##### Table of Contents

Table of Contents**TABLE OF CONTENTS**      **Page****PART I.    **  **Financial Information**   Item 1.  Consolidated Financial Statements      Statements of Consolidated Income   1   Consolidated Balance Sheets   2   Statements of Consolidated Common Stock Equity   4   Statements of Consolidated Cash Flows   5   Notes to Consolidated Financial Statements   6   Note 1.  General   6   Note 2.  Relationship with PG&E Corporation   10   Note 3.  Liquidity and Financing Resources   11   Note 4.  Price Risk Management   12   Note 5.  Income Taxes   14   Note 6.  Commitments and Contingencies   14Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   16Item 3.  Quantitative and Qualitative Disclosures About Market Risk   24Item 4.  Controls and Procedures   24**PART II.**  **Other Information**   Item 1.  Legal Proceedings   25Item 5.  Other Information   25Item 6.  Exhibits and Reports on Form 8-K   26Signatures and Certifications  27
Table of Contents **PART I:    FINANCIAL INFORMATION** **ITEM 1.    *****CONSOLIDATED FINANCIAL STATEMENTS******* *******Statements of Consolidated Income**************(Unaudited)*******    **Three Months Ended****September30,**   **Nine Months Ended****September30,** (In Thousands)  **2002**   **2001**   **2002**   **2001** **OPERATING REVENUES:**                    Gas transportation  **$****46,442**** **  $46,056   **$****136,648**** **  $155,521 Gas transportation for affiliates  ** ****10,716**** **   11,203   ** ****33,049**** **   30,241 Other  ** ****4,675**** **   47   ** ****4,773**** **   144          Total operating revenues  ** ****61,833**** **   57,306   ** ****174,470**** **   185,906          **OPERATING EXPENSES:**                    Administrative and general  ** ****7,841**** **   9,133   ** ****23,304**** **   25,302 Operations and maintenance  ** ****4,093**** **   5,167   ** ****11,636**** **   14,253 Depreciation and amortization  ** ****11,191**** **   10,506   ** ****33,607**** **   31,265 Property and other taxes  ** ****2,602**** **   2,664   ** ****8,050**** **   8,793          Total operating expenses  ** ****25,727**** **   27,470   ** ****76,597**** **   79,613          **OPERATING INCOME**  ** ****36,106**** **   29,836   ** ****97,873**** **   106,293          **OTHER INCOME:**                    Allowance for equity funds used during construction  ** ****1,463**** **   262   ** ****3,634**** **   350 Interest income  ** ****428**** **   1,626   ** ****3,487**** **   5,156 Other—net  ** ****112**** **   441   ** ****56**** **   1,979          Total other income  ** ****2,003**** **   2,329   ** ****7,177**** **   7,485          **INTEREST EXPENSE:**                    Interest on long-term debt  ** ****9,853**** **   8,858   ** ****28,152**** **   27,395 Allowance for borrowed funds used during construction  ** ****(1,080****)**   (255)  ** ****(2,554****)**   (319)Other interest charges  ** ****89**** **   482   ** ****264**** **   1,528          Net interest expense  ** ****8,862**** **   9,085   ** ****25,862**** **   28,604          **INCOME BEFORE INCOME TAXES**  ** ****29,247**** **   23,080   ** ****79,188**** **   85,174 **INCOME TAX EXPENSE**  ** ****10,823**** **   4,669   ** ****29,463**** **   28,785          **NET INCOME**  **$****18,424**** **  $18,411   **$****49,725**** **  $56,389           *The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.* 1 
Table of Contents *******Consolidated Balance Sheets**************(Unaudited)******* *******ASSETS*******(In Thousands)  **September 30,****2002**   **December 31,****2001** **PROPERTY, PLANT and EQUIPMENT:**          Property, plant and equipment in service  **$****1,575,090**** **  $1,566,796 Accumulated depreciation and amortization  ** ****(608,673****)**   (578,517)     Net plant in service  ** ****966,417**** **   988,279 Construction work in progress  ** ****110,719**** **   67,487      **Total property, plant and equipment—net**  ** ****1,077,136**** **   1,055,766      **CURRENT ASSETS:**          Cash and cash equivalents  ** ****8,127**** **   3,667 Accounts receivable—gas transportation (net of allowance for doubtful accounts of $1,406 in eachperiod)  ** ****17,706**** **   15,892 Accounts receivable—transportation imbalances and fuel  ** ****1,538**** **   2,286 Accounts receivable—affiliated companies  ** ****8,794**** **   10,536 Notes receivable—affiliates  ** ****64,000**** **   —   Inventories (at average cost)  ** ****7,835**** **   7,697 Prepayments and other current assets  ** ****1,437**** **   5,167      **Total current assets**  ** ****109,437**** **   45,245      **OTHER NON-CURRENT ASSETS:**          Note receivable—parent  ** ****—  **** **   75,000 Income tax related regulatory assets  ** ****26,644**** **   24,912 Deferred charge on reacquired debt  ** ****7,932**** **   8,835 Unamortized debt expense  ** ****3,626**** **   2,725 Other regulatory assets  ** ****2,541**** **   2,315 Other  ** ****2,826**** **   2,582      **Total other non-current assets**  ** ****43,569**** **   116,369      **TOTAL ASSETS**  **$****1,230,142**** **  $1,217,380       *The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.* 2 
Table of Contents *******Consolidated Balance Sheets**************(Unaudited)******* *******CAPITALIZATION AND LIABILITIES******* (In Thousands)  **September 30,****2002**  **December 31, 2001****CAPITALIZATION:**        Common stock—no par value, 1,000 shares authorized, issued and outstanding  **$****85,474**  $85,474Additional paid-in capital  ** ****245,417**   227,717Reinvested earnings  ** ****119,691**   113,966     Total common stock equity  ** ****450,582**   427,157Long-term debt  ** ****497,976**   488,892     **Total capitalization**  ** ****948,558**   916,049     **CURRENT LIABILITIES:**        Long-term debt—current portion  ** ****6,000**   33,000Accounts payable  ** ****12,570**   29,475Accounts payable to affiliates  ** ****19,542**   16,029Accrued interest  ** ****10,411**   3,633Accrued liabilities  ** ****2,185**   3,570Accrued taxes  ** ****3,258**   1,093     **Total current liabilities**  ** ****53,966**   86,800     **NON-CURRENT LIABILITIES:**        Deferred income taxes  ** ****213,161**   202,467Other  ** ****14,457**   12,064     **Total non-current liabilities**  ** ****227,618**   214,531     **COMMITMENTS and CONTINGENCIES (Note 6)**  ** ****—  **   —       **TOTAL CAPITALIZATION AND LIABILITIES**  **$****1,230,142**  $1,217,380      *The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.* 3 
Table of Contents *******Statements of Consolidated Common Stock Equity**************(Unaudited)*******    **Nine Months Ended****September30,** (In Thousands)  **2002**   **2001** **BALANCE AT BEGINNING OF PERIOD**  **$****427,157**** **  $386,761 Comprehensive income:          Net income  ** ****49,725**** **   56,389 Other comprehensive income—Price risk management  ** ****—  **** **   —        **Comprehensive Income**  ** ****49,725**** **   56,389      Dividend to parent company  ** ****(44,000****)**   (52,500)Contribution from parent company  ** ****17,700**** **   —        **BALANCE AT END OF PERIOD**  **$****450,582**** **  $390,650       *The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.* 4 
Table of Contents *******Statements of Consolidated Cash Flows**************(Unaudited)*******    **Nine Months Ended****September30,** (In Thousands)  **2002**   **2001** **CASH FLOWS FROM OPERATING ACTIVITIES:**          Net income  **$****49,725**** **  $56,389 Adjustments to reconcile net income to net cash provided by          Operations:          Depreciation and amortization  ** ****34,818**** **   33,490 Deferred income taxes  ** ****10,694**** **   7,903 Allowance for equity funds used during construction  ** ****(3,634****)**   (350)Changes in operating assets and liabilities:          Accounts receivable—gas transportation and other  ** ****(1,066****)**   2,283 Accounts payable and accrued liabilities  ** ****(11,512****)**   15,671 Net receivable/payable—affiliates, income taxes and other  ** ****5,255**** **   34,236 Accrued taxes, other than income  ** ****2,165**** **   2,098 Inventory  ** ****(138****)**   3,163 Other working capital  ** ****3,730**** **   2,996 Regulatory accruals  ** ****2,002**** **   1,184 Other—net  ** ****(2,942****)**   341      **Net cash provided by operating activities**  ** ****89,097**** **   159,404      **CASH FLOWS FROM INVESTING ACTIVITIES:**          Construction expenditures  ** ****(48,783****)**   (44,298)Note receivable—parent  ** ****75,000**** **   —   Note receivable—affiliated company  ** ****(64,000****)**   —   Allowance for borrowed funds used during construction  ** ****(2,554****)**   (319)     **Net cash used in investing activities**  ** ****(40,337****)**   (44,617)     **CASH FLOWS FROM FINANCING ACTIVITIES:**          Repayment of long-term debt  ** ****(320,000****)**   (107,402)Long-term debt issued, net of issuance costs  ** ****302,000**** **   43,997 Cash dividends paid to parent  ** ****(44,000****)**   (52,500)Equity contribution from parent  ** ****17,700**** **   —        **Net cash used in financing activities**  ** ****(44,300****)**   (115,905)     **NET CHANGE IN CASH AND CASH EQUIVALENTS**  ** ****4,460**** **   (1,118)**CASH AND CASH EQUIVALENTS AT JANUARY 1**  ** ****3,667**** **   2,528      **CASH AND CASH EQUIVALENTS AT SEPTEMBER 30**  **$****8,127**** **  $1,410      **SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:**          Cash paid for:          Interest  **$****19,965**** **  $20,458 Income taxes  **$****16,465**** **  $85       *The accompanying Notes to Consolidated Financial Statements are anintegral part of these statements.* 5 
