similarly affected by changes in economic, regulatory, or other conditions. The Company mitigates potential credit losses in accordance with established credit policies that establish the levels of business
conducted with counterparties that have, or provide a guarantee from an entity that has, an acceptable investment grade credit rating as specified in GTNs or NBPs system Tariffs. For shippers that meet this standard, the Company will
extend limited credit based on a shippers financial statements or on the financial statements of the guarantor, as applicable. For shippers not meeting these requirements, the Company will accept credit assurances either in the form of cash or
a standby letter of credit. The Company reviews credit exposure to each counterparty periodically or on an event driven basis.



Regarding credit assurances, GTN is currently involved in several proceedings at FERC and the Court of Appeals for the D.C. Circuit in which the
Commission is evaluating (or in which GTN is challenging the



19



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Commissions determination of) the level of collateral that GTN may demand from shippers not meeting GTNs credit standard. See Part II.
Other InformationLegal Proceedings below, for a discussion of proceeding before the Commission at Docket Nos. RP03-41 and RP03-70.



Mirant Americas Energy Marketing, LP (MAEM), one of the Companys shippers, voluntarily filed for Chapter 11 Bankruptcy protection on July 14, 2003.
MAEM has not defaulted on any of their contracts or obligations, and the Company holds the maximum amount of collateral allowed by Tariff. MAEM was current with its obligations with the Company at the time of the Chapter 11 filing.The
Company does not expect the MAEM bankruptcy filing to have a material adverse effect on its financial condition, results of operations, or cash flows.



Market Risk



GTN PipelineCurrently, the GTN Pipeline has sold approximately 95.5 percent of its total available long-term firm capacity under
long-term firm contracts with an average remaining term of approximately 10.4 years. GTN remarkets the remaining capacity as short-term (less than one year) firm capacity and/or on a long-term basis and anticipates that it will remarket the capacity
on a long-term basis in the future. Variables that impact GTNs ability to contract capacity under long-term firm agreements include, but are not limited to, continental gas supply and demand levels, the availability of energy substitutes, the
availability and transportation cost of interconnecting pipeline facilities as well as the availability and transportation cost of competitive pipeline facilities that access the same supply sources and serve the same market areas as the GTN
Pipeline.



North Baja PipelineNBP currently has
sold approximately 87.2 percent of its total available long-term firm capacity under long-term firm contracts with an average remaining term of approximately 18.9 years. NBP has entered into contractual commitments which, when fully implemented in
January 2006, will result in a subscription rate for available long-term firm capacity of approximately 95.0 percent. NBP remarkets the remaining capacity as short-term (less than one year) firm capacity and/or on a long-term basis and anticipates
that it will remarket the capacity on a long-term basis in the future. See System Expansion and Business Development under Liquidity and Capital Resources above, for discussion regarding current open season for capacity.
Variables that impact NBPs ability to contract capacity under long-term firm agreements include, but are not limited to, continental gas supply and demand levels, the availability of energy substitutes, the availability and transportation cost
of interconnecting pipeline facilities as well as the availability and transportation cost of competitive pipeline facilities that access the same supply sources and serve the same market areas as NBP.



RESULTS OF OPERATIONS



Selected operating results and other data are as follows:



|                                          |  | Three Months EndedSeptember 30, |      | Nine months EndedSeptember 30,
|----------------------------------------- |  | ------------------------------- | ---- | ------------------------------
|                                          |  | 2003                            |      |                               
|                                          |  | (In Millions)                   |      | (In Millions)                 
|Operating revenues                        |  | $                               | 58.9 |                               
|Operating expenses                        |  |                                 | 27.3 |                               
|                                          |  |                                 |      |                               
|Operating income                          |  |                                 | 31.6 |                               
|Other income and (income deductions), net |  |                                 | (3.8 | )                             
|Net interest expense                      |  |                                 | 9.8  |                               
|                                          |  |                                 |      |                               
|Income before taxes                       |  |                                 | 18.0 |                               
|Income tax expense                        |  |                                 | 7.1  |                               
|                                          |  |                                 |      |                               
|Net Income                                |  | $                               | 10.9 |                               
|                                          |  |                                 |      |                               



Net
IncomeNet income for the three-month period ended September 30, 2003 decreased $10.8 million compared to the same period in 2002. For the nine months ended September 30, 2003, net income



20



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decreased $16.1 million when compared to the nine months ended September 30, 2002. For the year to date, an increase in operating revenues during 2003 as a
result of NBP going into service in late 2002 was more than offset by a combination of factors including higher operating expenses, reduced AFUDC income in 2003, lower interest income, higher net interest expense, and a charge for an anticipated
settlement under a related party guarantee. Further detail on the items effecting net income are reflected in the paragraphs which follow.



