SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K10-K/A
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 19992000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to_____________________ to____________
Commission file number 0-994
[LOGO] NW NATURAL
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 226-4211
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Shares outstanding on February 29, 2000
- ------------------- ---------------------------------------
Common Stock, $3 1/6 par value,
and Common Share Purchase Rights 25,154,849
Preference Stock, without par value 250,000
Preferred Stock, without par value 105,643
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, $3 1/6 par value,
and Common Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Shares outstanding on February 28, 2001
- ------------------- ---------------------------------------
Preference Stock, without par value 250,000
Preferred Stock, without par value 97,500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].[X].
The aggregate market value of the shares of voting stock (common stock) held by
non-affiliates of the registrant at February 29, 200028, 2001 was: $479,149,100.$618,598,200.
Indicate number of shares outstanding of each of registrant's classes of common
stock as of February 28, 2001: Common Stock, $3 1/6 par value,
and Common Share Purchase Rights 25,230,166
DOCUMENTS INCORPORATED BY REFERENCE
List documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated.
Portions of the Proxy Statement of Company, to be filed in connection with the
20002001 Annual Meeting of Shareholders, are incorporated by reference in Part III.
NORTHWEST NATURAL GAS COMPANY
Annual Report to Securities and Exchange Commission
onIntroductory Note
-----------------
This Form 10-K
for the year 1999
TABLE OF CONTENTS
PART I Page
- ------ ----
Item 1. Business
General..................................................... 3
Gas Supply.................................................. 3
Regulation and Rates........................................ 6
Competition and Marketing................................... 8
Environment................................................. 10
Employees................................................... 10
Item 2. Properties....................................................... 10
Item 3. Legal Proceedings................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
Additional Item
Executive Officers of the Registrant............................. 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data.......................................... 1510-K/A amends Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition......................................... 17
Item 7A. QuantitativeCondition - "Other Income (Expense)" and Qualitative Disclosures About Market Risk ...... 27
Item 8. Financial Statements and Supplementary Data...................... 30
Item 9. Changes inData - Note 1, Note 2 and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 59
PART III
Items 10. - 13. Incorporated by Reference to Proxy Statement............... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 59
SIGNATURES ............................................................ 65
2
NORTHWEST NATURAL GAS COMPANY
PART I
ITEM 1. BUSINESS
General
- -------
Northwest Natural Gas Company (NW Natural or the Company) was
incorporated under the laws of Oregon in 1910. The Company and its predecessors
have supplied gas service to the public since 1859. Since September 1997, it has
been doing business as NW Natural.
NW Natural is principally engaged in the distribution of natural gas.
The Oregon Public Utility Commission (OPUC) has allocated to NW Natural as its
exclusive service area a major portion of western Oregon, including the Portland
metropolitan area, most of the Willamette Valley and the coastal area from
Astoria to Coos Bay. NW Natural also holds certificates from the Washington
Utilities and Transportation Commission (WUTC) granting it exclusive rights to
serve portions of three Washington counties bordering the Columbia River. Gas
service is provided in 95 cities, together with neighboring communities, in 16
Oregon counties, and in nine cities, together with neighboring communities, in
three Washington counties. Based on U.S. Census Bureau statistics for 1995, NW
Natural's service areas had a population of about 2,735,000, including about 78
percent of the population of the State of Oregon and 6 percent of the population
of the State of Washington. The city of Portland is the principal retail and
manufacturing center in the Columbia River Basin, and is a major port and
growing nucleus for trade with Pacific Rim nations such as Japan, Taiwan and
Korea.
At year-end 1999, NW Natural had about 447,700 residential customers,
52,900 commercial customers and 600 industrial customers. Industries served
include pulp, paper and other forest products; the manufacture of electronic,
electrochemical and electrometallurgical products; the processing of farm and
food products; the production of various mineral products; metal fabrication and
casting; and the production of machine tools, machinery and textiles.
The Company operated two subsidiaries during 1999. NNG Financial
Corporation (Financial Corporation), a wholly-owned subsidiary, is incorporated
in Oregon. Financial Corporation holds financial investments as a limited
partner in three solar electric generating plants, four windpower electric
generation projects and a hydroelectric project, all located in California, and
in two low-income housing projects in Portland. Financial Corporation also holds
interests in certain gas producing properties in the western United States (See
Item 2, Properties, below). Canor Energy Ltd. (Canor) was a majority-owned
subsidiary incorporated in Alberta, Canada. In January 2000, the Company sold
its interest in Canor. For purposes of the accompanying consolidated financial
statements, Canor has been reclassified as a discontinued segment (see Part II,
Item 8, Notes 1 and 2Note 4
to the Consolidated Financial Statements). Prior to its
sale, Canor was engaged in natural gas and oil exploration in Alberta and
Saskatchewan, Canada.
Gas Supply - General
- --------------------
NW Natural meets the needs of its core market (residential, commercial
and firm industrial) customers through natural gas purchases from a variety of
suppliers. NW Natural has a diverse portfolio of short- and long-term firm gas
supply contracts. During periods of peak demand, supplies under these contracts
are supplemented with gas from storage facilities either owned by or
contractually committed to NW Natural.
Natural gas for NW Natural's core market is transported over the
interstate pipeline system of Williams Gas Pipeline - West (WGP), also known as
Northwest Pipeline Corporation. Most supplies also move over other pipelines
3
upstream of WGP's systemStatements contained in the U.S. and Canada. Rates for service under
transportation agreements between NW Natural and the U. S. interstate pipelines
are established by the Federal Energy Regulatory Commission (FERC), and by
Canadian federal or provincial authorities for the Canadian pipelines over which
NW Natural transports gas.
The largestAnnual Report on Form
10-K of the transportation agreements with WGP expires Sept. 30,
2013 and provides for firm transportation capacity of up to 2,160,440 therms1
per day. This agreement provides access to natural gas supplies in British
Columbia and the U.S. Rocky Mountains.
The Company's second largest transportation agreement with WGP expires
on Nov. 30, 2011. It provides 1,020,000 therms per day of firm transportation
capacity from the point of interconnection of the WGP and PG&E Gas Transmission
Northwest (PG&E GT-NW) systems in eastern Oregon to NW Natural's service
territory. PG&E GT-NW's pipeline runs from the U.S./Canadian border through
northern Idaho, southeastern Washington and central Oregon to the
California/Oregon border. NW Natural's total capacity on PG&E GT-NW and two
upstream pipelines (Alberta Natural Gas Company and NOVA Corporation of Alberta,
now both units of TransCanada PipeLines Limited) substantially matches this
amount of WGP capacity northward into Alberta, Canada.
NW Natural also has an agreement with WGP expiring Sept. 30, 2009, for
340,000 therms per day of firm transportation capacity for the Company's core
market. This agreement accesses gas supplies in the U.S. Rocky Mountain region.
The cost to NW Natural of gas to supply its core market consists of the
purchase price paid to suppliers plus charges paid to pipelines to transport
such gas to NW Natural's distribution system. While the rates for pipeline
transportation and peaking services are subject to federal regulation, the
purchase price of gas is not. Pipeline transportation rates have been relatively
stable in the past three years, helping to mitigate the effect on core market
customers of increases in gas commodity prices. Higher commodity prices also
have been offset in part by credits in the form of revenues from off-system
sales of commodity and released transportation capacity in periods when core
market customers do not fully utilize firm pipeline capacity.
NW Natural supplies many of its non-core customers (larger industrial
interruptible customers with full or partial dual fuel capabilities) through gas
transportation service, delivering gas purchased by these customers directly
from suppliers. (See "Transportation.")
Gas Supply -- Core Market Basic Supply
- --------------------------------------
NW Natural purchases gas for its core market from a variety of
suppliers located in the western United States and Canada. About 80 percent of
the annual supply comes from Canada, with most of the rest from the U.S. Rocky
Mountain region. At Jan. 1, 2000, NW Natural had 22 firm contracts with 15
suppliers with original terms of from four months to 15 years, which provided
for a maximum of 3,122,540 therms of firm gas per day during the peak winter
season and 1,343,300 therms per day during the remainder of the year. These
contracts have a variety of pricing structures and purchase obligations. NW
Natural intends to enter into new short-term purchase agreements in 2000 for
equivalent volumes of gas to replace similar agreements that expire after the
end of the 1999-2000 winter season.
- -----------------------------
1 One therm is equivalent to 100 cubic feet of natural gas at an
assumed heat content of 1,000 British Thermal Units (Btu's) per cubic
foot.
4
NW Natural's largest core market gas supply contract is an agreement
expiring Nov. 1, 2003, with CanWest Gas Supply, Inc. (CanWest), an aggregator
for gas producers in British Columbia, Canada. This contract entitles NW Natural
to purchase up to 960,000 therms of firm gas per day. The contract contains a
demand and commodity pricing structure and a provision for annual renegotiations
of the commodity price to reflect then-prevailing market prices. The demand
charges reflect the reservation of firm transportation space on the Westcoast
Energy, Inc. pipeline system in British Columbia. These demand charges are
subject to change as approved by the Canadian National Energy Board (NEB) in
rate proceedings similar to those conducted in the United States by the FERC.
The CanWest contract contains minimum purchase obligations.
NW Natural also buys gas on the spot market (30 days or less) as needed
to meet demand. Some flexibility is provided under the terms of NW Natural's
firm supply contracts, permitting the purchase of spot gas in lieu of firm
contract volumes and allowing NW Natural to take advantage of favorable pricing
on the spot market from time to time.
NW Natural's goal in purchasing gas for its core market is to meet
customers' needs at reasonable prices. NW Natural believes that gas supplies
available from suppliers in the western United States and Canada are adequate to
serve its core market customers for the foreseeable future, and that the cost of
such gas generally will track market prices.
Gas Supply -- Core Market Peaking Supply
- ----------------------------------------
NW Natural supplements its firm gas supplies with gas from
Company-owned or contracted peaking facilities in which gas is stored during
periods of low demand for use during periods of peak demand. In addition to
enabling NW Natural to meet its peak demand, these facilities make it possible
to lower the annual average cost of gas by allowing NW Natural both to minimize
its pipeline transportation contract demand and to purchase gas for storage
during the summer months when prices are generally at their lowest.
NW Natural has contracts with WGP which expire in 2004 for firm storage
services from the underground gas storage field at Jackson Prairie near
Centralia, Washington, and the liquefied natural gas (LNG) facility at Plymouth,
Washington. Together, these facilities provide NW Natural with daily firm
deliverability of 1,061,300 therms and total seasonal capacity of 15,991,880
therms. Separate contracts with WGP provide for the transportation of these
storage supplies to NW Natural's service territory.
NW Natural owns and operates two LNG plants which liquefy gas during
the summer months for storage until the peak winter season. These two plants,
one located in Portland and the other near Newport, Oregon, provide a maximum
daily deliverability of 1.8 million therms and a total seasonal capacity of 17
million therms.
NW Natural also owns and operates an underground gas storage facility
at Mist, Oregon. This facility has a maximum daily deliverability of 1.9 million
therms and a total seasonal working gas capacity of 85 million therms. NW
Natural is engaged in a multi-year, major expansion of the Mist storage
facility. A new pipeline placed into service in November 1999 increased the Mist
facility's maximum daily deliverability by 0.45 million therms.
NW Natural also has contracts with one electric generator, three
industrial customers, two gas marketing companies and another local gas
distribution company that together provide a total of 137,000 therms per day of
year-round capacity, plus 660,000 therms per day of recallable capacity and
supply. These contracts have remaining terms ranging from one to 10 years.
5
Gas Supply -- Transportation
- ----------------------------
Since WGP opened its system to the transportation of customer-owned gas
in the late 1980s, most of NW Natural's large industrial customers have switched
from sales service to transportation service whereby they purchase gas directly
from suppliers and ship the gas on the Company's system and those of its
pipeline suppliers for a fee. The ability of industrial customers to switch
between sales service and transportation service has made it possible for NW
Natural to retain most of these customers. Because transportation charges
typically have been the same as the margin on an equivalent sale of gas,
switching between sales service and transportation service by industrial
interruptible customers has not had a material effect on NW Natural's results of
operations. (See "Competition and Marketing.")
Regulation and Rates
- --------------------
NW Natural is subject to regulation with respect to, among other
matters, rates, systems of accounts and issuance of securities by the OPUC and
the WUTC. In 1999, 94 percent of NW Natural's gas deliveries and 93 percent of
its utility operating revenues were derived from Oregon customers and the
balance from Washington customers. The Company is exempt from the provisions of
the Natural Gas Act by order of the Federal Power Commission (now the FERC).
NW Natural's most recent general rate increase in Oregon, which was
effective Dec. 1, 1999, authorized rates designed to produce a return on common
shareholders' equity (ROE) of 10.25 percent. The OPUC approved a revenue
increase of $0.2 million per year, or 0.1 percent of Oregon revenues. The most
recent general rate increase in Washington, which was effective in 1997,
authorized rates designed to produce an ROE of 11.25 percent. Actual revenues
resulting from the OPUC's and the WUTC's general rate orders are dependent on
weather, economic conditions, customer growth, competition and other factors
affecting gas usage in NW Natural's service area. NW Natural's returns on
average common equity from utility operations were 9.9 percent in 1998 and 10.8
percent in 1999. The Company's returns from consolidated operations, including
subsidiary results, were 6.4 percent in 1998 and 10.2 percent in 1999.
In January 2000, NW Natural filed a general rate case in Washington
proposing a revenue increase of $6.2 million per year through rate increases
averaging 18.8 percent for Washington customers. The increase is designed to
cover utility plant investments in recent years and to implement the results of
a collaborative study to allocate costs of service between Oregon and
Washington. The WUTC suspended the filing for investigation and hearings. A
decision in the case is expected in late 2000.
In Oregon, NW Natural has a Purchased Gas Cost Adjustment (PGA) tariff
under which net income derived from Oregon operations is affected only within
defined limits by changes in purchased gas costs. The PGA tariff provides for
periodic revisions in rates due to changes in the Company's cost of purchased
gas. Costs included in the PGA adjustments are based on NW Natural's gas
requirements for the 12-month period ended each June 30. Any resulting rate
adjustments, derived from gas prices negotiated for the gas supply contract year
commencing on the following Nov. 1, are made effective on the following Dec. 1.
The PGA tariff provides that 67 percent of any difference between
actual purchased gas costs and estimated purchased gas costs incorporated into
rates will be deferred for amortization in subsequent periods. If actual gas
commodity costs exceed those incorporated in rates, NW Natural subsequently will
adjust its rates upward to recover 67 percent of the deficiency from core market
customers. Similarly, if actual gas commodity costs are lower than those
reflected in rates, rates will be adjusted downward to distribute to core market
customers 67 percent of such gas commodity cost savings.
6
In Washington, NW Natural is permitted to track increases and decreases
in gas commodity costs coincidental with their occurrence, with the result that
net income is not directly affected by changes in commodity costs.
In both Oregon and Washington, the PGA permits NW Natural to recover
100 percent of FERC-approved pipeline transportation cost increases.
In October 1999, NW Natural filed under its Oregon PGA tariff to
increase rates for Oregon customers by an average of 10.6 percent. The OPUC
approved a substitute filing increasing rates by an average of 6.9 percent
effective Dec. 1, 1999, with the balance of gas cost deferrals to be recovered
in future filings. Also effective Dec. 1, 1999, the OPUC approved a $4.8 million
rate increase to reflect the cost of service of the Company's investment in
Phase III of its Mist underground gas storage facility.
Effective Dec. 1, 1999, the WUTC approved rate increases for Washington
customers averaging 11.1 percent under NW Natural's Washington PGA tariff.
In a regulatory proceeding relating to the PGA tariff in Oregon, the
OPUC issued an order in April 1999 formalizing a process that tests for
"excessive earnings" in connection with gas utilities' annual filings of rate
changes due to increases or decreases in gas commodity costs. Under the OPUC's
order, NW Natural will be able to retain all of its earnings up to a threshold
level equal to its authorized ROE plus 300 basis points. If earnings exceed the
threshold, NW Natural will share one-third of the "excess" amount with
customers. The OPUC confirmed NW Natural's ability to pass through 100 percent
of its prudently incurred gas costs into rates. The excess earnings threshold is
subject to adjustment up or down each year depending on movements in interest
rates.
The OPUC and WUTC have approved transportation tariffs under which NW
Natural may contract with customers to deliver customer-owned gas. Under these
tariffs, revenues from the transportation of customer-owned gas, except that of
large industrial customers having the capability of bypassing NW Natural's
system, generally are equivalent to the margins that would have been realized
from sales of Company-owned gas. (See "Gas Supply - Transportation" and
"Competition and Marketing.")
The OPUC and WUTC have implemented "integrated resource planning"
processes under which utilities develop plans defining alternative growth
scenarios and resource acquisition strategies. In 1996 and 1997, respectively,
the OPUC and the WUTC acknowledged and accepted NW Natural's submission of its
third Integrated Resource Plan. Elements of the Plan included an evaluation of
supply and demand resources; the consideration of uncertainties in the planning
process and the need for flexibility to respond to changes; a primary goal of
"least cost" service; and consistency with state energy policy. Although the
OPUC's order acknowledging the Integrated Resource Plan does not constitute
ratemaking approval of any specific resource acquisition or expenditure, the
OPUC indicated that it would give considerable weight in prudency reviews to
utility actions that are consistent with acknowledged plans. NW Natural's fourth
Integrated Resource Plan filing, originally scheduled for 1998 and deferred
until 1999, was further deferred until 2000.
7
Competition and Marketing
- -------------------------
NW Natural has no direct competition in its service area from other
natural gas distributors. For residential customers' heating needs, however, NW
Natural competes with electricity, fuel oil, and, to a lesser extent, wood. It
also competes with electricity and fuel oil for commercial applications.
Competition among these forms of energy is based on price, reliability,
efficiency and performance. In 1999, NW Natural maintained its competitive price
advantage over electricity and approximate price parity with fuel oil in both
the residential and commercial markets. Throughout 1999, natural gas rates
continued to be substantially lower than rates for electricity provided by the
investor-owned utilities which serve approximately 75 percent of the homes in NW
Natural's Oregon service area. NW Natural believes that this rate advantage will
continue for the foreseeable future.
The relatively low saturation of natural gas in residential
single-family and attached dwellings in NW Natural's service territory,
estimated at 35 to 40 percent, together with the price advantage of natural gas
compared with electricity and its operating convenience over fuel oil, provides
the potential for continuing growth in the residential conversion market. In
1999, 22,053 net residential customers (after subtracting disconnected or
terminated services) were added, including 8,998 units of existing residential
housing which were reconnected to the system or were converted from oil or
electric appliances to natural gas. Of the new heating conversions from other
fuels, about 64 percent also converted to gas for water heating. In addition,
1,711 net commercial customers were connected in 1999. The net total of all new
customers added in 1999, including industrial sales and transportation
customers, was 23,756. This constituted a growth rate of 5.0 percent, about
three times the national average for local distribution companies as reported by
the American Gas Association.
Due to weather which was about 6 percent colder than in 1998, natural
gas sales volumes to residential and commercial customers in 1999 were up about
8 percent over 1998. Temperatures in NW Natural's service territory in 1999,
based on heating degree days, were 2 percent colder than the 20-year average.
The Pacific Northwest has historically enjoyed some of the lowest
electric rates in the nation, primarily due to the proximity of federal
hydropower facilities. With further deregulation in the energy business, the
region is unlikely to experience the large drop in electric rates expected in
other, high-cost areas of the country.
Electric deregulation holds the prospect of changing the competitive
landscape in the Northwest. Due to a number of environmental, economic and
political limitations on the future use of the hydroelectric infrastructure that
has dominated the Northwest energy supply for decades, several large gas-fired
generation projects are being planned to meet the region's future electricity
load growth. These projects could present opportunities for gas distributors to
serve the new loads as well as challenges from gas marketers. The developers of
generation projects often are affiliated with national multi-fuel marketers that
hold strong positions in a number of geographical areas in both gas and electric
markets. The availability of interstate pipeline capacity and gas storage
capacity will play significant roles in the future development of generation
projects.
While the natural gas industry, including producers, interstate
pipelines and local distribution companies (LDCs), has undergone many changes in
its history, perhaps no era has brought greater change than the past decade.
These changes, brought about by the deregulation or restructuring of the energy
markets, are intended to promote competition where it is economically beneficial
to consumers. The changes are continuing, though at different rates among the
various regulatory jurisdictions throughout the country.
8
Traditionally, LDCs have sold a "bundled" product which included the
natural gas itself as well as delivery to the meter. Since the late 1980s,
however, large customers have sought savings by procuring their own supplies of
natural gas from producers and contracting with pipelines and LDCs for
transportation. Since the cost of the gas commodity is passed through directly
to LDC customers without markup, the effect on net income when a customer
chooses transportation service has been negligible. While NW Natural's ability
to obtain competitively-priced gas commodity has enabled it to retain its
residential, commercial and many industrial customers as sales customers,
further deregulation of the industry may bring an unbundled product offering to
a greater number of customers, such that an increasing number of suppliers will
actively compete for customers' gas commodity business. However, since the final
delivery of customer-owned gas will continue to be through regulated
distribution systems, no material impact on NW Natural's profitability is
anticipated.
Competition to serve the industrial and large commercial market in the
Pacific Northwest has been relatively steady since the early 1990s in terms of
numbers and types of competitors. Competitors consist of gas marketers,
oil/propane sellers and electric utilities. Wood-based fuels continue to lose
market share primarily due to environmental concerns and restrictions.
Total industrial throughput, including both sales and transportation of
firm and interruptible gas, was 617 million therms in 1999, up 5.5 percent from
585 million therms in 1998. This increase was primarily related to a temporary
shift by an electric generation customer from a separate pipeline to
transportation service on NW Natural's system. Excluding this factor, throughput
for sales and transportation of industrial firm and interruptible gas was 584
million therms in 1999.
Industrial firm gas sales and transportation deliveries during 1999
totaled 219 million therms, up 1 percent from 1998. Industrial interruptible gas
sales and transportation deliveries during 1999 totaled 398 million therms, up 8
percent from 1998. In 1999, 4 percent of total utility operating revenues and 33
percent of total therms delivered were from sales and transportation deliveries
to industrial interruptible customers.