Table of Contents ***Notes to Consolidated Financial Statements (Unaudited)*** **NOTE 1:  GENERAL** **Organization and Basis of Presentation** PG&E Gas Transmission, Northwest Corporation (PG&E GTN) was incorporated in California in 1957 under its former name, Pacific GasTransmission Company. PG&E GTN is an indirect wholly owned subsidiary of PG&E National Energy Group, Inc. (PG&E NEG) and is affiliated with, but is not the same company as, Pacific Gas and Electric Company (the Utility), the gas andelectric company serving northern and central California. PG&E Corporation is the ultimate corporate parent for both PG&E NEG and the Utility.  The accompanying unaudited consolidated financial statements, which have been prepared in accordance with interim period reporting requirements, reflect the results for PG&E GTN and its whollyowned subsidiaries which include Pacific Gas Transmission Company, PG&E Gas Transmission Service Company LLC (PG&E GTS), Pacific Gas Transmission International, Inc., and a 50 percent interest in a joint venture known as Stanfield HubServices, LLC. PG&E GTN and its subsidiaries are collectively referred to herein as the “Company”.  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 FinancialStatements 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, 2001, and its other reports filed with the Securities and Exchange Commission sincethe Annual Report on Form 10-K was filed.  In the opinion of management, the accompanying unaudited consolidatedfinancial 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 inthis 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 2002 presentation. Results ofoperations for interim periods are not necessarily indicative of results to be expected for a full year.  **Significant AccountingPolicies** Except as disclosed below, PG&E GTN is following the same accounting principles discussed in the2001 Annual Report on Form 10-K.  ***Accounting for Impairment or Disposal of Long-Lived Assets*** On January 1, 2002, PG&E GTN adopted SFAS No. 144, *“Accounting for the Impairment or Disposal of Long-Lived Assets”.*SFAS No. 144 supersedes SFAS No. 121, *“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,”* but retains the fundamental provision for recognizing and measuring impairment of long-livedassets to be held and used. This Statement also requires that all long-lived assets to be disposed of by sale are carried at the lower of carrying amount or fair value less cost to sell, and that depreciation should cease to be recorded on suchassets. SFAS No. 144 standardizes the accounting and presentation requirements for all long-lived assets to be disposed of by sale, superseding previous guidance for discontinued operations of business segments. The adoption of the Statement did nothave any impact on the consolidated financial statements of PG&E GTN. 6 
Table of Contents ***Accounting for Gains and Losses on Debt Extinguishment and Certain Lease Modifications*** On July 1, 2002, PG&E GTN adopted SFAS No. 145, *“Rescission of FASB Statements No. 4, 44, and64, Amendment of FASB Statement No. 13, and Technical Corrections.”* This Statement eliminates the current requirement that gains and losses on debt extinguishment must be classified as extraordinary items in the income statement. Instead,such gains and losses will be classified as extraordinary items only if they are deemed to be unusual and infrequent, in accordance with the current criteria under accounting principles generally accepted in the United States of America forextraordinary classification. In addition, SFAS No. 145 eliminates an inconsistency in lease accounting by requiring that modifications of capital leases that result in reclassification as operating leases be accounted for consistent withsale-leaseback accounting rules. Adoption of this Statement did not have any impact on PG&E GTN’s consolidated financial statements.  ***Accounting for Goodwill and Other Intangible Assets*** On January 1, 2002 PG&E GTNadopted SFAS No. 142, *“Goodwill and Other Intangible Assets.”* This Statement eliminates the amortization of goodwill, and requires that goodwill be reviewed at least annually for impairment. This Statement also requires that theuseful lives of previously recognized intangible assets be reassessed and the remaining amortization periods be adjusted accordingly. Adoption of this Statement did not require any adjustments to be made to the useful lives of existing intangibleassets and no reclassifications of intangible assets to goodwill were necessary. Implementation of this Statement did not have any impact on the consolidated financial statements of PG&E GTN.  ***Accounting for Price Risk Management Activities*** PG&E GTN adopted Statement of Financial Accounting Standards (SFAS) No. 133, *“Accounting for Derivative Instruments and Hedging Activities,”* as amended by SFAS Nos. 137 and 138, on January 1, 2001. This Statementrequires the recognition of all derivatives, as defined in the Statement, on the balance sheet at fair value. Effective January 1, 2001, derivatives are classified as price risk management assets and liabilities. Derivatives, or any portion thereof,that are not effective hedges must be adjusted to fair value through income. If derivatives are effective hedges, depending on the nature of the hedges, changes in the fair value of derivatives either offset the change in fair value of the hedgedassets, liabilities, or firm commitments through earnings, or are recognized in other comprehensive income, a component of shareholder’s equity, until the hedged items are recognized in earnings.  SFAS No. 133 also provides for certain derivative contracts for physical delivery of purchase and sale quantities transacted in the normalcourse of business to be exempt from the requirements of the Statement. In June 2001 (as amended in October 2001 and in December 2001), the Financial Accounting Standards Board (FASB) approved an interpretation issued by the DerivativesImplementation Group that changed the definition of normal purchases and sales. As such, certain derivative contracts no longer qualify as normal purchases and sales and are no longer exempt from the requirements of SFAS No. 133.  PG&E GTN has contracts for the transportation of natural gas transacted in the normal course of business. Thesetransportation service contracts have been determined to be exempt from the requirements of SFAS No. 133, and will, therefore, not be reflected on the Consolidated Balance Sheets at fair value.  7 
Table of ContentsThe earnings impact of adopting SFAS No. 133, as amended, on January 1, 2001 was immaterial. The effect on othercomprehensive income was a decrease of $5.0 million related to hedging certain negotiated rate transportation contracts. See “Note 4: Price Risk Management,” below for a further discussion of the hedging activities.  **Related Party Transactions** During the three-month periods ended September 30, 2002 and 2001, PG&E GTN provided transportation services to the Utility and its affiliates in the normal course of business which accounted for approximately $10.7million, or 19 percent, and $11.2 million, or 20 percent, respectively, of PG&E GTN’s transportation revenues. For the nine-month periods ended September 30, 2002 and 2001, PG&E GTN provided transportation services to the Utility andits affiliates in the normal course of business which accounted for approximately $33.0 million, or 19 percent, and $30.2 million, or 16 percent, respectively, of PG&E GTN’s transportation revenues.  PG&E GTN is charged by PG&E Corporation, PG&E NEG, PG&E GTS, and other affiliates for services, such as legal, tax,treasury, human resources, and other administrative functions, and for other costs incurred on PG&E GTN’s behalf, including employee benefit costs, insurance, and other related costs. The charges for these costs are based on directassignment to the extent practicable or by using allocation methods that PG&E GTN believes are reasonable reflections of the utilization of services provided to or for the benefits received by PG&E GTN.  On January 1, 2002, PG&E GTN entered into a management services agreement with PG&E GTS, a wholly owned subsidiary, under whichPG&E GTS will provide all operations and management services previously performed internally by PG&E GTN. Pursuant to the terms of that agreement, PG&E GTN transferred to PG&E GTS, and PG&E GTS accepted assignment of, allemployees and the management of all employment-related obligations for current employees. PG&E GTN will reimburse PG&E GTS for such services based on direct assignment to the extent practicable or by using allocation methods that arereasonable reflections of the utilization of services provided to or for the benefits received by PG&E GTN. PG&E GTS also has entered into a management services agreement to provide all management and operational services for North BajaPipeline, LLC (NBP), a new interstate pipeline owned by PG&E NEG.  On October 26, 2000, PG&E GTN loaned$75.0 million to PG&E Corporation pursuant to a promissory note bearing a floating interest rate tied to PG&E Corporation’s external borrowing rate. The loan was payable upon demand but had been recorded under non-current assets andshown as a Note receivable – parent company on the Consolidated Balance Sheets, which reflected PG&E GTN’s expectations about the timing of repayment. In June, 2002 PG&E Corporation repaid the loan with accrued interest. During2002, PG&E GTN accrued interest income on the loan at an average interest rate of 7.6 percent.  PG&E GTNhad been authorized by its Board of Directors to execute and deliver guarantees to support obligations of PG&E Energy Trading Holdings Corporation (PG&E ET), a wholly owned subsidiary of PG&E NEG, in an aggregate amount not to exceed$900 million and to support the obligations of NBP, a wholly owned pipeline subsidiary of PG&E NEG, in an amount not to exceed $146 million. PG&E GTN and PG&E ET have terminated the arrangements pursuant to which PG&E and GTN hasprovided guarantees on behalf of PG&E ET in the past. Existing guarantees, which remain in effect, are described in the paragraphs which follow.  At September 30, 2002 and December 31, 2001 guarantees, on behalf of PG&E NEG subsidiaries other than NBP, with a face value of $641.8 million and $985.4 million, respectively, were outstanding,with an overall net exposure of $79.1 million and $28.9 million, respectively, on the transactions supported by the guarantees. The net exposure is comprised of the amount of outstanding guarantees directly supporting underlying transactions, net ofoffsetting positions, cash, and other collateral. At September 30, 2002 and December 31, 2001, a total of $13 million and $47 million, respectively, of guarantees were outstanding on behalf of NBP.  8 