Operating RevenuesOperating revenues for the three-month period ended September 30, 2003 decreased $3.7 million compared to the
same period in 2002. The decrease resulted from a combination of factors. Transportation revenues on the GTN Pipeline system were down $2.8 million from the comparable period in the prior year. In the third quarter 2002, the Company recorded $4.6
million of revenue that resulted from negotiated long-term contract termination settlements, with no comparable revenue present in the third quarter 2003. Partially offsetting those reductions was $3.8 million of additional revenues earned from NBP
in the three-month period ended September 30, 2003. For the nine-month period ended September 30, 2003, total operating revenue increased $6.3 million compared to the same period of 2002. A total of $11.7 million additional revenues earned from NBP
which were not present in the comparable periods in 2002 helped increase total revenues above prior year levels. In addition, a $2.7 million contract termination settlement fee was received by NBP and recorded as Operating Revenue during the first
quarter of 2003. Partially offsetting these increases, in addition to the $4.6 million of revenue from negotiated long-term contract termination settlements received in 2002, mentioned above, was the fact that long-term firm commodity revenues
related to actual gas flows, short-term firm revenues, and interruptible revenues were all down in 2003 when compared to 2002 as a result of unfavorable price differentials between various points along the GTN Pipeline system during the first nine
months of 2003.



Operating ExpensesThe
components of total operating expenses are as follows:



|                              |  | Three Months EndedSeptember 30, |      | Nine months EndedSeptember 30,
|----------------------------- |  | ------------------------------- | ---- | ------------------------------
|                              |  | 2003                            |      | 2002                          
|                              |  | (In Millions)                   |      | (In Millions)                 
|Administrative and general    |  | $                               | 6.5  |                               
|Operations and maintenance    |  |                                 | 4.4  |                               
|Depreciation and amortization |  |                                 | 12.9 |                               
|Property and other taxes      |  |                                 | 3.5  |                               
|                              |  |                                 |      |                               
|Total operating expenses      |  | $                               | 27.3 |                               
|                              |  |                                 |      |                               



For the three-month
period ended September 30, 2003, compared with the same period in 2002, total operating expenses increased $1.3 million.For the three-month period ended September 30, 2003, administrative and general expenses show a decline year over year,
due in part to a credit to employee benefit costs associated with accounting for pension contributions. Industry surcharge fees that are associated with actual gas deliveries were lower in 2003 than in 2002 by $0.5 million. The reduction in these
fees are offset by corresponding revenue reductions. In addition, labor related savings and cost containment efforts reduced administrative and general expenses by $0.2 million in 2003, however, corporate allocations were $0.1 million higher than
the prior year period and NBP expenses in 2003 added $0.3 million.Operations and maintenance expenses are higher in 2003 due in part to higher safety training costs on GTN and expenses on NBP which were not present in 2002. Depreciation
expense was up by $1.0 million as a result of placing the NBP system into service and by $0.4 million from the completion of the 2002 expansion project on GTN. Property and other taxes were up $0.4 million on GTN as a result of the completion of the
2002 GTN expansion and $0.5 million on the NBP system.



For the
nine-month period ended September 30, 2003, administrative and general expenses show a decline year over year which is due in large part to lower industry surcharge fees that are associated with actual gas deliveries which have been lower in 2003
than in 2002. The reduction in surcharge fees of $1.6 million when compared to the 2002 year to date period are offset by corresponding revenue reductions. In



21



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addition to the credit to employee benefit costs discussed above, labor related savings and cost containment efforts reduced administrative and general
expenses by $1.1 million in 2003. NBP administrative and general expenses in 2003 added $0.9 million over the prior year. Operations and maintenance expenses are higher in 2003 due in part to higher labor costs on GTN and expenses on NBP which were
not present in 2002. Depreciation expense was up as a result of depreciation on the NBP system of $3.8 million and from the completion of the 2002 expansion project on GTN. Property and other taxes were up $1.1 million on GTN as a result of
the completion of the 2002 GTN expansion and $0.9 million on NBP as a result of the NBP system commencing operation.



