SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[ X ][X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998March 31, 1999
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to
________________--------------------- ----------------------
Commission file number 0-994
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 226-4211
--------------
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 ][X] No [ ]
At NovemberMay 10, 1998, 24,804,0981999, 24,922,734 shares of the registrant's Common Stock, $3-1/6 par
value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
September 30, 1998March 31, 1999
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements Number
------
(1) Consolidated Statements of Income for the three andthree-month 3
nine month
periods ended September 30,March 31, 1999 and 1998, and 1997,
and ConsolidatedConsoli-
dated Statements of Earnings Invested in the Business
for the nine-monththree-month periods ended September 30, 1998March 31, 1999 and
1997.1998.
(2) Consolidated Balance Sheets at September 30, 1998March 31, 1999 4
and 19971998 and December 31, 1997.1998.
(3) Consolidated Statements of Cash Flows for the 5
nine-monththree-month periods ended September 30, 1998March 31, 1999 and 1997.1998.
(4) Consolidated Statements of Capitalization at 6
September 30,March 31, 1999 and 1998 and 1997 and December 31, 1997.1998.
(5) Notes to Consolidated Financial Statements.Statements 7
Item 2. Management's Discussion and Analysis of 9
Results of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk 19
PART II. OTHER INFORMATION
Item 5. Other Information 2019
Item 6.6 Exhibits and Reports on Form 8-K 2120
Signature 2220
2
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating Revenues:
Gross operating revenues ................ $ 53,810 $ 46,068 $273,161 $245,993
Cost of sales ........................... 19,350 14,171 110,391 86,991
-------- -------- -------- --------
Net operating revenues ............ 34,460 31,897 162,770 159,002
Operating Expenses:
Operations and maintenance ............. 20,941 18,481 61,082 57,613
Taxes other than income taxes .......... 4,361 3,493 16,372 15,003
Depreciation, depletion and amortization 13,496 10,875 38,137 31,797
-------- -------- -------- --------
Total operating expenses .......... 38,798 32,849 115,591 104,413
-------- -------- -------- --------
Income (Loss) from Operations ............... (4,338) (952) 47,179 54,589
Other Income ................................ 2,550 2,189 7,237 3,690
Interest Charges - net ...................... 7,647 7,320 23,615 20,765
-------- -------- -------- --------
Income (Loss) Before Income Taxes ........... (9,435) (6,083) 30,801 37,514
Income Taxes ................................ (3,515) (3,635) 9,442 12,849
-------- -------- -------- --------
Net Income (Loss) ........................... (5,920) (2,448) 21,359 24,665
Redeemable preferred and preference stock
dividend requirements ..................... 638 653 1,939 1,992
-------- -------- -------- --------
Earnings (Loss) Applicable to Common Stock .. $ (6,558) $ (3,101) $ 19,420 $ 22,673
======== ======== ======== ========
Average Common Shares Outstanding ........... 24,763 22,734 24,037 22,662
Earnings (Loss) Per Share of Common Stock:
Basic .................................. $ (0.26) $ (0.14) $ 0.81 $ 1.00
Diluted ................................ $ (0.26) $ (0.14) $ 0.80 $ 0.99
Dividends Per Share of Common Stock ......... $ 0.305 $ 0.30 $ 0.915 $ 0.90
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
--------------------
1999 1998
---- ----
Operating Revenues:
Gross operating revenues $171,049 $135,697
Cost of sales 81,968 57,390
--------- --------
Net operating revenues 89,081 78,307
Operating Expenses:
Operations and maintenance 22,523 20,259
Taxes other than income taxes 8,402 7,025
Depreciation, depletion and amortization 13,555 11,945
--------- --------
Total operating expenses 44,480 39,229
--------- --------
Income from Operations 44,601 39,078
Other Income 1,498 3,077
Interest Charges - net 8,168 8,409
--------- --------
Income Before Income Taxes 37,931 33,746
Income Taxes 13,888 10,560
--------- --------
Net Income 24,043 23,186
Redeemable preferred and preference stock
dividend requirements 637 653
--------- --------
Earnings Applicable to Common Stock $ 23,406 $ 22,533
========= ========
Average Common Shares Outstanding 24,883 22,903
Earnings per share of common stock:
Basic $0.94 $0.98
Diluted $0.93 $0.97
Dividends Paid Per Share of Common Stock $0.305 $0.305
See Notes to Consolidated Financial Statements.
================================================================================
Consolidated Statements of Earnings Invested in the Business
(Thousands,Unaudited)
Nine Months Ended September 30,
1998 1997
------------------ ----------------------
Earnings invested in the business:
Balance at Beginning of Period $113,098 $100,026
Net Income 21,359 $21,359 24,665 $24,665
Dividends Declared or Paid:
Redeemable preferred and preference stock (1,949) (2,006)
Common stock (22,050) (20,373)
Common Stock Expense (1,697) -
-------- -------
Balance at End of Period $108,761 $102,312Consolidated Statements of Earnings Invested in the Business
(Thousands, Three-Months Ended March 31)
(Unaudited)
1999
-------------------------
Earnings invested in the business:
Balance at Beginning of Period $ 106,513
Net Income 24,043 $ 24,043
Dividends declared or paid:
Redeemable preferred and preference stock (637)
Common stock (7,583)
----------
Balance at End of Period $ 122,336
=========
Accumulated other comprehensive income (loss):
Balance at Beginning of Period $ (2,460)
Other comprehensive income-
Foreign currency translation adjustment (433) (433)
--------- ---------
Comprehensive income $ 23,610
=========
Balance at End of Period $ (2,893)
=========
1998
-------------------------
Earnings invested in the business:
Balance at Beginning of Period $ 113,098
Net Income 23,186 $ 23,186
Dividends declared or paid:
Redeemable preferred and preference stock (1,307)
Common stock (13,970)
----------
Balance at End of Period $ 121,007
=========
Accumulated other comprehensive income (loss):
Balance at Beginning of Period $ (2,235)
Other comprehensive income-
Foreign currency translation adjustment (40) (40)
--------- ---------
Comprehensive income $ 23,146
=========
Balance at End of Period $ (2,275)
========= ========
Accumulated Other Comprehensive Income:
Balance at Beginning of Period $ (2,235) $ (1,650)
Other comprehensive income-
Foreign currency translation adjustment 167 167 (1) (1)
-------- ------- -------- -------
Comprehensive Income $21,526 $24,664
======= =======
Balance at End of Period $ (2,068) $ (1,651)
======== ========
See Notes to Consolidated Financial Statements.