Table of ContentsPG&E GTN has issued a guarantee of PG&E ET’s payment obligations under an 8-year tolling agreement with DTEGeorgetown, LLC (DTE) in an amount not to exceed $24 million, which is included in the total guarantee amounts shown above. By letter dated October 14, 2002, DTE provided notice to PG&E ET that the downgrade of PG&E GTN’s credit rating(as described further in “Note 3: Liquidity and Financing Resources”, below) constituted a material adverse change under the tolling agreement between PG&E ET and DTE and that PG&E ET was required to post replacement securitywithin ten days. By letter dated October 23, 2002, PG&E ET advised DTE that because there had not been a material adverse change with respect to PG&E GTN within the meaning of the tolling agreement, PG&E ET was not required to postreplacement security. If PG&E ET was required to post replacement security and it failed to do so, DTE would have the right to terminate the tolling agreement and seek recovery of a termination payment. Determination of the termination paymentis based on a formula that takes into account a number of factors including such market conditions as the price of power and the price of fuel. In the event of a dispute over the terms of the contract or the amount of any termination payment thatthe parties are unable to resolve by negotiation, the tolling agreement provides for mandatory arbitration, which could take as long as six months to more than a year to complete. To the extent that the results of such arbitration would requirePG&E ET to pay damages, and PG&E ET does not do so, DTE may seek payment from PG&E GTN under the guarantee for an amount not to exceed $24 million.  PG&E GTN also has provided a secondary guarantee to PG&E Energy Trading—Power, L.P. (PGET), a subsidiary of PG&E ET, related to a tolling agreement between PGET and Liberty ElectricPower, LLC (Liberty). PG&E NEG is the primary guarantor. The aggregate liability under these guarantees is $150 million, the face value of which is also included in the total shown above. Liberty has provided notice to PGET that the downgrade ofPG&E NEG constituted a material adverse change under the tolling agreement requiring PG&E ET to post security in the amount of $150 million. PGET has not posted such security. Liberty has the right to terminate the agreement and seekrecovery of a termination payment. Under the terms of these guarantees, Liberty must first proceed against PG&E NEG’s guarantee**,** and can only demand payment under PG&E GTN’s guarantee if (1) PG&E NEG is in bankruptcy or(2) Liberty has made a payment demand on PG&E NEG which remains unpaid five business days after the payment demand is made. In addition, PG&E ET has provided notices to Liberty of several breaches of the tolling agreement by Liberty and hasadvised Liberty that, unless cured, these breaches would constitute a default under the agreement. If these defaults remain uncured, PG&E ET has the right to terminate the agreement and seek recovery of a termination payment. Regardless of whichcounter-party is seeking recovery of the termination payment, determination of such payment is based on a formula that takes into account a number of factors including such market conditions as the price of power and the price of fuel. In the eventof a dispute over the amount of any termination payment that the parties are unable to resolve by negotiation, the tolling agreement provides for mandatory arbitration. The dispute resolution process could take as long as six months to more than ayear to complete. Management cannot predict whether PG&E GTN will become directly liable under this guarantee. If PG&E GTN becomes directly liable under the guarantee for this tolling agreement, such liability could have a material adverseeffect on its financial condition, results of operations, or cash flows.  On September 24, 2002, PG&E GTNloaned $64 million to NBP, a wholly owned subsidiary of PG&E NEG, pursuant to a promissory note bearing a floating interest rate tied to the London interbank borrowing rate (LIBOR) as quoted the day of the borrowing for such loan period, plus450 basis points. The loan agreement provides for further advances from PG&E GTN to NBP for an amount not to exceed $75 million. As of November 11, 2002, the balance was $73 million. The loan is payable upon demand and has been recorded undercurrent assets and shown as a Note receivable—affiliated company on the Consolidated Balance Sheets, which reflects PG&E GTN’s expectations about the timing of repayment.  9 
Table of Contents PG&E GTN is evaluating the purchase of all or part of NBP from PG&E NEG.If this transaction proceeds, PG&E GTN may fund some or all the acquisition and remaining development costs through the forgiveness of the $73 million outstanding balance on the loan to NBP and through internally generated cash and its availableline of credit. NBP owns and operates a new Federal Energy Regulator Commission (FERC)-regulated interstate pipeline system located in the states of Arizona and California. The system is in the final stages of construction and will consist ofapproximately 80 miles of pipe that began commercial operation on September 1, 2002 and 25,000 horsepower of compression facilities which are expected to be completed by the end of 2002. As of September 30, 2002, PG&E NEG has spent approximately$137 million to construct this project. Total costs of the project when fully complete will be approximately $156 million. PG&E GTN believes acquisition of NBP would be accretive to earnings in 2003. **** **NOTE 2:  RELATIONSHIP WITH PG&E CORPORATION** In December 2000, and Januaryand February 2001, PG&E Corporation and PG&E NEG completed a corporate restructuring that involved the use or creation of limited liability companies (LLCs) as intermediate owners between a parent company and its subsidiaries. The LLCsinclude among others, GTN Holdings LLC which owns 100 percent of the stock of PG&E GTN. In addition, PG&E NEG’s organizational documents were modified to include the same structural elements as the LLCs.  GTN Holdings LLC’s charter requires unanimous approval of its Board of Control, including at least one independent director, beforeit can (a) consolidate or merge with any entity, (b) transfer substantially all of its assets to any entity, or (c) institute or consent to bankruptcy, insolvency, or similar proceedings or actions. GTN Holdings LLC may not declare or pay dividendsunless the Board of Control has unanimously approved such action and GTN Holdings LLC, on a consolidated basis with PG&E GTN, meets specified financial requirements. After the restructuring was completed, two independent rating agencies,Standard & Poors (S&P) and Moody’s Investor Services (Moody’s), reaffirmed investment grade ratings for PG&E GTN and issued investment grade ratings for PG&E NEG.**** (See “Note 3: Liquidity and FinancingResources”, below for current credit ratings.)  On April 6, 2001, the Utility filed a voluntary petition forrelief under the provisions of Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of California (Bankruptcy Court). Pursuant to Chapter 11 of the U.S. Bankruptcy Code, the Utility retains control of itsassets and is authorized to operate its business as a debtor-in-possession while being subject to the jurisdiction of the Bankruptcy Court.  Management believes that the Company would not be substantively consolidated with PG&E Corporation in any insolvency or bankruptcy proceeding involving PG&E Corporation or the Utility. The Utility and PG&E Corporation have jointly filed a proposed plan of reorganization for the Utility thatentails separating the Utility into four distinct businesses. The proposed plan of reorganization does not directly affect the Company or any of its subsidiaries, except that the Company has reached an agreement to sell to a subsidiary of theUtility approximately 2.66 miles of 42-inch and 36-inch mainline pipe from the Company’s southernmost meter station to the California border, and has filed an application with the Federal Energy Regulatory Commission (FERC or Commission)requesting approval to effectuate the sale. This sale is conditioned on the confirmation of the reorganization plan by the Bankruptcy Court and approval by FERC of the Utility’s application to acquire, and PG&E GTN’s relatedapplication to abandon, the facilities. The facilities will be priced at the Company’s net book value for that portion of pipe at the time the transaction closes. The proposed plan is subject to confirmation by the Bankruptcy Court. Inaddition, before the plan can become effective, various regulatory approvals must be obtained and certain other conditions must be satisfied.  10 