NW Natural and many of its largest industrial customers have entered
into negotiated transportation service agreements. These agreements are designed
to provide rates that are competitive with either the costs of alternative
fuels, such as heavy oil, or the customer's bypass alternatives. The agreements
generally prohibit bypass during their terms. Due to the cost pressures that
confront a number of the Company's largest customers which compete globally, the
risk of bypass continues to be a threat. Although NW Natural does not expect a
significant number of its large customers to bypass its system in the
foreseeable future, it may experience further deterioration of margin associated
with customers' transfers to contracts with pricing designed to be competitive
with the capital and operating costs of direct connections to WGP's system.
Since 1994, NW Natural has been authorized by the OPUC to make upstream
commodity sales and to release portions of its firm interstate pipeline capacity
at discounted rates when seasonal demand is low. This authorization allows NW
Natural to compete effectively with independent gas marketers. Sixty-seven
percent of all positive net revenues (gross revenues less the actual cost of gas
or pipeline capacity) generated from these sales and capacity releases ($1.7
million in 1999) have been credited to Oregon core market customer gas costs,
with the balance benefiting shareholders.
9
Environment
- -----------
NW Natural is subject to air, water, hazardous waste and other
environmental regulation by state and federal authorities and has complied in
all material respects with applicable regulations. Compliance with these
regulations has not had a material effect on the Company's capital expenditures,
earnings or competitive position.
NW Natural owns property in Linnton, Oregon, that is the site of a
former gas manufacturing plant that was closed in 1956. In 1993, pursuant to
Oregon Department of Environmental Quality (ODEQ) procedures, NW Natural
submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup
Program and, in 1994, the site was listed on ODEQ's Confirmed Release List and
Inventory. During 1995, initial tests revealed environmental contamination, but
the extent or the estimated cost of remediation cannot yet be determined. During
1998, the ODEQ and the U.S. Environmental Protection Agency (EPA) completed a
study of sediments in a 5.5-mile segment of the Willamette River that includes
the area adjacent to the site. Remediation of the site may be affected by the
sediments management plan now being developed in response to the ODEQ/EPA
sediments study.
Since 1993, NW Natural has recorded expenses of $2.6 million for the
estimated costs of consultants' fees, ODEQ oversight cost reimbursements, and
the voluntary investigation, plus an estimate for costs of the continuing
investigation. NW Natural expects that its costs of investigation and any
remediation for which it may be responsible should be recoverable, in large
part, from insurance. In the event these costs are not recovered from insurance,
NW Natural will seek recovery through future rates.
In 1996, the Eugene Water and Electric Board (EWEB) asked NW Natural to
participate in an investigation and potential remediation of a 1.5 acre site of
a former manufactured gas plant in Eugene, Oregon. NW Natural purchased the
property in 1958, after the plant had been converted to a liquid propane gas
plant. It used the propane plant until 1960, when the distribution system was
converted to natural gas, and continued to use the plant as a service center
until its sale in 1976. Although NW Natural never operated the manufactured gas
plant, EWEB has contended that NW Natural's activities on the site may have
exacerbated prior contamination. To date, NW Natural has not agreed to
participate in an investigation of the site and has not obtained sufficient
information to determine the extent of its responsibility, if any, for
remediation of the site.
Employees
- ---------
At year-end 1999, NW Natural had 1,275 employees, of which 929 were
members of the Office and Professional Employees International Union, Local No.
11. These union employees are working under a seven-year Joint Accord covering
wages, benefits and working conditions which will expire March 31, 2004.
ITEM 2. PROPERTIES
NW Natural's natural gas distribution system consists of 11,278 miles
of mains, as well as service pipes, meters and regulators, and gas regulating
and metering stations. The mains and feeder lines are located in municipal
streets or alleys pursuant to valid franchise or occupation ordinances, in
county roads or state highways pursuant to valid agreements or permits granted
pursuant to statute, or on lands of others pursuant to valid easements obtained
from the owners of such lands. NW Natural also holds all necessary permits for
the crossing of the Willamette River and a number of smaller rivers by its
mains.
10
NW Natural owns service facilities in Portland, as well as various
satellite service centers, garages, warehouses and other buildings necessary and
useful in the conduct of its business. It leases office space in Portland for
its corporate headquarters. District offices are maintained on owned or leased
premises at convenient points in the distribution system. NW Natural owns LNG
facilities in Portland and near Newport, Oregon, and also owns underground
natural gas storage facilities located near Mist, Oregon.
NW Natural considers all of its properties currently used in its
operations, both owned and leased, to be well maintained, in good operating
condition, and adequate for its present and foreseeable future needs. In order
to reduce risks associated with gas leakage in older parts of its system, NW
Natural undertook an accelerated pipe replacement program in the 1980s under
which it has reduced the amount of low pressure gas main (including cast iron
and bare steel) in the system from 400 miles of main in 1985 to less than 25
miles at the end of 1999.
NW Natural's Mortgage and Deed of Trust constitutes a first mortgage
lien on substantially all of the real property constituting its utility plant.
NW Natural holds interests in 5,521 net acres of underground natural
gas storage and 1,824 net acres of oil and gas leases in Oregon. Financial
Corporation holds interests in oil and gas leases covering 4,500 net acres
located in California, Wyoming and Colorado. NW Natural owns depleted gas
reservoirs near Mist, Oregon, that are continuing to be developed as underground
gas storage facilities. It also holds an option to purchase future storage
rights in certain other areas of the Mist gas field. The Company also holds an
equity investment in a Boeing 737-300 aircraft.
ITEM 3. LEGAL PROCEEDINGS
NW Natural recorded a charge of $5.6 million in the fourth quarter of
1996, equivalent to 15 cents a share, as a reserve against possible payment of
the judgment, related costs and post-judgment interest in a case brought by a
commercial customer in July 1995, Northwest Natural Gas Company v. Chase
Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). In the second
quarter of 1999, the Oregon Supreme Court ruled in the Company's favor on the
larger of the two claims in the suit, resulting in a credit to the litigation
reserve of $3.9 million, equivalent to 9 cents a share. The remaining issues in
the case were favorably resolved in a decision by the Oregon Court of Appeals,
resulting in an additional credit to the litigation reserve of $2.7 million,
equivalent to 8 cents a share, in the fourth quarter of 1999 (see Part II, Item
8, Note 12 to the Consolidated Financial Statements).
The Company is party to certain other legal actions in which claimants
seek material amounts. Although it is impossible to predict the outcome with
certainty, based upon the opinions of legal counsel, management does not expect
disposition of these matters to have a materially adverse effect on the
Company's financial position, results of operations or cash flows.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
ended Dec. 31, 1999.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
Name December 31, 1999 Positions held during last five years
---- ----------------- -------------------------------------
Richard G. Reiten 60 President (1996- ); Chief Executive Officer (1997- );
Chief Operating Officer (1996); President and Chief
Operating Officer, Portland General Electric Company
(1992-95).
Michael S. McCoy 56 Executive Vice President, Customer and Utility Operations
(2000- ); Senior Vice President, Customer and Utility
Operations (1999-00); Senior Vice President, Customer
Services (1992-99).
Bruce R. DeBolt 52 Senior Vice President, Finance, and Chief Financial Officer
(1990- ).
Mark S. Dodson 54 Senior Vice President, Public Affairs and General Counsel
(1998- ); Senior Vice President (1997); Partner, Ater
Wynne Hewitt Dodson & Skerritt LLP (1981-97).
Stephen P. Feltz 44 Treasurer and Controller (1999- ); Assistant Treasurer
(1996-99); Manager, General Accounting (1996-99).
Dwayne L. Foley 54 Senior Vice President (1999- ); Senior Vice President,
Operations Support, and Chief Engineer (1997-99); Senior
Vice President, Operations and Information Services
(1992-97).
W. Richard Harper, Jr. 46 Vice President, Market Services (1999- ); Vice President,
Energy Marketing and Supply (1997-99);
Vice President, Industrial and District Operations
(1995-97).
Diana J. Johnston 55 Vice President, Human Resources and Administrative Services
(1996- ); Vice President, Human Resources (1992-96).
Gregg S. Kantor 42 Vice President, Public Affairs and Communications (1998- );
Director, Public Affairs and Communications (1996-97);
Principal, Kantor & Associates (1994-96).
C. J. Rue 54 Secretary (1982- ); Assistant Treasurer (1987- ).
Each executive officer serves successive annual terms; present terms
end May 25, 2000.
There are no family relationships among the Company's executive
officers.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(A) NW Natural's common stock is traded on the Nasdaq National Market
tier of the Nasdaq Stock Market, which reports the daily high, low and closing
transaction prices, as well as volume data, under the symbol "NWNG."
NW Natural's common stock is included on the Federal Reserve Board's
list of over-the-counter securities determined to be subject to margin
requirements under the Board's regulations.
The quarterly high and low trades for NW Natural's common stock, as
quoted on the Nasdaq National Market and published in The Wall Street Journal
and on Nasdaq's World Wide Web site, were as follows:
1999 1998
-------------------------- -----------------------
Quarter Ended High Low High Low
- -------------------------------------------------------------------------------
March 31 $27.00 $21.00 $30.75 $25.75
June 30 27.00 19.50 28.25 26.38
September 30 27.88 23.31 28.00 24.25
December 31 27.00 21.13 30.25 25.75
The closing quotation for the common stock on Dec. 31, 1999, was
$21.9375. The closing quotation on Dec. 31, 1998, was $25.875.
(B) As of Dec. 31, 1999, there were 11,511 holders of record of the
Company's common stock.
(C) NW Natural has paid quarterly dividends on its common stock
in each year since the stock first was issued to the public in 1951. In December
1999, the Company also paid a special dividend on its common stock. Annual
common dividend payments have increased each year since 1956. Dividends per
share paid during the past two years were as follows:
Payment Date 1999 1998
------------ ---- ----
February 15 $0.305 $0.305
May 15 $0.305 $0.305
August 15 $0.305 $0.305
November 15 $0.305 $0.305
December 15 $0.005 -
------ ------
Total per share $1.225 $1.220
It is the intention of the Board of Directors to continue to pay cash
dividends on the Company's common stock on a quarterly basis. However, future
dividends will be dependent upon NW Natural's earnings, its financial condition
and other factors.
NW Natural's Dividend Reinvestment and Stock Purchase Plan permits
registered owners of common stock to reinvest all or a portion of their
quarterly dividends in additional shares of NW Natural's common stock at the
13
current market price. Shareholders also may invest cash on a monthly basis, up
to $50,000 per calendar year, in additional shares at the current market price.
During 1999, dividend reinvestments and optional cash investments under the Plan
aggregated $4.6 million and resulted in the issuance of 188,821 shares of common
stock. During the 22 years the Plan has been available, the Company has issued
and sold 3,783,766 shares of common stock which produced $80 million in
additional capital.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the Company's
operations and financial condition.
Operating revenues and cost of sales ($000): 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Sales revenues:
Residential $ 242,952 $ 205,388 $177,835 $183,802 $165,662
Commercial 139,425 117,889 100,677 104,582 99,079
Industrial - firm 35,857 34,303 27,025 30,672 31,268
Industrial - interruptible 17,182 15,337 13,944 17,097 24,113
Unbilled revenues (2,671) 8,314 1,647 1,627 1,173
----------- ----------- ----------- ----------- -----------
Total gas sales revenues 432,745 381,231 321,128 337,780 321,295
Transportation 21,351 19,958 22,029 22,533 16,650
Other 1,194 2,617 7,884 9,824 9,411
----------- ----------- ----------- ----------- -----------
Total utility operating revenues 455,290 403,806 351,041 370,137 347,356
Cost of gas 212,021 173,242 130,381 141,789 142,025
----------- ----------- ----------- ----------- -----------
Net utility operating revenues 243,269 230,564 220,660 228,348 205,331
Non-utility net operating revenues 368 402 450 636 8,271
----------- ----------- ----------- ----------- -----------
Net operating revenues $ 243,637 $ 230,966 $ 221,110 $228,984 $213,602
=========== =========== =========== =========== ===========
Net income $ 45,296 $ 27,301 $ 43,059 $46,793 $38,065
Preferred and preference stock
dividend requirements 2,515 2,577 2,646 2,723 2,806
----------- ----------- ----------- ----------- -----------
Earnings applicable to common stock $ 42,781 $ 24,724 $ 40,413 $44,070 $35,259
=========== =========== =========== =========== ===========
Average common shares outstanding (000)* 24,976 24,233 22,698 22,391 21,817
=========== =========== =========== =========== ===========
Basic earnings per share of common stock* $1.71 $1.02 $1.78 $1.97 $1.62
=========== =========== =========== =========== ===========
Diluted earnings per share of common stock* $1.70 $1.02 $1.76 $1.94 $1.60
=========== =========== =========== =========== ===========
Dividends per share of common stock* $1.225 $1.22 $1.205 $1.20 $1.18
=========== =========== =========== =========== ===========
Total assets - at end of period ($000) $1,244,423 $1,191,736 $1,111,617 $988,869 $929,277
=========== =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges** 3.12 2.20 2.99 3.53 3.15
===== ===== ===== ===== =====
* Data for 1995 have been restated to give effect to the three-for-two stock
split in September 1996.
** Computed using the Securities and Exchange Commission method. For this
purpose, earnings consist of net income before taxes plus fixed charges, and
fixed charges consist of interest on all indebtedness, the amortization of debt
expense and discount or premium, and the estimated interest portion of rentals
charged to income.
15
SELECTED FINANCIAL DATA (continued)
Capitalization - at end of period ($000): 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Common stock equity $429,596 $412,404 $366,265 $346,778 $323,552
Redeemable preference stock 25,000 25,000 25,000 25,000 25,000
Redeemable preferred stock 10,564 11,499 12,429 13,749 14,840
Long-term debt 396,379 366,738 344,303 271,838 279,945
---------- ---------- ---------- ---------- ----------
Total capitalization $861,539 $815,641 $747,997 $657,365 $643,337
========== ========== ========== ========== ==========
Gas sales and transportation deliveries (000 therms):
Residential 352,969 315,686 306,356 306,310 256,462
Commercial 252,382 229,124 225,249 225,115 196,723
Industrial - firm 84,630 87,275 84,523 91,122 82,958
Industrial - interruptible 52,938 51,521 53,929 63,261 84,173
Unbilled therms (9,343) 8,645 3,615 3,759 4,946
---------- ---------- ---------- ---------- ----------
Total gas sales 733,576 692,251 673,672 689,567 625,262
Transportation 480,570 446,165 440,452 410,062 379,116
---------- ---------- ---------- ---------- ----------
Total volumes delivered 1,214,146 1,138,416 1,114,124 1,099,629 1,004,378
========== ========== ========== ========== ==========
Customers (average for period):
Residential 435,959 413,714 394,415 374,558 355,427
Commercial 52,029 50,469 48,232 46,355 44,740
Industrial - firm 396 404 411 409 405
Industrial - interruptible 118 114 119 131 143
Transportation 127 122 120 106 79
---------- ---------- ---------- ---------- ----------
Total customers 488,629 464,823 443,297 421,559 400,794
========== ========== ========== ========== ==========
Customer statistics:
Heat requirements***
Actual degree days 4,256 4,011 4,092 4,427 3,779
20-year average degree days 4,193 4,234 4,264 4,273 4,306
Average annual use per customer in therms:
Residential 810 749 777 823 726
Commercial 4,851 4,540 4,670 4,874 4,420
Gas purchased cost per therm - net (cents) 27.85 25.09 24.05 22.25 20.67
===== ===== ===== ===== =====
*** A degree day is the measure of the coldness of the weather experienced
based on the extent to which the average of the high and low temperatures
for a day falls below 65 degrees Fahrenheit.
16
Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary Canor Energy, Ltd. (Canor), a majority-owned
subsidiary reclassified as a discontinued segment in 1999 and
sold in the first quarter of 2000
Together these businesses are referred to herein as the "Company" (see
"Subsidiary Operations" below and Note 2 to the Consolidated Financial
Statements).
At Dec. 31, 1999, the Company's investment in Canor was reclassified
to current assets and reported as a discontinued segment. In the consolidated
statements of income statements for 1999 1998 and 1997,1998, Canor's operating revenues and expenses
are included in net income from discontinued segment. The balance
sheets and statements of cash flows and capitalization for prior years have not
been restated.
The following is management's assessment of the Company's financial
condition including the principal factors that affect results of operations. The
discussion refers to the consolidated activities of the Company for the three
years ended Dec. 31, 1999.2000.
Highlights and Outlook
- ----------------------
Among its accomplishments in 1999,2000, NW Natural:
o added 23,756grew the customer base by more than 4 percent for the 12th year in a
row, adding 22,243 customers to theits gas distribution system during the
year, including the Company's 500,000th customer in
December;year;
o completed a criticalanother phase in the expansion of the Mist gas storage
system and placed it in service Dec. 1, 1999,2000, on time and on budget;
o wrapped upfiled and settled a majorgeneral rate case in OregonWashington and secured fair
regulatory treatment in both Oregon and Washington for the Mist
storage project, new state cost allocations and annual gas cost changes;
o completed the replacement of the last remaining portion of its
100-year-old low-pressure gas distribution system;
o sold its Canadian energy exploration and production subsidiary at a
gain, redeploying $35 million in cash proceeds from the sale into the
Company's growing operations in its core market;
o increased productivity while raisingby 6 percent, reducing its ratio of expenses
per customer satisfaction
ratingsfrom $188.56 in 1999 to record levels.$176.31 in 2000; and
o began trading its common stock on the New York Stock Exchange.
Among its corporate strategies for 2000,2001, NW Natural will focus on:
o supporting and strengthening its core gas distribution business;
o sustaining profitable customer growth while providing outstandingexcellent
customer service;
o enhancing service and creating shareholder value through further gas
storage development; and
o improving efficiency through technological advancementsby managing costs, investments and a high performance culture; and
o reinvesting the proceeds from the saleutilization of
the Company's
investment in Canor.assets.
2
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock in 19992000 were $42.8$47.8
million, up from $42.8 million in 1999 and $24.7 million in 1998 and $40.4 million in 1997.1998. Earnings for
1999 and 1997 were the second and third highest on2000 set a new record for the Company 17
respectively.while earnings for 1999 were its third
highest on record. Earnings for 1998 were reduced by write-downs of subsidiary
assets and by warmer than normal weather.
Diluted earnings per share from consolidated operations were $1.88 a
share in 2000, compared to $1.70 a share in 1999 compared toand $1.02 a share in 1998 and $1.76 a share in
1997.1998.
NW Natural earned $1.66$1.78 a diluted share from gas utility operations in
1999,2000, compared to $1.66 in 1999 and $1.43 in 1998 and $1.68 in 1997.1998. Weather conditions in its
service territory in 2000 were 4 percent colder than in 1999 wereand 5 percent
colder than the 20-year average. Weather in 1999 was 6 percent colder than in
1998 and 2 percent colder than the 20-year average. Weather in 1998 was 2 percent
warmer than in 1997 and 5
percent warmer than the 20-year average.
The estimated
weather-related increase in netNon-regulated operating revenues (margin) during 1999 was
equivalent to about 16 centsresults for 2000, excluding Canor, were
earnings of 1 cent a share compared to actual conditions during 1998.
The weather-related decrease in margin in 1998 was equivalent to about 9 cents a
share as compared to actual conditions in 1997.
Subsidiary results for 1999, excluding a discontinued segment,
were earnings of 3 cents a share compared tofrom these
operations in 1999 and a loss of 42 cents a share in 1998
and earnings of 7 cents a share in 1997 (see Note 2). The loss
in 1998 included write-downs of subsidiary assets equivalent to 43 cents a
share. 1997 results
includedThe Company recognized a gain equivalent to 59 cents a share from the sale
of an interest in a
California solar electric partnership.Canor during the first quarter of 2000. Results from the discontinued segmentCanor for
each of the years
ended Dec. 31, 1999 1998 and 19971998 were equivalent to earnings of 1 cent a share (see
Note 2). Results in 1998 included write-downs of assets equivalent to 7 cents a
share and a gain equivalent to 15 cents a share from a transaction involving
Canor (see "Discontinued Segment," below).
19992000 was the 44th45th consecutive year in which the Company's dividends
paid have increased. Dividends paid on common stock were $1.24 a share in 2000
compared to $1.225 a share in 1999 compared toand $1.22 a share in 1998 and $1.205 in 1997.1998.
Results of Operations
- ---------------------
Regulatory Matters
------------------
NW Natural provides gas utility service in Oregon and Washington, with
Oregon representing approximately 9392 percent of its revenues. Future earnings
and cash flows from utility operations will be determined largely by the pace of
continued growth in the residential and commercial markets and by NW Natural's
ability to remain price competitive in the large industrial market, to control
expenses, and to obtain reasonable and timely regulatory ratemaking treatment
for investments made in utility plant.
In October 1998, NW Natural filed2000, the Washington Utilities and Transportation
Commission (WUTC) authorized a general rate case in
Oregon proposing a revenue increase of $14.7totaling $4.3 million per
year, through rate
increases averaging 3.8or 12.1 percent. The first $3.0 million per year of the revenue increase,
relating to costs allocated to Washington under a new cost allocation study
approved by the WUTC and the Public Utility Commission of Oregon (OPUC), was
effective on Nov. 1, 2000. The remaining increase of $1.3 million per year will
be effective on Oct. 1, 2001. The WUTC authorized and based rates on a return on
common equity (ROE) of 10.8 percent.
In November 1999, the Oregon Public Utility
Commission (OPUC) issued an order authorizingOPUC authorized a revenuegeneral rate increase of $0.2
million per year effective Dec. 1, 1999, through1999. Higher revenues from rate increases
averaging 1.3 percent for residential customers were partially offset by rate
decreases for certain commercial and large industrial customers. The OPUC
authorized and based rates on a return on common equity (ROE)an ROE of 10.25 percent. On Dec. 1, 2000, NW
Natural reduced rates in Oregon by $3.0 million per year to implement the cost
allocation study that produced the equivalent rate increase in Washington.
3
NW Natural applies rate changes each year reflecting changes in its
purchased gas costs, the application of temporary rate adjustments to amortize
regulatory balancing accounts and the removal of temporary rate adjustments
effective the previous year. On Sept. 28, 2000, the OPUC approved, effective
Oct. 1, 2000, rate increases averaging 23 percent for NW Natural's Oregon sales
customers. On July 31, 2000, the WUTC approved, effective Aug. 1, 2000, rate
increases also averaging 23 percent for NW Natural's Washington sales customers.
These rate increases reflect sizable increases in the cost of natural gas
commodity purchased under contracts with gas producers (see "Comparison of Gas
Operations--Cost of Gas," below).