3
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
September 30, September 30,Mar. 31, Mar. 31, Dec. 31,
1999 1998 1997 19971998
----------- ----------- -----------
Assets:
Plant and Property:
Utility plant ............................. $ 1,218,3801,263,599 $ 1,122,5001,184,480 $ 1,164,4991,239,690
Less accumulated depreciation ............. 395,323 359,378 366,607413,763 376,767 404,117
----------- ----------- -----------
Utility plant - net .................. 823,057 763,122 797,892849,836 807,713 835,573
----------- ----------- -----------
Non-utility property ...................... 90,901 52,252 52,42291,667 77,211 89,050
Less accumulated depreciation and depletion 27,731 21,577 22,84331,170 23,904 29,927
----------- ----------- -----------
Non-utility property - net ........... 63,170 30,675 29,57960,497 53,307 59,123
----------- ----------- -----------
Total plant and property ............. 886,227 793,797 827,471910,333 861,020 894,696
----------- ----------- -----------
Investments and Other:
Investments ............................... 34,022 35,230 34,14814,910 32,361 15,898
Long-term notes receivable ................ 794 1,211 978585 750 816
----------- ----------- -----------
Total investments and other .......... 34,816 36,441 35,12615,495 33,111 16,714
Current Assets:
Cash and cash equivalents ................. 6,469 4,332 6,7318,921 28,525 7,383
Accounts receivable - net ................. 21,791 19,165 39,42053,025 48,305 47,476
Accrued unbilled revenue .................. 7,180 6,467 23,91116,424 12,470 34,258
Inventories of gas, materials and supplies 23,310 18,779 17,3859,833 11,587 21,258
Prepayments and other current assets ...... 10,126 9,047 17,22614,413 12,784 16,105
----------- ----------- -----------
Total current assets ................. 68,876 57,790 104,673102,616 113,671 126,480
Regulatory Tax Assets .......................... 56,860 59,64056,860 56,860
Deferred Gas Costs Receivable .................. 28,499 14,133 28,62822,171 34,201 27,795
Deferred Debits and Other ...................... 65,643 55,894 58,85975,047 59,304 69,191
----------- ----------- -----------
Total Assets ......................... $ 1,140,9211,182,522 $ 1,017,6951,158,167 $ 1,111,6171,191,736
=========== =========== ===========
Capitalization and Liabilities:
Capitalization:
Common stock .............................. $ 306,802309,835 $ 253,353257,210 $ 255,402308,351
Earnings invested in the business ......... 108,761 102,312 113,098122,336 121,007 106,513
Accumulated other comprehensive income .... (2,068) (1,651) (2,235)(loss) (2,893) (2,275) (2,460)
----------- ----------- -----------
Total common stock equity ............ 413,495 354,014 366,265429,278 375,942 412,404
Redeemable preference stock ............... 25,000 25,000 25,000
Redeemable preferred stock ................ 11,499 12,429 12,42911,499
Long-term debt ............................ 346,953 325,396 344,303366,683 347,146 366,738
----------- ----------- -----------
Total capitalization ................. 796,947 716,839 747,997832,460 760,517 815,641
----------- ----------- -----------
Minority Interest .............................. 17,672 -- --16,026 18,037 16,322
----------- ----------- -----------
Current Liabilities:
Notes payable ............................. 75,056 60,850 89,31751,261 76,834 87,264
Accounts payable .......................... 37,788 32,980 58,77551,981 49,457 56,039
Long-term debt due within one year ........ 10,000 15,000 16,00033,000 10,000
Taxes accrued ............................. 371 (56) 4,65619,106 10,978 7,486
Interest accrued .......................... 9,809 8,939 6,05810,302 10,355 6,204
Other current and accrued liabilities ..... 21,889 20,289 21,39023,762 29,679 23,477
----------- ----------- -----------
Total current liabilities ............ 154,913 138,002 196,196166,412 210,303 190,470
Deferred Investment Tax Credits ................ 11,525 12,344 11,94910,725 11,498 11,248
Deferred Income Taxes .......................... 142,629 135,295 139,953138,830 141,747 140,310
Regulatory Liabilities and Other ............... 17,235 15,215 15,52218,069 16,065 17,745
Commitments and Contingencies .................. -- -- --
----------- ----------- ------------ - -
---------- ---------- ----------
Total Capitalization and Liabilities . $ 1,140,9211,182,522 $ 1,017,6951,158,167 $ 1,111,6171,191,736
=========== =========== ===========
See Notes to Consolidated Financial Statements.
4
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
NineThree Months Ended
September 30,
--------------------March 31,
---------------------------
1999 1998
1997
-------- ------------ ----
Operating Activities:
Net income ..................................................... $ 21,35924,043 $ 24,66523,186
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization ................... 38,137 31,79713,555 11,945
Gain on sale of assets ..................................... (3,794) --(876) (3,542)
Deferred income taxes and investment tax credits ........... 2,252 12,346(2,003) 1,343
Equity in (earnings)losses of investments ........................ (399) (1,143)336 1,279
Allowance for funds used during construction ............... (1,109) (1,261)(97) (315)
Deferred gas costs receivable .......................... 129 (22,191)5,624 (5,573)
Regulatory liabilities (assets)accounts and other - net ............ (5,071) (9,049)(5,532) (445)
-------- --------
Cash from operations before working capital changes ... 51,504 35,16435,050 27,878
Changes in operating assets and liabilities:
Accounts receivable ................................... 17,629 21,668receivable-net (5,549) (8,885)
Accrued unbilled revenue .............................. 16,731 15,87317,834 11,441
Inventories of gas, materials and supplies ............ (5,925) (4,340)11,425 5,798
Accounts payable ...................................... (20,987) (31,815)(4,058) (9,318)
Accrued interest and taxes ............................ (534) 29115,718 10,619
Other current assets and liabilities .................. 7,499 4,4071,977 5,529
-------- --------
Cash Provided By Operating Activities ...................... 65,917 41,24872,397 43,062
-------- --------
Investing Activities:
Acquisition and construction of utility plant assets ........... (56,735) (71,520)(25,364) (20,294)
Investment in non-utility property ............................. (17,583) (7,541)plant (4,578) (3,306)
Proceeds from sale of non-utility assets 1,723 -
Investments and other .......................................... 809 (675)587 836
-------- --------
Cash Used In Investing Activities .......................... (73,509) (79,736)(27,632) (22,764)
-------- --------
Financing Activities:
Common stock issued ............................................ 51,050 4,509
Redeemable preferred stock retired ............................. (930) (1,320)1,429 1,651
Long-term debt issued .......................................... 32,000 70,000- 22,000
Long-term debt retired ......................................... (35,000) (27,000)- (2,000)
Change in short-term debt ...................................... (14,261) 10,792(36,003) (12,483)
Cash dividend payments:
Redeemable preferred and preference stock .................. (1,949) (2,006)(637) (653)
Common stock ............................................... (22,050) (20,373)(7,583) (6,979)
Foreign currency translation and capital stock expense ......... (1,530) (1)
--------433 (40)
--------- --------
Cash Provided By (Used For) Financing Activities ...................... 7,330 34,601(43,227) 1,496
--------- --------
--------
Increase (Decrease) In Cash and Cash Equivalents .................... (262) (3,887)1,538 21,794
Cash and Cash Equivalents - Beginning of Period .....................7,383 6,731
8,219
----------------- --------
Cash and Cash Equivalents - End of Period ........................... $ 6,4698,921 $ 4,33228,525
======== ========
===============================================================================================================================================================================================================
Supplemental Disclosure of Cash Flow Information:Information
Cash paid during the period for:
Interest ................................................... $ 20,4443,984 $ 17,7184,255
Income taxes ............................................... $ 8,205 $ 7,284
============================================================================================Taxes 3,950 -
===================================================================================================================
Supplemental Disclosure of NoncashNon-cash Financing Activities:Activities
Conversion to common stock:
7-1/4 percent Series of Convertible Debentures ............. $ 35055 $ 442
============================================================================================157
===================================================================================================================
See Notes to Consolidated Financial Statements.
5
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands)
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
September 30,Mar. 31, 1999 Mar. 31, 1998 September 30, 1997 Dec. 31, 19971998
- -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 78,51278,894 $ 72,105 72,40472,636 $ 78,701
Premium on common stock 228,290 181,248 182,998230,941 184,574 229,650
Earnings invested in the business 108,761 102,312 113,098122,336 121,007 106,513
Accumulated other comprehensive income (2,068) (1,651) (2,235)
-------- -------- -------(loss) (2,893) (2,275) (2,460)
--------- --------- ---------
Total common stock equity 413,495429,278 52% 354,014 50% 366,265375,942 49% --------412,404 51%
--------- ---- ----------------- ---- ---------------- ----
REDEEMABLE PREFERENCE STOCK:
$6.95 Series, stated value $100 per share 25,000 25,000 25,000
-------- -------- --------------- --------- ---------
Total redeemable preference stock 25,000 3% 25,000 3% 25,000 3%
----------------- ---- ----------------- ---- ----------------- ----
REDEEMABLE PREFERRED STOCK, statedSTOCK:
Stated value $100 per share:
$4.75 Series 249 429 429249
$7.125 Series 11,250 12,000 12,000
-------- -------- -------11,250
--------- --------- ---------
Total redeemable preferred stock 11,499 1% 12,429 2% 12,429 2%
--------11,499 1%
--------- ---- ----------------- ---- ---------------- ----
LONG-TERM DEBT:
First Mortgage Bonds
9-3/4% Series due 2015 50,000 50,000 50,000
9-1/8% Series due 2019 - 20,000 20,00018,000 -
Medium-Term Notes
First Mortgage Bonds:
7.69% Series A due 1999 10,000 10,000 10,000
5.96% Series B due 2000 5,000 5,000 5,000
5.98% Series B due 2000 5,000 5,000 5,000
8.05% Series A due 2002 10,000 10,000 10,000
5.55% Series B due 2002 20,000 - 20,000
6.40% Series B due 2003 20,000 20,000 20,000
6.34% Series B due 2005 5,000 5,000 5,000
6.38% Series B due 2005 5,000 5,000 5,000
6.45% Series B due 2005 5,000 5,000 5,000
6.80% Series B due 2007 10,000 10,000 10,000
6.50% Series B due 2008 5,000 5,000 5,000
8.26% Series B due 2014 10,000 10,000 10,000
7.00% Series B due 2017 40,000 40,000 40,000
6.60% Series B due 2018 22,000 - -22,000 22,000
8.31% Series B due 2019 10,000 10,000 10,000
9.05% Series A due 2021 10,000 10,000 10,000
7.25% Series B due 2023 20,000 20,000 20,000
7.50% Series B due 2023 4,000 4,000 4,000
7.52% Series B due 2023 11,000 11,000 11,000
6.52% Series B due 2025 10,000 10,000 10,000
7.05% Series B due 2026 20,000 20,000 20,000
7.00% Series B due 2027 20,000 20,000 20,000
6.65% Series B due 2027 20,000 -20,000 20,000
6.65% Series B due 2028 10,000 - -10,000
Unsecured:
8.93% Series A due 1998 - 5,000 5,000-
8.95% Series A due 1998 - 10,000 10,000-
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 9,953 10,396 10,303
-------- -------- --------
356,953 340,396 360,3039,683 10,146 9,738
--------- --------- ---------
376,683 380,146 376,738
Less long-term debt due within one year 10,000 15,000 16,000
-------- -------- --------33,000 10,000
--------- --------- ---------
Total long-term debt 346,953366,683 44% 325,396347,146 46% 366,738 45%
344,303 46%
----------------- ---- ----------------- ---- ----------------- ----
TOTAL CAPITALIZATION $796,947$ 832,460 100% $716,839$ 760,517 100% $747,997$ 815,641 100%
================= ==== ================= ==== ================= ====
See Notes to Consolidated Financial Statements.