Other income and (income deductions)For the three-month period ended September 30, 2003, the Company reflected a total income
deduction of $3.8 million, compared with $4.9 million of other income in the same period in 2002. The year on year change resulted from a $4.3 million reduction in AFUDC equity credits related to the construction activity levels and a $4.1 million
charge in 2003 associated with an anticipated obligation under a related party guarantee. For further detail regarding the anticipated settlement, see Note 1: GeneralRelated Party Transactions contained in Item 1. Condensed
Consolidated Financial Statements above. On a year to date basis, AFUDC equity credits declined $9.4 million and interest income, associated with the $75.0 million loan to PG&E Corporation which existed during the first half of 2002 and is
no longer in place, decreased $3.0 million.



Interest ExpenseNet interest expense for the three-month period ended September 30, 2003 was $0.9 million more than interest expense for the same periods in 2002 primarily as a result of $1.0 million less AFUDC credit
for borrowed funds in 2003. Reduced levels of construction activity in 2003 reduced the total AFUDC credit for borrowed funds for the nine- month period ended September 30, 2003 by $2.3 million from the comparable period in 2002. Slightly higher
average outstanding debt balances during 2003 and slightly higher average interest rates in 2003, when compared to the same periods in 2002 also contributed to the overall increase in net interest expense of $3.7 million on a year to date basis. The
table that follows provides a comparison of the average outstanding debt levels and interest rates on borrowed funds:



|                         |  | Three Months Ended September 30, |       |   | Nine months Ended September 30, |  
|------------------------ |  | -------------------------------- | ----- | - | ------------------------------- | -
|                         |  | 2003                             |       |   | 2002                            |  
|                         |  | (In Millions)                    |       |   | (In Millions)                   |  
|Average outstanding debt |  | $                                | 521.4 |   |                                 | $
|Average interest rate    |  |                                  | 7.5   | % |                                 |  



CRITICAL ACCOUNTING
POLICIESACCOUNTING FOR THE EFFECTS OF REGULATION



The Company accounts for the financial effects of regulation in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of
Regulation. As a result of applying the provisions of SFAS No. 71, the Company has accumulated $42.8 million of regulatory assets and $17.5 million of regulatory liabilities as of September 30, 2003. See Summary of Significant
Accounting PoliciesRegulation under Note 1: General included in Item 8. Financial Statements and Supplementary Data in the Companys Annual Report on Form 10-K for the year ended December 31, 2002, for
further discussion of accounting for the effects of regulation.



ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED



Changes to Accounting for Certain Derivative Contracts



In June 2003, the FASB issued a new Derivatives Implementation Group (DIG) interpretation of SFAS No. 133, Issue No. C20, Scope Exceptions: Interpretation of the Meaning of Not Clearly and Closely Related in
Paragraph 10(b) regarding Contracts with a Price Adjustment Feature (DIG C20). DIG C20 specifies additional circumstances under which price adjustment features, such as those based on broad



22



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market indices, in a derivative contract would not be an impediment to qualifying for the normal purchases and normal sales scope exception under SFAS No.
133. The adoption of this Issue, which is anticipated to occur in the fourth quarter of 2003, is not expected to impact on the Companys Consolidated Financial Statements.



Consolidation of Variable Interest Entities



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN
46), which expands upon existing accounting guidance addressing when a company should include in its financial statements the assets, liabilities, and activities of another entity or arrangement with which it is involved. A variable interest
entity is an entity that does not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support from other parties or an entity where equity investors lack the
essential characteristics of a controlling financial interest. The Company is currently assessing the impact, if any, of FIN 46 on its Consolidated Financial Statements.



The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003.
There were no new variable interest entities created by the Company between February 1, 2003, and September 30, 2003. The consolidation requirements related to entities or arrangements existing before February 1, 2003 were originally effective July
1, 2003. However, due to implementation issues, the FASB deferred the implementation until the fourth quarter of 2003. The Company is evaluating the impacts of FIN 46s initial recognition, measurement, and disclosure provisions on the
Consolidated Financial Statements.



SAFETY AND ENVIRONMENTAL MATTERS



The Company is subject to a number of federal, state and
local laws and regulations designed to protect human health and the environment by imposing stringent controls with regard to planning and construction activities, land use, and air and water pollution, and, in recent years, by governing the use,
treatment, storage, and disposal of hazardous or toxic materials. These laws and regulations affect future planning and existing operations, including environmental protection and remediation activities. The Company has generally been able to
recover the costs of compliance with safety and environmental laws and regulations in its rates.