Also reflecting changes in NW Natural's purchased gas costs, the OPUC
approved rate increases averaging 9.1 percent effective Dec. 1, 1999, and
increases averaging 3.4 percent, 6.1 percent and 11.4 percent effective Dec. 1,
April 1 and Jan. 1, 1998, respectively. The WUTC approved rate increases
averaging 11.1 percent and 5.8 percent effective Dec. 1, 1999 and 1998,
respectively.
In an order issued in April 1999, the OPUC formalized a process that
tests for excessive earnings in connection with gas utilities' annual filings of
rate changes due to increases or decreases in gas costs. The OPUC confirmed NW
Natural's ability to pass through 100 percent of its prudently 18
incurred gas
costs into rates. Under this order, NW Natural is authorized to retain all of
its earnings up to a threshold level equal to its authorized ROE plus 300 basis
points. One-third of any earnings above that level will be refunded to
customers. In connection with the OPUC's order in the general rate
case, this means that NW Natural can earn up to 13.25 percent on equity before
sharing any additional earnings with customers. The excess earnings threshold is subject to adjustment up or down
each year depending on movements in interest rates.
The OPUC approvedEven with the commodity-related rate increases averaging 9.1 percent
effective Dec. 1, 1999, and increases averaging 3.4 percent, 6.1 percent and
11.4 percent effective Dec. 1, April 1 and Jan. 1, 1998, respectively. These
rate changes reflected changes in NW Natural's purchased gas costs, the
application of temporary rate adjustments to amortize regulatory balancing
accounts and the removal of temporary rate adjustments effective the previous
year.
The Washington Utilities and Transportation Commission (WUTC)
approved rate increases averaging 11.1 percent, 5.8 percent and 10.5 percent
effective Dec. 1, 1999, 1998 and 1997, respectively. These rate changes
primarily reflected changes in NW Natural's purchased gas costs. In October
1997, the WUTC approved a general rate increase averaging 3 percent for NW
Natural's customers in Washington
and authorized an ROE of 11.25 percent.
19Oregon in recent years, NW Natural expects to maintain a price advantage
over competing fuels, including heating oil as well as electricity provided by
the investor-owned electric utilities in its service territory.
4
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenues for the three years ended Dec. 31:
Thousands
1999 1998 1997
(Except customers and degree days) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Gas Sales and Transportation Volumes (Therms)- Therms (000's):
- ------------------------------------------------------
Residential and commercial sales 606,755 605,351 544,810
531,605
Unbilled volumes 8,691 (9,343) 8,645
3,615---------- --------- ----------- -------------------
Weather-sensitive volumes 615,446 52% 596,008 49% 553,455 49%
535,220 48%
Industrial firm sales 76,559 6% 84,630 7% 87,275 8%
84,523 7%
Industrial interruptible sales 56,632 5% 52,938 4% 51,521 4%
53,929 5%---------- --------- ----------- -------------------
Total gas sales 748,637 733,576 692,251
673,672
Transportation deliveries 431,136 37% 480,570 40% 446,165 39%
440,452 40%---------- ---- --------- ------- ------------- ------- ---------- ------------ --------- ----
Total volumes sold and delivered 1,179,773 100% 1,214,146 100% 1,138,416 100%
1,114,124 100%========== ==== ========= ======= ============= ============ ========= ============
Utility Operating Revenues:Revenues - ---------------------------Dollars (000's):
- ---------------------------------------------
Residential and commercial sales $382,377 $323,277 $278,512$ 440,302 $ 382,377 $ 323,277
Unbilled revenues 12,661 (2,671) 8,314
1,647---------- --------- ----------- -------------------
Weather-sensitive revenues 452,963 85% 379,706 83% 331,591 82%
280,159 80%
Industrial firm sales 37,378 7% 35,857 8% 34,303 8%
27,025 8%
Industrial interruptible sales 23,483 5% 17,182 4% 15,337 4%
13,944 4%---------- --------- ----------- -------------------
Total gas sales 513,824 432,745 381,231
321,128
Transportation revenues 21,491 4% 21,351 5% 19,958 5%
22,029 6%
Other revenues (3,976) (1%) 1,194 - 2,617 1%
7,884 2%---------- ---- --------- ------- ----------- -------- ---------- ------------ --------- ----
Total utility operating revenues $455,290$ 531,339 100% $403,806$ 455,290 100% $351,041$ 403,806 100%
========== ==== ========= ======= =========== ======== ========== ============ ========= ====
Cost of gas sold $212,021 $173,242 $130,381$ 273,978 $ 212,021 $ 173,242
========== ========= =========== ===================
Total number of customers
(end of period) 523,406 501,163 477,407
458,021========== ========= =========== ===================
Actual degree days 4,418 4,256 4,011
4,092========== ========= =========== ===================
20-year average degree days 4,197 4,193 4,234
4,264========== ========= =========== ===================
205
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with 23,75622,243
customers added since Dec. 31, 1998.1999. This represents a growth rate of 54.4
percent, compared to a5 percent in 1999 and 4.2 percent growth rate in 1998 and a record growth rate
of 5.7 percent in 1997.1998. In the three
years ended Dec. 31, 1999, approximately
68,0002000, more than 65,000 customers were added to the system,
representing an average annual growth rate of 54.6 percent.
Typically, 75 percent or more of NW Natural's annual operating
revenues are derived from gas sales to weather-sensitive residential and
commercial customers. Accordingly, variations in temperatures between periods
will affect volumes of gas sold to and revenues derived from these customers.
Weather conditions were 5 percent colder than average in 2000, 2
percent colder than average in 1999 and 5 percent warmer than average in 1998 and 4 percent warmer than average in 1997.1998.
Average weather conditions are calculated from the most recent 20 years of
temperature data measured by heating degree days. Weather in 2000 was 4 percent
colder than 1999 and 1999 was 6 percent colder than in 1998 and 1998 was 2 percent warmer than 1997.1998.
The volumes of gas sold to residential and commercial customers duringwere 3
percent higher in 2000 than in 1999 increasedand 8 percent compared tohigher in 1999 than in 1998,
reflecting the continued customer growth and colder weather. Related revenues increased 15Partially
offsetting the effects of the customer growth and colder weather on sales to
these customers in 2000, however, was a reduction from 1999 of about 7 percent
in residential and commercial customers' consumption per heating degree day,
probably due to the impact of gas commodity cost-related rate increases in
recent years (see "Regulatory Matters," above). Revenue from residential and
commercial customers was up 19 percent in 2000 due to increased volumes and the
rate increases effective in 19981999 and late 1999. Revenue from residential2000, and commercial customers was up 1815 percent in 19981999 due to
increased volumes and rate increases effective in late 19971998 and 1998.1999.
In order to match revenues with related purchased gas costs, NW
Natural records unbilled revenues for gas delivered but not yet billed to
customers through the end of the period. Amounts reported as unbilled revenues
reflect the increase or decrease in the balance of unbilled revenues over the
prior year end. Year-end balances are affected by weather conditions, rate
changes and customer billing dates from one period to the next.
Industrial Sales, Transportation and Other Revenues
---------------------------------------------------
Total volumes of gas delivered to industrial customers were 9 percent
lower in 2000 than in 1999 and 6 percent higher in 1999 than in 1998 and 1 percent higher in 1998 than in 1997.1998. During
1999, industrial transportation volumes included 33 million therms of deliveries
to an electric generating plant during a temporary shutdown of its primary gas
supply line. The combined margin from industrial sales and transportation
decreased 2 percent in 2000 from 1999 and increased slightly from 1998 and decreased by 7 percent in 1998 from 1997. The slight increase in
industrial margin in 1999 andfrom 1998.
The 2000 results include the decrease in 1998, despite increased volumes in
both 1999 and 1998, primarily reflect the effectpositive effects on industrial margins of lowhigher
oil prices onin an industrial schedule in which rates vary with oil prices. The
slight increase in industrial margin in 1999 from 1998 reflected the effect of
low oil prices on rates under this schedule, and transfers of some industrial
customers to rate schedules or special contracts with lower margins.
Other revenues relate primarily to accumulations or
adjustments toinclude amortizations from regulatory accounts (see Note 1) and to
miscellaneous fees assessedcharged to gas sales customers. Other revenues in 2000
amounted to a net reduction to utility operating revenues of $4.0 million,
compared to a net increase of $1.2 million in 1999. Factors contributing to the
reduction in 2000 were higher amortizations from regulatory accounts covering
conservation programs ($1.9 million), property taxes ($1.7 million) and Year
2000 costs ($1.1 million), and lower miscellaneous revenues ($1.0 million),
partially offset by higher revenues from customer late payment and reconnection
fees ($0.6 million).
In 1999, other revenues totaled $1.2 million, including fees assessed
to customers ($1.6 million), partially offset by other regulatory account
adjustments ($0.4 million). In 1998, other revenues included the deferral of
$2.0 million in revenue reductions required under a settlement approved by the
6
OPUC as part of the Jan. 1, 1998 rate changes, offset by $3.1 million from the
amortization of property tax savings and $1.4 million from amortizations of
other regulatory accounts.
In 1997, other revenues included $6.1 million from the amortization of
property tax savings and $1.2 million from the amortization of Oregon income tax
savings.
21
Cost of Gas
-----------
NW Natural's cost per therm of gas sold was 1527 percent higher in 19992000
than in 1998,1999, primarily due to higher prevailing prices in the natural gas
commodity market. Its cost of gas sold was 2915 percent higher in 19981999 than in
1997.1998. The cost per therm of gas sold includes current gas purchases, gas drawn
from storage inventory, gains or losses from commodity hedges, demand cost
equalization, regulatory deferrals and company use.
NW Natural was able to offset some of the impact of the higher gas
prices during 2000 through an active natural gas commodity hedge program
conducted under the terms of the Company's Derivatives Policy (see Note 1,
"Derivatives Policy"). NW Natural recorded net gains from commodity swap and
call option contracts of $56 million in 2000, compared to net gains of $4
million in 1999. Gains (losses) from commodity hedges are recorded as reductions
(increases) to the cost of gas. The cost of gas sold also was reduced by
off-system gas sales of $3.0 million in 2000, compared to $1.7 million in 1999
compared toand $4.6 million in 1998 and $2.3 million in 1997.1998. Under an agreement with the OPUC, revenues from these
sales are treated as a reduction of gas costs.
NW Natural has a Purchased Gas Cost Adjustment (PGA) tariff under which its
net income from Oregon operations is affected only within defined limits by
changes in purchased gas costs. NW Natural absorbs 33 percent of the higher cost
of gas sold, or retains 33 percent of the lower cost, in either case as compared
to projections. The remaining 67 percent of the higher or lower gas costs are
recorded as deferred debits or credits (regulatory assets or liabilities) for
recovery from or refund to customers in future rates. SubsidiaryNW Natural deferred $6.1
million of higher gas costs in 2000 and expects to recover these amounts from
customers during the next two years. The combined impact of NW Natural's higher
gas costs and its partially offsetting off-system gas sales under the PGA
sharing mechanism in 2000 was that the Company absorbed $2.0 million of its
higher gas costs, reducing earnings by about 5 cents a share.
Non-regulated Operations
---------------------
Results from continuing operations for Financial Corporation------------------------
Non-regulated operating results in 19992000 were earnings equivalentof 1 cent a
share, compared to earnings of 3 cents a share compared to lossesfrom these operations in 1999 and
a loss of 42 cents a share in 1998 and earnings of 7 cents a share in 1997 (see Note 2).
Financial Corporation's operating results in 19992000 were net income of
$0.5$0.1 million, compared to $0.5 million in 1999 and $0.1 million in 1998 and $1.6 million1998. The
decrease in 1997.income from 1999 to 2000 was primarily due to an adjustment to
deferred taxes in 2000. The increase in income from 1998 to 1999 was primarily
due to stronger operating results from itsFinancial Corporation's investments in
limited partnerships in solar electric, wind-power electric and hydroelectric
generation projects in California. The decline in income from 1997 to 1998 was primarily due to weaker
operating results from its investments in the limited partnerships. Its 1997
results included a $1.1 million gain from the sale of an interest in a solar
electric partnership.
Financial Corporation recorded asset impairment charges in 1998
totaling $16.6 million, equivalent to 43 cents a share. The charges resulted
from the application of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," to Financial Corporation's limited partnership
investments. The determinations of impairments for Financial Corporation's
assets resulted from lower estimates in 1998 of lower prices for future sales of
electricity from the partnerships' power projects.
The Company's investment in Financial Corporation at Dec. 31, 1999,2000,
was $7.2 million, compared to $7.1 million compared toat Dec. 31, 1999 and $6.6 million at
Dec. 31, 1998.
The Company realized income of $0.1 million in 2000 from non-utility
gas storage, involving the sale of gas storage services to upstream customers
using storage capacity not required from time to time for service to utility
customers. NW Natural retains 80 percent of the revenues from the upstream
storage services and credits the remaining 20 percent to its utility customers.
7
Discontinued Segment
--------------------
In the fourth quarter of 1999On Jan. 26, 2000, the Company decided to sellsold its interestsinterest in Canor at a gain of
$2.4 million, equivalent to 9 cents a diluted share (see Note 2), with the effect that Canor has been
reclassified as a discontinued segment.. Net income
from the discontinued segmentCanor for 1999 and 1998 was $0.4 million in both years, compared to income of $0.2 million in 1997.years. Results for 1998
included asset write-downs totaling $2.8 million, equivalent to 7 cents a share,
and a $3.5 million gain, equivalent to 15 cents a share, from a merger involving
Canor. Approximately half of the write-downs were asset impairment
22
charges due to the application of SFAS No. 121, resulting from the impact of low
oil prices on Canor's oil properties in Alberta. The remaining write-downs were
due to determinations that some oil and gas wells were no longer productive
because of water encroachment. The gain from the merger was not subject to U.S. income tax. In 1997, Canor's results included a $0.9 million write-downtax in 1998, but
it was effectively taxed upon disposition of unproven properties under SFAS No. 121.Canor in 2000.
The Company's investment in Canor of $29.2 million at Dec. 31, 1999,
iswas reported in current assets as an investment in discontinued segment in current assets.
The Company's investment in Canor for the years ended Dec. 31, 1998 and 1997 was
$31.9 million and $19.8 million, respectively. In 1998, the increase in the
Company's investment in Canor included $11.8 million converted to equity from
inter-company debt at the time of Canor's merger.segment.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $5$4.6 million, or
6 percent, lowerhigher in 19992000 than in 1998. NW Natural's operations and
maintenance expenses decreased $4.8 million, or 6 percent.1999. The reductionincrease was primarily due to
credits to a litigation reserve in 1999 totaling $4.9 million resulting from
favorable decisions by the Oregon Supreme Court and the Oregon Court of Appeals
in a case involving claims by a commercial customer (see Note 12), and to
increased payroll costs ($0.9 million) and accruals for environmental claims
($0.6 million) in 2000, partially offset by a lower bonus accrual ($1.3 million)
in 2000.
Operations and maintenance expenses in 1999 were $5.0 million, or 6
percent, lower than in 1998. The decrease was primarily due to the $4.9 million
credit to the litigation reserve (see above). Lower expenses in 1999 for
uncollectible accounts ($0.6 million), pensions ($0.4 million) and other
miscellaneous operating costs ($2.0 million) were approximately offset by higher
expenses for bonus accruals ($2.5 million) and early retirement and severance
charges ($0.9 million).
Operations and maintenance expenses in 1998 were $4.4 million,
or 6 percent, higher than in 1997 primarily due to higher accruals for
uncollectible accounts ($1.4 million); maintenance expenses for a new customer
information system (CIS) ($1.1 million); amortizations of Year 2000 costs ($0.8
million); higher market development expense ($0.4 million); and employee
severance charges ($0.6 million).
Taxes Other Than Income
-----------------------
Taxes other than income, which are comprised of property, franchise,
payroll and other taxes, increased $3.7 million, or 15 percent, in 2000.
Franchise taxes, which are based on gross revenues, increased $2.6 million, or
25 percent, reflecting higher revenues due to an increase in the Company's
customer base and rate increases effective in late 1999 and 2000. Property tax
expense was $0.6 million, or 7 percent, higher than in 1999 due to more plant in
service. Payroll tax expense was $0.3 million, or 9 percent, higher than in 1999
due to an increase in payroll expense.
Taxes other than income increased $2.7 million, or 12 percent, in
1999. Property tax expense was $0.9 million, or 10 percent, higher than in 1998
due to more plant in service. Franchise taxes which are based on gross
revenues, increased $1.4 million, or 16
percent, reflecting higher revenues due to an increase in the Company's customer base and rate increases effective Dec. 1, 1998
and 1999.
Taxes other than income increased $2.0 million, or 10 percent,
in 1998. NW Natural's property taxes increased $0.9 million, or 12 percent, due
to more plant in service. Franchise taxes increased $1.1 million, or 14 percent,
reflecting higher revenues due to rate increases effective Jan. 1, April 1 and
Dec. 1, 1998.8
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense was $3.6 million
lower in 2000 than in 1999. The reduction was due to charges to NW Natural's
depreciation expense in both years relating to regulatory treatment of a new
customer information system (CIS) completed in 1997. NW Natural wrote down its
CIS assets by $6.5 million in 1999 pursuant to the OPUC's order in its Oregon
general rate case concluded in November 1999, and by a further $0.4 million in
2000 pursuant to the WUTC's order in its Washington general rate case concluded
in October 2000. (See "Results of Operations - Regulatory Matters," above.)
Exclusive of these regulatory mandated charges, consolidated
depreciation, depletion and amortization expense increased $7.1$2.6 million, or 166
percent, in 2000 compared to 1999 and $0.5 million, or 1 percent, in 1999
compared to 1998,1998. As a percentage of average plant and $4.9property, depreciation,
depletion and amortization expense was 3.5 percent for both 2000 and 1999.
Other Income (Expense)
- ----------------------
Other income was $3.9 million or 13
percent, in 1998 compared to 1997. NW Natural's depreciation expense increased
$7.12000, $1.0 million from 1998 tolower than in
1999, primarily due to an asset write-down of the CIS
($6.5 million) resulting from the OPUC's order in NW Natural's Oregon general
23
rate case concluded in November (see "Results of Operations -- Regulatory
Matters," above). The $4.9 million, or 13 percent, increase from 1997 to 1998
was due to additional utility plant placed in service.
Other Income (Expense)
----------------------
The variations in other income (expense) during the past three
years resulted primarily from non-recurring items. Other income for 1999
consisted primarilya reduction of interest income ($3.9 million). Infrom $3.9 million to $3.1
million. Other income was $4.8 million in 1999, compared to Other expense of
$13.7 million in 1998, other income
(expense) reflectedreflecting $16.6 million in asset write-downs recorded in
1998 related to Financial Corporation's limited partnership interests in solar
electric, wind-power electric and hydroelectric generation projects in
California (see "Non-regulated Operations," above). These asset write-downs
resulted primarily from the effect of projected lower prices for future sales of
electricity from these projects during the period of their expected remaining
lives ranging from 18 to 20 years.
As a result of the outlook for reduced cash flows due to lower energy
prices in California, the Company investigated a potential sale of its interests
in these projects and conducted an impairment analysis. The Company concluded
that the aggregate fair value of these assets was potentially much lower than
their book value, but that the market was limited and market prices were not
readily available. The Company then determined these projects were held for use
and did an impairment test on that basis.
Impairment tests were conducted using a model based on SFAS No. 121.
The assumptions used were determined to be reasonable based on historical data,
best available information and previous analyses performed. The Company's cash
flow projections focused primarily on future projected electricity prices. The
projections also included assumptions related to project operating and
maintenance costs, production availabilities, avoided power costs and discount
rates.
The impairment tests compared the undiscounted estimated future cash
flows from the assets to their book value. Because the undiscounted future cash
flows were less than the book value, the assets were deemed to be impaired,
requiring write-downs by Financial
Corporation underthe amount of the difference between the book value and
the discounted value of their estimated future cash flows. The SFAS No. 121
(see "Subsidiary Operations," above).valuation model used, including key assumptions and present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved, represented the best estimate of fair value for these projects.
Interest Charges - Net
----------------------
Interest charges decreased $1.5increased $3.5 million, or 512 percent, in 19992000
compared to 19981999, primarily due to an increase in long-term debt outstanding and
an adjustment relating to the favorable decisions by the Oregon Supreme Court
and the Oregon Court of Appeals in a case involving claims by a commercial
customer that reduced interest expense by $1.7 million in 1999 (see Note 12).
9
Interest charges in 1998 increased $3.1decreased $1.5 million, or 115 percent, in 1999
compared to 1997. The 1998, increase resulted from increases in
long-term debt and commercial paperprimarily due to higher gas costs, construction
spending to fundreversals of interest charges recorded in
prior years following the favorable decisions by the Oregon Supreme Court and
the Oregon Court of Appeals in the case involving claims by a commercial
customer growth and other spending for general corporate
purposes.(see Note 12).
Allowance for Funds Used During Construction (AFUDC) represents the
cost of funds used during the construction of utility plant (see Note 1). In
1999,2000, AFUDC reduced interest expense by $1.2$0.8 million compared to $1.2 million in
1999 and $1.4 million in 1998 and $1.7 million in 1997.1998. The weighted average AFUDC rates were 6.0 percent
in 2000 and 1999 and 5.5 percent in 1998 and 5.8 percent in 1997 (see "Financing Activities," below).
Income Taxes
------------
The effective corporate income tax rates for 2000, 1999 and 1998 and
1997 were
3535.9 percent, 3535.4 percent and 3335.1 percent, respectively. The effective tax
rate in 1997 was lower than the statutory rate due to permanent tax savings from
a change in book depreciation rates, an increase in tax credits and a reversal
of amounts previously recorded for the California solar energy investment sold
(see Note 8).
Redeemable Preferred and Preference Stock Dividend Requirements
---------------------------------------------------------------
Redeemable preferred and preference stock dividend requirements for
19992000 and 19981999 were lower by $0.1 million, or 2 percent, in 2000 and 3 percent in
1999, due to sinking fund redemptions.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth, system improvements and the
development of underground gas storage. NW Natural finances these expenditures
from cash provided by operations and from short-term borrowings which are
periodically refinanced through the sale of long-term debt or equity securities.
In addition to its capital expenditures, the weather-sensitive nature of gas
usage by NW Natural's residential and commercial customers influences the
Company's financing requirements. Short-term liquidity is satisfied primarily
24
through the sale of commercial paper, which is supported by commercial bank
lines of credit (see Note 6).