6
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of financial statements
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
Together these businesses are referred to herein as the
"Company." Intercompany accounts and transactions have been eliminated.
The information presented in the consolidated financial statements is
unaudited, but includes all adjustments, consisting of only normal recurring
accruals, which the management of the Company considers necessary for a fair
presentation of the results of such periods. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 19971998 Annual Report on Form 10-K (1997(1998
Form 10-K). A significant part of the business of the Company is of a seasonal
nature; therefore, results of operations for the interim periods are not
necessarily indicative of the results for a full year.
Certain amounts from prior periods have been reclassified to conform with
the 19981999 presentation.
2. Recently Issued Accounting Standards
In the first quarter ofJune 1998, the Company adoptedFinancial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of elements of
comprehensive income, including foreign currency translation adjustments,
unrealized gains and losses on certain investments in debt and equity securities
and minimum pension liability adjustments.
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which requires disclosure of segment data based on how management
makes decisions about allocating resources to segments and measuring
performance. The Company principally operates in a single line of business
consisting of the distribution of natural gas. Therefore, management does not
believe SFAS No. 131 will have a significant impact on the Company's financial
reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." This standard is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. Adoption of this standard may result in additional financial
disclosures but the impact of SFAS No. 132 for both the three month and nine
month periods ended September 30, 1998 is immaterial.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities." This standard is
effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000
for the Company). SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives will be
recorded each period either in current earnings 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. Management anticipatesThe
Company has not determined the impact that the adoption of SFAS No. 133 will have on
results of operation or its financial position.
The FASB's Emerging Issues Task Force (EITF) Issue 98-10, "Accounting for
Energy Trading and Risk Management Activities," which is effective for fiscal
years beginning after December 15, 1998, addresses how to account for purchases
and sales of energy trading contracts. The Company's purchase and sales
activities do not have a significantmeet the definition of trading activities, and therefore EITF
Issue 98-10 is not applicable.
The American Institute of Certified Public Accountants' Accounting
Standards Executive Committee issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
which are effective for years beginning after December 31, 1998. The Company has
adopted SOP 98-1 and SOP 98-5 with no material effect on the Company's results of
operations or its
financial position.
3. Minority InterestSegment Reporting
The Company reportedprincipally operates in a minority interestsingle line of $17.7 million in
the Consolidated Balance Sheet at September 30, 1998, resulting from a
transaction involving its Canadian energy exploration and production subsidiary,
Canor Energy, Ltd. (Canor). In March 1998, Canor acquired allbusiness consisting of
the capital
stockdistribution of Southlake Energy, Inc. (Southlake), an indirect subsidiarynatural gas. Other segments are primarily investments in oil
and gas exploration properties in Canada and in alternative energy projects in
California.
7
The following table presents information about reportable segments for the
three months ended March 31, 1999 and 1998. Inter-segment transactions are
insignificant.
Thousands Utility Other Total
- --------------------------------------------------------------------------------
Three Months Ended March 31, 1999
- ---------------------------------
Net operating revenues $ 85,802 $ 3,279 $ 89,081
Income (loss) from operations 45,593 (992) 44,601
Depreciation expense 11,198 2,357 13,555
Net income (loss) 24,409 (366) 24,043
Assets - end of NIPSCO
Industries, Inc. (NI), in exchange for sharesperiod 1,105,131 77,391 1,182,522
Three Months Ended March 31, 1998
- ---------------------------------
Net operating revenues $ 76,295 $ 2,012 $ 78,307
Income (loss) from operations 39,426 (348) 39,078
Depreciation expense 10,788 1,157 11,945
Net income 20,342 2,844 23,186
Assets - end of common stock representing a 34
percent interest in Canor. After the acquisition, Southlake was amalgamated with
Canor. The transaction resulted in a $3.5 million gain to the Company,
equivalent to 15 cents a share, due to Canor's assets having represented a lower
percentage of the total assets of the amalgamated corporation than the Company's
resulting percentage interest in Canor's common stock. The minority interest in
Canor, formerly held by NIPSCO Energy Services Canada Ltd. (NESCL), was
transferred to NI Canada ULC (NICULC), effective as of August 31, 1998. Both
NESCL and NICULC are indirect subsidiaries of NI. For financial reporting
purposes, the assets, liabilities and earnings of Canor are consolidated in the
Company's financial statements, and NICULC's common stock interest has been
recorded as "Minority Interest" in the Balance Sheet.period 1,062,755 95,412 1,158,167
4. Income Taxes
No U.S. taxes were provided for a gain in the first quarter of
1998 from the combination of Canor and Southlake (see Note 3, "Minority
Interest"), since it is the Company's intention to indefinitely reinvest Canor's
earnings. Determination of the amount of unrecognized deferred tax liability on
these unremitted earnings is not practicable. Undistributed net earnings of the
Company's foreign subsidiary were $1.1 million at September 30, 1998. The amount
of foreign withholding taxes that would be payable upon remittance of those
earnings is approximately $0.1 million.
5. Contingencies
See Part II, Item 7., "Contingent Liabilities" and "Environmental Matters"Matters,"
in the 19971998 Form 10-K and Part II, Item 5,
"Environmental Matters," below.10-K.
8
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. 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
Together these businesses are referred to herein as the "Company" (see
"Subsidiary Operations" below and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements," in the Company's 19971998 Annual Report on
Form 10-K (1997(1998 Form 10-K)).
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
and nine months ended September 30, 1998March 31, 1999 and 1997.1998.
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 Oregon Public Utility
Commission (OPUC) and the Washington Utilities and Transportation Commission
(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.settlements; and
(xi) estimates of future costs or the effect on future operations as a result of
events that could result from the Year 2000 issue described further herein. All
9
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.
Earnings and Dividends
- ----------------------
The Company incurred a loss of 26Earnings from consolidated operations were 93 cents a diluted share
for the quarter ended September 30, 1998,March 31, 1999, compared to a loss of 1497 cents a diluted share in
last year's thirdfirst quarter. The lossCompany's earnings applicable to common stock
was $6.6were $23.4 million in the third quarter of 1998 and $3.1ended March 31, 1999, up 4 percent from
$22.5 million in the thirdfirst quarter of 1997. A third quarter loss is customary for1998.
NW Natural reflecting low
summertime use of natural gas.
NW Natural lost 28earned 95 cents a diluted share from utility operations in
the thirdfirst quarter of 1998,1999, compared to a loss of 1985 cents a diluted share in the same
period in 1997. The higher loss from utility
operations1998. Weather conditions in the third quarter was due to a non-recurring benefit in the third
quarter of 1997 from adjustments reconciling the Company's federal and state tax
accruals to the prior year's returns as filed (5 cents), an increase in
depreciation expense for the new Customer Information System (CIS) (2 cents), a
decrease in net operating revenues (margin) from an industrial schedule in which
rates vary with oil prices (2 cents), an increase in interest charges (1 cent)
and revenue reductions required by the OPUC (1 cent), offset by an increase in
margin due to customer growth (3 cents).