Table of Contents The Utility has been PG&E GTN’s largest customer, accounting for over 15percent of its transportation revenues for the past several years. As a result of the April 6, 2001 filing with the Bankruptcy Court, all $2.9 million due from the Utility for transportation services as of that date remains outstanding pending thedecision of the Bankruptcy Court. In accordance with PG&E GTN’s FERC tariff provisions, the Utility has provided assurances in the form of cash to support its position as a shipper on the PG&E GTN pipeline. The Utility is current on allsubsequent obligations incurred for the transportation services provided by PG&E GTN and has indicated its intention to remain current. The proposed plan of reorganization filed by PG&E Corporation and the Utility contemplates that theUtility will pay all its legitimate debts with interest. The Company anticipates that the Utility will pay the outstanding $2.9 million at the conclusion of the bankruptcy proceedings.  **NOTE 3:  LIQUIDITY AND FINANCING RESOURCES** **Credit Ratings** On July 31, 2002, S&P downgraded PG&E NEG to BB+ and CreditWatch with negative implications from BBB/stable. On October 11, 2002,S&P downgraded the senior unsecured debt ratings of PG&E NEG and several of its subsidiaries, including PG&E GTN. S&P downgraded the senior unsecured debt of PG&E NEG to B- from BB+ and downgraded the senior debt of PG&E GTNto BB- from BBB+. The ratings on each of these companies remained on CreditWatch with negative implications.  S&P lowered PG&E GTN’s rating to below investment grade to reflect S&P’s maximum three-notch differential between the ratings of a ring fenced entity and its ultimate parent. Although S&P noted that PG&EGTN is “legally ring fenced,” and that PG&E GTN’s stand-alone credit quality remains good, S&P stated it could not view PG&E GTN’s rating on a stand-alone basis because of the 100% ownership by PG&E NEG and theguarantees that PG&E GTN holds on behalf of affiliates.  On October 16, 2002, Moody’s downgraded thecredit ratings of PG&E GTN’s senior unsecured indebtedness to Baa3 from Baa2 and also downgraded the ratings of certain other PG&E NEG subsidiaries. Moody’s stated that its action reflects that PG&E GTN and the othersubsidiaries are wholly owned by PG&E NEG, “whose credit profile has deteriorated due to weak operating performance, low operating cash flow relative to its debt levels, and very tight liquidity” noting that PG&E NEG relies uponexcess cash flow generated by PG&E GTN and certain other subsidiaries.  On October 18, 2002, Moody’sfurther downgraded PG&E GTN’s senior unsecured debt rating to Ba1 from Baa3. (On the same date, Moody’s also downgraded PG&E NEG’s senior unsecured debt, issuer and syndicated bank credit facility to B3 from B1, followingMoody’s October 8, 2002 downgrade of PG&E NEG’s ratings to a below investment grade rating of B1 from the prior ratings of Ba2.) Moody’s kept these ratings under review for further possible downgrade.  11 
Table of Contents PG&E NEG has been in active negotiations with its lenders regarding aproposed global restructuring of its various debt facilities. If the restructuring cannot be achieved by agreement with PG&E NEG’s creditors, PG&E NEG and certain of its subsidiaries, including potentially PG&E GTN, may be compelledto seek protection under, or be forced into, Chapter 11 of the Bankruptcy code.  **Debt Financing** On May 2, 2002, PG&E GTN entered into a three year $125 million corporate credit facility pursuant to a credit agreement dated as ofMay 2, 2002 (Credit Agreement) to replace (1) the then existing $100 million revolving credit agreement which was due to expire on May 30, 2002, and (2) the promissory agreement and note with PG&E NEG, which was correspondingly terminated. Theinterest rate on the facility is based on the London Interbank Offer Rate (LIBOR) plus a credit spread that initially was 0.725 percent but, as a result of the downgrades, has increased to 1.45 percent. The credit spread percentage corresponds to arating issued from time to time by S&P or Moody’s on PG&E GTN’s senior unsecured long-term debt.  At September 30, 2002, there were no outstanding borrowings under the Credit Agreement. At December 31, 2001, PG&E GTN had classified its borrowings under the revolving credit agreement as long-term debt as the Company intendedto refinance such borrowing with the promissory note with NEG or the new three-year revolving credit agreement.  On June 6, 2002, PG&E GTN issued $100 million of 6.62 percent Senior Notes due June 6, 2012 pursuant to a Note Purchase Agreement dated June 6, 2002 (Note Purchase Agreement). Proceeds were used to repay $90 million of debt underthe Credit Agreement, and the balance retained to meet general corporate needs. A commitment from a financial institution for a back-up 364-day bank facility, obtained in the event PG&E GTN had decided to postpone such long-term financing, wascorrespondingly terminated.  During the three-month period ended September 30, 2002, PG&E GTN repaid $33million of Medium Term Notes (MTNs) as they matured. The remaining MTN in the amount of $6 million is reflected on the Consolidated Balance Sheet at September 30, 2002 as Long-term debt—current portion to reflect its maturity within the nexttwelve months.  The Credit Agreement and the Note Purchase Agreement contain a covenant which limits total debt to70 percent of total capitalization. At September 30, 2002, the total debt to total capitalization ratio, as defined in the agreements, was 53 percent and PG&E GTN was in compliance with all terms and conditions of its debt agreements. **NOTE 4:  PRICE RISK MANAGEMENT** PG&E GTN has contracts for thetransportation of natural gas transacted in the normal course of business. PG&E GTN has used and may use other derivative contracts (i.e., other than the transportation service contracts), in limited instances and solely for hedging purposes, tooffset price risk associated with certain negotiated rate transportation contracts. Commodity price risk is the risk that changes in market prices will adversely affect earnings and cash flows. During 2001, PG&E GTN applied a hedging program toreduce exposure to commodity price risk associated with negotiated rate index price contracts to provide transportation service. The goal of the hedging program was to effectively convert a portion of PG&E GTN’s variable-rate futurerevenues into fixed-rate revenues by locking in forward prices on certain volumes through the basis swap arrangements with its affiliate, PG&E Energy Trading. These hedge contracts were effective from April through October of 2001. In late Juneof 2001, PG&E GTN entered into new contracts exactly offsetting the initial basis swap arrangements for July through October. The initial and offsetting swap contracts were designated as cash flow hedges and recorded on the balance sheet at fairvalue, with the offset in the other comprehensive income section of equity. All swaps were settled by the end of October 2001, and no further hedging activity has been conducted since that time. 12 
Table of ContentsPG&E GTN adopted Statement of Financial Accounting Standards (SFAS) No. 133, *“Accounting for DerivativeInstruments and Hedging Activities,”* as amended by SFAS Nos. 137 and 138, on January 1, 2001. The earnings impact of adopting SFAS No. 133, as amended, on January 1, 2001 was immaterial. The effect on other comprehensive income was adecrease of $5.0 million. Through September 30, 2001, PG&E GTN recorded $3.4 million of pre-tax ($2.1 million after tax) swap losses reported as an offset against gas transportation revenues. As of September 30, 2001, due to the execution of newcontracts which exactly offset the remaining initial basis swap arrangements, GTN had reflected no remaining other comprehensive income. All 2001 unrealized losses were amortized to income in 2001 as they were realized. At September 30, 2002, thereare no cash flow hedges recorded in relation to SFAS No. 133.  The schedule below summarizes the activitiesaffecting accumulated other comprehensive income (loss) from derivative instruments:     **Nine Months Ended September 30,**    **2002**  **2001**    ****(In Millions)**** Beginning Accumulated other comprehensive income (loss)  $—    $(5.0)from SFAS No. 133 transition adjustments at January 1, 2001         Net change of current period hedging transactions gain (loss)   —     2.9 Net reclassification to earnings   —     2.1      Ending Accumulated other comprehensive income (loss)  $—    $—         13 