On an ongoing basis, the Company assesses measures that may need to be taken to comply with environmental laws and regulations related to its operations.
The Company believes that it is in substantial compliance with applicable existing environmental requirements and that the ultimate amount of costs, individually or in the aggregate, that it may incur in connection with its compliance and
remediation activities will not have a material effect on its financial condition, results of operations, or cash flows.



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



See Credit and Market Risk Management Activities included in Item 2: Managements Discussion and Analysis of Financial Condition
and Results of Operations above.



ITEM 4.CONTROLS AND PROCEDURES



EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES



Based on an evaluation of the Companys disclosure controls and procedures as of September 30, 2003, the Companys principal executive and
principal financial officers have concluded that such



23



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disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports the Company files or submits
under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



There were no changes in internal controls over financial reporting that
occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



There were no significant changes in internal controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.



PART
II:    OTHER INFORMATION



ITEM 1.LEGAL PROCEEDINGS



Natural Gas Royalties ComplaintSee Legal Matters in Note 3: Commitments and Contingencies included in
Item 1. Condensed Consolidated Financial Statements above.



e prime, inc., FERC Docket No. RP03-41 and RP03-70On October 29, 2002, e prime, inc. (e prime), a shipper on the GTN Pipeline system, filed a complaint with the FERC in Docket No. RP03-41 alleging that GTNs credit
requirements were too onerous and not supported by the pipelines Tariff. On November 8, 2002, GTN responded to the complaint, and also filed revised Tariff sheets in Docket No. RP03-70, clarifying its credit procedures. Significant issues
raised in the proceeding include whether GTN can require up to one year of collateral from shippers that do not maintain an investment grade rating and whether such collateral must be maintained in segregated accounts. On December 6, 2002, FERC
issued an order accepting and suspending GTNs Tariff filing in Docket No. RP03-70, subject to the outcome of a technical conference, which was held on January 10, 2003. Initial and reply comments to the technical conference were filed by GTN
and various parties.



On January 24, 2003, the Commission
issued an order in the underlying e prime complaint proceeding (Docket No. RP03-41) supporting GTNs determination that e prime was not creditworthy pursuant to GTNs Tariff, and directing GTN to provide additional information supporting
its Tariff requirements. GTN provided the additional information on January 29, 2003.



On March 14, 2003, FERC issued an order granting e primes complaint to the extent that GTN required e prime to provide a prepayment of 12 months of demand charges, and directed GTN to refund to e prime
collateral held in excess of 3 months of demand charges. In accordance with the Commissions order, GTN refunded $0.5 million to e prime, inclusive of interest. GTN also reduced the amount of collateral held from other similarly situated
shippers. On April 14, 2003, GTN filed for rehearing and clarification of the Commissions March 14 Order. On July 2, FERC issued an order granting GTNs request for clarification and denying GTNs request for rehearing. On May 7,
2003, the Commission issued an Order in Docket No. RP03-70, accepting GTNs Tariff filing subject to further modifications, including a requirement that GTN modify its Tariff to limit the amount of collateral it is entitled to require from
existing shippers, with an S&P rating less than BBB receiving service on existing system facilities, to three months of demand charges. On May 19, 2003 GTN filed Tariff sheets in compliance with the Commissions May 7 Order, and on June 6,
2003, GTN and certain other parties filed requests for rehearing of that order.



At the conclusion of these proceedings, GTN may be permitted to reinstate its collateral requirement to twelve months of demand charges for some or all of its shippers and/or be required to hold shipper collateral in
segregated accounts. The Company does not expect that the ultimate outcome of these matters will have a material adverse effect on its financial condition, results of operations, or cash flows.