The Company earned $19.4 million, or 80 cents a diluted share,
and $22.7 million, or 99 cents a diluted share, for the nine months ended
September 30, 1998 and 1997, respectively. Year-to-date, NW Natural earned 67
cents a diluted share from utility operations compared to 92 cents a diluted
share in the same period in 1997. WeatherNatural's service territory in the
first nine monthsquarter of 1999 were 9 percent colder than the yearfirst quarter of 1998 and
comparable to normal weather conditions. The Company estimates that the
weather-related increase in gross margin revenues (margin) during the first
quarter of 1999 was 4 percent warmer in 1998 than in 1997, resulting in a decrease in margin
from residential and commercial customers equivalent to an estimated 15 cents a
share. Other factors affecting utility earnings were an increase in interest
charges (7 cents), a non-recurring benefit in 1997 from adjustments reconciling
the Company's federal and state tax accruals to the prior year's return as filed
(5 cents), an increase in depreciation expense for CIS (4 cents) and other
additional depreciation expense (6 cents), a decrease in margin from an
industrial schedule in which rates vary with oil prices (5 cents) and revenue
reductions required by the OPUC (4 cents). Partially offsetting these negative
factors was NW Natural's residential and commercial customer growth in the past
year which contributed higher margin equivalent to an estimated 20about 18 cents a share incompared to the first
nine monthsquarter of 1998. Earnings from NW Natural's non-utility operationsWeather conditions in the first quarter of 1998 included 15were 8 percent
warmer than average resulting in an estimated margin reduction equivalent to
22 cents a share dueas compared to a transaction involving Canor,the first quarter of 1997. These estimates are
derived from the Company's Canadian gasinternal planning model (see Part II, Item 7.,
"Earnings and oil explorationDividends," in the 1998 Form 10-K). The model also estimates that
customer growth in the residential and production subsidiary (see
"Other Income (Expense)," below).commercial segments since March 31, 1998
contributed an additional $3.9 million of margin during the first quarter of
1999.
NW Natural's subsidiaries earned 1 centlost 2 cents a share during the thirdfirst
quarter of 1998, and 51999, compared to a loss of 3 cents in the thirdfirst quarter of 1997. Year-to-date
subsidiary results were a loss of 1 cent a share for 1998 compared to income of
8 cents a share for 1997.1998. See
"Subsidiary Operations,Operations." below.
Dividends paid on common stock were 30.5 cents and 30 cents a share for each of the
three-month periods ended September 30, 1998March 31, 1999 and 1997,
respectively.1998. In October 1998,April 1999, the Company's
Board of Directors declared a quarterly dividend of 30.5 cents a share on theits
common stock, payable November
13, 1998,May 14, 1999, to shareholders of record on OctoberApril 30, 1998.1999.
The current indicated annual dividend rate is $1.22 a share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility
volumes and revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Gas Sales and Transportation Volumes
- - Therms (000's):
Residential and commercial sales ............. 48,337 46,626 388,468 387,258
Unbilled volumes ............................. 1,876 2,725 (37,426) (32,953)
--------- --------- --------- ---------
Weather-sensitive volumes ............... 50,213 49,351 351,042 354,305
Industrial firm sales ........................ 17,353 17,862 64,906 62,086
Industrial interruptible sales ............... 11,643 11,879 38,608 39,317
--------- --------- --------- ---------
Total gas sales ......................... 79,209 79,092 454,556 455,708
Transportation deliveries .................... 106,644 105,617 340,690 319,495
--------- --------- --------- ---------
Total volumes sold and delivered ............. 185,853 184,709 795,246 775,203
========= ========= ========= =========
Utility Operating Revenues - Dollars (000's):
Residential and commercial revenues .......... $ 33,403 $ 27,704 $ 227,713 $ 202,968
Unbilled revenues ............................ 1,102 1,274 (17,769) (16,522)
--------- --------- --------- ---------
Weather-sensitive revenues .............. 34,505 28,978 209,944 186,446
Industrial firm sales revenues ............... 7,056 5,658 25,233 19,861
Industrial interruptible sales revenues ...... 3,298 2,958 11,345 9,981
--------- --------- --------- ---------
Total gas sales revenues ................ 44,859 37,594 246,522 216,288
Transportation revenues ...................... 4,914 5,232 15,050 16,395
Other revenues ............................... 292 1,079 2,295 6,484
--------- --------- --------- ---------
Total utility operating revenues ............. $ 50,065 $ 43,905 $ 263,867 $ 239,167
========= ========= ========= =========
Cost of gas sold - Dollars (000's) ................ $ 19,303 $ 13,710 $ 110,257 $ 86,047
========= ========= ========= =========
Total number of customers (end of period) ......... 463,743 441,906 463,743 441,906
========= ========= ========= =========
Actual degree days ................................ 48 49 2,460 2,565
========= ========= ========= =========
20-year average degree days ....................... 100 106 2,617 2,638
========= ========= ========= =========
The following table summarizes the composition of gas utility volumes
and revenues for the three months ended March 31:
10
1999 1998
---- ----
Gas Sales and Transportation Volumes - Therms (000's):
Residential and commercial sales 267,905 227,206
Unbilled volumes (30,455) (26,495)
-------- --------
Weather-sensitive volumes 237,450 200,711
Industrial firm sales 27,312 25,989
Industrial interruptible sales 14,491 14,431
-------- --------
Total gas sales 279,253 241,131
Transportation deliveries 107,010 122,148
------- --------
Total volumes sold and delivered 386,263 363,279
======== ========
Utility Operating Revenues - Dollars (000's):
Residential and commercial revenues $163,856 $125,411
Unbilled revenues (17,276) (12,543)
-------- --------
Weather-sensitive revenues 146,580 112,868
Industrial firm sales revenues 11,464 9,648
Industrial interruptible sales revenues 4,667 4,515
-------- --------
Total gas sales revenues 162,711 127,031
Transportation revenues 4,806 5,331
Other revenues 213 1,271
-------- --------
Total utility operating revenues $167,730 $133,633
======== ========
Cost of gas sold - Dollars (000's) $ 81,928 $ 57,338
======== ========
Total number of customers (end of period) 485,297 461,485
======== ========
Actual degree days 1,855 1,697
======== ========
20-year average degree days 1,848 1,854
======== ========
Residential and Commercial
--------------------------
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 these customers. Average weather conditions
are calculated from the most recent 20 years of temperature data measured by
heating degree days. Weather conditions as measured in degree days (see Part II,
Item 7, "Earnings and Dividends,"were comparable to average conditions in
the 1997 Form 10-K) were 52 percent warmer
than average in the thirdfirst quarter of 19981999 and 29 percent warmercolder than in the thirdfirst quarter of
1997.1998.
NW Natural continues to experience rapida high level of customer growth
relative to other local gas distribution companies, with 21,83723,812 customers added
since September 30, 1997,March 31, 1998 for a growth rate of 4.95.2 percent. In the three years ended
DecemberDec. 31, 1997,1998, more than 66,00067,000 customers were added to the system, representing
an average annual growth rate of 5.45.2 percent.
Volumes of gas deliveredsold to residential and commercial customers increased
0.936.7 million therms, or 218 percent, in the thirdfirst quarter of 19981999 compared to the
thirdfirst quarter of 1997. Margin from these customer
categories was $1.01998. Related revenues increased $33.7 million, or 430 percent, higher primarily
due to increased volumes and rate increases effective during 1998. Effective
Jan. 1, April 1 and Dec. 1, 1998, the OPUC approved rate increases averaging
11.4 percent, 6.1 percent and 3.4 percent, respectively, for NW Natural's
11
customers in Oregon. 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 in 1997. Effective Dec. 1, 1998, the WUTC approved a rate increase
averaging 5.8 percent primarily to pass through to Washington customers
increases in purchased gas costs.
In October 1998, NW Natural filed its first general rate case in
Oregon since 1989. The filing proposes a revenue increase of $14.7 million per
year from Oregon operations through rate increases averaging 3.8 percent. The
proposed increase is designed to cover the costs of additional gas storage at
Mist, NW Natural's new customer growth.
Volumesinformation system, and the Year 2000 project.
In November 1998, the OPUC suspended the proposed rate increase for
investigation and hearings. In March 1999, the Staff of the OPUC issued its
recommendations on issues in the general rate case. The Staff recommended a
revenue reduction of $19.9 million per year which incorporates a recommended
return on common shareholders' equity (ROE) of 8.5 percent, compared to NW
Natural's proposed ROE of 11.25 percent. NW Natural's currently authorized ROE
is 13.25 percent. The OPUC Staff is considered to be an independent party in the
rate case. Its position is not binding on either the administrative law judge
who will preside over hearings in the case or on the Commission when it makes
its decisions on the issues. The OPUC is expected to extend its order suspending
the filing for investigation and hearing until Sept. 1, 1999.
In order to match revenues with related purchased gas costs, NW
Natural records unbilled revenues for gas delivered but not yet billed to
residential and commercial
customers were 3.3 million therms, or 1 percent, lower inthrough the first nine monthsend of 1998 than in the first nine months of 1997. Related margin was lower by $0.1
million, or less than 1 percent. The increased margin from customer growth was
offset by weather that was 4 percent warmer than in the first nine months of
1997.period.