The Company's long-term goal is to maintain a capital structure
comprised of 45 to 50 percent common stock equity, 5 to 10 percent preferred and
preference stock and 45 to 50 percent short-term and long-term debt. When
additional capital is required, the Company issues debt or equity securities
depending upon both the target capital structure and market conditions. The
Company also uses these sources to meet long-term debt and preferred and
preference stock redemption requirements (see Notes 3 and 5).
Cash Flows
----------
Operating Activities
--------------------
Operating activitiesContinuing operations provided net cash of $108.5$87.2 million in 19992000
compared to $66.9$108.2 million in 1999. An increase in cash from operations before
working capital changes ($14.8 million) was offset by higher working capital
requirements ($35.8 million). The increase in cash from continuing operations
before working capital changes was primarily due to an increase in the balance
of deferred income taxes and investment tax credits compared to a decrease in
1999 ($9.7 million), a decrease in regulatory account net debit balances
compared to an increase in 1999 ($8.1 million) and higher net income from
continuing operations ($2.9 million), offset in part by lower depreciation,
depletion and amortization ($3.6 million) and a smaller decrease in deferred gas
costs receivable ($2.9 million). The increase in working capital requirements
was due to changes in net balances of other current assets and liabilities
($33.0 million) (see "Port of Portland Building," below), an increase in
accounts receivable compared to a decrease in 1999 ($18.2 million) and an
increase in accrued unbilled revenue compared to a decrease in 1999 ($16.8
million), offset in part by a larger increase in accounts payable ($25.6
million) and an increase in accrued interest and taxes compared to a decrease in
1999 ($6.9 million).
10
Cash provided by continuing operations in 1999 was $108.2 million
compared to $66.6 million in 1998. The 62 percent increase was due to increased
cash from operations ($6.8 million) and lower working capital requirements
($34.8 million). The increase in cash from continuing operations before working
capital changes compared to 1998 was primarily due to higher net income from
continuing operations ($18.0 million) and a greater reduction in deferred gas
costs receivable ($6.0 million). The increase, offset in cash from operations in 1999 ($16.1 million) was due
topart by non-cash investment losses in
1998 including the asset write-downs by Financial Corporation.Corporation ($16.1 million).
The decrease in working capital requirements in 1999 was primarily due to an
increase in accounts payable compared to a decrease in 1998 ($19.6 million), and
reductions in accrued unbilled revenue and accounts receivable compared to
increases in 1998 ($13.1 million and $8.8 million, respectively). The decreases
in working capital requirements were partially offset by a larger increase in
inventories of gas, materials and supplies ($8.8 million).
Cash provided by operating activities in 1998 was $66.9
million compared to $45.8 million in 1997. The 46 percent increase was due to
increased cash from operations ($26.6 million), offset in part by higher working
capital requirements ($5.5 million). The increase in cash from operations
compared to 1997 was primarily due to lower deferred gas costs receivable ($37.5
million), an increase in depreciation, depletion and amortization expense ($11.2
million) and non-cash investment losses in 1998 including the asset write-downs
by Financial Corporation ($16.0 million). The increase in cash from operations
was partially offset by lower net income from continuing operations ($15.9
million), a reduction in deferred taxes and investment tax credits ($17.0
million) and higher gains on sale of assets ($2.9 million). The increase in
working capital requirements was due to an increase in accounts receivable in
1998 compared to a reduction in 1997 ($9.5 million), partially offset by a
smaller reduction in accounts payable in 1998 ($3.3 million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Note 12).
Port of Portland Building
-------------------------
A large portion of the change in cash from continuing operations in
2000, compared to 1999, was due to cash flows relating to NW Natural's
development contract for construction of a new headquarters building for the
Port of Portland. The Port made construction progress payments totaling $18.8
million in the second and third quarters of 1999. NW Natural recorded current
liabilities in the amounts of these payments, pending closing on the sale of the
building, with the effect of reducing working capital requirements in the first
nine months of 1999. The Port made its final payment of $1.2 million at closing
on the sale of the building in the third quarter of 2000. At that time NW
Natural reversed the balance of current liabilities relating to the building
($19.3 million), with the effect of increasing working capital requirements by
that amount in 2000.
Cash used in construction of the building was recorded in both periods
as an investment in non-utility property (see "Investing Activities," below). NW
Natural used a portion of the Port's progress payments to pay off the balance
outstanding under a bank line of credit arranged for construction of the
building ($12.3 million), contributing to a reduction in short-term debt in
1999.
Investing Activities
--------------------
Cash used inrequirements for investing activities increased $20.6in 2000 totaled $30.9
million, down from $98.6 million in 1998 to $119.2$118.9 million in 1999. Cash requirements for utility
construction totaled $80.4 million, down $28.7 million from 1999. The decrease
in cash requirements for utility construction in 2000 resulted from lower
expenditures for completion of another phase of the Company's gas storage
expansion project ($24.8 million); lower construction overhead ($1.9 million);
and reduced expenditures for computer hardware and software ($1.6 million).
Cash requirements for NW Natural's capital expendituresprogram in 1999 totaled
$109$109.1 million, up $29$29.1 million or 36 percent, from 1998. The increase in cash requirements
for utility construction in 1999 resulted from higher expenditures for gas
storage development due to completion
of a new phase of the Company's gas storage expansion project (Mist Storage
III)($($23.9 million); higher expenditures for computer hardware
and software ($2.3 million), communications technology ($0.8 million) and large
system 25
improvement projects ($1.3 million); and higher construction overhead
($2.0 million).
Cash requirements for NW Natural's capital program in 1998
totaled $80 million, down $36 million, or 31 percent, from 1997. The decrease in
cash requirements for utility construction in 1998 resulted from lower
expenditures for completion of the new CIS ($14.0 million), an earlier phase of
the gas storage expansion project (Mist Storage II) ($5.2 million) and several
large system improvement projects ($5.9 million); reduced expenditures for
computer hardware and software ($1.1 million); and lower construction overhead
($2.0 million).
NW Natural's utility construction expenditures are estimated at $82to total $75
million for 2000.2001. Over the five-year period 20002001 through 2004,2005, these
expenditures are estimated at between $450 million and $500 million. The high level
of capital expenditures over the next five years reflects projected high
customer growth plus a major system reinforcement project and the development of
additional underground gas storage facilities. An estimated 60 percent of the
required funds is expected to be internally generated over the five-year period,
with the remainder to be funded through a combination of long-term debt and equity
securities with short-term debt providing liquidity and bridge financing.
NW Natural had11
Investments in non-utility capitalproperty in 2000 included expenditures for
completion of $10.7the portion of the Company's gas storage expansion project
utilized for interstate storage ($4.9 million) and final payments of $2.6
million in 1999, primarily relating to a contract for the construction of a new
headquarters building for the Port of Portland. The purchase and sale agreement
between NW Natural and the Port of Portland provides forbuilding. Total proceeds
from the Port to pay at
closing an established purchase price for construction of the core and shellsale of the building plus NW Natural's costs for constructionin 2000 ($20.0 million) were recognized as
proceeds from sale of tenant improvements. NW
Natural anticipates that closing will occur during the first or second quarter
of 2000. In June and Augustassets. Investments in non-utility property in 1999 were
$10.7 million, including $9.7 million relating to the Port made construction progress payments
in advance of closing totaling $18.8 million, which were used to pay off the
balance outstanding under a line of credit used for construction of thePortland building.
There were no new capital investments in either of the Company's
subsidiaries during 1999. Non-utility capital expenditures totaled $19.8 million
in 1998, including Canor's investments of $13.5 million in Canadian exploration
and production properties. NW Natural's non-utility expenditures in 1998
totaling $6.3 million included expenditures relating to the Port of Portland
contractbuilding ($6.0 million) and additions to existing facilities ($0.3 million).
NW Natural invested $3.0The sale of Canor provided net cash of $34.8 million in Canor's exploration and
production program in 1997 to supplement Canor's internally generated funds.2000.
Financing Activities
--------------------
Cash used in financing activities in 2000 totaled $55 million,
compared to cash provided by financing activities in 1999 of $13 million.
Factors contributing to the $68 million difference were retirements of long-term
debt of $60 million in 2000 compared to $10 million in 1999, and a reduction in
short-term debt ($38 million) in 2000 compared to an increase in short-term debt
($13 million) in 1999, partially offset by an increase in long-term debt issued
($35 million) in 2000.
NW Natural sold $75 million of its Medium-Term Notes (MTNs) in 2000.
It sold $50 million of secured MTNs with a weighted average maturity of 28 years
and a weighted average coupon rate of 7.75% and used the proceeds to redeem all
$50 million of the callable 9-3/4% Series of First Mortgage Bonds due 2015. The
refunding will save the Company about $0.8 million per year (net) in future
interest expense. NW Natural used $10 million from the remaining $25 million of
proceeds from sales of secured MTNs in 2000 to refund maturing long-term debt,
and $15 million to meet capital requirements for the Company's ongoing
construction program or to reduce short-term debt.
In May 2000, the Company commenced a program to repurchase up to 2
million shares, or up to $35 million in value, of NW Natural's common stock
through a repurchase program to extend through May 2001. The purchases are made
in the open market or through privately negotiated transactions. As of Dec. 31,
2000, the Company had repurchased 108,700 shares of common stock at a total cost
of $2.4 million.
Cash provided by financing activities in 1999 totaled $13.3$13 million,
down from $32.3$32 million in 1998. The decrease was due to lower proceeds from sales
of common stock ($47 million), partially offset by higher net proceeds from the
issuance and retirement of long-term debt ($13 million) and an increase in
short-term debt.debt ($15 million). Proceeds from the sales of $20 million of Medium-Term Notes, Series B, in both
September and December 1999, and $12.7 million from the increase in short-term
debt,secured
MTNs were used in part to reducerefund maturing long-term debt ($10 million).
Cash provided by financing activities in 1998 was down $44.5
million from $76.8 million in 1997. This decrease was due to a $2 million
reduction in short-term debt in 1998 compared to a $39 million increase in 1997,
asStock Listing
-------------
On July 27, 2000, the Company's higher proceeds fromCommon Stock, $3-1/6 par value, and
the sale of commonCommon Share Purchase Rights appurtenant thereto, began trading on the New
York Stock Exchange, Inc. under the symbol "NWN". The stock in 1998 were
approximately offset by lower net proceeds frompreviously traded on
the issuance and retirement of
26
long-term debt. Proceeds fromNasdaq National Market with the sales of $22 million, $10 million and $20
million of Medium-Term Notes, Series B, in March, June and November 1998,
respectively, and $44.7 million from the negotiated public offering and sale of
1,725,000 shares of NW Natural's common stock in April 1998, were used in part
to reduce long-term debt ($35 million) and short-term debt ($2 million).symbol NWNG.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the years ended Dec. 31, 2000, 1999 1998 and 1997,1998, the Company's ratios
of earnings to fixed charges, computed using the Securities and Exchange
Commission method, were 3.14, 3.12 2.20 and 2.99,2.20, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges. Fixed charges
12
consist of interest on all indebtedness, the amortization of debt expense and
discount or premium, and the estimated interest portion of rentals charged to
income.
Contingent Liabilities
- ----------------------
Year 2000 Readiness
-------------------
During 1999 NW Natural completed corrections to the
information technology (IT) and non-IT systems within its control that could be
affected by the Year 2000 (Y2K) issue. Y2K project work included maintaining and
managing the inventory of its date-sensitive IT and non-IT systems; renovating
and testing high-priority internal IT systems; researching and evaluating the
degree of Y2K readiness of IT and non-IT systems of suppliers and vendors; and
developing contingency plans for high-risk systems or vendor products where
products were known to be non-compliant or readiness levels could not be
independently verified. NW Natural did not experience significant Y2K-related
problems with its systems.
NW Natural's total cost for its Y2K readiness program was
about $7 million. The total estimated cost does not include the costs incurred
for IT systems that were replaced rather than renovated. In accordance with an
order of the OPUC, NW Natural's incremental operating costs for Year 2000
readiness were deferred and will be amortized over a five-year period.
Environmental Matters
---------------------
Since 1993, NW Natural has recorded expenses of $2.6 million for the
costs of a continuing investigation of property it owns in Linnton, Oregon, that
is the site of a former gas manufacturing plant that was closed in 1956 (see Note 12)(the
Linnton site). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures associated with
activities involving derivative financial instruments and other financial
instruments are natural gas commodity price risk, foreign currency risk and
interest rate risk.In 2000, NW Natural uses derivative financial instruments as tools to
mitigate certainrecorded an additional accrued liability of
$1.4 million representing the estimated costs of further investigation and
interim remediation on this site. Correspondingly, the Company recorded a
receivable for its estimated recovery of these market risks (see Note 11).additional costs from insurance
or through future rates.
Also in 2000, NW Natural enters into
such instruments for hedging purposes, not for trading purposes. Market risks
associated withrecorded expenses of $0.4 million relating to
an investigation of a site adjacent to the derivative financial instruments are monitored by management
personnel who do not directly enter into these contractsLinnton site that now is the location
of a manufacturing plant (the Wacker site), and by$0.6 million relating to a
committeesegment of the Board of Directors.
27
Physical and Financial Commodity and Foreign Currency Transactions
------------------------------------------------------------------
NW Natural enters into short-term and long-term natural gas
purchase contracts with demand and commodity fixed-price and variable-price
components, along with associated short-term and long-term natural gas
transportation contracts. Many ofWillamette River (the Portland Harbor) that includes the purchases made under these contracts are
in Canadian dollars and NW Natural uses foreign currency forward contracts to
hedge against foreign exchange rate fluctuations.
NW Natural historically has taken physical delivery of at
least the minimum quantities specified in its natural gas purchase contracts.
The contracts are subject to annual re-pricing, a process that is intended to
reflect anticipated market price trends during the next year. NW Natural's PGA
mechanism in Oregon provides for the recovery from customers of actual commodity
costs in comparison with established benchmark costs, except that NW Natural
absorbs 33 percent of the higher cost of gas sold, or retains 33 percent of the
lower cost, in either case as compared to projections.
At Dec. 31, 1999, differences between notional values and fair
values with respect to NW Natural's open positions in derivative financial
instruments were not materialarea
adjacent to the Company's financial position or results of
operations. However, to the degree that market risks exist due to potential
adverse changes in commodity prices and foreign exchange rates in relation to
these financial and physical contracts, the Company considers the risks to be:
Commodity Price Risk
--------------------
The prices of natural gas commodity are subject to
fluctuations due to unpredictable factors including weather, pipeline
transportation congestion and other factors that affect short-term supply and
demand. NW Natural uses natural gas commodity swap agreements to convert certain
long-term gas purchase contracts from floating prices to fixed prices. As of
Dec. 31, 1999, the Company had not entered into any natural gas commodity swaps
or other derivative commodity instruments extending beyond the end of 2000. If
all of the commodity swap agreements had been settled on Dec. 31, 1999, NW
Natural would have realized a loss of $7.7 million.
Foreign Currency Risk
---------------------
The costs of natural gas commodity and certain pipeline
services are subject to changes in the value of Canadian currency in relation to
U. S. currency. NW Natural uses foreign currency forward contracts to hedge
against fluctuations in currency values with respect to its purchases of at
least 80 percent of its estimated daily requirements for natural gas purchased
from suppliers in Canada. As of Dec. 31, 1999, the Company had not entered into
any derivative financial instruments relating to foreign currency exchange rates
extending beyond the end of 2000. If all of the contracts had been settled on
Dec. 31, 1999, NW Natural would have realized a gain of $0.2 million.
Interest Rate Risk
------------------
Interest rate risk relates to new debt financing needed to
fund capital requirements, including maturing debt securities, and to the
issuance of commercial paper. NW Natural manages interest rate risk through the
issuance of fixed-rate debt with varying maturitiesLinnton site and the refunding of debt
through optional redemption when interest rates are favorable. NW Natural had no
derivative financial instruments to hedge interest rates in place at Dec. 31,
1999.
28
Wacker site. See Note 12.
Forward-Looking Statements
- --------------------------
This report and other presentations made by the Company from time to
time may contain forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and other statements which are other than statements of
historical facts. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis. However, each such forward-looking statement involves uncertainties and
is qualified in its entirety by reference to the following important factors
that could cause the actual results of the Company to differ materially from
those projected in such forward-looking statements: (i) prevailing governmental
policies and regulatory actions, including those of the OPUC and the WUTC, with
respect to allowed rates of return, industry and rate structure, purchased gas
and investment recovery, acquisitions and dispositions of assets and facilities,
operation and construction of plant facilities, present or prospective wholesale
and retail competition, changes in tax laws and policies and changes in and
compliance with environmental and safety laws and policies; (ii) weather
conditions and other natural phenomena; (iii) unanticipated population growth or
decline, and changes in market demand and demographic patterns; (iv) competition
for retail and wholesale customers; (v) pricing of natural gas relative to other
energy sources; (vi) unanticipated changes in interest or foreign currency
exchange rates or in rates of inflation; (vii) unanticipated changes in
operating expenses and capital expenditures; (viii) capital market conditions;
(ix) competition for new energy development opportunities; and (x) legal and
administrative proceedings and settlements. All subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of the
Company, also are expressly qualified by these cautionary statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
2913
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
1. Management's Responsibility for Financial Statements................ 31Statements................. 15
2. Report of Independent Accountants................................... 32Accountants.................................... 16
3. Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31,
2000, 1999 1998 and 1997................................................. 331998.................................................. 17
Consolidated Statements of Earnings Invested in the Business for the
Years Ended December 31, 2000, 1999 1998 and 1997.................... 341998......................... 18
Consolidated Balance Sheets, December 31, 19992000 and 1998............. 351999.............. 19
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 1998 and 1997.................................... 371998.................................................. 21
Consolidated Statements of Capitalization, December 31, 19992000 and
1998............................................................ 381999................................................................. 22
Notes to Consolidated Financial Statements.......................... 39Statements........................... 23
4. Quarterly Financial Information (unaudited)......................... 57.......................... 42
5. Supplementary Data:
Financial Statement Schedules for the Years Ended December 31, 2000,
1999 1998 and 19971998: Schedule II - Valuation and Qualifying Accounts and
Reserves............................................... 58Reserves............................................................. 43
Supplemental Schedules Omitted
All other schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included
elsewhere in the financial statements.
3014
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
----------------------------------------------------
The financial statements in this report were prepared by management,
which is responsible for their objectivity and integrity. The statements have
been prepared in conformity with generally accepted accounting principles and,
where appropriate, reflect informed estimates based on judgments of management.
The responsibility of the Company's independent accountants is to render an
independent report on the financial statements.
The Company's system of internal accounting controls is designed to
provide reasonable assurance that assets are safeguarded and transactions are
executed in accordance with management's authorizations, that transactions are
recorded to permit the preparation of financial statements in conformity with
orders of regulatory authorities and generally accepted accounting principles
and that accountability for assets is maintained. The Company's system of
internal controls has provided such reasonable assurances during the periods
reported herein. The system includes written policies, procedures and
guidelines, an organization structure that segregates duties and an established
program for monitoring the system by internal auditors. In addition, the Company
has prepared and annually distributes to its employees a Code of Ethics covering
its policies for conducting business affairs in a lawful and ethical manner.
Ongoing review programs are carried out to ensure compliance with these
policies.
The Board of Directors, through its Audit Committee, oversees
management's financial reporting responsibilities. The Committee meets regularly
with management, the internal auditors, and representatives of the Company's
independent accountants. Both internal auditors and external accountants have
free and independent access to the Committee and the Board of Directors. No
member of the Committee is an employee of the Company. The Committee reports the
results of its activities to the full Board of Directors. Annually, the
Committee recommends the nomination of independent accountants to the Board of
Directors for shareholder approval.
/s/ Richard G. Reiten
----------------------------------
Richard G. Reiten
President and
Chief Executive Officer
/s/ Bruce R. DeBolt
----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
3115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NW Natural
In our opinion, the accompanying consolidated financial statements listed in the accompanying
table of contents present fairly, in all material respects, the financial
position of Northwest Natural Gas Company (doing business as NW Natural) and its
subsidiaries (the Company)"Company") at December 31, 19992000 and 1998,1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999,2000, in conformity with accounting principles generally
accepted in the United States.States of America. In addition, in our opinion, the
financial statement schedulesschedule listed in the accompanying table of contents
presentpresents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and this financial statement schedulesschedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and this financial statement schedulesschedule
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed
above.our opinion.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
February 18, 2000
3216, 2001
16
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Share Amounts)
Year Ended December 31 2000 1999 1998
1997
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING REVENUES:Operating Revenues:
Gross operating revenues $455,834 $404,390 $351,709$ 532,110 $ 455,834 $ 404,390
Cost of sales 274,160 212,197 173,424
130,599
------- ------- ----------------- ---------- ----------
Net operating revenues 257,950 243,637 230,966
221,110
OPERATING EXPENSES:Operating Expenses:
Operations and maintenance 77,817 73,209 78,226 73,864
Taxes other than income taxes 28,351 24,652 21,939 19,952
Depreciation, depletion and amortization 47,440 51,008 43,937
39,051
------- ------- ----------------- ---------- ----------
Total operating expenses 153,608 148,869 144,102
132,867
------- ------- -------
INCOME FROM OPERATIONS---------- ---------- ----------
Income from Operations 104,342 94,768 86,864
88,243
------- ------- -------
OTHER INCOME (EXPENSE)Other Income (Expense) 3,860 4,816 (13,723)
4,138
INTEREST CHARGESInterest Charges - net 33,561 30,052 31,586
28,469
------- ------- -------
INCOME BEFORE INCOME TAXES---------- ---------- ----------
Income Before Income Taxes 74,641 69,532 41,555
63,912
INCOME TAXESIncome Taxes 26,829 24,591 14,604
21,034
------- ------- -------
NET INCOME FROM CONTINUING OPERATIONS---------- ---------- ----------
Net Income from Continuing Operations 47,812 44,941 26,951
42,878
NET INCOME FROM DISCONTINUED SEGMENTDiscontinued Segment:
Income from discontinued segment - net of tax - 355 350
181
------- ------- -------
NET INCOMEGain on sale of discontinued segment - net of tax 2,412 - -
---------- ---------- ----------
Net Income 50,224 45,296 27,301 43,059
Redeemable preferred and preference stock dividend requirements 2,456 2,515 2,577
2,646
------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK $42,781 $24,724 $40,413
======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING---------- ---------- ----------
Earnings Applicable to Common Stock $ 47,768 $ 42,781 $ 24,724
========== ========== ==========
Average Common Shares Outstanding 25,183 24,976 24,233
22,698
======= ======= =======
BASIC EARNINGS PER SHARE OF COMMON STOCK:Basic Earnings Per Share of Common Stock:
From continuing operations $1.70 $1.01 $1.77$ 1.80 $ 1.70 $ 1.01
From discontinued segment - 0.01 0.01
0.01
----- ----- -----From gain on sale of discontinued segment 0.10 - -
---------- ---------- ----------
Total basic earnings per share $1.71 $1.02 $1.78
===== ===== =====
DILUTED EARNINGS PER SHARE OF COMMON STOCK:$ 1.90 $ 1.71 $ 1.02
========== ========== ==========
Diluted Earnings Per Share of Common Stock:
From continuing operations $1.69 $1.01 $1.75$ 1.79 $ 1.69 $ 1.01
From discontinued segment - 0.01 0.01
0.01
---- ---- ----From gain on sale of discontinued segment 0.09 - -
---------- ---------- ----------
Total diluted earnings per share $1.70 $1.02 $1.76
===== ===== =====
DIVIDENDS PER SHARE OF COMMON STOCK $1.225 $1.22 $1.205
====== ===== ======$ 1.88 $ 1.70 $ 1.02
========== ========== ==========
Dividends Per Share of Common Stock $ 1.24 $ 1.225 $ 1.22
========== ========== ==========
------------------------------------
See Notes to Consolidated Financial Statements.