Table of Contents **NOTE 5:  INCOME TAXES** The differences between reported income taxes and taxamounts determined by applying the federal statutory rate of 35 percent to income before income tax expense were:     **Three Months Ended September 30,**   **Nine Months Ended September 30,**    **2002**   **2001**   **2002**   **2001**    (In Thousands) Expected federal income tax expense  **$****10,238******   $8,079   **$****27,719******   $29,814 Increase (decrease) in income tax expense                        resulting from:                    State income taxes, net of federal benefit  **** **1,012******    799   **** **2,742******    2,949 Prior year tax contingencies resolved in the  ** ****—  **** **   (4,300)  **** **—  ******          3rd quarter of 2001                  (4,300)Allowance for equity funds used    during construction  **** **(452****)**   12   **** **(1,066****)**   205 Other  **** **25******    79   **** **68******    117          Total income tax expense  **$****10,823******   $4,669   **$****29,463******   $28,785           **NOTE 6: COMMITMENTS AND CONTINGENCIES** **Credit Support** PG&E GTN was authorized by its Board of Directors to provide credit support including the execution and delivery of guarantees tosupport the obligations of various PG&E NEG subsidiaries. PG&E GTN and PG&E ET have termined the agreement pursuant to which PG&E GTN has provided guarantees on behalf of PG&E ET. See “Related Party Transactions” in“Note 1: General,” above for a further discussion of the credit support, and the guarantees which remain in effect.  **LegalMatters** In addition to the following legal proceeding, PG&E GTN is subject to routine litigationincidental to its business.  ***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 theparlance of the False Claims Act) on behalf of the United States of America against more than 330 defendants, including PG&E GTN. The cases were consolidated for pretrial purposes in the U.S. District Court, for the District of Wyoming. Thecurrent case grows out of prior litigation brought by the same relator in 1995 that was dismissed in 1998.  Underprocedures 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 doso. In April 1999, the DOJ declined to intervene in any of the cases.  The complaints allege that the variousdefendants (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 othersto underpay, the royalties that were due to the United States for the production of natural gas from those leases.  14 
Table of Contents The complaints do not seek a specific dollar amount or quantify the royaltiesclaim. The complaints seek unspecified treble damages, civil penalties, and expenses associated with the litigation.  PG&E GTN believes that it is reasonably possible that it could incur a loss but it is not able to determine the amount of such loss and, therefore, whether such loss would have a material adverse effect on PG&E GTN’sfinancial condition, results of operations, or cash flows.**** 15 
Table of Contents **ITEM 2.** **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** **GENERAL** PG&EGas Transmission, Northwest Corporation (PG&E GTN) is an indirect wholly owned subsidiary of PG&E National Energy Group, Inc. (PG&E NEG) and is affiliated with, but is not the same company as, Pacific Gas and Electric Company (theUtility), the gas and electric company serving northern and central California. PG&E Corporation is the ultimate corporate parent for both PG&E NEG and the Utility.  The accompanying unaudited consolidated financial statements include PG&E GTN and its wholly owned subsidiaries, Pacific Gas Transmission International, Inc., PacificGas Transmission Company, PG&E Gas Transmission Service Company LLC, and its 50 percent ownership interest in a joint venture known as Stanfield Hub Services, LLC. PG&E GTN and its subsidiaries are collectively referred to herein as the“Company”.  This information should be read in conjunction with the Consolidated Financial Statementsand 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, 2001, and its other reports filed with theSecurities and Exchange Commission since the Annual Report on Form 10-K was filed.  PG&E GTN operates anopen-access transportation system that transports primarily western Canadian gas from the British Columbia-Idaho border to the Oregon-California border for third-party shippers on a nondiscriminatory basis. PG&E GTN’s transportation systemalso provides service to various delivery points in Idaho, Washington, and Oregon. PG&E GTN’s natural gas transportation services are regulated by the Federal Energy Regulatory Commission (FERC), and various safety issues are subject to thejurisdiction of the U.S. Department of Transportation.  **RISK FACTORS** The information in this Quarterly Report on Form 10-Q includes forward-looking statements that are necessarily subject to various risks and uncertainties. These statementsare based on current expectations and assumptions which management believes are reasonable and on information currently available to management. These forward-looking statements are identified by words such as “estimates,”“expects,” “anticipates,” “plans,” “believes,” and other similar expressions. Actual results could differ materially from those contemplated by the forward-looking statements.  Although PG&E GTN is not able to predict all of the factors that may affect future results, some of the factors that could causefuture results to differ materially from those expressed or implied by the forward-looking statements, or historical results include:   • volatility of commodity fuel and electricity prices and the spread between them (which may result from a variety of factors, including: weather; the supply anddemand 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 energyand 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, andwhether PG&E GTN’s strategies to manage and respond to such volatility are successful; 16 
Table of Contents  • the extent and timing of electric generation, pipeline, and storage capacity expansion and retirement by others;   • The impact on PG&E GTN of the outcome of PG&E NEG’s negotiations with its lenders to reach a global restructuring of PG&E NEG’sindebtedness;   • future sales levels which are affected by general economic and financial market conditions and changes in interest rates, among other factors;   • the extent to which PG&E GTN’s current or planned development of pipeline projects are completed and the pace and cost of that completion, includingthe 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 PG&E GTN’s failure to obtain necessarypermits or equipment, the failure of third-party contractors to perform their contractual obligations, or the failure of necessary equipment to perform as anticipated;   • the ability of PG&E GTN’s counterparties to satisfy their financial commitments to PG&E GTN and the impact of counterparties’ nonperformanceon PG&E GTN’s liquidity position;   • heightened rating agency criteria and the impact of changes in credit ratings on PG&E GTN’s future financial condition and its ability to obtainfinancing for planned development projects;   • heightened regulatory and enforcement agency focus on the energy business with the potential for changes in industry regulations and in the treatment ofPG&E GTN by state and federal agencies;   • the effectiveness of PG&E GTN’s risk management policies and procedures;   • the effect of new accounting pronouncements; 17 
Table of Contents  • legislative or regulatory changes affecting the electric and natural gas industries in the United States, including the pace and extent of efforts torestructure the electric and natural gas industries;   • the effect of compliance with existing and future environmental and safety laws, regulations, and policies, the cost of which could be significant;  • the effect of the Utility bankruptcy proceedings upon PG&E Corporation, PG&E NEG, and PG&E GTN;   • the outcomes of the California Public Utilities Commission’s (CPUC’s) pending investigation into whether the California investor-owned utilities andtheir parent holding companies, including PG&E Corporation, have complied with past CPUC decisions, rules, or orders authorizing their holding company formations; the outcomes of the lawsuits brought by the California Attorney General and theCity and County of San Francisco against PG&E Corporation alleging unfair or fraudulent business acts or practices based on alleged violations of conditions established in the CPUC’s holding company decisions; and the outcome of theCalifornia Attorney General’s petition requesting revocation of PG&E’s exemption from the Public Utility Holding Company Act of 1935, and the effect of such outcomes, if any, on PG&E Corporation, PG&E NEG, and PG&E GTN;  • changes in or application of federal, state, and local laws and regulations to which PG&E GTN and its subsidiaries and the projects in which PG&E GTNinvests are subject;   • changes in or application of Canadian laws, regulations, and policies which may impact PG&E GTN and its subsidiaries;   • the continuing ability of existing customers to meet their financial obligations;   • the financial condition of affiliates for whom PG&E GTN has provided credit support and the extent to which counterparties of such affiliates seek recoursefrom the credit support provided by PG&E GTN;   • the outcome of pending or future litigation and environmental matters.  Although PG&E GTN believes that the expectations reflected in the forward-looking statements are reasonable, PG&E GTN cannot guarantee future results, events,levels of activity, performance, or achievements.  **LIQUIDITY AND FINANCIAL RESOURCES** ***Sources of Capital***—The Company’s capital requirements are funded from cash provided by operations and, to theextent necessary, external financing and capital contributions from its parent company. PG&E GTN has paid dividends as part of a balanced approach to managing its capital structure, funding its operations and capital expenditures, andmaintaining appropriate cash balances. PG&E Corporation and PG&E NEG completed a corporate restructuring that involved the use or creation of limited liability companies as intermediate owners between a parent and its subsidiaries. For moreinformation on these corporate actions, see “Note 2: Relationship with PG&E Corporation” included in “Item 1: Notes to Consolidated Financial Statements,” above. As a result of these actions, GTN Holdings LLC, PG&EGTN’s immediate parent, may not declare or pay dividends unless its Board of Control (including at least one independent director) has unanimously approved such dividends, and GTN Holdings LLC, on a consolidated basis with PG&E GTN,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 an investment grade credit rating.  18 