Industrial Sales, Transportation and Other Revenues
------------------------------------------------------------------------------------------------
Total volumes delivered to industrial firm, industrial interruptible,
and transportation customers were 0.313.8 million therms, or less
than 18 percent, higherlower in
the three months ended September 30, 1998first quarter of 1999 than in the same period of 1997. Transportation volumes increased 1.0 million therms while
gas sales to industrial firm and interruptible customers decreased 0.7 million
therms as compared to the third quarter of 1997.1998. Margin from these
customers decreased by 8 percent from $11.4to $12.6 million in the thirdfirst quarter of 1997 to $10.51999
from $13.7 million in the thirdfirst quarter of 1998, due in partreflecting some large
interruptible customers' use of oil rather than gas during the quarter, lower
margins from industrial schedules where rates are tied to the effect of low oil
prices on an industrial schedule in which rates vary with oil prices.
For the current nine-month period, total volumes delivered to
industrial and transportation customers increased 23.3 million therms from 1997.
However, margin from these customers was $2.0 million, or 5 percent, lower than
in the first nine months of 1997 due to the effect of low oil prices on the
industrial schedule in which rates vary with oil prices, and transfersthe
loss of someone industrial customerscustomer to rate schedules or special contracts with lower margins.bypass. (See Part II, Item 7., "Results of
Operations - Industrial Sales, Transportation and Other Revenues," in the 1998
Form 10-K.)
Other revenues, which includerelate primarily to accumulations or
amortizations of regulatory account balancesaccounts (see Part II, Item 8., Note 1, "Notes to
Consolidated Financial Statements," in the 19971998 Form 10-K), were $0.8decreased $1.1
million, or 7383 percent, lower during the thirdfirst quarter of 1998 and $4.2 million, or 65 percent, lower
year-to-date1999 compared to 1997.the first
quarter of 1998. The principal factors were a decrease in amortizationamortizations of
property tax savings ($2.6 million) and deferrals, offset by the conclusion of amortizations
of revenue reductions required under a settlement approved bynegotiated with the OPUC as part of the JanuaryJan. 1, 1998 rate
change ($1.50.8 million) and the refund of 1996-97 excise taxes ($0.4 million).
Cost of Gas
-----------
The average cost per therm of gas purchased was 13 percent
higher in the third quarter of 1998, and was 7 percent higher year-to-date, than
in the same period last year. The increase was due to higher prevailing prices
in the natural gas commodity market.
Total cost per therm of gas sold was 4123 percent higher during the thirdfirst
quarter of 1998, and 28 percent higher year-to-date,1999 than in the same
periodsfirst quarter of 1997.1998. The changes in cost of gas sold between respective periods are
greater than the changes in cost of gas purchased due to higher regulatory
deferrals of gas costs in 1997, accounted for as credits to cost of gas. The
costper therm of gas
sold includes current gas purchases, gas drawn from storage, demand cost
equalization and regulatory deferrals, and companyless Company use. NW Natural made
off-systemThe cost of gas sold
was reduced by non-regulated net gas sales of $1.7$0.4 million and $1.0$0.8 million for
the first nine monthsquarters of 19981999 and 1997,1998, respectively. Under an agreement with the
OPUC,
net proceeds12
revenues from these sales are treated as a reduction of gas costs.
UnderThe average cost per therm of gas purchased in the first quarter of
1999 was 7 percent higher than in the first three months of 1998, due to higher
prevailing prices in the natural gas commodity market. NW Natural'sNatural has a
Purchased Gas Adjustment (PGA) tariff in Oregon, under which its net income from
Oregon operations is affected only within defined limits by changes in purchased
gas costs. In 1997,Effective Jan. 1, 1998, NW Natural absorbed 20
percent of the higher cost of gas purchased, as compared to projections, under
this tariff. The remaining 80 percent of higher gas costs was recorded as
deferred debits (regulatory assets). Effective January 1, 1998, the incentive
formula for deferred gas costs was modified so that NW Natural now absorbsrecognizes 33 percent of the
difference between actual and projected gas costs andin current operating results
while the remaining 67 percent is deferred for recovery from or refund to
customers in future rates. (See Part II, Item 5, Other Information, "Regulatory
Developments.")
Subsidiary Operations
---------------------
The following table summarizes financial information for the
Company's consolidated subsidiaries:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Consolidated Subsidiaries (Thousands):
Net Operating Revenues ............... $ 3,699 $ 2,293 $ 9,160 $ 7,133
Operating Expenses ................... 4,879 2,123 10,914 6,110
-------- -------- -------- --------
Income (Loss) from Operations ........ (1,180) 170 (1,754) 1,023
Income from Financial Investments .... 1,228 1,250 399 1,143
Other Income and Interest Charges .... 42 102 415 227
Minority Interest .................... 389 -- 470 --
-------- -------- -------- --------
Income (Loss) Before Income Taxes ... 479 1,522 (470) 2,393
Income Tax Expense (Benefit) ......... 138 380 (258) 633
-------- -------- -------- --------
Net Income (Loss) .................... $ 341 $ 1,142 $ (212) $ 1,760
======== ======== ======== ========
The following table summarizes financial information for the Company's
consolidated subsidiaries:
Three Months Ended
March 31,
1999 1998
---- ----
Consolidated Subsidiaries (Thousands):
Net Operating Revenues $ 3,279 $ 2,012
Operations and Maintenance Expense 1,914 1,203
Depreciation 2,357 1,157
------- -------
Income (Loss) from Operations $ (992) $ (348)
Income (Loss) from Financial Investments (631) (1,279)
Other Income (Expense) and Interest Charges 886 281
Minority Interest 73 -
------- -------
Income (Loss) Before Income Taxes (664) (1,346)
Income Tax Expense (Benefit) (255) (626)
------- -------
Net Income (Loss) $ (409) $ (720)
======= =======
Results of operations for the individual subsidiaries for the thirdfirst
quarter of 19981999 were a net loss of $0.8$0.1 million for Canor down fromcompared to a
negligible net income of $0.1 millionloss for the same period last year,first quarter of 1998, and a net incomeloss of
$1.1$0.3 million for Financial Corporation up from $1.0compared to a net loss of $0.7 million
infor the thirdfirst quarter of 1997.1998. Canor's results were lower than last year due tooperations have been adversely affected
by low oil prices lower
than expected gas productionduring the first quarter of 1999, while Financial Corporation
normally incurs a loss in the first quarter due to the seasonality of revenues
from its investments in solar and chargeswindpower generating plants in California.
In the first quarter of 1998 NW Natural recorded a $3.5 million gain,
equivalent to 215 cents a share, due to
unsuccessful drilling efforts duringfrom the quarter.
For the nine months ended September 30, 1998, the
subsidiaries' net results were a losscombination of $0.2 million, compared to net income of
$1.8 million in the first nine months of 1997. These results are equivalent to a
loss of 1 cent a share in 1998 compared to net income of 8 cents a share in
1997. The portion of Canor's results applicable to the Company decreased from
net income of $0.5 million in the first nine months of 1997 to a loss of $0.9
million in the first nine months of 1998. Financial Corporation earned $0.7
million, compared to net income of $1.3 million in the first nine months of
1997.
The same factors that reduced Canor's and Financial
Corporation's earnings in the first nine months of 1998 are expected to continue
to depress their operating results during the remaining months of 1998.
In March 1998, Canor purchased the stock ofwith Southlake
Energy, Inc. (Southlake), an indirect subsidiary of NIPSCO Industries, Inc.
(NI). Canor was then amalgamatedpurchased Southlake's stock in exchange for shares of Canor, with Southlake. Thethe
resulting company is owned 66 percent by NW Natural and 34 percent by NI Canada ULC, anotheran indirect
subsidiary of NI. For financial reporting purposes, Canor'sNIPSCO. The resulting gain was not subject to U.S. income tax.
Canor had managed Southlake's assets since 1995 under a previous agreement.
The following discussion summarizes operating revenuesexpenses, other income
(expense), interest charges - net, and expenses
are included in full in the Company's Statements of Income. The 34 percent
portion of Canor's results applicable to the minority interest is included in
Other Income (Expense) as a reduction in the case of earnings, or as an increase
in the case of losses.
The Company's equity investments in its subsidiaries at
September 30, 1998, were $34.1 million for Canor and $18.0 million for Financial
Corporation, up from $20.1 million for Canor and $17.0 million for Financial
Corporation at September 30, 1997. The $14.0 million increase in the Company's
equity investment in Canor includes $11.8 million converted to equity from
intercompany debt in the first quarter of 1998.income taxes.