3317
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS
(Thousands)
Year Ended December 31,
2000 1999 1998
1997
--------------------- ---------------------- ------------------------------------------- ---------------------
Earnings investedInvested in the business:Business:
Balance at beginningBeginning of year $106,513 $113,098Year $ 100,026118,711 $ 106,513 $ 113,098
Net incomeIncome 50,224 $ 50,224 45,296 $45,296$ 45,296 27,301 $27,301 43,059 $43,059$ 27,301
Cash dividends paid:Dividends Paid:
Redeemable preferred and preference stock (2,466) (2,525) (2,587)
(2,660)
Common stock (31,198) (30,569) (29,615)
(27,321)
Common stock expenseStock Repurchased (1,080) - -
Common Stock Expense (2) (4) (1,684)
(6)
------------ ---------- --------------------- ----------
Balance at endEnd of yearYear $ 134,189 $ 118,711 $106,513 $ 113,098
============106,513
========== ===================== ==========
Accumulated other comprehensive income (loss)Other Comprehensive Income (Loss):
Balance at beginningBeginning of year $ (2,460) $ (2,235) $ (1,650)
Other comprehensive income (loss)-
Foreign currency translation adjustment from
discontinued segment (721) (721) (225) (225) (585) (585)
------------ --------- ---------- --------- ----------- ---------
Comprehensive income $44,575 $27,076 $42,474
========= ========= =========
Balance at end of yearYear $ (3,181) $ (2,460) $ (2,235)
============Other comprehensive income (loss) - net of tax:
Foreign currency translation adjustments
from discontinued segment - - (721) (721) (225) (225)
Recognition of foreign currency translation
adjustment included in gain on sale of
discontinued segment 3,181 3,181 - - - -
---------- --------- ---------- --------- ---------- ---------
Comprehensive Income $ 53,405 $ 44,575 $ 27,076
========= ========= =========
Balance at End of Year $ - $ (3,181) $ (2,460)
========== ===================== ==========
------------------------------------
See Notes to Consolidated Financial Statements.
3418
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 2000 1999
1998
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ASSETS:
PLANT AND PROPERTY:Assets:
Plant and Property:
Utility plant $1,331,415 $1,239,690$ 1,406,970 $ 1,331,415
Less accumulated depreciation 478,138 436,386 404,117
------------ ------------
Utility plant - net 928,832 895,029 835,573
------------ ------------
Non-utility property 8,649 8,548 89,050
Less accumulated depreciation and depletion 3,451 7,654
29,927
-------------------------- ------------
Non-utility property - net 5,198 894
59,123
-------------------------- ------------
Total plant and property 934,030 895,923
894,696
INVESTMENTS AND OTHER------------ ------------
Investments and Other 14,526 16,557
16,714
CURRENT ASSETS:Current Assets:
Cash and cash equivalents 11,283 10,013 7,383
Accounts receivable, less allowancesallowance for uncollectible
accounts of $1,867 in 2000 and $1,669 in 1999 and $1,547 in 199860,753 43,349 47,476
Accrued unbilled revenue 45,619 31,550 34,258
Inventories of gas, materials and supplies 46,883 33,919 21,258
Investment in discontinued segment - 29,163 -
Property held for sale - 16,712 -
Prepayments and other current assets 22,834 18,349
16,105
-------------------------- ------------
Total current assets 187,372 183,055
126,480
--------------Regulatory Tax Assets 49,515 51,060
------------ REGULATORY TAX ASSETS 51,060 56,860
-------------- ------------
DEFERRED GAS COSTS RECEIVABLEDeferred Gas Costs Receivable 16,973 20,950
27,795
-------------- ------------ DEFERRED DEBITS AND OTHER------------
Deferred Debits and Other 76,297 76,878
69,191
-------------- ------------ TOTAL ASSETS $1,244,423 $1,191,736
==============------------
Total Assets $ 1,278,713 $ 1,244,423
============ ============
-----------------------------------
See Notes to Consolidated Financial Statements.
3519
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 2000 1999
1998
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES:
CAPITALIZATIONCapitalization and Liabilities:
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 79,45879,905 $ 78,70179,458
Premium on common stock 238,215 234,608 229,650
Earnings invested in the business 134,189 118,711 106,513
Accumulated other comprehensive income (loss) - (3,181)
(2,460)
------------- ------------------------- ------------
Total common stock equity 452,309 429,596 412,404
Redeemable preference stock 25,000 25,000
Redeemable preferred stock 9,750 10,564 11,499
Long-term debt 400,790 396,379
366,738
------------- ------------------------- ------------
Total capitalization 887,849 861,539
815,641
------------- -------------
MINORITY INTEREST - 16,322
------------- -------------
CURRENT LIABILITIES:------------ ------------
Current Liabilities:
Notes payable 56,263 94,149 87,264
Accounts payable 110,698 68,163 56,039
Long-term debt due within one year 10,00020,000 10,000
Taxes accrued 8,066 4,101 7,486
Interest accrued 2,696 4,673 6,204
Other current and accrued liabilities 23,638 39,153
23,477
------------- ------------------------- ------------
Total current liabilities 221,361 220,239
190,470
------------- -------------
DEFERRED INVESTMENT TAX CREDITSDeferred Investment Tax Credits 9,538 10,393
11,248
------------- -------------
DEFERRED INCOME TAXES------------ ------------
Deferred Income Taxes 141,656 136,150
140,310
------------- -------------
REGULATORY LIABILITIES AND OTHER------------ ------------
Regulatory Liabilities and Other 18,309 16,102
17,745
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note------------ ------------
Commitments and Contingencies (see Note 12) - -
------------- -------------
TOTAL CAPITALIZATION AND LIABILITIES $1,244,423 $1,191,736
============= =============------------ ------------
Total Capitalization and Liabilities $ 1,278,713 $ 1,244,423
============ ============
-----------------------------------
See Notes to Consolidated Financial Statements.
3620
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Year Ended December 31 2000 1999 1998
1997
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:Operating Activities:
Net income from continuing operations $ 47,812 $ 44,941 $ 26,951 $ 42,878
Adjustments to reconcile net income to net cash provided by operations:
Depreciation, depletion and amortization 47,440 51,008 55,822 44,619
Gain on sale of assets (491) - (3,782) (849)
Deferred income taxes and investment tax credits 4,651 (5,015) (344) 16,609
Equity in (earnings) losses of investments 221 (490) 15,572 (468)
Income from discontinued segment 355 350 181
Allowance for funds used during construction (789) (1,153) (1,426) (1,868)
Deferred gas costs receivable 3,977 6,845 833 (36,686)
Regulatory accounts and other - net 4,333 (3,795) (8,109) (5,159)
--------- --------- ---------
Cash from operations before working capital changes 92,696 85,867 59,257107,154 92,341 85,517
Changes in operating assets and liabilities:
Accounts receivable - net (17,404) 792 (8,056) 1,413
Accrued unbilled revenue (14,069) 2,708 (10,347) (1,571)
Inventories of gas, materials and supplies (12,964) (12,661) (3,873)
(2,946)
Accounts payable 42,535 16,910 (2,736) (6,020)
Accrued interest and taxes 1,988 (4,916) 2,976 2,122
Other current assets and liabilities (20,000) 12,992 3,108
(6,439)
--------- --------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 108,521 66,939 45,816
INVESTING ACTIVITIES:---------
Cash Provided by Continuing Operating Activities 87,240 108,166 66,589
--------- --------- ---------
Cash Provided by Operations of Discontinued Segment - 46 2,633
--------- --------- ---------
Investing Activities:
Acquisition and construction of utility plant assets (80,444) (109,144) (80,022) (115,886)
Investment in non-utility property (6,923) (10,713) (19,780) (9,229)
Proceeds from sale of non-utility assetsdiscontinued segment 34,756 - -
1,014Proceeds from sale of assets 21,012 - -
Investments and other 647 1,226 (35)610 956 (1,057)
--------- --------- ---------
CASH USED IN INVESTING ACTIVITIES (119,210) (98,576) (124,136)
FINANCING ACTIVITIES:Cash Used in Investing Activities (30,989) (118,901) (100,859)
Financing Activities:
Common stock issued 4,826 5,356 52,384
6,465Common stock repurchased (2,441) - -
Redeemable preferred stock retired (814) (935) (930)
(1,320)
Long-term debt:
Issueddebt issued 75,000 40,000 52,000
90,000
RetiredLong-term debt retired (60,000) (10,000) (35,000) (27,000)
Change in short-term debt (37,886) 12,717 (2,054) 39,259
Cash dividend payments:
Redeemable preferred and preference stock (2,466) (2,525) (2,587)
(2,660)
Common stock (31,198) (30,569) (29,615) (27,321)
Foreign currency translation and capital stock expense (2) (725) (1,909) (591)
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIESCash Provided by (Used in) Financing Activities (54,981) 13,319 32,289
76,832
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTSIncrease in Cash and Cash Equivalents 1,270 2,630 652
(1,488)
CASH AND CASH EQUIVALENTSCash and Cash Equivalents - BEGINNING OF YEARBeginning of Year 10,013 7,383 6,731 8,219
--------- --------- ---------
CASH AND CASH EQUIVALENTSCash and Cash Equivalents - END OF YEAREnd of Year $ 11,283 $ 10,013 $ 7,383
$ 6,731
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Supplemental Disclosure of Cash Flow Information:
Cash paid during the yearperiod for:
Interest $ 35,592 $ 30,506 $ 32,323
Income Taxes $ 28,756
Income taxes22,552 $ 27,302 $ 8,205
$ 7,288
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:Supplemental Disclosure of Non-cash Financing Activities:
Conversion to common stock:
7-1/4%4 % Series of Convertible Debentures $ 589 $ 359 $ 565 $ 535
------------------------------------
See Notes to Consolidated Financial Statements
3721
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands, Except Share Amounts)
December 31 2000 1999
1998
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:Common Stock Equity:
Common stock - par value $3-1/6 per share; authorized 60,000,000 shares:
outstanding - 2000, 25,233,424 shares; 1999, 25,091,938 shares; 1998, 24,853,121 shares $ 79,45879,905 $ 78,70179,458
Premium on common stock 238,215 234,608 229,650
Earnings invested in the business 134,189 118,711 106,513
Accumulated other comprehensive income (loss) - (3,181)
(2,460)
------------------- ---------
Total common stock equity 452,309 51% 429,596 50%
412,404 51%
---------- ---- --------- ----
REDEEMABLE PREFERENCE STOCK,---------
Redeemable Preference Stock, authorized 2,000,000 shares; $6.95 Series,
stated value $100 per share; outstanding - 1999,2000, 250,000 shares;
1998,1999, 250,000 shares 25,000 25,000
------------------- ---------
Total redeemable preference stock 25,000 3% 25,000 3%
---------- ---- --------- ----
REDEEMABLE PREFERRED STOCK,Redeemable Preferred Stock, authorized 1,500,000 shares; all outstanding series
have a stated value of $100 per share:share
$4.75 Series, outstanding-1999,outstanding - 1999, 643 shares; 1998, 2,458 shares - 64 249
$7.125 Series, outstanding -1999,- 2000, 97,500 shares; 1999, 105,000 shares; 1998, 112,500 shares 9,750 10,500
11,250
------------------- ---------
Total redeemable preferred stock 9,750 1% 10,564 1%
11,499 1%
---------- ---- --------- ----
LONG-TERM DEBT:Long-Term Debt:
First Mortgage Bonds
--------------------
9-3/4% Series due 2015 50,000- 50,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
7.69% Series A due 1999 - 10,000
5.96% Series B due 2000 5,000- 5,000
5.98% Series B due 2000 5,000- 5,000
6.62% Series B due 2001 10,000 -10,000
6.75% Series B due 2002 10,000 -10,000
8.05% Series A due 2002 10,000 10,000
5.55% Series B due 2002 20,000 20,000
6.40% Series B due 2003 20,000 20,000
6.34% Series B due 2005 5,000 5,000
6.38% Series B due 2005 5,000 5,000
6.45% Series B due 2005 5,000 5,000
6.80% Series B due 2007 10,000 10,000
6.50% Series B due 2008 5,000 5,000
7.45% Series B due 2010 25,000 -
8.26% Series B due 2014 10,000 10,000
7.00% Series B due 2017 40,000 40,000
6.60% Series B due 2018 22,000 22,000
8.31% Series B due 2019 10,000 10,000
7.63% Series B due 2019 20,000 -20,000
9.05% Series A due 2021 10,000 10,000
7.25% Series B due 2023 20,000 20,000
7.50% Series B due 2023 4,000 4,000
7.52% Series B due 2023 11,000 11,000
7.72% Series B due 2025 20,000 -
6.52% Series B due 2025 10,000 10,000
7.05% Series B due 2026 20,000 20,000
7.00% Series B due 2027 20,000 20,000
6.65% Series B due 2027 20,000 20,000
6.65% Series B due 2028 10,000 10,000
7.74% Series B due 2030 20,000 -
7.85% Series B due 2030 10,000 -
Unsecured:
8.47% Series A due 2001 10,000 10,000
Convertible Debentures
----------------------
7-1/4% Series due 2012 8,790 9,379
9,738
---------- --------- ---------
420,790 406,379 376,738
Less long-term debt due within one year 20,000 10,000
10,000
------------------- ---------
Total long-term debt 400,790 45% 396,379 46%
366,738 45%
---------- ---- --------- ----- TOTAL CAPITALIZATION $861,539--------- -----
Total capitalization $ 887,849 100% $ 815,641861,539 100%
========== ============= ===== ========= =====
------------------------------------
See Notes to Consolidated Financial Statements.
3822
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------------------------------------------------------
Organization and Principles of Consolidation
- --------------------------------------------
The consolidated financial statements include:
Regulated utility:
-NorthwestNorthwest Natural Gas Company (doing business as NW(NW Natural)
Non-regulated subsidiary businesses:
-NNGNNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary -CanorCanor Energy, Ltd. (Canor), a majority-owned subsidiary
reclassified as a discontinued segment in 1999 and sold in the
first quarter of 2000
Together these businesses are referred to herein as the "Company."
Intercompany accounts and transactions have been eliminated.
Investments in corporate joint ventures and partnerships in which the
Company's ownership is 50 percent or less are accounted for by the equity
method or the cost method (see Note 9).
Certain amounts from prior years have been reclassified to conform with the
19992000 presentation. These reclassifications had no impact on prior year
results of operations.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the consolidated financial
statements and accompanying notes. Changes in such estimates may affect
amounts reported in future periods.
Industry Regulation
- -------------------
The Company's principal business is the distribution of natural gas which
is regulated by the Oregon Public Utility Commission (OPUC) and the
Washington Utilities and Transportation Commission (WUTC). Accounting
records and practices conform to the requirements and uniform system of
accounts prescribed by these regulatory authorities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation."
Utility Plant
- -------------
Utility plant for NW Natural is stated at cost (see table in Note 9). When
a depreciable unit of property is retired, the cost is removed from both
utility plant and the accumulated provision for depreciation together with
the cost of removal, less any salvage. No gain or loss is recognized upon
normal retirement.
NW Natural's provision for depreciation of utility property, which is
computed under the straight-line, age-life method in accordance with
independent engineering studies and as approved by regulatory authorities,
approximated 4.03.5 percent of average depreciable plant in 2000, 4.0 percent
in 1999 and 3.9 percent in 1998 and 3.8 percent in 1997.1998. The rate of depreciation approximates the
economic life of the utility property.
3923
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Certain additions to utility plant include an allowance for funds used
during construction (AFUDC), a non-cash item. AFUDC represents the cost of
funds borrowed during construction and is calculated using actual
commercial paper interest rates. If commercial paper borrowings are
insufficient to finance the total work in progress, then a composite rate
of interest on all debt, shown as a reduction to interest charges, and a
return on equity funds, shown as other income, is used to compute AFUDC.
While cash is not realized currently from AFUDC, it is realized in the
ratemaking process over the service life of the related property through
increased revenues resulting from higher rate base and higher depreciation
expense. NW Natural's weighted average AFUDC rates were 6.0 percent for
both 2000 and 1999 and 5.5 percent for 1998 and 5.8 percent for 1997.1998.
Regulatory Accounts
- -------------------
In applying SFAS No. 71, NW Natural has capitalized certain costs and
benefits as regulatory assets and liabilities pursuant to orders of the
state utility regulatory commissions, in general rate proceedings or
expense deferral proceedings, in order to provide for recovery of revenues
or expenses from, or refunds to, NW Natural's utility customers in future
periods. At Dec. 31, 19992000 and 1998,1999, regulatory tax assets were $51.1$49.5
million and $56.9$51.1 million, respectively, while other regulatory assets and
liabilities (net) were $37.4$26.5 million and $40.4$37.4 million, respectively.
If NW Natural should determine in the future that all or a portion of these
regulatory assets and liabilities no longer meet the criteria for continued
application of SFAS No. 71, then NW Natural would be required to write off
that portion which it could not recover or refund.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and highly liquid temporary investments with expected maturity
dates of three months or less.
Unbilled Revenue Recognition
- ----------------
NW Natural accrues-------------------
The Company's utility revenues are derived primarily from the sale and
transportation of natural gas. The Company recognizes utility revenue from
gas sales and transportation when the gas is delivered to customers.
Estimated revenues are accrued for gas deliveries not billed to customers
from the
meter reading dates to month end.end (unbilled revenue) and are reversed
the following month when actual billings occur.
Revenues from non-utility services, including gas storage services, are
recognized upon delivery of the service to customers.
Inventories
- -----------
NW Natural's inventories of gas in storage and materials and supplies are
stated at the lower of average cost or net realizable value.
Derivatives Policy
- ------------------
NW Natural's "Derivatives Policy" allows up to a 100 percent hedge position
in currency derivatives to match and lock in prices on individual Canadian
natural gas purchase transactions; interest rate derivatives to match
specific outstanding debt instruments maturing in less than five years; and
natural gas commodity derivatives to lock in or cap prices on gas purchased
for a future period under contracts with market-indexed pricing. The policy
requires derivatives to be used within prescribed limitations and only in
order to reduce price risk, so as to qualify for hedge accounting
treatment. The Company's derivatives policy also has specific requirements
in terms of counterparty credit-worthiness. Changes in market values of
foreign currency contracts, and gains or losses on commodity derivative
contracts, are deferred and recognized as adjustments to gas purchase costs
upon concurrent settlement of these contracts (see Note 11).
4024
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In June 1999,1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137,133, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
which postponed the effective date of SFAS No.133, "AccountingActivities".
This statement establishes accounting and reporting standards for
Derivative Instrumentsderivative instruments, including certain derivative instruments embedded
in other contracts and Hedging Activities," tofor hedge accounting. It requires that an entity
recognize all fiscal years
beginning after June 15, 2000 (Jan. 1, 2001 for the Company).derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS No. 133 requires that allchanges in the fair
value of a derivative be recognized currently in earnings, unless specific
hedge accounting criteria are met. In June 2000, the FASB issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities", amending portions of SFAS No. 133. Among other things, SFAS
No. 138 provides an exception for contracts intended for the normal
purchase and normal sale of something other than a financial instrument or
derivative instrument, for which physical delivery is probable. Some of the
Company's gas supply and transportation contracts are derivative
instruments as defined under SFAS No. 133. These standards will be
recorded each period
either in current earningseffective for the Company beginning Jan. 1, 2001. Adoption of these new
accounting standards, as of Jan. 1, 2001, is not expected to have a
material affect on net income or in other comprehensive income, depending
on whether a derivative is designated as part of a hedge transaction
and, if so designated, what type of hedge transaction it is.financial position. The Company expects all of its derivative instruments andCompany's primary
derivatives hedging activities towill be classifiedaccounted for as cash flow hedges. Changes inhedges
under SFAS No. 133. Due to the fair
market valuenature of thesethe Company's hedging strategy,
cash flow hedges are expected to be highly effective. Furthermore, because
the results of the Company's hedging program are included in the regulated
cost of gas, unrealized hedging gains or losses will be includedtracked in deferred
gas costs rather than other comprehensive income in accordance with SFAS No. 133. Theincome.
25
Northwest Natural Gas Company
has
not determined the impact that adoption of SFAS No. 133 will have on
other comprehensive income or on its financial position.Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Segment Reporting
- -----------------
The Company principally operates in a single line of utility business
consisting of distribution of natural gas. Other segments are primarily
investments in alternative energy projects in California, and athe discontinued
oil and gas exploration business.business, a Boeing 737-300 Aircraft which is leased
to Continental Airlines and non-utility gas storage.
The following table presents information about reportable segments for
2000, 1999 1998 and 1997.1998. Inter-segment transactions are insignificant.