Table of Contents***Net Cash Provided by Operating Activities*** — For the nine months ended September 30, 2002, net cashprovided by operating activities was $89.1 million, compared with $159.4 million for the same period in 2001. The $70.3 million decrease was due to a number of factors, including the payment of income taxes to PG&E GTN’s parent in 2002,which was not done during the nine months ended September 30, 2001, lower net income in 2002, and changes in the balances of certain operating assets and liabilities.  ***Net******Cash Used in Investing Activities*** — For the nine months ended September 30, 2002, net cash used in investing activities was $40.3million, compared to $44.6 million in the same nine-month period of 2001. The construction expenditures are primarily a reflection of the 2002 Pipeline Expansion spending which commenced in 2001 and is nearing completion. The higher AFUDC credit in2002 is a direct result of the increased Construction Work in Progress balances arising from the 2002 Pipeline Expansion. The 2002 total reflects the repayment by PG&E Corporation of the $75 million note receivable partially offset by thelending of $64 million to North Baja Pipeline, LLC, a wholly owned pipeline subsidiary of PG&E NEG.  ***Future Expansion and Business Development*** — PG&E GTN has substantially completed its 2002 Expansion Project, expanding its system by approximately 217 MMcf per day. Approximately 40 MMcf per day of thatexpansion capacity was placed in service in November 2001 and the remaining capacity was placed in service in November, 2002. The total cost of the expansion is approximately $127 million. One shipper contractually committed to 175,000 Dth per dayof capacity on this project failed to provide PG&E GTN with adequate assurances of the shipper’s ability to meet its obligations under its transportation contract. On October 25, 2002, PG&E GTN and that shipper terminated thetransportation contract and PG&E GTN received $16.8 million from that shipper in settlement of the contract.  In response to changing market conditions, PG&E GTN reached agreement with all shippers contractually committed to a second expansion (2003 Expansion Project) to terminate their firm transportation precedent agreements.Accordingly, on October 10, 2002, PG&E GTN filed with the FERC a request to vacate its 2003 Expansion proceeding and deferred the project. To date PG&E GTN has spent $5.3 million on the project. PG&E GTN is continuing necessarydevelopment activities and expects to refile an application with FERC when market conditions improve.  Related totermination of the 2003 Expansion project precedent agreements, all but one of the former 2003 Expansion shippers has committed to take capacity on PG&E GTN’s system made available as a result of the 2002 shipper termination or capacityformerly held by Enron or other existing capacity on PG&E GTN’s system. PG&E GTN anticipates that it will enter into additional contracts for capacity made available from these sources through open market sales. As of early November2002, PG&E GTN had approximately 155,000 Dth per day of capacity available for subscription on a long-term basis.  PG&E GTN isevaluating the purchase of all or part of NBP from PG&E NEG. If this transaction proceeds, PG&E GTN may fund some or all the acquisition and remaining development costs through the forgiveness of the $73 million outstanding balance on theloan to NBP and through internally generated cash and its available line of credit. NBP owns and operates a new FERC-regulated interstate pipeline system located in the states of Arizona and California. The system is in the final stages ofconstruction and will consist of approximately 80 miles of pipe that began commercial operation on September 1, 2002 and 25,000 HP of compression facilities which are expected to be completed by the end of 2002. As of September 30, 2002, PG&ENEG has spent approximately $137 million to construct this project. Total costs of the project when fully complete will be approximately $156 million. PG&E GTN believes acquisition of NBP would be accretive to earnings in 2003.  PG&E GTN regularly solicits expressions of interest for the acquisition or development of additional pipeline capacity andmay develop additional firm transportation capacity as sufficient demand is demonstrated. PG&E GTN has initiated preliminary assessments of lateral pipelines that would originate on the PG&E GTN mainline system and would extend tometropolitan areas in the Pacific Northwest. 19 
Table of Contents***Net Cash Used in Financing Activities****—* For the nine months ended September 30, 2002, net cashused in financing activities was $44.3 million reflecting $44.0 million of dividends to parent and $18.0 million net repayment of long-term debt partially offset by $17.7 million of equity contributions. For the nine months ended September 30, 2001,cash used in financing activities was $115.9 million, reflecting a reduction in long-term debt and the payment of cash dividends to parent. See “Note 3: Liquidity and Financing Resources” included in “Item 1. Notes to ConsolidatedFinancial Statements,” above for a further discussion of financing activities.  ***Credit RatingChanges*** —****** On July 31, 2002, Standard and Poors (S&P) reduced PG&E GTN’s credit rating to BBB+ and CreditWatch with negative implications from A-/stable. Also on July 31, 2002, S&P downgraded PG&E NEGto BB+ and CreditWatch with negative implications from BBB/stable. On October 11, 2002, S&P downgraded the senior unsecured debt ratings of PG&E NEG and several of its subsidiaries, including PG&E GTN. On that date, S&P downgradedthe senior unsecured debt of PG&E NEG to B- from BB+ and downgraded the senior debt of PG&E GTN to BB- from BBB+. The ratings on each of these companies remain on CreditWatch with negative implications.  S&P lowered PG&E GTN’s rating to below investment grade to reflect S&P’s maximum three-notch differential betweenthe ratings of a ring fenced entity and its ultimate parent. Although S&P noted that PG&E GTN is “legally ring fenced,” and that PG&E GTN’s stand-alone credit quality remains good, S&P stated it could not view PG&EGTN’s rating on a stand-alone basis because of the 100% ownership by PG&E NEG and the guarantees that PG&E GTN has provided on behalf of affiliates.  On October 16, 2002, Moody’s Investor Services (Moody’s) downgraded the credit ratings of PG&E GTN’s senior unsecured indebtedness to Baa3 from Baa2 and also downgraded the ratingsof certain other PG&E NEG subsidiaries. Moody’s stated that its action reflects that PG&E GTN and the other subsidiaries are wholly owned by PG&E NEG, “whose credit profile has deteriorated due to weak operating performance,low operating cash flow relative to its debt levels, and very tight liquidity” noting that PG&E NEG relies upon excess cash flow generating by PG&E GTN and certain other subsidiaries.  On October 18, 2002, Moody’s further downgraded PG&E GTN’s senior unsecured debt rating to Ba1 from Baa3. (On the same date,Moody’s also downgraded PG&E NEG’s senior unsecured debt, issuer and syndicated bank credit facility to B3 from B1, following Moody’s October 8, 2002 downgrade of PG&E NEG’s ratings to a below investment grade rating ofB1 from the prior ratings of Ba2.) Moody’s kept these ratings under review for further possible downgrade.  These ratings actions will increase PG&E GTN’s costs to borrow money under its Credit Agreement which currently has no outstanding borrowings. Management has determined that such an increase will not have a material impacton its financial condition, results of operations, or cash flows. **** PG&E GTN’s parent company,PG&E NEG, has been in active negotiations with its lenders regarding a proposed global restructuring of its various debt facilities. If the restructuring cannot be achieved by agreement with PG&E NEG’s creditors, PG&E NEG andcertain of its subsidiaries, including potentially PG&E GTN, may be compelled to seek protection under, or be forced into, Chapter 11 of the Bankruptcy code.  ***Guarantees*** — At October 27, 2002 guarantees, on behalf of PG&E NEG subsidiaries other than NBP, with a face value of $573.8 million were outstanding, with an overall net exposureof $65.2 million on the transactions supported by the guarantees. The net exposure is comprised of the amount of outstanding guarantees directly supporting underlying transactions, net of offsetting positions, cash, and other collateral. At October27, 2002 a total of $13 million of guarantees were outstanding on behalf of NBP. PG&E GTN and PG&E ET have terminated the arrangements pursuant to which PG&E GTN provided guarantees on behalf of PG&E ET. See “Related PartyTransactions” in “Note 1: General” in Notes to Consolidated Financial Statements included in “Item 1. Consolidated Financial Statements”, above for further detail regarding guarantees which remain in effect. 20 