13
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $3.5$2.3 million, or 611 percent,
higher in the nine months ended September 30, 1998first quarter of 1999 compared to the same period in 1997.1998. NW
Natural's operations and maintenance expenses increased $1.0$1.6 million, or 8 percent, in the first quarter of
1999, primarily due primarily to increased information systems costs of a special voluntary early retirement program
($0.8 million) and higher accruals for network and
communication system upgrades; application service maintenance, including
maintenance of NW Natural's new CIS, and other information system expenses.bad debts ($0.6 million). Subsidiary
operating expenses increased by $2.5$0.7 million, primarilyor 59 percent, as compared to the
first quarter of 1998, due to the combinedinclusion in this category of expenses for Canorof
Southlake following the Canor/Southlake amalgamation.amalgamation at the end of the first
quarter of 1998.
Taxes Other than Income
-----------------------
Taxes other than income wereincreased $1.4 million, or 9 percent,
higher for the nine months ended September 30, 1998. NW Natural's property20 percent.
Franchise tax expense increased $0.8$0.9 million in the first quarter of 1999
compared to the first quarter of 1998 as a result of the higher revenues
reflecting rate increases and increased sales due to colder weather. Property
taxes increased $0.3 million due to more utility plant in service. Franchiseservice, while
regulatory commission fees and local business taxes which are based on gross revenues,each increased $0.6 million, reflecting higher
revenues due to rate increases effective January 1 and April 1, 1998.$0.1 million.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation expense for the nine months ended
September 30, 1998 increased $6.3$1.6 million, or
2013 percent, compared to the first nine monthsquarter of 1997.1998. NW Natural's depreciation
expense increased by $4.0$0.4 million primarily due to the placement into service in
November 19971998 of an expansion of its new CISunderground gas storage facility (Mist
Phase II) ($1.7
million), Mobile Data Terminals ($0.2 million), investments in computer
equipment ($0.40.3 million) and other additional utility plant ($1.6 million). Canor'splant. Subsidiary
depreciation expense increased $2.3 million due to the increase in total assets
after the Canor/Southlake amalgamation and increased dry hole and abandonment
expense of $0.8$1.2 million in the first nine monthsquarter of 1998 as1999
compared to $0.4
million1998 due to an increase in the same period in 1997.Canor's total assets following its
amalgamation with Southlake.
Other Income (Expense)
----------------------
The Company's other income was $3.5decreased $1.6 million higher in the first nine monthsquarter
of 1998 than in1999 compared to the same period in 1997. In1998. Results from the first quarter of
1998 NW Natural recorded as other income aincluded the one-time $3.5 million gain equivalent to
15 cents a share, from the amalgamationcombination of Canor with
Southlake. The resulting
gain was not subject to U.S. income taxSouthlake (see Item 1, Notes 3 and 4, "Notes to
Consolidated Financial Statements,"Subsidiary Operations," above). Other income now includes interest incomeThe first quarter of 1999
included a gain on deferred
regulatory accounts; other income for the comparable periods in 1997 has been
reclassified to conform to this presentation. Prior to January 1, 1998, interest
earned on deferred regulatory accounts was included in miscellaneous operating
income or was treated assale of assets by Canor ($0.6 million); a reduction in the cost of gas. Interest income on
deferred regulatory accounts was $1.2 million higher in the first nine months of
1998 than in the same period in 1997, while other interest income decreased $0.3
million. This net increase was offset by a decrease in the Allowance for Funds
Used During Construction (AFUDC) ($0.2 million), a decrease in net merchandise
revenue ($0.5 million), and a decrease in the incomesmaller loss
from Financial Corporation's alternative energy investments ($0.70.6 million); an
increase in net income from merchandise sales ($0.4 million); and increased
interest income ($0.1 million).
Interest Charges - net
----------------------
The Company's net interest charges - net increased $2.9expense decreased $0.2 million, or
143 percent, in the first nine monthsquarter of 19981999 compared to the same period in 1997. The increase was1998.
Long-term debt decreased $3.5 million from March 31, 1998 and average interest
rates on outstanding debt declined due to interest charges that were capitalized last year
as AFUDC, plus interest on a $16.6the redemption or maturity of
$33.0 million increase inof long-term debt overbearing interest rates of 8.93 percent to
9.125 percent in the prior yearsecond and a $5.4 million increase in average commercial paper balances
outstanding compared to the first nine monthsthird quarters of 1997. The higher commercial
paper balances were due to increased gas costs, construction spending to fund
customer growth and other spending for general corporate purposes.1998.
14
Income Taxes
------------
The effective corporate income tax rates for the ninethree months ended
September 30,March 31, 1999 and 1998 and 1997 were 30.737 percent and 34.331 percent, respectively. The lower
1998 rate was due primarilyin part to the non-taxable$3.5 million gain from Canor's amalgamationthe Canor combination
with Southlake (seethat was not subject to income tax. (See Part II, Item 1, Notes 3 and 4,8.,
Note 7, "Notes to Consolidated Financial Statements," and "Other Income (Expense)," above), and in part to permanent tax savings resulting from a change in book depreciation rates
and increased tax credits. The 1997 effective tax rate was lower than statutory
rates due to the adjustments of the 1996 income tax accruals to actual and the
flow through treatment of property tax refunds. Last year's third quarter
results included a non-recurring benefit equivalent to 5 cents a share due to
adjustments reconciling the Company's federal and state tax accruals to the
prior year's return as filed.1998 Form 10-K).
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth and system improvements. 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 revenue derived from gas usage by NW Natural's
residential and commercial customers influences the Company's financing
requirements from one quarter to the next. Short-term liquidity is satisfied
primarily through the sale of commercial paper, which is supported by commercial
bank lines of credit (see Part II, Item 8., Note 6, "Notes to Consolidated
Financial Statements," in the 19971998 Form 10-K).
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 stock
redemption requirements (see Part II, Item 8., Notes 3 and 5, "Notes to
Consolidated Financial Statements," in the 19971998 Form 10-K). In March
and June 1998, NW Natural issued and sold $22 million and $10 million,
respectively, of its Medium-Term Notes, Series B. In April 1998, NW Natural
issued and sold, through a negotiated public offering, 1,725,000 shares of its
common stock.
Cash Flows
----------
Operating Activities
-----------------------------------------
Operating activities provided net cash of $65.9$72.4 million forin the three
months ended March 31, 1999 compared to $43.1 million in the first ninethree months
of 1998, compared to $41.2 million for the first nine
months of 1997.1998. The 68 percent increase of $24.6 million, or 60 percent, was due to increased cash from operations
($16.37.2 million) and lower working capital requirements ($8.322.2 million). The
increase in cash from operations over the same
period last yearcompared to 1998 was primarily due to lower
deferred gas cost receivablescosts receivable ($22.311.2 million), a decrease in non-cash gains on
the sale of assets ($2.7 million) and an increase in depreciation, depletion and
amortization expense ($6.31.6 million), partially; offset by lower net income ($3.3 million) and a reduction in deferred income
taxes and investment tax credits ($10.13.3 million) and higher regulatory account
debit balances ($5.1 million). The reductiondecrease in working capital requirements was
due to greater decreases in accrued unbilled revenue ($6.4 million) and
inventory balances ($5.6 million), a $10.8 million smaller reductiondecrease in accounts payable
($5.3 million) and a $3.1 million greater increase in other
current assetsaccrued interest and liabilities duringtaxes
($5.1 million). A non-cash gain of $3.5 million was recognized in the current nine-month period, partially
offset by a $4.0 million smaller increase in accounts receivable and a $1.6
million greater reduction in inventoriesfirst
quarter of gas, materials and supplies.1998 from Canor's amalgamation with Southlake.
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Part II, Item 8., Note 13,12, "Notes to Consolidated Financial Statements," in the
19971998 Form 10-K).
15
Investing Activities
--------------------
Cash requirements for utility construction in the first nine
monthsquarter of
19981999 totaled $56.7$25.4 million, a decrease of $14.8up $5.1 million, or 2125 percent, from the first
nine monthsquarter of 1997.1998. The decrease resulted largely from
a reductionincrease was primarily due to higher expenditures for the
development of construction expenditures relating to the completion of the CISadditional underground storage facilities ($5.9 million) and several other special projects ($4.0 million), lower
equipment and structures expenditures ($1.6 million), reduced replacement and
reinforcement expenditures ($1.7 million) and lower construction overhead ($0.94.6 million).