Thousands Utility Other Total
--------- ------- ----- ------------------------------------------------------------------------------------
2000
----
Net operating revenues $ 257,361 $ 589 $ 257,950
Income from operations 103,902 440 104,342
Net income from continuing operations 47,519 293 47,812
Income from financial investments - 103 103
Income from non-utility storage - 102 102
Gain on sale of discontinued segment - 2,412 2,412
Assets 1,260,013 18,700 1,278,713
1999
----
Net operating revenues $ 243,269 $ 368 $ 243,637
Income from operations 94,744 24 94,768
Net income from continuing operations 44,323 618 44,941
Income (loss) from financial investments - (82) (82)
Net income from continuing operations 44,323 618 44,941
Net income from discontinued segment - 355 355
Assets 1,197,673 46,750 1,244,423
1998
----
Net operating revenues $ 230,564 $ 402 $ 230,966
Income (loss) from operations 86,981 (117) 86,864
Net income (loss) from continuing operations 37,530 (10,579) 26,951
Income (loss) from financial investments - (17,192) (17,192)
Net income (loss) from continuing operations 37,530 (10,579) 26,951
Net income from discontinued segment - 350 350
Assets 1,120,706 71,030 1,191,736
1997
Net operating income $ 220,660 $ 450 $ 221,110
Income from operations 88,127 116 88,243
Income from financial investments - 468 468
Net income from continuing operations 41,226 1,652 42,878
Net income from discontinued segment 181 181- 350 350
Assets 1,049,289 62,328 1,111,6171,120,706 71,030 1,191,736
41
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Income Taxes
- ------------
NW Natural uses the balance sheet method of accounting for deferred income
taxes. Deferred tax liabilities and assets reflect the expected future tax
consequences, based on enacted tax law, of temporary differences between
the tax basis of assets and liabilities and their financial reporting
amounts (see Note 8).
Consistent with rate and accounting instructions of regulatory authorities,
deferred income taxes are not currently collected for those temporary
income tax differences where the prescribed regulatory accounting methods
do not provide for current recovery in rates. NW Natural has recorded a
regulatory tax asset for amounts pending recovery from customers in future
rates. These amounts are primarily differences between the book and tax
basis of net utility plant in service. This asset balance was $51.1$49.5 million
and $56.9$51.1 million at Dec. 31, 19992000 and 1998,1999, respectively.
Investment tax credits on utility property additions and leveraged leases
which reduce income taxes payable are deferred for financial statement
purposes and are amortized over the life of the related property or lease.
Investment and energy tax credits generated by non-regulated subsidiaries
are amortized over a period of one to five years.
26
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other Income (Expense)
- ----------------------
Other income (expense) consists of interest income; gain on sale of assets;
investment income (loss) of Financial Corporation, including write-downs
due to asset impairments in 1998; and other miscellaneous income from
merchandise sales, rents, an aircraft lease and other items.
Earnings Per Share
- ------------------
Basic earnings per share are computed based on the weighted average number
of common shares outstanding each year. Diluted earnings per share reflect
the potential effects of the conversion of any outstanding convertible
debentures and the exercise of outstanding stock options. Diluted earnings
are calculated as follows:
Thousands, except per share amounts 2000 1999 1998
1997
----------------------------------- ---- ---- ----------------------------------------------------------------------------------
Earnings applicable to common stock $42,781 $24,724 $40,413$ 47,768 $ 42,781 $ 24,724
Debenture interest less taxes 389 415 431 455
-------- -------- --------
Net income available for diluted common stock $43,196 $25,155 $40,868
======= ========== =======$ 48,157 $ 43,196 $ 25,155
======== ======== ========
Average common shares outstanding 25,183 24,976 24,233
22,698
Stock options 13 21 41
32
Convertible debentures 442 471 489
518
-------- -------- ---------------
Diluted average common shares outstanding 25,638 25,468 24,763
23,248
====== ====== ============== ======== ========
Diluted earnings per share of common stock $1.70 $1.02 $1.76
===== ===== =====$ 1.88 $ 1.70 $ 1.02
======== ======== ========
2. CONSOLIDATED SUBSIDIARY OPERATIONS AND DISCONTINUED SEGMENT:
- -------------------------------------------------------------------------------------------------------------------------------------
At Dec. 31, 1999,2000, the Company had one active subsidiary, Financial
Corporation, a wholly-owned subsidiary, and onesubsidiary. One discontinued segment, Canor, a
majority-owned subsidiary.
42
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------subsidiary, was sold in January 2000.
NNG Financial Corporation
- -------------------------
Financial Corporation provided short-term financing for Canor and has
several financial investments, including investments as a limited partner
in solar electric generating systems, windpower electric generating
projects, a hydroelectric facility and low-income housing projects. It also
holdsheld interests in certain gas producing properties in the western United
States (see Note 9).
During the fourth quarter of 1998, Financial Corporation recorded asset
impairment charges resulting from the application of an impairment model
based on SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," to limited partnership
investments in solar electric, wind-powerwindpower electric and hydroelectric generation
projects in California. The pre-tax write-down of $16.6 million is included
in other income (expense) in the consolidated statements of income.
These asset write-downs resulted primarily from the effect of projected
lower prices for future sales of electricity from these projects during the
period of their expected remaining lives ranging from 18 to 20 years. As a
result of the outlook for reduced cash flows due to lower energy prices in
California, the Company investigated a potential sale of its interests in
these projects and conducted an impairment analysis. The Company concluded
that the aggregate fair value of these assets was potentially much lower
than their book value, but that the market was limited and market prices
were not readily available. The Company then concluded that it would not
currently sell its interests in the projects and determined that an
impairment test would provide a best estimate of fair value.
27
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Impairment tests were conducted using a model based on SFAS No. 121. The
assumptions used were determined to be reasonable based on historical data,
best available information and previous analyses performed. The Company's
cash flow projections focused primarily on future projected electricity
prices. However, the projections also included assumptions related to
project operating and maintenance costs, production availabilities, avoided
power costs and discount rates. The Company used a discount rate of 15
percent, a rate which was deemed to be commensurate with the risk that
would be involved in similar investments with like risks. Production
forecasts as well as projected operating, maintenance and other operating
expenses used in the cash flow analyses were consistent on a
project-by-project basis with historical data for the projects since their
inception and estimates provided by the projects' operators, and also
included a reasonable trend line for projected future costs.
The impairment tests compared the undiscounted estimated future cash flows
from the assets to their book value. Because the undiscounted future cash
flows were determined to be less than the book value, the assets were
determined to be impaired, requiring write-downs by the amount of the
difference between the book value and the discounted value of their
estimated future cash flows. The SFAS No. 121 valuation model used,
including key assumptions and present value of estimated expected future
cash flows using a discount rate commensurate with the risks involved,
represented the best estimate of fair value for these projects.
Canor Energy, Ltd.
- ------------------
On Dec. 16, 1999,Jan. 26, 2000, the Company decided to sellsold its interest in Canor Energy Ltd.
(Canor), an Alberta, Canada corporation engaged in natural gas and oil
exploration, development and production in Alberta and Saskatchewan,
Canada. Canor
hasThe after-tax gain from the sale was $2.4 million, net of Canadian
tax on dividends ($0.6 million) and U.S. income tax ($2.8 million) and is
shown as gain on sale of discontinued segment.
The consolidated financial statements of the Company have been reclassifiedrestated to
reflect Canor as a discontinued segment and itssegment. Accordingly, Canor's operating
revenues and expenses are included in net income from a discontinued segment
net of tax of $0.3 million, $(2.4) million and $0.1 million
for 1999 and 1998, and 1997, respectively. The balance sheets and
statements ofits cash flows and capitalizationare reported as cash provided by
discontinued segment for prior years have not
been restated.all periods presented. At Dec. 31, 1999, the
Company's investment in Canor was $29.2 million and is shown as investment
in discontinued segment (in current assets). Net assets of Canor at Dec. 31, 1998 and 1997 were
$31.9 million and $19.8 million, respectively.
Canor began operations in 1990 as a wholly-owned indirect subsidiary. In
1998, Canor acquired all of the capital stock of Southlake Energy, Inc.
(Southlake), an indirect subsidiary of NIPSCO Industries, Inc. (NI), in
exchange for shares of common stock representing a 34 percent interest in
Canor. Subsequent to year-end 1999,In January 2000, the Company acquired NI's interest in Canor and
then sold 100 percent of Canor's stock. The
sale of Canor in January 2000 will result in a estimated gain of $2.5
million, net of tax.
During 1998, Canor recorded asset write-downs of $4.2 million for its oil
and gas production properties. Approximately half of the write-downs were
due to impairment charges under SFAS No. 121 resulting from the impact of
low oil prices on Canor's oil properties in Canada. The additional
write-downs were due to determinations that some of Canor's oil and gas
wells were no longer productive due to water encroachment.
3. CAPITAL STOCK:
- ------------------------------------------
Common Stock
- ------------
At Dec. 31, 1999,2000, NW Natural had reserved 36,925222,229 shares of common stock
for issuance under the Employee Stock Purchase Plan, 353,497153,577 shares under
its Dividend Reinvestment and Stock Purchase Plan, 787,337781,347 shares under its
1985 Stock Option Plan (see Note 4), 531,636502,056 shares for future conversions
of its 7-1/4% Convertible Debentures and 3,000,000 shares under the
Shareholder Rights Plan.
4328
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Redeemable Preference Stock
- ---------------------------
The $6.95 Series of Preference Stock is not redeemable prior to Dec. 31,
2002, but is subject to mandatory redemption on that date.
Redeemable Preferred Stock
- --------------------------
The mandatory preferred stock redemption requirements aggregate $0.8
million in 2000, 2001, 2002, 2003, 2004 and 2004.2005. These requirements are
non-cumulative. At any time NW Natural is in default on any of its
obligations to make the prescribed sinking fund payments, it may not pay
cash dividends on common stock or preference stock. Upon involuntary
liquidation, all series of redeemable preferred stock are entitled to their
stated value.
The remaining shares of the $4.68$4.75 Series of redeemable preferred stock were
redeemed on June 2, 1997.Sept. 1, 2000.
The redeemable preferred stock is callable at stipulated prices, plus
accrued dividends. At Dec. 31, 1999, the redemption price for the $4.75
Series was $100 per share. Shares2000, shares of the $7.125 Series are
redeemable on or after May 1, 20002001 at a price of $103.80$103.325 per share
decreasing each year thereafter to $100 per share on or after May 1, 2008.
44Stock Repurchase Program
- ------------------------
In May 2000, the Company commenced a program to repurchase up to 2 million
shares, or up to $35 million in value, of its common stock through a
repurchase program to extend through May 2001. Purchases are made in the
open market or through privately negotiated transactions. As of Dec. 31,
2000, the Company had repurchased 108,700 shares of common stock at a total
cost of $2.4 million.
29
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table shows the changes in the number of shares of NW Natural's
capital stock and the premium on common stock for the years 2000, 1999 1998 and 1997:1998:
Premium
--------------------------- Shares ---------------- on-------------Shares-------------- Premium-on
Redeemable Redeemable common
Common Common Preference Preferred Stock
Stock Stock Stock (Thousands)preference preferred stock
stock stock stock (thousands)
--------------------------------------------
Balance, Dec. 31, 1996 22,555,184 250,000 137,490 $176,977
Sales to employees 27,525 - - 514
Sales to stockholders 211,532 - - 4,561
Exercise of stock options - net 43,216 - - 496
Conversion of convertible
debentures to common 26,871 - - 450
Sinking fund purchases - - (13,205) -
------------- ---------- ---------- ----------
Balance, Dec. 31, 1997 22,864,328 250,000 124,285 $ 182,998
Sales to the public 1,725,000 - - 40,789
Sales to employees 17,637 - - 366
Sales to stockholders 194,835 - - 4,644
Exercise of stock options - net 22,946 - - 377
Conversion of convertible
debentures to common 28,375 - - 475
Sinking fund purchases - - (9,300) 1
------------- ---------- ---------- --------- ----------
Balance, Dec. 31, 1998 24,853,121 250,000 114,985 229,650
Sales to employees 13,619 - - 295
Sales to stockholders 188,821 - - 4,028
Exercise of stock options - net 18,355 - - 334
Conversion of convertible
debentures to common 18,022 - - 301
Sinking fund purchases - - (9,342) -
------------- ---------- ---------- --------- ----------
Balance, Dec. 31, 1999 25,091,938 250,000 105,643 $234,608
=============234,608
Sales to employees 14,696 - - 278
Sales to stockholders 199,920 - - 3,769
Exercise of stock options - net 5,990 - - 81
Conversion of convertible
debentures to common 29,580 - - 495
Stock repurchase (108,700) - - (1,016)
Sinking fund purchases - - (8,143) -
---------- ---------- --------- ----------
Balance, Dec. 31, 2000 25,233,424 250,000 97,500 $ 238,215
========== ========== ========= ==========
4. STOCK OPTION AND PURCHASE PLANS:
- ------------------------------------------------------------------------------
NW Natural's 1985 Stock Option Plan (Plan) authorizes an aggregate of
1,200,000 shares of common stock for issuance as incentive or non-statutory
stock options. These options may be granted only to officers and key
employees designated by a committee of NW Natural's Board of Directors.
All options are granted at an option price not less than the market value
at the date of grant and may be exercised for a period not exceeding 10
years from the date of grant. Option holders may exchange shares they have
owned for at least one year, at the current market price, to purchase
shares at the option price.
Since the Plan's inception in 1985, options on 769,173922,171 shares of common
stock have been granted at prices ranging from $11.75 to $27.875 per share,
and options on 66,29679,296 shares have expired. NW Natural applies Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized
for either the Plan or the Employee Stock Purchase Plan. If compensation
cost for awards under NW Natural's two stock-based compensation plans had
been determined based on the fair
4530
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
been determined based on the fair value at the grant dates using the method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1999 1998 1997
---- ---- ----
Earnings applicable to common stock ($000):
- ------------------------------------------
As reported $42,781 $24,724 $40,413
Pro forma 42,525 24,518 40,302
Basic earnings per share
- ------------------------
As reported $1.71 $1.02 $1.78
Pro forma 1.70 1.01 1.78
Diluted earnings per share
- --------------------------
As reported $1.70 $1.02 $1.76
2000 1999 1998
---- ---- ----
Earnings applicable to common stock ($000):
-------------------------------------------
As reported $ 47,768 $ 42,781 $ 24,724
Pro forma 47,190 42,525 24,518
Basic earnings per share
------------------------
As reported $ 1.90 $ 1.71 $ 1.02
Pro forma 1.87 1.70 1.01
Diluted earnings per share
--------------------------
As reported $ 1.88 $ 1.70 $ 1.02
Pro forma 1.86 1.69 1.01
1.75
For purposes of determining the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions used for
grants in 19982000 and 1996,1998, respectively: a dividend yield of 4.75.2 and 5.04.7
percent; expected volatility of 2731.4 and 2227 percent; risk-free interest
rates of 5 and 65 percent; and expected lives of seven years. There were no
new grants during 1999.
Information regarding the Plan is summarized as follows:
Options
-------------------------------------
1999 1998 1997
---- ---- ----
Outstanding, beginning of year 320,032 227,733 308,663
$16.59 Options:
Exchanged by holders - (2,608) (20,598)
Exercised - (2,264) (10,432)
$24.00 Options:
Exchanged by holders - - (7,184)
Exercised (7,500) (8,082) (12,243)
Expired - - (4,773)
$20.17 Options:
Exchanged by holders (1,465) - -
Exercised (5,755) (247) (500)
$20.92 Options:
Exchanged by holders - (1,147) (5,159)
Exercised (5,100) (12,353) (20,041)
46
Options
----------------------------
2000 1999 1998
---- ---- ----
Outstanding, beginning of year 290,212 320,032 227,733
$16.59 Options:
---------------
Exchanged by holder - - (2,608)
Exercised (88) - (2,264)
$24.00 Options:
---------------
Exchanged by holder (6,305) - -
Exercised (2,320) (7,500) (8,082)
Expired (1,500) - -
$20.17 Options:
---------------
Exchanged by holder (1,912) (1,465) -
Exercised (582) (5,755) (247)
$20.92 Options
--------------
Exchanged by holder - - (1,147)
Exercised (3,000) (5,100) (12,353)
Expired (3,000) - -
$27.875 Options
---------------
Granted - - 116,000
Expired (6,000) (10,000) (1,000)
$26.75 Options
--------------
Granted - - 4,000
$20.25 Options
--------------
Granted 145,500 - -
Expired (2,500) - -
$21.625 Options
---------------
Granted 2,500 - -
$22.875 Options
---------------
Granted 5,000 - -
-------- -------- --------
Outstanding, end of year 416,005 290,212 320,032
======== ======== ========
Available for grant, end of year 357,125 497,125 487,125
======== ======== ========
31
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Options
-----------------------------------
1999 1998 1997
---- ---- ----The weighted average grant-date market value for options granted during
2000 was $20.36. For options outstanding at December 31, 2000, the range of
exercise prices was $20.17 to $27.875, Options:
Granted - 116,000 -
Expired (10,000) (1,000) -
$26.75 Options:
Granted - 4,000 -
------- ------- -------
Outstanding, end of year 290,212 320,032 227,733
======= ======= =======
Available for grant, end of year 497,125 487,125 606,125
======= ======= =======
- --------------------------------------------------------------------------------and the weighted average remaining
contractual life was 6.9 years.
NW Natural's Employee Stock Purchase Plan, as amended in 2000, allows
employees to purchase common stock at 9285 percent of the average bid and ask
market price on the subscription date which is set annually. Each eligible
employee may purchase up to 900 shares through payroll deduction over a six
to 12 month period.
5. LONG-TERM DEBT:
- --------------------------------------------
The issuance of first mortgage bonds, including secured medium-term notes,
under the Mortgage and Deed of Trust (Mortgage) is limited by property,
earnings and other provisions of the Mortgage. The Mortgage constitutes a
first mortgage lien on substantially all of NW Natural's utility property.
The 7-1/4 % Series of Convertible Debentures may be converted at any time
into 50-1/4 shares of common stock for each $1,000 face value ($19.90 per
share).
The maturities for the five years ending Dec. 31, 2004,2005, on the long-term
debt outstanding at Dec. 31, 19992000 amount to: $10.0 million in
2000, $20.0$20 million in 2001, $40.0$40
million in 2002, $20.0$20 million in 2003, and no maturity in 2004.2004 and $15 million
in 2005.
6. NOTES PAYABLE AND LINES OF CREDIT:
- ----------------------------------------------------------------------------------
NW Natural has available through Sept. 30, 2000,2001, committed lines of credit
with fivefour commercial banks totaling $120 million consisting of
a primary fixed amount of $60 million plus an excess amount of up to
$60 million availablewhich are used as needed.backup
lines for the commercial paper program. In addition, Financial Corporation
has available through Sept. 30, 2000,2001, committed lines of credit with two
commercial banks totaling $20 million. Financial Corporation's lines are
supported by the guaranty of NW Natural.
Under the terms of these lines of credit, which are used as backup
lines for commercial paper programs, NW Natural and Financial
Corporation pay commitment fees but are not required to maintain
compensating bank balances. The interest rates on borrowings under these
lines of credit are based on current market rates as negotiated. There were
no outstanding balances on theseeither the NW Natural or Financial Corporation
lines of credit as of Dec. 31, 19992000 or 1998.
During 1998, NW Natural entered into an additional $18 million line1999.
The Company's primary source of credit with ashort-term funds is commercial bank for the purpose of constructing a new
headquarters building for the Port of Portland on property owned by NW
Natural. At Dec. 31, 1999, there was no outstanding balance. At Dec.
31, 1998, the outstanding balance was $6 million.
47
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------paper. Both
NW Natural and Financial Corporation issue domestic commercial paper
which is supported by the committed bank lines, under agency
agreements with a commercial bank. The commercial paper is supported by the
Company's lines of credit. Financial Corporation's commercial paper is
supported by the guaranty of NW Natural. The amounts and average interest
rates of commercial paper outstanding were as follows at Dec. 31:
1999 1998
------------------------ -------------------------------2000------ --------1999-----
Thousands Amount Rate Amount Rate
--------------------------------- ----------- ----------- -------------
NW Natural $94,149$ 56,263 6.5% $ 94,149 5.8% $75,400 5.2%
Financial Corporation - -
---------- ----------
Total $ 56,263 $ 94,149
========== ==========
32
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- -
------- -------
Total $94,149 $75,400
======= =======--------------------------------------------------------------------------------
7. PENSION AND OTHER POSTRETIREMENT BENEFITS:
- --------------------------------------------------------------------------------------------------
NW Natural has two qualified non-contributory defined benefit plans
covering all regular employees with more than one year of service, a
non-qualified supplemental pension plan for eligible executive officers and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations
and fair value of assets over the three-year period ended Dec. 31, 19992000 and
a statement of the funded status as of Dec. 31, 2000, 1999 1998 and 1997:1998:
Pension Benefits Other Benefits
---------------------------------------- --------------------------------------------------------------------------- ----------------------------------
Thousands 2000 1999 1998 19972000 1999 1998
1997- --------- ---- ---- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at Jan. 1 $142,619 $127,879 $112,281 $15,717 $12,332 $10,863$ 136,198 $ 142,619 $ 127,879 $ 11,902 $ 15,717 $ 12,332
Service cost 3,475 4,259 3,430 2,858234 162 288
238
Interest cost 10,312 9,379 9,282 8,424995 715 891 844
Expected benefits paid (8,035) (6,911) (6,762) (6,041)(878) (766) (578)
(570)
Plan amendments 12 4,057 (2,948) 3,175- (1,583) - -
Net actuarial (gain) loss 4,840 (17,205) 11,738 7,1821,816 (2,343) 2,784
957
----------- --------- --------- --------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Benefit obligation at Dec. 31 146,802 136,198 142,619 127,87914,069 11,902 15,717
12,332
----------- --------- --------- --------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Change in plan assets:
Fair value of plan assets at Jan. 1 193,427 175,554 158,118 134,375 - - -
Actual return on plan assets 4,351 24,104 23,532 29,298 - - -
Employer contributions 708 680 666 529878 766 578
570
Benefits paid (8,035) (6,911) (6,762) (6,084)(878) (766) (578)
(570)
----------- --------- --------- --------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Fair value of plan assets at Dec. 31 190,451 193,427 175,554 158,118 - - -
----------- --------- --------- --------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Funded status:
Funded status at Dec. 31 43,649 57,229 32,935 30,239(14,069) (11,902) (15,717) (12,332)
Unrecognized transition obligation 701 1,035 1,072 1,0275,232 5,667 7,896 8,460
Unrecognized prior service cost 8,022 9,184 5,601 10,054191 210 - -
Unrecognized net actuarial (gain) loss (47,661) (67,656) (40,936) (44,060)1,061 (755) 1,553
(1,230)
----------- --------- --------- --------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Net amount recognized $ 4,711 $ (208) $ (1,328) $ (2,740) $(6,780)(7,585) $ (6,780) $ (6,268)
$(5,102)
=========== ========= ========= ========= ======== ================== ========== ========== ========== ========== ==========
Amounts recognized in the
consolidated balance sheets:
Prepaid benefit cost $ 13,150 $ 7,712 $ 5,900 $ 3,271 $ - $ - $ -
Accrued benefit liability (8,932) (8,578) (8,902) (9,987)(7,585) (6,780) (6,268)
(5,102)
Intangible asset 493 658 1,674 3,976 - - -
----------- --------- --------- --------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Net amount recognized $ 4,711 $ (208) $(1,328) $(2,740) $(6,780) $(6,268) $(5,102)
=========== ========= ========= ========= ======== ========
- -----------------------------------------------------------------------------------------------------------------------------$ (1,328) $ (7,585) $ (6,780) (6,268)
========== ========== ========== ========== ========== ==========
48
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company's non-qualified supplemental pension plan was the only pension
plan with an accumulated benefit obligation in excess of plan assets. The
plan's accumulated benefit obligation was $10.4 million, $9.8 million $11.1 million and
$13.5$11.1 million at Dec. 31, 2000, 1999 1998 and 1997,1998, respectively. There were no
plan assets in the non-qualified plan due to the nature of the plan, but
the Company funds its obligation with trust-owned life insurance. The
amount of the life insurance coverage is designed to provide sufficient
returns to recover all costs of the plan. The Company's plans for
postretirement benefits other than pensions also have no plan assets. The
aggregate benefit obligation for those plans is $14.1 million, $11.9
million $15.7 million and $12.3$15.7 million at Dec. 31, 2000, 1999 1998 and 1997,1998, respectively.