Table of Contents**RISK MANAGEMENT ACTIVITIES** PG&E Corporation and PG&E NEG have established officer-level risk policy and risk management committees. The PG&E NEG risk management policies are applicable to PG&E GTN. PG&E GTN may only engage in theuse of derivatives in accordance with policies established by the Risk Management Committees of PG&E Corporation and PG&E NEG. PG&E NEG measures its commodity price risk exposure using value-at-risk and other methodologies that simulatefuture price movement in the energy markets to estimate the size and probability of future potential losses. Market risk is quantified using the variance/co-variance value-at-risk model that provides a consistent measure of risk across diverseenergy markets and products. The use of this methodology requires a number of important assumptions, including the selections of confidence level for losses, volatility of prices, market liquidity, and holding period.  ***Credit Risk*** — Credit risk is the risk of loss that PG&E GTN would incur if counterparties fail to perform theircontractual obligations. PG&E GTN 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 bychanges in economic, regulatory, or other conditions. PG&E GTN mitigates potential credit losses in accordance with established credit approval practices and limits by conducting business primarily with creditworthy counterparties. PG&E GTNreviews credit exposure to each counterparty monthly or on an event driven basis. To be considered creditworthy for firm transportation, counterparties must have a BBB S&P equivalent rating or higher, or provide assurances either in the form ofcash, a guarantee from a BBB or better entity, or a standby letter of credit. For shippers with credit based on a BBB S&P equivalent rating, PG&E GTN will extend limited credit based on a shipper’s financials or on the financials of aguarantor.  On October 25, 2002, e prime, inc., a firm transportation customer on PG&E GTN’s system,filed a complaint before the Commission challenging PG&E GTN’s credit requirements with respect to (1) PG&E GTN’s requirement that a shipper demonstrate creditworthiness through a “senior unsecured debt” rating of BBB orbetter, rather than an “issuer” or other credit rating; and (2) whether PG&E GTN may demand up to 12 months of collateral from shippers that do not demonstrate creditworthiness through a BBB (or equivalent) senior unsecured debt creditrating. On November 8, 2002, PG&E GTN responded to the complaint.  PG&E GTN believes that the Commissionultimately will rule in favor of PG&E GTN on the material elements of this complaint. In the event the Commission issues an order in favor of e prime, PG&E GTN may be required to return some or all of the collateral PG&E GTN holds from eprime and other customers, and may face increased credit risk.  On December 2, 2001, Enron Corporation and certainsubsidiaries that were then shippers on PG&E GTN’s system, including Enron Energy Services and Enron North America (collectively referred to as “Enron”), filed a voluntary petition for relief under the provisions of Chapter 11 ofthe U.S. Bankruptcy Code. During the nine months ended September 30, 2002, 20,000 Dth per day of capacity held by Enron was assigned to third parties. Enron’s remaining firm transportation contracts with a capacity of 10,099 Dth per dayexpiring on October 31, 2002 and 42,500 Dth per day expiring on October 31, 2008 were terminated effective April 11, 2002 pursuant to an order of the Enron Bankruptcy Judge. Subsequent to termination, PG&E GTN remarketed 15,000 Dth per daybeginning on November 1, 2002 on a long-term basis. PG&E GTN continues to remarket the remaining 27,500 Dth per day capacity on a short-term basis and anticipates that it will remarket the capacity on a long-term basis in the future. AtSeptember 30, 2002, PG&E GTN had an unpaid receivable from Enron of approximately $3.5 million and has recorded a reserve of $1.4 million against such receivable representing the amount that may not be collectible. PG&E GTN believes that itsexposure to Enron will not have a material impact on its financial condition, results of operations, cash flow. 21 
Table of Contents**RESULTS OF OPERATIONS** Selected operating results and other data are as follows:     **Three Months Ended September 30,**  **Nine Months Ended****September 30,**   **2002**  **2001**  **2002**  **2001**   (In Millions)  (In Millions)Operating revenues  **$****61.8**  $57.3  **$****174.5**  $185.9Operating expenses  ** ****25.7**   27.5  ** ****76.6**   79.6         Operating income  ** ****36.1**   29.8  ** ****97.9**   106.3Other income, net  ** ****2.0**   2.3  ** ****7.2**   7.5Net interest expense  ** ****8.9**   9.0  ** ****25.9**   28.6         Income before taxes  ** ****29.2**   23.1  ** ****79.2**   85.2Income tax expense  ** ****10.8**   4.7  ** ****29.5**   28.8         Net Income  **$****18.4**  $18.4  **$****49.7**  $56.4          ***Net Income***—For the three-month period endedSeptember 30, 2002, net income was comparable to the same period in 2001. The decreases in net income for the nine-month period ended September 30, 2002 compared to the same period in 2001 resulted primarily from lower operating revenues partiallyoffset by lower operating expenses and interest expense as noted below.  ***OperatingRevenues***—Operating revenues for the three-month period ended September 30, 2002 increased $4.5 million compared to the same period in 2001. The increase reflects additional revenue collected as a result of negotiated long-term contracttermination settlements in the amount of approximately $4.6 million. The decreases for the nine-month period ended September 30, 2002, resulted from weak pricing fundamentals on gas transportation to the California and Pacific Northwest gas marketscompared to the same periods in 2001, partially offset by the termination settlements in the current quarter of 2002.  ***Operating Expenses***—The components of total operating expenses are as follows:     **Three Months Ended September 30,**  **Nine Months Ended****September 30,**   **2002**  **2001**  **2002**  **2001**   (In Millions)  (In Millions)Administrative and general  **$****7.8**  $9.1  **$****23.3**  $25.3Operations and maintenance  ** ****4.1**   5.2  ** ****11.6**   14.2Depreciation and amortization  ** ****11.2**   10.5  ** ****33.6**   31.3Property and other taxes  ** ****2.6**   2.7  ** ****8.1**   8.8         Total operating expenses  **$****25.7**  $27.5  **$****76.6**  $79.6          For the three- and nine-month periods ended September 30, 2002,compared with the same periods in 2001, operating expenses decreased $1.8 million and $3.0 million, respectively. The lower administrative and general expenses in the three- and nine-month periods ended September 30, 2002, are primarily driven bylower outside consultant fee charges, compared to the same periods in the prior year. Operations and maintenance expense decreased $2.6 million during the nine months ended September 30, 2002 compared to the same period in 2001 related to areduction in compressor overhaul activity. The reduction in property and other taxes during 2002 compared to 2001 is primarily the result of lower Washington compressor fuel use tax which is based on the indexed price of natural gas. Partiallyoffsetting these decreases was an increase in depreciation and amortization expense related to the placement in service of a portion of the 2002 expansion project and the accelerated amortization of computer software which will be replaced beforethe end of its originally estimated useful life. 22 
Table of Contents***Other income****—*The decrease in other income for the three months ended September 30, 2002 isprimarily due to the loss of rental income which was present in 2001 and higher interest income in 2001 on affiliate note receivable. See “Note 1: General” included in “Item 1. Notes to Consolidated Financial Statements,” abovefor a further discussion of the affiliate notes receivable. Partially offsetting these decreases are higher Allowance for Funds Used During Construction (AFUDC) recorded in the current year as a result of significantly higher levels of constructionwork in process existing in 2002 when compared to the prior year and higher interest income from available cash on hand in 2002.  ***Interest Expense*******—Interest expense for the three- and nine-month periods ended September 30, 2002 was $0.1 and $2.7 million less, respectively, than interest expense for the same periods in 2001. Thereduction of interest expense in the nine-month period ended September 30, 2002, compared to the same period in 2001, is primarily due to higher AFUDC credits in 2002, the absence of interest on the capital lease which was disposed of in late 2001,and lower average rates, partially offset by higher debt balances (excluding the capital lease obligations). For the three months ended September 30, 2002, and 2001, the average interest rate was approximately 7.6 percent and 7.5 percent,respectively, while the average balance of debt outstanding (excluding capital lease obligations) was $514 million and $469 million, respectively. For the nine months ended September 30, 2002 and 2001, the average interest rate was approximately 7.1percent and 7.5 percent, while the average balance of long-term debt (excluding capital lease obligations) outstanding was $527 million and $486 million, respectively.  **CRITICAL ACCOUNTING POLICIES—ACCOUNTING FOR THE EFFECTS OF REGULATION** PG&E GTN 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 ofRegulation.*” As a result of applying the provisions of SFAS No. 71, PG&E GTN has accumulated approximately $37.3 million of regulatory assets and $14.1 million of regulatory liabilities as of September 30, 2002.  **ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED** In August 2001, the Financial Accounting Statements Board (FASB) issued Statement of Financial Accounting Statements (SFAS) No. 143, “*Accounting for Asset Retirement Obligations.*” ThisStatement is effective for fiscal years beginning after June 15, 2002. SFAS No. 143 provides accounting requirements for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Under theStatement, the asset retirement obligation is recorded at fair value in the period in which it is incurred by increasing the carrying amount of the related long-lived asset. The liability is accreted to its present value in each subsequent periodand the capitalized cost is depreciated over the useful life of the related asset. PG&E GTN is currently evaluating the impact of SFAS No. 143 on its consolidated financial statements. 23 