NW Natural's construction expenditures are estimated to total
$90at $110 million
for 1998.1999. Over the five-yearfive year period 19981999 through 2002,2003, these expenditures are
estimated at between $500$450 million and $550$500 million. The projected level of
capital expenditures during the next five years reflects forecastedprojected customer
growth, a major system reinforcement project and the development of additional
underground storage facilities and a major system reinforcement project.facilities. It is anticipated that approximately 50 percent
of the funds required for these expenditures will be internally generated, and
that the remainder will be funded through the sale of long-term debt and equity
securities with short-term debt providing liquidity and bridge financing.
In the first nine monthsquarter of 1998,1999, non-utility capital expenditures totaled
$17.6$4.6 million. Canor invested $13.0$2.1 million in Canadian exploration and production
properties.properties and NW Natural's non-utility expenditures totaling $4.6were $2.5 million included expenditures relating to a contract for the
construction of a new headquarters building for the Port of Portland on land
currently owned by NW Natural ($4.3 million) and additions to existing
facilities ($0.3 million)building (see "Lines of Credit," below).
During the first quarter of 1998, NW Natural converted to equity $11.8 million
of intercompany loans to Canor to equity.Canor. (See Part II, Item 7., Financial Condition,
"Investing Activities," in the 1998 Form 10-K.)
Financing Activities
--------------------
Cash provided by financing activities inIn the first nine monthsquarter of 1998 totaled $7.3 million, compared to $27.3 million during the first nine
months of 1997. Proceeds from the sales of $22 million and $10 million of
Medium-Term Notes, Series B, in March and June 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, were1999, internally generated cash was
used in part to reduce short-term debt ($14.2 million)by $36.0 million. In the first quarter of 1998,
proceeds from the issuance of Medium-Term Notes were used to reduce short term
debt by $12.5 million and long-term debt ($35.0 million). NW Natural issued $38.0
million less long-term debt in the first nine months of 1998 than in the first
nine months of 1997. Short-term debt balances went down $14.3 million in the
current nine-month period, compared to a $10.8 million increase in short-term
debt in the same period last year.by $2.0 million.
Lines of Credit
---------------
NW Natural has available through SeptemberSept. 30, 1999, committed lines of
credit with five commercial banks totaling $100 million, consisting of a primary
fixed amount of $50 million plus an excess amount of up to $50 million available
as needed, at NW Natural's option, on a monthly basis. Financial Corporation has
available through SeptemberSept. 30, 1999, committed lines of credit with two commercial
banks totaling $20 million, consisting of a primary fixed amount of $15 million
plus an excess amount of up to $5 million available as needed, at Financial
Corporation's option, on a monthly basis. 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 either the NW
Natural or Financial Corporation lines of credit as of September 30, 1998March 31, 1999 or 1997.1998.
In April 1998, NW Natural entered into an additional $18 million line
of credit with a commercial bank for the purpose of constructing the new
headquarters building for the Port of Portland on land currently owned by NW
Natural (see "Investing Activities," above). This line of credit is available
through NovemberNov. 30, 1999.
The1999, and the outstanding balance at September 30, 1998March 31, 1999 was
$4.4$8.6 million.
16
Canor has a $30 million (Canadian) revolving credit facility available
for its normal business operations through a Canadian commercial bank. The
amount of the facility declines by $1.2 million per quarter beginning April 1,
1999 and is subject to a re-setting annually either upward or downward, based
upon an analysis of Canor's gas and oil reserves as of March 31 each year. Canor
had $5.8the U.S. dollar equivalent of $4.8 million (U.S.) of its bankoutstanding on this line of
credit outstanding at September 30, 1998.March 31, 1999.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper.
Both NW Natural and Financial Corporation issue commercial paper which
is supported by the bank lines discussed above, under agency
agreements with a commercial bank. Financial Corporation's commercial paper is
supported by the guaranty of NW Natural (see Part II, Item 8., Note 6, "Notes to
Consolidated Financial Statements," in the 19971998 Form 10-K). NW Natural had $64.8 million of
commercial paper notes outstanding at September 30, 1998. Financial Corporation
had no commercial paper notes outstanding at that date.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended September 30,March 31, 1999 and Dec. 31, 1998, and December 31,
1997, the
Company's ratios of earnings to fixed charges, computed using the Securities and
Exchange Commission method, were 2.632.26 and 2.99,2.12, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges,
and fixedcharges. 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.
Contingent Liabilities
- ----------------------
Year 2000 Readiness
-------------------
Overview
--------
The Company has identified and is in the process of correcting the
information technology (IT) and non-IT systems within its control that could be
affected by the Year 2000 issue. See Part II, Item 7., "Contingent
Liabilities," in the 1997 Form 10-K. It completed an assessment of these issues
in July 1997, in which its consultant estimated that the cost of renovating its
remaining applications that were not yet Year 2000-ready would be about $4.0
million.
In early 1997, NW Natural established a Year
2000 Project Office with technical specialists experienced in the Year 2000
issue, sponsored by two senior executives. The project office has achieved various stages of
correction for impacted IT systems and non-IT equipment and, overall, NW Natural
has maintained and expects to continue its planned schedule for correction. NW
Natural plans to complete renovations of of its internal applications with the
highest risk ratings by June 30, 1999, and to evaluate and develop appropriate
plans to address risks of failure in its remaining lower-risk systems by the end
of 1999. The Company has not quantified its worst-case exposure from the Year
2000 issue, but the project office intends to make such estimates while
prioritizing the highest-risk systems for correction.
The Company's objective in its Year 2000 program is to reduce the risk
of business disruption or serious financial loss due to IT and non-IT systems
failures relating to the Year 2000 issue. In November 1997, NW Natural replaced
its largest operating system, its customer information system for residential
and small commercial customers incorporating billing, customer order, credit and
other programs, with a fully Year 2000-ready system. The program for its remaining systems which commenced in
October 1997Additional project work
includes maintaining and managing the inventory of its date-sensitive IT and
non-IT systems; researching and managing the degree of Year 2000 readiness of IT
and non-IT systems of the suppliers and vendors with whom it has material
relationships; identifying and assessing the cost of renovating or replacing
non-IT systems within its control that could be affected by the Year 2000 issue;
assigning risk ratings to its IT and non-IT systems in order to prioritize
renovation and replacement efforts; and developing contingency plans for
high-risk systems or vendor products where products are known to be
non-compliant or readiness levels cannot be independently verified.
17
Readiness of Systems
--------------------
The Year 2000 project office has achieved various stages of correction
for impacted IT systems and non-IT equipment and, overall, NW Natural has
maintained and expects to continue its planned schedule for correction. NW
Natural plans to complete renovations of its internal applications with the
highest risk ratings by June 30, 1999, and to evaluate and develop appropriate
plans to renovate or address risks of failure in its remaining lower-risk
systems by the end of 1999.
Among 29 high-priority applications originally identified for internal
renovation, 38 percent had been completed through construction, testing and
implementation as of March 31, 1999.
NW Natural has been developing a new billing system for industrial and
large commercial (I&C) customers to replace an existing system that is not Year
2000 compliant. The development project for the new I&C system is on schedule,
but NW Natural has implemented a contingency plan for the renovation of the
existing system so that it could be ready by year-end. This effort may be
terminated at any time if it appears that the I&C replacement project is
reaching its key milestones on schedule for completion by October 1999.
Suppliers and Vendors
---------------------
NW Natural is evaluating the status of Year 2000 compliance efforts of
critical suppliers and vendors. These contacts include written communication or
face-to-face meetings with providers of interstate capacity and storage, natural
gas suppliers, financial institutions and electric and telephone companies. In
addition, the project office is currently investigating 588 vendor-supplied
products. Of these products, as of March 31, 1999, 443 products either have been
determined to be compliant or have been represented by the vendors to be
compliant if used in connection with other compliant systems. Another 89
products were deemed non-compliant and 56 products were under active
investigation. If warranted, the Company will identify alternative vendor
sources to the extent alternatives are available, and develop contingency plans
for any critical vendor products considered at risk where alternatives are not
available.
Risks and Contingency Planning
------------------------------
The Company has not quantified its worst-case exposure from the Year
2000 issue, but the project office intends to make such estimates while
prioritizing the highest-risk systems for correction.
With respect to its internal operations, NW Natural believes its most
significant risks are its ability to render timely bills to its industrial and
large commercial customers, its ability to use electronic devices to control and
operate its distribution system and its ability to maintain continuous operation
of its computer systems. In the event that any Year 2000-related problems may
occur, the Company intends to implement contingency plans to mitigate the impact
of such failures to the extent possible. These plans will include options for
manual control and operation of the gas distribution system.