The following tables provide the components of net periodic cost (benefit)
for the plans for the years ended Dec. 31, 2000, 1999 1998 and 19971998 and the
assumptions used in the measurement of these costs and the Company's
benefit obligations:
33
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------- -------------------------------------------------- ------------------------------------
Thousands 2000 1999 1998 19972000 1999 1998
1997- --------- ---- ---- ---- ---- ---- ----
Service cost $ 3,475 $ 4,259 $ 3,430 $ 2,858234 $ 162 $ 288
$ 238
Interest cost 10,312 9,379 9,282 8,424995 715 890 845
Expected return on plan assets (16,056) (15,570) (13,926) (10,915) - - -
Amortization of transition (asset)
obligation 334 37 (45) (45) 436 564436 564
Amortization of prior service cost 1,174 827 1,481 865 -19 - -
Recognized actuarial (gain) loss (3,449) (781) (969) (676)- (35) 2 (87)
Special termination benefits - 1,410 - - - -
-
---------- --------- -------- --------- -------- ------------------ ---------- ---------- ---------- ----------
Net periodic benefit cost (benefit) $ (4,210) $ (439) $ (747) $ 511 $1,278 $1,744 $1,5601,684 $ 1,278 $ 1,744
========== ========= ======== ========= ======== ================= ========== ========== ========== ==========
Weighted average assumptions as
of Dec. 31:
Discount rate 7.50% 7.75% 6.75% 7.25%7.50% 7.75% 6.75% 7.25%
Expected return on plan assets 9.00% 10.00% 10.00% 9.00% n/a n/a n/a
Rate of compensation increase 4.25%-5.0% 4.50%4.25%-5.0% 4.50% n/a n/a n/a
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.0 percent during 1999. These
rates were2000. The rate was
assumed to decrease gradually each year to a rate of 4.5 percent for 2005
and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 1one percent change in assumed
health care cost trend rates would have the following effects:
Thousands 1% Increase 1% Decrease
--------- ----------- -----------
Effect on the total service and interest
cost components of net periodic
postretirement health care benefit cost $ 52,923 $ (49,392)$50 ($48)
Effect on the health care component of the
accumulated postretirement benefit obligation $446,471 $(407,863)$459 ($460)
NW Natural also has a qualified defined benefit contribution plan under
Internal Revenue Code Section 401(k) and a non-qualified deferred
compensation plan for eligible employees. These plans are designed to
enhance the existing retirement program of employees and to assist them in
strengthening their financial security by providing an incentive to save
and invest regularly. NW Natural's contributions to these plans were $1.3
million in 2000, $1.0 million in 1999 and $1.1 million in both 1998 and 1997.
491998.
34
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES:
- ----------------------------------------
A reconciliation between income taxes calculated at the statutory federal
tax rate and the tax provision reflected in the financial statements is as
follows:
Thousands 2000 1999 1998
1997
- ------------------------------------------------------------- ------------- --------------- ----------------------------------------------------------------------------------------------------
Computed income taxes based on statutory federal income
tax rate of 35% $24,336 $14,544 $22,369$ 26,124 $ 24,336 $ 14,544
Increase (reduction) in taxes resulting from:
DifferencesDifference between book and tax depreciation 222 222 310 221
Current state income tax, net of federal tax benefit 2,622 2,450 1,976 1,944
Federal income tax credits (357) (357) (574)
(360)
RestorationAmortization of investment and energy tax credits (855) (855) (700) (844)
Removal costs (480) (485) (424) (544)
Reversal of amounts provided in prior years (25) (655) (361) (1,455)
Gains on Company-owned life insurance (611) (703) (504) (470)
Other - net 189 638 337
173
-------- --------- ----------------- --------
Total provision for income taxes $24,591 $14,604 $21,034$ 26,829 $ 24,591 $ 14,604
======== ================= ========
5035
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
The provision for income taxes consists of the following:
Thousands 2000 1999 1998
1997
- ------------------------------------------------ ---------------- --------------- -------------------------------------------------------------------------------------------------------
Income taxes currently payable:
Federal $20,518 $13,004 $5,855$ 18,228 $ 20,518 $ 13,004
State 2,444 3,288 1,790
(1,644)
---------- --------- ----------------- -------- --------
Total 20,672 23,806 14,794
4,211
---------- --------- ----------------- -------- --------
Deferred taxes - net:
Federal 7,495 1,283 (876)
13,032
State (483) 357 1,386
4,635
---------- --------- ----------------- -------- --------
Total 7,012 1,640 510
17,667
---------- --------- ----------------- -------- --------
Investment and energy tax credits restored:
From utility operations (800) (800) (645) (800)
From subsidiary operations (55) (55) (44)
---------- --------- ---------(55)
-------- -------- --------
Total (855) (855) (700)
(844)
---------- --------- ----------------- -------- --------
Total provision for income taxes $24,591 $14,604 $21,034
---------- --------- ---------$ 26,829 $ 24,591 $ 14,604
======== ======== ========
Percentage of pretax income 35% 35% 33%
========== ========= =========35.9% 35.4% 35.1%
======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following:
Thousands 2000 1999 1998
- ------------------------------------------------ --------------- --------------- --------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $123,559 $114,664 $112,495
Regulatory asset 14,349 15,894 21,388
--------- ----------------- -------- --------
Total 137,908 130,558 133,883
--------- ----------------- -------- --------
Deferred tax assets:
Regulatory liability (9,558) (10,784) (14,684)
Other deferred assets 5,810 5,192 8,257
--------- ----------------- -------- --------
Total (3,748) (5,592) (6,427)
--------- ----------------- -------- --------
Net accumulated deferred income tax liability $141,656 $136,150 $140,310
========= ================= ======== ========
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
5136
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. PROPERTY AND INVESTMENTS:
- ----------------------------------------------------------------
The following table sets forth the major classifications of NW Natural's
utility plant and accumulated provision for depreciation at Dec. 31:
1999 1998
--------------------------------- -----------------------------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
- ------------------------------------------------------- ------------------ ----- ---------------- ------------------
Transmission and distribution $1,086,891 3.3% $ 995,214 3.5%
Storage 98,750 2.6% 98,172 2.1%
General 80,509 4.7% 78,729 7.4%
Intangible and other 45,173 21.1% 49,628 8.6%
------------ -----------
Utility plant in service 1,311,323 4.0% 1,221,743 3.9%
Gas stored long-term 11,301 11,301
Work in progress 8,791 6,646
------------ -----------
Total utility plant 1,331,415 1,239,690
Less accumulated depreciation 436,386 404,117
------------ -----------
Utility plant-net2000 1999
---------------------- ---------------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
- ---------------------------------------------------------- ---------------------
Transmission and distribution $ 1,144,107 3.3% $ 1,086,891 3.3%
Storage 103,506 2.7% 98,750 2.6%
General 82,723 6.3% 80,509 4.7%
Intangible and other 46,344 5.5% 45,173 21.1%
----------- -----------
Utility plant in service 1,376,680 3.5% 1,311,323 4.0%
Gas stored long-term 11,301 11,301
Work in progress 18,989 8,791
----------- -----------
Total utility plant 1,406,970 1,331,415
Less accumulated depreciation 478,138 436,386
----------- -----------
Utility plant - net $ 928,832 $ 895,029 $ 835,573
============
===========
The following table summarizes the Company's investments in
non-utility plant at Dec. 31:
Thousands 1999 1998
- ----------------------------------------- ------------------------------ ------------------------------
Canadian oil and gas properties and other $ - $74,503
Port of Portland building - 6,016
Dock, land and oil station 3,565 3,565
Other 4,983 4,966
----- -----
Total non-utility plant 8,548 89,050
Less accumulated depreciation 7,654 29,927
----- ------
Non-utility plant - net $ 894 $59,123
====== =======
- -------------------------------------------------------------------------------------------------------
52
Northwest Natural Gas Company
Notes to Consolidated Financial Statements===========
The following table summarizes the Company's investments in non-utility
plant at Dec. 31:
Thousands 2000 1999
- --------------------------------------------------------------------------------
Storage $ 4,929 $ -
Dock, land and oil station 3,713 3,565
Other 7 4,983
----------- -----------
Total non-utility plant 8,649 8,548
Less accumulated depreciation 3,451 7,654
----------- -----------
Non-utility plant - net $ 5,198 $ 894
=========== ===========
- --------------------------------------------------------------------------------
Investments in Canadian oil and gas properties and the Port of Portland
building arewere included in current assets at Dec. 31, 1999. The Canadian oil
and gas properties arewere included in investment in a discontinued segment
(see Note 2) and the Port of Portland building iswas classified as property
held for sale. Both were sold in 2000. Also in 2000, Financial Corporation
sold domestic oil and gas properties that had been included among other
non-utility plant as of Dec. 31, 1999 ($4.9 million).
The following table summarizes the Company's investments in affiliated
entities accounted for under the equity and cost methods, and its
investment in aan aircraft leveraged lease at Dec. 31:
Thousands 2000 1999
1998
- ---------------------------------------- ------------- ---------------------------------------------------------------------------------------------
Electric generation $ 5,1654,898 $ 5,5095,165
Aircraft leveraged lease 7,479 7,925 8,439
Gas pipeline and other 1,776 2,919 1,950
Long-term notes receivable 373 548
816
-------- ------------------- -----------
Total investments and other $16,557 $16,714
======== ========$ 14,526 $ 16,557
=========== ===========
- ----------------------------------------------------------------------------------------------------------------------------------------------------
Financial Corporation has ownership interests ranging from 4.0 to 5.3
percent in solar electric generation plants located near Barstow,
California. Power generated by these plants is sold to Southern California
Edison Company under long-term contracts.
37
Financial Corporation also has ownership interests ranging from 8.5 to 41
percent in U. S. Windpower Partners electric generation projects located
near Livermore and Palm Springs, California. The wind-generated power is
sold to Pacific Gas and Electric Company and Southern California Edison
Company under long-term contracts.
In 1987, the Company invested in a Boeing 737-300 aircraft which was leased
to Continental Airlines for 20 years under a leveraged lease agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- --------------------------------------------------------------------------------------
The estimated fair values of NW Natural's financial instruments have been
determined using available market information and appropriate valuation
methodologies. The following is a list of financial instruments whose
carrying values are sensitive to market conditions:
December 31, 1999 December 31, 1998
-------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
- ------------------------------------- ------------- ------------------ ------------------ ---------------
Redeemable preference stock $ 25,000 $ 23,500 $ 25,000 $ 25,250
Redeemable preferred stock $ 10,564 $ 9,618 $ 11,499 $ 11,520
Long-term debt including amount due
within one year $406,379 $415,412 $376,738 $436,224
- ------------------------------------- ------------- ------------------ ------------------ ---------------
December 31, 2000 December 31, 1999
----------------------- --------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
------------------------------------------------------ --------------------
Redeemable preference stock $ 25,000 $ 22,750 $ 25,000 $ 23,500
Redeemable preferred stock $ 9,750 $ 9,750 $ 10,564 $ 9,618
Long-term debt including amount
due within one year $420,790 $460,929 $406,379 $415,412
---------------------------------------------------------------------------
Fair value of the redeemable preference stock and the redeemable preferred
stock was estimated using quoted market prices. Interest rates that are
currently available to the Company for issuance of debt with similar terms
and remaining maturities were used to estimate fair value for debt issues.
The carrying amount of long-term notes receivable was stated at
estimatedapproximates fair value
at Dec. 31, 19992000 and 1998.
53
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------1999.
11. USE OF FINANCIAL DERIVATIVES:
- ------------------------------------------------------------------------
In connection with its Canadian gas purchase commitments, NW Natural uses
foreign currency forward contracts to hedge against fluctuations in
currency values. The forward contracts have terms ranging up to 12 months.
Such contracts are purchased in an amount up to 100 percent but
not less than 80 percent of estimated
daily requirements for commodity gas purchased in Canadian currency from
gas suppliers in Canada. The notional amount of these contracts at Dec. 31,
2000 and 1999, and 1998, totaled $8.6$34.1 million and $7.9$8.6 million, respectively, and,
if settled on those dates, NW Natural would have realized a negligible gain of $0.4
million in 19982000 and a gain of $0.2 million in 1999.
As part of an overall strategy to maintain an acceptable level of exposure
to the risk of gas price fluctuation, NW Natural has developed a targeted
mix of fixed-rate and cap-protected natural gas commodity contracts versus
variable rate contracts. To efficiently manage this mix, NW Natural
utilizes natural gas commodity swap and cap agreements to effectively
convert the gas purchase commitments into an acceptable fixed-rate and
capped rate mix. NW Natural uses natural gas commodity swap agreements to
convert certain long-term gas purchase contracts from floating prices to
fixed prices. Under the commodity swap agreements, NW Natural receives or
makes payments based on the differential between a specified price and the
actual price of natural gas as measured by price indices relating to the
market area where it purchases the gas. The swap agreements have terms
ranging up to 12 months. At Dec. 31, 19992000 and 1998,1999, the Company had swap
agreements with broker-dealers to cover notional quantities of 100,00030.9 million
and 136,74124.1 million MMBtu, per day of gas, respectively. Under the swap agreements in effect
at Dec. 31, 19992000 and 1998,1999, the Company paid fixed prices averaging $2.396$3.457
and $1.898$2.396 per MMBtu, respectively. In return, it received a price that
varied from month to month with market conditions. The notional amounts of
the swap agreements at Dec. 31, 2000 and 1999 were $106.7 million and 1998 were $57.7
million, respectively, and, $48.7if settled on those dates, NW Natural would
38
have realized a gain of $122.6 million respectively,and a loss of $6.9 million,
respectively. At Dec. 31, 2000, the Company had cap agreements with
broker-dealers to cover notional quantities of 13.2 million MMBtu. Under
the cap agreements in effect at Dec. 31, 2000, the Company paid fixed
prices averaging $3.862 per MMBtu. The notional amounts of the cap
agreements at Dec. 31, 2000 were $51.1 million, and, if settled on those
dates, NW Natural would have realized a loss of $6.9 million and a gain of $0.6 million, respectively.$42.0 million. (See Note 1
for a summary of accounting for gains and losses.)
Canor, a discontinued segment, also managesmanaged its commodity price risk
through the use of gas and oil commodity swaps and collars. At Dec. 31,
1999, and 1998, the notional amount of these contracts was $4.3 million and, $1.4 million respectively, and, if
settled, on those dates, Canor would have realized a loss of $0.8 million in 1999 and a negligible
gain in 1998.
54
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------million.
12. COMMITMENTS AND CONTINGENCIES:
- --------------------------------------------------------------------------
Lease Commitments
-----------------
The Company leases land, buildings and equipment under agreements that
expire in various years through 2004.2006. Rental expense under operating leases
was $4.9 million, $5.2 million $6.0 million and $6.4$6.0 million for the years ended Dec.
31, 2000, 1999 1998 and 1997,1998, respectively. The table below reflects the future
minimum lease payments due under non-cancelable leases at Dec. 31, 1999.2000.
Such payments total $23.0$19.6 million for operating leases. The net present
value of such payments on capital leases was $1.1$1.6 million after deducting
imputed interest of $0.1 million. These commitments principally relate to
the lease of the Company's office headquarters, underground gas storage
facilities, vehicles and computer systems.
Later
Millions 2000 2001 2002 2003 2004 2005 years
---------------------- ------ -------- -------- ------- -------- ---------------------------------------------------------------------------------
Operating leases $4.5 $4.3 $4.0 $2.6 $2.0 $5.6$ 4.3 $ 4.0 $ 2.7 $ 2.3 $ 2.3 $ 4.0
Capital leases $0.4 $0.4 $0.4$ 0.8 $ 0.8 $ 0.1 $ - $ - $ -
Minimum lease
payments $4.9 $4.7 $4.4 $2.6 $2.0 $5.6$ 5.1 $ 4.8 $ 2.8 $ 2.3 $ 2.3 $ 4.0
Purchase Commitments
--------------------
NW Natural has signed agreements providing for the availability of firm pipeline
capacity under which it must make fixed monthly payments for contracted
capacity. The pricing component of the monthly payment is established, subject
to change, by U.S. or Canadian regulatory bodies. In addition, NW Natural has
entered into long-term agreements to release firm pipeline capacity. The
aggregate amounts of these agreements were as follows at Dec. 31, 1999:2000:
Capacity Capacity
Purchase Release
Thousands Agreements Agreements
-------------------------------------------- ----------- ---------------
2000--------------------------------------------------------------------------
2001 $ 79,98284,493 $ 3,870
2001 79,299 3,8703,840
2002 76,359 3,87080,943 3,840
2003 71,967 3,87075,919 3,840
2004 49,664 3,87050,458 3,840
2005 48,153 3,840
2006 through 2028 358,488 22,575
------- ------2023 313,144 18,537
-------- --------
Total 715,759 41,925653,110 37,737
Less: Amount representing interest 210,748 11,566174,530 9,322
-------- ---------------
Total at present value $505,011 $30,359$478,580 $ 28,415
======== =======
------------------------------------------------------------------------========
NW Natural's total payments of fixed charges under capacity purchase
agreements in 2000, 1999 and 1998 and 1997 were $81.5 million, $78.2 million $76.2 million and
$76.7$76.2 million, respectively. Included in the amounts for 2000, 1999 1998 and
19971998 were reductions for capacity release sales totaling $3.8 million, $3.9$3.8
million and $4.2$3.9 million, respectively. In addition, NW Natural is required
to pay per-unit charges based on the actual quantities shipped under the
agreements. In certain of NW Natural's take-or-pay purchase commitments,
annual deficiencies may be offset by prepayments subject 55
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
to recovery over a
longer term if future purchases exceed the minimum annual requirements.
39
Environmental Matters
---------------------
NW NaturalThe Company owns property in Linnton, Oregon that is the site of a former
gas manufacturing plant that was closed in 1956. In 1993,
pursuant to1956 (the Linnton site). The
Linnton site has been under investigation by the Company in recent years
under program oversight by the Oregon Department of Environmental Quality
(ODEQ)
procedures,. Since 1993, NW Natural submitted a noticehas recorded expenses of intent to participate in$2.6 million for
its costs of the ODEQ's Voluntary Cleanup Programvoluntary investigation including consultants' fees, ODEQ
oversight reimbursement and in 1994, the site was listed
on ODEQ's Confirmed Release Listlegal fees. In 2000, NW Natural recorded an
additional accrued liability and Inventory. During 1995, initial
tests revealed environmental contamination, but the extent orcorresponding receivable of $1.4 million
representing the estimated costcosts of further investigation and interim
remediation cannot yeton this site. The Company expects that it will be determined.
Duringable to
recover its costs of further investigation and any remediation for which it
may be responsible with respect to the Linnton site from insurance or
through future rates.
The Company previously owned property adjacent to the Linnton site that now
is the location of a manufacturing plant owned by Wacker Siltronic
Corporation (the Wacker site). In October 2000, the ODEQ issued an order
requiring Wacker and NW Natural to determine the nature and extent of
releases of hazardous substances to Willamette River sediments from the
Wacker site. The Company recorded a liability of $0.4 million for the
estimated costs of the investigation and initial remediation on the Wacker
site.
In 1998, the ODEQ and the U.S. Environmental Protection Agency (EPA)
completed a study of sediments in a 5.5 mile segment of the Willamette
River (the Portland Harbor) that includes the area adjacent to the Linnton
site and the Wacker site. Remediation ofIn 2000, the EPA listed the Portland Harbor as a
Superfund site may be affected byand notified the sediments management
plan now being developed in response to the ODEQ/EPA sediments study.
Since 1993,Company that it is a potentially
responsible party. In 2000, NW Natural has recorded an expense of $2.6$0.6 million
for its estimated share of the
estimated costs of consultants' fees, ODEQ oversight cost
reimbursements,remedial investigation of the
Portland Harbor. Although available information is insufficient to
determine either the total amount of liability for investigation and
remediation of the voluntary investigation, plusPortland Harbor or the Company's share of that
liability, this amount is an estimate for
costsof NW Natural's share of the continuing investigation.lower
end of a range of probable liability.
NW Natural expects that its costs of investigation and any remediation for
which it may be responsible with respect to the Wacker site and the
Portland Harbor Superfund site should be recoverable, in large part, from
insurance. In the event these costs are not recovered from insurance, NW
Natural will seek recovery through future rates.
Litigation
----------
In July 1995, a jury in an Oregon state court returned a verdict against NW
Natural in the case of Northwest Natural Gas Company v. Chase Gardens, Inc.