24



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County of Imperial and City of El Centro v. California State Lands Commission (North Baja Pipeline
LLC, Intergen Services, Inc. and Sempra Energy, Real Parties in Interest), California Court of Appeal, Third Appellate District, Civil No. C043219 (North Baja Pipeline Litigation)North Baja Pipeline, LLC and the California
State Lands Commission are defendants in an action brought by the County of Imperial and the City of El Centro alleging that the environmental impact report prepared for the North Baja pipeline by the California State Lands Commission fails to meet
the requirements of the California Environmental Quality Act (CEQA). Intergen and Sempra were subsequently dismissed from the case. The action contains eleven causes of action, all of which are alleged violations of CEQA. The first cause of action
alleges that the State Lands Commission, in preparing the environmental impact report, failed to address environmental justice issues. The remaining causes of action all challenge the environmental impact report on various grounds. Most of these
causes of action are based on a claim and theory that the environmental impact report was required to evaluate and the California State Lands Commission was required to mitigate, as part of the North Baja pipeline project, potential air emissions
from power plants located in Mexico which (in addition to plants in San Diego County) will be served by the pipeline. Petitioners prayer for relief further seeks to enjoin construction of the pipeline, although to date no injunction has been
sought. A Superior Court hearing on the merits of the case was held on September 13, 2002. On November 27, 2002, Judge Gail D. Ohanesian of the Sacramento County Superior Court entered a Judgment Denying the Petition for Writ of Mandate and Denying
Request for Declaratory and Injunctive Relief granting judgment in favor of the California State Lands Commission and North Baja Pipeline, LLC and against Petitioners.



On January 31, 2003, Petitioners filed a Notice of Appeal appealing the Superior Courts judgment to the California
Court of Appeal, Third Appellate District. The Company contemplates that the Court of Appeal will not issue its decision on Petitioners appeal before the latter part of 2003 or early 2004. The Company believes that the outcome of this matter
will not have a material adverse effect on its financial condition, results of operations, or cash flows.



In re PG&E National Energy Group, Inc., et al., Case Nos. 03-30459 (PM) and 03-30461 through 03-30464 (PM) (Jointly Administered)
(Bankr. D. Md.), PG&E National Energy Group, et al. v. Liberty Electric Power, LLC, Adv. Proc. No. 03-03104 (the Adversary Proceeding); Liberty Electric Power, LLC v. PG&E Gas Transmission,
Northwest Corporation, H-03-3649 (S.D. Tex.) (Liberty I); Liberty Electric Power, LLC v. PG&E Gas Transmission, Northwest Corporation, H-03-3646 (S.D. Tex.) (Liberty II)The
Company provided a guarantee to Liberty Electric Power, LLC (Liberty) which guaranteed certain obligations of NEGT Energy TradingPower, LP (ET Power), a subsidiary of NEGT Energy Trading Holdings Corporation, related to a tolling agreement
(the Liberty Toll) between ET Power and Liberty.



On July 8,
2003, ET Power filed a motion with the Bankruptcy Court to to reject the Liberty Toll. By orders dated August 6 and August 8, 2003, the Bankruptcy Court granted the motion to reject, and provided a process by which ET Power and Liberty would
exchange their respective calculations of any amounts owed between the parties and of the valuation of the rejected portion of the Agreement. The order also provided that the Bankruptcy Court would retain jurisdiction to hear and determine all
matters related to the Agreement.



On July 30, 2003, Liberty
sent ET Power a letter with an attachment purporting to show that ET Power owes Liberty $176.8 million as a termination payment for the rejection of the Agreement. Liberty also sent the Company demands under the guarantee for $5.4 million (relating
to amounts allegedly owed by ET Power pre-petition) and for $140.0 million (the maximum guarantee amount relating to Libertys rejection claim against ET Power. The Company responded by letter to Liberty disputing that any amounts are due under
the guarantee because (i) the amount due Liberty for the termination payment from ET Power is in dispute and (ii) ET Powers possible right to setoff pre-petition claims by Liberty against amounts potentially owed by Liberty to ET Power may
negate any Liberty pre-petition claims against ET Power. Consequently, the Company has asserted that, at this time, it has no liability under the guarantee to Liberty.



On September 11, 2003, Liberty filed two suits against the Company in United States District Court in Texas. Liberty
I seeks the Companys payment of $140.0 million to Liberty under the guarantee associated with Libertys purported rejection damages. Liberty II seeks $5.4 million from the Company under the guarantee related to tolling payments
that ET Power allegedly failed to make prior to ET Powers bankruptcy. These suits recently were served on the Company and the Company has not yet filed any answer or responsive pleading.