With respect to external factors, NW Natural relies on the suppliers
of natural gas and interstate transportation to deliver natural gas to NW
Natural's distribution system. External infrastructure such as electric and
telephone service is necessary for NW Natural's basic operation as well as the
18
operations of many of its customers. A failure by any of these critical vendors
could challenge NW Natural's ability to meet the demands of its customers. As
part of its normal business practice, however, NW Natural maintains plans to
follow during emergency circumstances. These plans are incorporated into its
contingency plan for potential Year 2000-related problems.
Financial Impact
----------------
NW Natural's total estimated cost for its Year 2000 readiness program
is $6.9 million. This amount includes its costs of assessment, planning, vendor
management, project management and other project costs as well as the costs of
renovating and testing internal applications. NW Natural's costs infrom 1997
through March 31, 1999 for Year 2000 assessment, planning
and renovation were $0.4activities totaled $4.9 million. ItsNeither
the total estimated cost nor the costs in 1998 through September 30 for
renovation, vendor management and other Year 2000 activities were $2.3 million.
These amounts do notto date include the costs incurred in
replacing itsNW Natural's customer information system or costs for other IT systems
that will beare being replaced rather than renovated. DespiteIn accordance with an order of
the OPUC, NW Natural's incremental operating costs for Year 2000 readiness are
being deferred and will be amortized over a five-year period.
Disclaimer
----------
As a result of its Year 2000 program and the replacement of the
residential and small commercial customer information system, the Company does
not believe that, in the aggregate, Year 2000 issues will be material to its
business, operations or financial condition. However, despite the Company's
efforts, there can be no assurance that all material Year 2000 risks relating to
systems within its control will have been adequately identified and corrected
before the end of 1999. In addition, while the Company is in the process of
researching the Year 2000 readiness of its suppliers and vendors, the Company
can make no assurances regarding the Year 2000 compliance status of systems or
parties outside its control, and currently cannot assess the effect on it of any
non-compliance by such systems or parties.
However, as a result of itsThe Year 2000 programstatements in this report are Year 2000 Readiness
Disclosures under the Year 2000 Information and Readiness Disclosure Act and are
made to the replacementbest knowledge and belief of the customer information system, the Company does not believe that, in the
aggregate, Year 2000 issues will be material to its business, operations or
financial condition.Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently not applicable.There have been no material changes to the information provided in
Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk,"
in the 1998 Form 10-K.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
General andRegulatory Developments
-----------------------
On April 19, 1999 the OPUC issued its order addressing the future
treatment of NW Natural's purchased gas costs. In its order, the OPUC formalized
a process that tests for "excessive earnings" in connection with gas utilities'
annual PGA Rate Cases
--------------------------
In October 1998,filings of rate changes due to increases or decreases in gas
commodity costs. Under the order, NW Natural filedis authorized to retain all of its
firstearnings up to a threshold level equal to its authorized return on equity plus
300 basis points. Until a decision is made on NW Natural's authorized ROE in the
19
pending Oregon general rate case in(see Part I, Item 2., "Results of Operations"),
NW Natural can earn up to a 12.6 percent ROE. One-third of any "excess" above
that level will be refunded to customers. The OPUC order also confirmed NW
Natural's ability to pass through 100 percent of its prudently incurred gas
costs into rates.
Gas Storage
-----------
On March 30, 1999, the Oregon since 1989. The filing proposes a revenue increase of $14.7 million
per year from Oregon operations through rate increases averaging 3.8 percent.
The proposed increase is designedEnergy Facility Siting Council approved
NW Natural's application to coveramend its site certificate for the costs ofSouth Mist
Feeder, its pipeline connecting the additionalMist gas storage at Mist,field with NW Natural's
distribution system in metropolitan Portland. The amendment authorizes
construction of 29 miles of 24-inch pipeline parallel to the original 16-inch
pipeline built in the late 1980s. The new CIS,pipeline, together with additional
underground storage reservoirs and making NW Natural's computer systems
compliant with Year 2000 requirements.
Also in October 1998, NW Natural filed its annual rate
adjustments under its PGA tariffs in Oregon and Washington. These filings
propose rate increases averaging 7gas compression capacity, will increase gas
deliverability from Mist to 190 million cubic feet per day, representing about
30 percent in Oregon and 5.8 percent in
Washington. The increases are due to higher costs of natural gas to be purchased
under contracts with gas producers during the coming year, and an increase in
temporary rate surcharges for recovery of balances in deferred gas cost and
other regulatory accounts.
All three filings propose that rate increases go into effect
on December 1, 1998. NW Natural expects the OPUC and the WUTC to approve the PGA
filings on approximately the terms proposed, while it expects the OPUC,
following normal procedures, to suspend the general rate case filing for
investigation and hearings.
Even assuming the residential rates proposed to be effective
December 1, 1998, NW Natural would continue to enjoy a significant price
advantage over competing fuels. Compared with rates charged by the electric
utility which serves approximately half of NW Natural's customers,firm gas would
cost about 50 percent less annually for space heating and about 41 percent less
annually for water heating, assuming typical consumption and appliance
efficiencies.
Environmental Matters
---------------------
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 ODEQ's Voluntary Cleanup Program
and in 1994, the site was listedload 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. The ODEQ and the
U. S. Environmental Protection Agency (EPA) have recently 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.
NW Natural expects that its costs of investigation and any
remediation at the Linnton site 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.
During the period from 1993 through the third quarter of 1998, NW Natural
recorded as expense a total of $1.6 million for the estimated costs of
consultants' fees, ODEQ oversight and the voluntary investigation.
Medium-Term Note Program
------------------------
In November 1998, NW Natural issued and sold $20 million of
Secured Medium-Term Notes, Series B, with a coupon rate of 5.55 percent. These
notes mature in 2002; they have no call or put options.
On September 30, 1998, NW Natural filed a Registration
Statement on Form S-3 with the Securities and Exchange Commission relating to an
additional $143 million of its Medium-Term Notes, Series B, which NW Natural
intends to sell from time to time over the next several years.
Gas Storage
-----------
Effective November 1, 1998, NW Natural placed into service the
$30 million Calvin Creek I phase of the storage facility at Mist, Oregon, the
first of several planned expansions totaling $120 million in NW Natural's
underground gas storage field. Additional phases are planned over the next eight
years to meet growing customer needs.most recent peak day.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(a)3 - Amendment 1998-1 to the Company's Executive
Supplemental Retirement Income Plan (1995 Restatement).
Exhibit 10(b) - ESRIP Change in Control Amendment to the Company's
Executive Supplemental Retirement Income Plan (1995
Restatement).
Exhibit 10(c) - Amendment No. 4 to the Company's Executive Deferred
Compensation Plan, effective September 24, 1998.
Exhibit 10(d) - Amendment No. 1 to the Company's Directors Deferred
Compensation Plan (December 1, 1997 Restatement), effective
September 24, 1998.
Exhibit 10(e) - Amendment dated September 24, 1998 to employee
agreement dated November 2, 1995,Bylaws of Northwest Natural Gas Company as previously amended
between the Company and an executive officer.
Exhibit 10(f) - Form of amended and restated executive change in
control severance agreement between the Company and each of
10 executives.
Exhibit 10(g) - Amendment dated September 24, 1998 to employment
agreement dated July 2, 1997, as previously amended, between
the Company and an executive officer.Feb. 25, 1999
Exhibit 11 - Statement re: Computation of Per Share Earnings.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended
September 30, 1998.March 31, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: November 16, 1998May 17, 1999 /s/ D. James Wilson
---------------------------------
D. James WilsonStephen P. Feltz
---------------------
Stephen P. Feltz
Principal Accounting Officer,
Controller and Treasurer
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
September 30, 1998March 31, 1999
Exhibit
Document Number
- -------- --------
Amendment 1998-1 to the Company's Executive Supplemental
Retirement Income Plan (1995 Restatement) 10(a)
ESRIP Change in Control Amendment to the Company's Executive
Supplemental Retirement Income Plan (1995 Restatement) 10(b)
Amendment No. 4 to the Company's Executive Deferred Compensation
Plan, effective September 24, 1998 10(c)
Amendment No. 1 to the Company's Directors Deferred Compensation Plan
(December 1, 1997 Restatement), effective September 24, 1998 10(d)
Amendment dated September 24, 1998 to employee agreement dated
November 2, 1995,-------
Bylaws of Northwest Natural Gas Company as previously amended
between the
Company and an executive officer 10(e)
Form of amended and restated executive change in control severance
agreement between the Company and each of 10 executives 10(f)
Amendment dated September 24, 1998 to employment agreement dated
July 2, 1997, as previously amended, between the Company and
an executive officer 10(g)February 25, 1999 3
Statement re: Computation of Per Share Earnings 11
Computation of RatiosRatio of Earnings to Fixed Charges 12
Financial Data Schedule 27