(Lane County Circuit Court Case No. 16-91-01370). In the fourth quarter of 1996, after the Oregon
Court of Appeals affirmed the trial court decision, NW Natural recorded
charges to operating expense and interest expense equivalent to 15 cents
per share as a reserve against payment of the judgment, related costs and
post-judgment interest. NW Natural petitioned for review byIn May 1999, the Oregon Supreme Court which issued its opinion in May 1999 reversingreversed the
Court of Appeals' decision, overturningoverturned the trial court verdict on the
larger of the two claims in the case and remandingremanded the case to the Court of
Appeals for further proceedings on NW Natural's appeal of the judgment on
the smaller of(contract) claims in the two claims.case. Reflecting the Supreme Court's
decision, NW Natural reduced the litigation reserve by a total of $3.9
million in the second quarter of 1999, reducing operating expense by $3.0
million and interest expense by $0.9 million. The Court of Appeals
subsequently issued an opinion in favor of NW Natural on the remaining
issues in the case.contract
claims. Based on that decision, NW Natural reversed the remaining reserve
balance of $2.7 million at Dec. 31, 1999, further reducing operating
expense for 1999 by $1.9 million and interest expense by $0.8 million. The
Oregon Supreme Court initially declined to review the Court of Appeals'
decision in favor of NW Natural on the contract claims, including a verdict
against the Company in the amount of $2.0 million plus interest. On
reconsideration, however, in December 2000 the Supreme Court agreed to
review the Court of Appeals' decision on the contract claims and is
expected to issue an opinion in 2001.
The Company is party to certain other legal actions in which claimants seek
material amounts. Although it is impossible to predict the outcome with
certainty, based upon the opinions of legal counsel, management does not
40
expect disposition of these matters to have a materially adverse effect on
the Company's financial position, results of operations or cash flows.
5641
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dollars Quarter Ended
------------------------------------------------------------------------------ended
---------------------------------------------------------------------
(Thousands Except Per Share Amounts) Mar.March 31 June 30 Sept. 30 Dec. 31 Total
- -------------------------------------------------- --------------- -------------- --------------- --------------- ----------------------------------------------------------------------------------------------------------------------
2000
Operating revenues 186,649 86,136 61,255 198,070 532,110
Net operating revenues 93,088 45,886 35,566 83,410 257,950
Net income (loss) from continuing operations 29,192 2,498 (4,868) 20,990 47,812
Gain (loss) on sale of discontinued segment 2,470 (35) (17) (6) 2,412
Net income (loss) 31,662 2,463 (4,885) 20,984 50,224
Basic earnings (loss) per share 1.24 0.07 (0.22) 0.81 1.90 *
Diluted earnings (loss) per share 1.22 0.07 (0.22) 0.80 1.88 *
1999
Operating Revenuesrevenues 167,873 94,252 55,737 137,972 455,834
Net operating revenues 85,905 55,241 33,605 68,886 243,637
Net income (loss) from continuing operations 24,184 10,529 (3,608) 13,836 44,941
Net income (loss) from discontinued segment (141) 255 48 193 355
Net income (loss) 24,043 10,784 (3,560) 14,029 45,296
Basic earnings (loss) per share 0.94 0.41 (0.17) 0.53 1.71*1.71 *
Diluted earnings (loss) per share 0.93 0.40 (0.17) 0.53 1.70*
1998
Operating revenues 133,803 80,327 50,186 140,074 404,390
Net operating revenues 76,413 46,676 30,836 77,041 230,966
Net income from continuing
operations 19,693 4,248 (5,164) 8,174 26,951
Net income from discontinued
segment 3,493 (155) (756) (2,232) 350
Net income 23,186 4,093 (5,920) 5,942 27,301
Basic earnings (loss) per share .98 0.14 (0.26) 0.21*1.70 * 1.02*
Diluted earnings (loss) per share .97 0.14 (0.26) 0.21** 1.02*
- ---------------------------------------------------------------------------------------------------------------------------------
* Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of shares
outstanding has increased in each quarter shown, the sum of quarterly earnings
doesmay not equal earnings per share for the year. Variations in earnings between
quarterly periods are due primarily to the seasonal nature of the Company's
business.
** Results for the fourth quarter of 1998 include a charge equivalent to 43
cents per share resulting from asset write-down charges by subsidiaries.
5742
NORTHWEST NATURAL GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Additions Deductions
Balance at -------------------------- Deductions------------------------ ---------- Balance
beginning Charged to Charged to ---------- at end
of costs other Net of
period and expenses accounts write-offs period
------ ------------ -------- ---------- ------
Thousands
- --------- ------
Thousands
- ---------
Years ended December 31:
2000
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $ 1,669 $ 2,344 $ - $ 2,146 $ 1,867
1999
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $1,547 $2,380$ 1,547 $ 2,380 $ - $2,258 $1,669$ 2,258 $ 1,669
1998
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $1,253 $3,005$ 1,253 $ 3,005 $ - $2,711 $1,547
1997
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $1,057 $1,624 $ - $1,428 $1,2532,711 $ 1,547
5843
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
(Item 10. Directors and Executive Officers of the Registrant;
Item 11. Executive Compensation; Item 12. Security Ownership
of Certain Beneficial Owners and Management; and Item 13.
Certain Relationships and Related Transactions.)
Information called for by Part III (Items 10.,
11., 12. and 13.) is incorporated herein by reference to portions of the
Company's definitive proxy statement. See the Additional Item included in Part
I for information concerning executive officers of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. A list of all Financial Statements and Supplemental Schedules is
incorporated by reference to Item 8.
2. List of Exhibits filed:
*(3a.) Restated Articles of Incorporation, as filed and effective
June 24, 1988 and amended December 8, 1992, December 1, 1993
and May 27, 1994 (incorporated herein by reference to
Exhibit (3a.) to Form 10-K for 1994, File No. 0-994).
*(3b.) Bylaws as amended February 25, 1999 (incorporated herein by
reference to Exhibit 3 to Form 10-Q for the quarter ended
March 31, 1999, File No. 0-994).
*(4a.) Copy of Mortgage and Deed of Trust, dated as of July 1,
1946, to Bankers Trust and R. G. Page (to whom Stanley Burg
is now successor), Trustees (incorporated herein by
reference to Exhibit 7(j) in File No. 2-6494); and copies of
Supplemental Indentures Nos. 1 through 14 to the Mortgage
and Deed of Trust, dated respectively, as of June 1, 1949,
March 1, 1954, April 1, 1956, February 1, 1959, July 1,
1961, January 1, 1964, March 1, 1966, December 1, 1969,
April 1, 1971, January 1, 1975, December 1, 1975, July 1,
1981, June 1, 1985 and November 1, 1985 (incorporated herein
by reference to Exhibit 4(d) in File No. 33-1929);
Supplemental Indenture No. 15 to the Mortgage and Deed of
Trust, dated as of July 1, 1986 (filed as Exhibit (4)(c) in
File No. 33-24168); Supplemental Indentures Nos. 16, 17 and
59
18 to the Mortgage and Deed of Trust, dated, respectively,
as of November 1, 1988, October 1, 1989 and July 1, 1990
(incorporated herein by reference to Exhibit (4)(c) in File
No. 33-40482); Supplemental Indenture No. 19 to the Mortgage
and Deed of Trust, dated as of June 1, 1991 (incorporated
herein by reference to Exhibit 4(c) in File No. 33-64014);
and Supplemental Indenture No. 20 to the Mortgage and Deed
of Trust, dated as of June 1, 1993 (incorporated herein by
reference to Exhibit 4(c) in File No. 33-53795).
*(4d.) Copy of Indenture, dated as of June 1, 1991, between the
Company and Bankers Trust Company, Trustee, relating to the
Company's Unsecured Medium-Term Notes (incorporated herein
by reference to Exhibit 4(e) in File No. 33-64014).
*(4e.) Officers' Certificate dated June 12, 1991 creating Series A
of the Company's Unsecured Medium-Term Notes (incorporated
herein by reference to Exhibit (4e.) to Form 10-K for 1993,
File No. 0-994).
*(4f.) Officers' Certificate dated June 18, 1993 creating Series B
of the Company's Unsecured Medium-Term Notes (incorporated
herein by reference to Exhibit (4f.) to Form 10-K for 1993,
File No. 0-994).
*(4f.(1)) Officers' Certificate dated January 15, 1999 relating to
Series B of the Company's Unsecured Medium-Term Notes and
supplementing the Officers' Certificate dated June 18, 1993
(incorporated herein by reference to Exhibit (4f.(1)) to
Form 10-K for 1998, File No. 0-994).
*(4g.) Rights Agreement, dated as of February 27, 1996, between the
Company and Boatmen's Trust Company (ChaseMellon Shareholder
Services, successor), which includes as Exhibit A thereto
the form of a Right Certificate and as Exhibit B thereto the
Summary of Rights to Purchase Common Shares (incorporated
herein by reference to Exhibit 1 to Form 8-A, dated February
27, 1996, File No. 0-994).
*(10j.) Transportation Agreement, dated June 29, 1990, between the
Company and Northwest Pipeline Corporation (incorporated
herein by reference to Exhibit (10j.) to Form 10-K for 1993,
File No. 0-994).
*(10j.(1)) Replacement Firm Transportation Agreement, dated July 31,
1991, between the Company and Northwest Pipeline Corporation
(incorporated herein by reference to Exhibit (10j.(2)) to
Form 10-K for 1992, File No. 0-994).
*(10j.(2)) Firm Transportation Service Agreement, dated November 10,
1993, between the Company and Pacific Gas Transmission
60
Company (incorporated herein by reference to Exhibit
(10j.(2)) to Form 10-K for 1993, File No. 0-994).
*(10j.(3)) Service Agreement, dated June 17, 1993, between Northwest
Pipeline Corporation and the Company (incorporated herein by
reference to Exhibit (10j.(3)) to Form 10-K for 1994, File
No. 0-994).
*(10j.(4)) Firm Transportation Service Agreement, dated October 22,
1993, between Pacific Gas Transmission Company and the
Company (incorporated herein by reference to Exhibit
(10j.(4)) to Form 10-K for 1994, File No. 0-994).
*(10j.(5)) Firm Transportation Service Agreement, dated June 22, 1994,
between Pacific Gas Transmission Company and the Company
(incorporated herein by reference to Exhibit (10j.(5)) to
Form 10-K for 1995, File No. 0-994).
*(10j.(6)) Firm Transportation and Supply Agreement, dated May 9,
1997, between PanEnergy Trading and Market Services, LLC,
Inland Pacific Energy Services Corp., and the Company
(incorporated herein by reference to Exhibit (10j.(6)) to
Form 10-K for 1997, File No. 0-994).
(11) Statement re computation of per share earnings.
(12) Statement re computation of ratios.
(23) Consent of PricewaterhouseCoopers LLP.
(27) Financial Data Schedule.
Executive Compensation Plans and Arrangements:
---------------------------------------------
*(10b.) Executive Supplemental Retirement Income Plan, 1995
Restatement (incorporated herein by reference to Exhibit
(10b.) to Form 10-K for 1994, File No. 0-994).
*(10b.-1) 1995 Amendment to Executive Supplemental Retirement Income
Plan (1995 Restatement) (incorporated herein by reference to
Exhibit (10b.-1) to Form 10-K for 1995, File No. 0-994).
*(10b.-2) Amendment 1998-1 to the Executive Supplemental Retirement
Income Plan (1995 Restatement) (incorporated herein by
reference to Exhibit 10(a) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
*(10b.-3) ESRIP Change in Control Amendment to the Executive
Supplemental Retirement Income Plan (1995 Restatement)
(incorporated herein by reference to Exhibit 10(b) to Form
10-Q for the quarter ended September 30, 1998, File No.
0-994).
61
*(10c). 1985 Stock Option Plan, as amended effective May 25, 1995
(incorporated herein by reference to Exhibit (10c.) to Form
10-K for 1995, File No. 0-994).
*(10e.) Executive Deferred Compensation Plan, 1990 Restatement,
effective January 1, 1990 (incorporated herein by reference
to Exhibit (10e.) to Form 10-K for 1990, File No. 0-994).
*(10e.-1) Amendment No. 1 to Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit (10e.-1) to
Form 10-K for 1991, File No. 0-994).
*(10e.-2) Amendment No. 2 to Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit (10e.-2) to
Form 10-K for 1994, File No. 0-994).
*(10e.-3) Amendment No. 3 to Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit (10e.-3) to
Form 10-K for 1997, File No. 0-994).
*(10e.-4) Amendment No. 4 to Executive Deferred Compensation Plan,
effective September 24, 1998 (incorporated herein by
reference to Exhibit 10(c) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
*(10f.) Directors Deferred Compensation Plan, effective June 1,
1981, restated as of December 1, 1997 (incorporated herein
by reference to Exhibit (10f.) to Form 10-K for 1997, File
No. 0-994).
*(10f.-1) Amendment No. 1 to Directors Deferred Compensation Plan
(December 1, 1997 Restatement) (incorporated herein by
reference to Exhibit 10(d) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
(10f.-2) Amendment No. 2 to Directors Deferred Compensation Plan
(December 1, 1997 Restatement).
*(10g.) Form of Indemnity Agreement as entered into between the
Company and each director and executive officer
(incorporated herein by reference to Exhibit (10g.) to Form
10-K for 1988, File No. 0-994).
*(10i.) Non-Employee Directors Stock Compensation Plan, as amended
effective January 1, 1998 (incorporated herein by reference
to Exhibit (10i.) to Form 10-K for 1997, File No. 0-994).
(10k.) Executive Annual Incentive Plan, effective March 1, 1990, as
amended effective January 1, 1992, January 1, 1996 and
January 1, 2000.
*(10n.) Employment agreement dated November 2, 1995, as amended
February 27, 1996, between the Company and an executive
62
officer (incorporated herein by reference to Exhibit (10n.)
to Form 10-K for 1995, File No. 0-994).
*(10n.-1) Amendment dated December 18, 1997 to employment agreement
dated November 2, 1995, as previously amended February 27,
1996, between the Company and an executive officer
(incorporated herein by reference to Exhibit (10n.-1) to
Form 10-K for 1997, File No. 0-994).
*(10n.-2) Amendment dated September 24, 1998 to employment agreement
dated November 2, 1995, as previously amended, between the
Company and an executive officer (incorporated herein by
reference to Exhibit 10(e) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
*(10o.) Form of amended and restated executive change in control
severance agreement as entered into between the Company and
each executive officer (incorporated herein by reference to
Exhibit 10(f) to Form 10-Q for the quarter ended September
30, 1998, File No. 0-994).
*(10p.) Employment Agreement dated July 2, 1997, between the Company
and an executive officer (incorporated herein by reference
to Exhibit 10(a) for Form 10-Q for the quarter ended
September 30, 1997, File No. 0-994).
*(10p.-1) Amendment dated December 18, 1997 to employment agreement
dated July 2, 1997, between the Company and an executive
officer (incorporated herein by reference to Exhibit
(10p.-1) to Form 10-K for 1997, File No. 0-994).
*(10p.-2) Amendment dated September 24, 1998 to employment agreement
dated July 2, 1997, as previously amended, between the
Company and an executive officer (incorporated by reference
to Exhibit 10(g) to Form 10-Q for the quarter ended
September 30, 1998, File No. 0-994).
*(10q.) Employment agreement dated October 19, 1998, between the
Company and an executive officer (incorporated herein by
reference to Exhibit (10q.) to Form 10-K for 1998, File No.
0-994).
*(10r.) Employment agreement dated May 11, 1999 between the Company
and an executive officer (incorporated herein by reference
to Exhibit 10 to Form 10-Q for the quarter ended June 30,
1999, File No. 0-994).
The Company agrees to furnish the Commission, upon request, a copy of
certain instruments defining rights of holders of long-term debt of
the Company or its consolidated subsidiaries which authorize
securities thereunder in amounts which do not exceed 10% of the total
assets of the Company.
63
(b) Report on Form 8-K.
On November 15, 1999, the Company filed a Current Report on Form 8-K
relating to the issuance of an order of the Oregon Public Utility
Commission in the Company's general rate case.
- --------------------------------------------
*Incorporated herein by reference as indicated
6444
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
Date: March 27, 2000August 10, 2001 By: /s/ Richard G. Reiten
---------------------------------------------------------------
Richard G. Reiten, PresidentChairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------------------------
/s/ Richard G. Reiten Principal Executive Officer and Director March 27, 2000
- ----------------------------------
Richard G. Reiten, President
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer March 27, 2000
- ----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ Stephen P. Feltz Principal Accounting Officer March 27, 2000SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
/s/ Richard G. Reiten Principal Executive Officer August 10, 2001
- ---------------------------------- and Director
Richard G. Reiten, Chairman
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer August 10, 2001
- ----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ Stephen P. Feltz Principal Accounting Officer August 10, 2001
- ----------------------------------
Stephen P. Feltz
Treasurer and Controller
/s/ Mary Arnstad Director )
- ---------------------------------- )
Mary Arnstad )
)
/s/ Thomas E. Dewey, Jr. Director )
- ---------------------------------- )
Thomas E. Dewey, Jr. )
)
/s/ Tod R. Hamachek Director )
- ---------------------------------- )
Tod R. Hamachek )
)
/s/ Richard B. Keller Director )
- ---------------------------------- )
Richard B. Keller )
)
/s/ Wayne D. Kuni Director )
- ---------------------------------- )
Wayne D. Kuni )
) March 27, 2000
/s/ Randall C. Pape Director ) August 10, 2001
- ---------------------------------- )
Randall C. Pape )
)
/s/ Robert L. Ridgley Director )
- ---------------------------------- )
Robert L. Ridgley )
)
/s/ Dwight A. Sangrey Director )
- ---------------------------------- )
Dwight A. Sangrey )
)
/s/ Melody C. Teppola Director )
- ---------------------------------- )
Melody C. Teppola )
)
/s/ Russell F. Tromley Director )
- ---------------------------------- )
Russell F. Tromley )
)
/s/ Benjamin R. Whiteley Director )
- ---------------------------------- )
Benjamin R. Whiteley )
65)
/s/ Richard L. Woolworth Director )
- ---------------------------------- )
Richard L. Woolworth )
45
NORTHWEST NATURAL GAS COMPANY
-----------------------------
EXHIBIT INDEX
-------------
To
Annual Report on Form 10-K
For Fiscal Year Ended
December 31, 19992000
Exhibit
Document Number
-------- --------
* Restated Articles of Incorporation, as filed (3a.)
June 24, 1988 and amended December 8, 1992,
December 1, 1993 and May 27, 1994
* Bylaws as amended February 25, 1999 (3b.)
* Mortgage and Deed of Trust, dated as of July 1, (4a.)
1946, as supplemented by Supplemental Indenture
Nos. 1 through 20
* Indenture, dated as of June 1, 1991, between (4d.)
the Company and Bankers Trust Company
* Officers' Certificate, dated June 12, 1991, (4e.)
creating Unsecured Medium-Term Notes Series A
* Officers' Certificate, dated June 18, 1993, (4f.)
creating Unsecured Medium-Term Notes Series B
* Officers' Certificate, dated January 15, 1999, (4f.(1))
relating to Series B of the Company's Unsecured
Medium-Term Notes and supplementing the Officers'
Certificate dated June 18, 1993
* Rights Agreement, dated as of February 27, 1996, (4g.)
between the Company and Boatmen's Trust Company
(ChaseMellon Shareholder Services, successor)
* Transportation Agreement, dated June 29, 1990, (10j.)
between the Company and Northwest Pipeline
Corporation
* Replacement Firm Transportation Agreement, (10j.(1))
dated July 31, 1991, between the Company and
Northwest Pipeline Corporation
* Firm Transportation Service Agreement, dated (10j.(2))
November 10, 1993, between the Company and
Pacific Gas Transmission Company
* Service Agreement, dated June 17, 1993, between (10j.(3))
Northwest Pipeline Corporation and the Company
* Firm Transportation Service Agreement, dated (10j.(4))
October 22, 1993, between Pacific Gas
Transmission Company and the Company
* Firm Transportation Service Agreement, dated (10j.(5))
June 22, 1994, between Pacific Gas Transmission
Company and the Company
* Firm Transportation and Supply Agreement, (10j.(6))
dated May 9, 1997, between PanEnergy Trading
and Market Services, Inland Pacific Energy Services
Corp., and the Company
Statement re computation of per share earnings (11)
Statement re computation of ratios (12)-------------
Consent of PricewaterhouseCoopers LLP (23)
Financial Data Schedule (27)
Executive Compensation Plans and Arrangements
---------------------------------------------
* Executive Supplemental Retirement Income (10b.)
Plan, 1995 Restatement
* 1995 Amendment to Executive Supplemental (10b.-1)
Retirement Income Plan (1995 Restatement)
* Amendment 1998-1 to the Executive (10b.-2)
Supplemental Retirement Income Plan
(1995 Restatement)
* ESRIP Change in Control Amendment to the (10b.-3)
Executive Supplemental Retirement Income
Plan (1995 Restatement)
* 1985 Stock Option Plan, as amended effective (10c.)
May 25, 1995
* Executive Deferred Compensation Plan, 1990 (10e.)
Restatement, effective January 1, 1990
* Amendment No. 1 to Executive Deferred (10e.-1)
Compensation Plan
* Amendment No. 2 to Executive Deferred (10e.-2)
Compensation Plan
* Amendment No. 3 to Executive Deferred (10e.-3)
Compensation Plan
* Amendment No. 4 to Executive Deferred (10e.-4)
Compensation Plan
* Directors Deferred Compensation Plan, (10f.)
effective June 1, 1981, restated as of
December 1, 1997
* Amendment No. 1 to Directors Deferred (10f.-1)
Compensation Plan (December 1, 1997
Restatement)
Amendment No. 2 to Directors Deferred (10f.-2)
Compensation Plan (December 1, 1997
Restatement)
* Form of Indemnity Agreement entered into (10g.)
between the Company and each director and
executive officer
* Non-Employee Directors Stock Compensation (10i.)
Plan, as amended effective January 1, 1998
Executive Annual Incentive Plan, effective (10k.)
March 1, 1990, as amended effective
January 1, 1992, January 1, 1996 and
January 1, 2000
* Employment agreement dated November 2, 1995, (10n.)
as amended February 27, 1996, between the
Company and an executive officer
* Amendment dated December 18, 1997 to (10n.-1)
employment agreement dated November 2, 1995,
between the Company and an executive officer
* Amendment dated September 24, 1998 to (10n.-2)
employment agreement dated November 2, 1995,
as previously amended, between the Company
and an executive officer
* Form of amended and restated executive change (10o.)
in control severance agreement as entered into
between the Company and each executive officer
* Employment agreement dated July 2, 1997 (10p.)
between the Company and an executive officer
* Amendment dated December 18, 1997 to (10p.-1)
employment agreement dated July 2, 1997,
between the Company and an executive officer
* Amendment dated September 24, 1998 to (10p.-2)
employment agreement dated July 2, 1997, as
previously amended, between the Company and an
executive officer
* Employment agreement dated October 19, 1998, (10q.)
between the Company and an executive officer
* Employment agreement dated May 11, 1999, (10r.)
between the Company and an executive officer
- ----------------------------------
* Incorporated by reference