25



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On September 23, 2003, ET Power provided Liberty its termination payment calculation pursuant to the
Agreement and the rejection order. That calculation shows ET Power to be owed approximately $108.0 million under the Liberty Toll. On the same date, ET Power, along with NEGT and the Company, filed an adversary proceeding against Liberty in
Bankruptcy Court. That lawsuit seeks declaratory relief, injunctive relief and damages. The debtors seek (i) a declaration that the automatic stay of the NEGT bankruptcy extends to stay the actions in Liberty I and Liberty II; (ii) an
injunction against Liberty enjoining it from pursuing its litigation against the Company until the claims are resolved between ET Power and Liberty; and (iii) damages of over $100.0 million from Liberty resulting from the rejection of the Agreement.
Liberty has not filed any answer or responsive pleadings.



It
is not now possible to assess the likelihood of an unfavorable outcome or estimate the amount or range of potential loss. Management of the Company intends to pursue the claims they may have against Liberty in this matter and to vigorously defend
against any potential claims asserted by Liberty.



ITEM 5.OTHER INFORMATION



Gas Transmission Northwest Corporations earnings to fixed charges ratio for the nine-month period ended September 30, 2003 was 3.2 to 1. The
statement of the foregoing ratio, together with the statement of the computation of the foregoing ratio filed as Exhibit 12 hereto, is included herein for the purpose of incorporating such information and exhibit into Registration Statement No.
33-91048 relating to the Companys debt outstanding.



ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K



(a)    Exhibits:



|            |  |  
|----------- |  | -
|Exhibit 3.1 |  | 
|            |  |  
|Exhibit 3.2 |  | 
|            |  |  
|Exhibit 4.1 |  | 
|            |  |  
|Exhibit 4.2 |  | 
|            |  |  
|Exhibit 4.3 |  | 



26



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|Exhibit 4.4  |  |  |  | Credit Agreement, dated as of May 2, 2002, by and among PG&E GTN, The Royal Bank of Scotland, as Administrative Agent, and the other lenders and other parties thereto
(incorporated by reference to PG&E GTNs 8-K dated May 8, 2002 (File No. 0-25842), Exhibit 99).
|------------ |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|             |  |  
|Exhibit 4.5  |  |  |  | Note Purchase Agreement, dated as of June 6, 2002, authorizing the issuance of $100,000,000 in 6.62% Senior Notes due June 6, 2012 (the 6.62% Notes) (incorporated by
reference to PG&E GTNs 8-K dated June 13, 2002 (File No. 0-25842), Exhibit 99).              
|             |  |  
|Exhibit 12   |  |  |  | Computation of Ratio of Earnings to Fixed Charges.                                                                                                                                                                                                                    
|             |  |  
|Exhibit 31.1 |  |  |  | Certification of Principal Executive Officer pursuant to Securities and Exchange Commission Rule 13a14(a).                                                                                                                                                           
|             |  |  
|Exhibit 31.2 |  |  |  | Certification of Principal Financial Officer pursuant to Securities and Exchange Commission Rule 13a14(a).                                                                                                                                                           
|             |  |  
|Exhibit 32.1 |  |  |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                      
|             |  |  
|Exhibit 32.2 |  |  |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                                                                                                      



(b)    Reports on Form 8-K were issued during the quarter ended September 30, 2003, and through the date hereof:



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                 |  | GAS TRANSMISSION NORTHWEST CORPORATION |  |                              
|---------------- |  | -------------------------------------- |  | -----------------------------
|                 |  | (Registrant)                           |  |                              
|                 |  |                                        | 
|November 7, 2003 |  | By:                                    |  | /s/    P. CHRISMAN IRIBE     
|                 |  | Name:                                  |  | P. Chrisman Iribe            
|                 |  | Title:                                 |  | President                    
|                 |  |                                        | 
|November 7, 2003 |  | By:                                    |  | /s/    THOMAS E. LEGRO       
|                 |  | Name:                                  |  | Thomas E. Legro              
|                 |  | Title:                                 |  | Vice President and Controller



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EXHIBIT INDEX



|Exhibit No.: |  | Description of Exhibit                                                                                    
|------------ |  | ----------------------------------------------------------------------------------------------------------
|             | 
|3.1          |  | Restated Articles of Incorporation                                                                        
|             | 
|12           |  | Computation of Ratio of Earnings to Fixed Charges                                                         
|             | 
|31.1         |  | Certification of Principal Executive Officer pursuant to Securities and Exchange Commission Rule 13a-14(a)
|             | 
|31.2         |  | Certification of Principal Financial Officer pursuant to Securities and Exchange Commission Rule 13a-14(a)
|             | 
|32.1         |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350                           
|             | 
|32.2         |  | Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350                           



29