Table of ContentsIn June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,”which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. PG&E GTN will adopt the provisions of SFAS No. 146 forrestructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exitcost was recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizingfuture restructuring costs as well as the amount recognized.  **SAFETY AND ENVIRONMENTAL MATTERS** PG&E GTN is subject to a number of federal, state and local laws and regulations designed to protect human health and the environmentby 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 andregulations affect future planning and existing operations. PG&E GTN has generally been able to recover the costs of compliance with safety and environmental laws and regulations in its rates.  On an ongoing basis, PG&E GTN assesses measures that may need to be taken to comply with safety and environmental laws and regulationsrelated to its operations. PG&E GTN believes that it is in substantial compliance with applicable existing environmental and safety requirements and that the ultimate amount of costs, individually or in the aggregate, that it may incur inconnection with its present compliance and remediation activities will not have a material effect on its financial position, cash flows, or results of operations.  **ITEM 3.    *****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK******* See “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 DISCLOSURECONTROLS AND PROCEDURES** Based on an evaluation of PG&E GTN’s disclosure controls and proceduresconducted on October 21, 2002, PG&E GTN’s principal executive and principal financial officers have concluded that such controls and procedures effectively ensure that information required to be disclosed by PG&E GTN in reports theCompany 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 significant changes in internal controls or in other factors that could significantly affect these controls subsequent tothe date of their evaluation. 24 
Table of Contents **PART** **II:    OTHER INFORMATION** **ITEM 1.    *****LEGAL PROCEEDINGS******* *******Natural Gas Royalties Complaint*****—**See “Legal Matters” in “Note 6: Commitments and Contingencies” in Notes to Consolidated Financial Statements included in “Item 1. ConsolidatedFinancial Statements,” above.  ***PG&E Gas Transmission, Northwest Corporation, FERC Docket Nos.RP99-518-019; RP99-518-020; RP99-518-021; RP99-518-022*****—********Between March 1, 2001 and June 1, 2001, PG&E GTN entered into ten contracts with eight different shippers under which the shippers agreed to pay anegotiated rate for service based on the differentials between spot market gas prices at various points on PG&E GTN’s system. In accordance with procedures established by FERC, PG&E GTN filed Tariff sheets with the Commission outliningthe specific transactions. In a series of orders, FERC accepted each of these filings, allowed PG&E GTN to place the negotiated rates into effect, but set the rates subject to refund. On January 28, 2002, PG&E GTN submitted an Offer ofSettlement in this proceeding, which does not propose a refund of any revenue collected by PG&E GTN. FERC staff filed comments in support of the Offer of Settlement, and the CPUC filed comments opposed to the Offer of Settlement. Both PG&EGTN and FERC staff filed reply comments in opposition to the CPUC’s comments and urged the Administrative Law Judge (ALJ) to certify the Offer of Settlement to the Commission. On April 4, 2002, the ALJ certified the Offer of Settlement to theCommission. On September 23, 2002, FERC issued an order approving the settlement in all respects and terminating the proceeding. On October 23, 2002, the CPUC filed a request for rehearing of the Commission’s September 23 order.  At the conclusion of these proceedings, FERC may require PG&E GTN to refund revenues received under some or all of thesecontracts in excess of revenues that would have been received under PG&E GTN’s recourse tariff rate. The total amount of potential refunds as of September 30, 2002, is approximately $11 million (including interest). PG&E GTN does notexpect that the ultimate outcome of this matter will have a material adverse effect on its financial condition, results of operations, or cash flows. **** ***e prime, inc., FERC Docket No. RP03-41—***As described in more detail under “Risk Management Activities” included in “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operation” above, one firm shipper on PG&E GTN’s system has filed a complaint with the FERC related to PG&E GTN’s credit policies. Management believes PG&E GTN will ultimatelybe successful defending the material aspects of e prime’s complaint. PG&E GTN does not expect that the ultimate outcome of this matter will have a material adverse effect on its financial condition, results of operations, or cash flows. **ITEM 5.    *************OTHER INFORMATION*************** PG&E Gas Transmission, Northwest Corporation’s earnings to fixed charges ratio for the nine months ended September 30, 2002 was 3.7:1. The statement of the foregoing ratio, together with the statement of thecomputation 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 PG&E GTN’s debt outstanding. 25 
Table of Contents**ITEM 6.    *******EXHIBITS AND REPORTS ON FORM 8-K********* (a)    Exhibits:  Exhibit 12 – Computation of Ratio ofEarnings to Fixed Charges.  Exhibit 99.1 – Certification of Principal Executive Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  Exhibit 99.2 – Certification ofPrincipal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (b)    Reports on Form 8-K issued during the quarter ended September 30, 2002, and through the date hereof:   1. October 21, 2002    Item 5.  Other Events – Rating agencies announce decisions to downgrade the senior unsecured debt ratings of PG&E GTN.  26 
Table of Contents **SIGNATURES** Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  PG&E GAS TRANSMISSION, NORTHWEST CORPORATION (Registrant)   November 12, 2002  By:    /S/    THOMAS B. KING   Name:  Thomas B. King   Title:  President and Chief Operating OfficerNovember 12, 2002  By:    /S/    JOHN R. COOPER   Name:  John R. Cooper   Title:  Senior Vice President, Chief Financial Officerand Treasurer 27 
Table of Contents I, John R. Cooper, certify that:  1. I have reviewed this quarterly report on Form 10-Q of PG&E GTN;  2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;  3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;  4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:   • designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, ismade known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;   • evaluated the effectiveness of the registrant’s disclosure controls and procedures within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and   • presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of theEvaluation Date;  5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing the equivalent function):   • all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and   • any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  Date: November 12, 2002  /S/    JOHN R.COOPER                            John R. Cooper Senior Vice President,Chief Financial Officer and Treasurer  28 
Table of Contents I, Thomas B. King, certify that:  1. I have reviewed this quarterly report on Form 10-Q of PG&E GTN;  2 Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;  3 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;  4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:   • designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, ismade known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;   • evaluated the effectiveness of the registrant’s disclosure controls and procedures within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and   • presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of theEvaluation Date;  5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing the equivalent function):   • all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and   • any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and 6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controlsor in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.  Date: November 12, 2002  /S/    THOMAS B.KING                                Thomas B. King President and ChiefOperating Officer  29 
Table of Contents **EXHIBIT INDEX** **Exhibit No.:**  **Description of Exhibit**12     Computation of Ratio of Earnings to Fixed Charges99.1  Certification of Principal Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of 200299.2  Certification of Principal Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002