SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,For the quarterly period ended June 30, 2002
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 No. 0-994
[GRAPHIC OMITTED][GRAPHIC OMITTED] NW NATURAL[COMPANY LOGO]
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
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 [ ]
At May 8,August 9, 2002, 25,419,80425,471,670 shares of the registrant's Common Stock, $3-1/6
par value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
March 31,June 30, 2002
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Page Number
------
-----------
(1) Consolidated Statements of Income for the three-month and six-month periods
ended March 31,June 30, 2002 and 2001 3
(2) Consolidated Statements of Earnings Invested in the Business for the
three-monthsix-month periods ended March 31,June 30, 2002 and 2001 4
(3) Consolidated Balance Sheets at March 31,June 30, 2002 and 2001 and Dec. 31, 2001
5
(4) Consolidated Statements of Cash Flows for the three-monthsix-month periods ended March 31,June
30, 2002 and 2001 7
(5) Consolidated Statements of Capitalization at March 31,June 30, 2002 and 2001 and
Dec. 31, 2001 8
(6) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2325
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 2326
Signature 2326
2
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
------------------------------Six Months Ended
Thousands, except per share amounts June 30, June 30,
- -----------------------------------------------------------------------------------------------------------------------
2002 2001 - ---------------------------------------------------------------------------------------------2002 2001
---- ---- ---- ----
Operating revenues:
Gross operating revenues $ 278,563101,873 $ 217,341118,150 $ 380,436 $ 335,491
Cost of sales 167,897 125,688
--------------- ------------45,309 63,424 213,206 189,112
---------- ---------- --------- ---------
Net operating revenues 110,666 91,65356,564 54,726 167,230 146,379
Operating expenses:
Operations and maintenance 22,169 21,04320,233 20,986 42,402 42,029
Taxes other than income taxes 12,002 9,6946,852 6,265 18,854 15,959
Depreciation, depletion and amortization 12,814 12,128
--------------- ------------12,784 12,287 25,598 24,415
---------- ---------- --------- ---------
Total operating expenses 46,985 42,865
--------------- ------------39,869 39,538 86,854 82,403
---------- ---------- --------- ---------
Income from operations 63,681 48,78816,695 15,188 80,376 63,976
Other income (expense) (870) 606(13,557) (9) (14,427) 597
Interest charges - net 8,149 8,260
--------------- ------------8,577 7,926 16,726 16,186
---------- ---------- --------- ---------
Income (loss) before income taxes 54,662 41,134(5,439) 7,253 49,223 48,387
Income taxes 20,215 15,227
--------------- ------------tax expense (benefit) (2,447) 2,388 17,768 17,615
---------- ---------- --------- ---------
Net income 34,447 25,907(loss) (2,992) 4,865 31,455 30,772
Redeemable preferred and preference stock
dividend requirements 595 608
--------------- ------------590 604 1,185 1,212
---------- ---------- --------- ---------
Earnings (loss) applicable to common stock $ 33,852(3,582) $ 25,299
=============== ============4,261 $ 30,270 $ 29,560
========== ========== ========= =========
Average common shares outstanding
25,266 25,20725,410 25,103 25,338 25,155
Basic earnings (loss) per share of common stock $ 1.34(0.14) $ 1.000.17 $ 1.19 $ 1.18
Diluted earnings (loss) per share of common stock $ 1.32(0.14) $ 0.99
Dividends per share of common stock0.17 $ 0.3151.18 $ 0.31
1.16
Dividends per share of common stock $ 0.315 $ 0.31 $ 0.63 $ 0.62
--------------------------------------------------
See Notes to Consolidated Financial Statements
3
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Statements of Earnings Invested in the Business
(Unaudited)
ThreeSix Months Ended March 31,
-------------------------------------------------------------June 30,
--------------------------------------------------------------
Thousands 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Earnings invested in the business:
Balance at beginning of period $ 147,950 $ 134,189
Net income 34,44731,455 $ 34,447 25,90731,455 30,772 $ 25,90730,772
Cash dividends paid:
Redeemable preferred and preference stock (594) (608)(1,194) (1,221)
Common stock (7,953) (7,812)(15,957) (15,592)
Common stock repurchased - (1,801)
----------------(2,688)
------------- -------------
Balance at end of period $ 173,850162,254 $ 149,875
================145,460
============= =============
Accumulated other comprehensive income (loss): $
Balance at beginning of period $ (375) $ -
Other comprehensive income - net of tax:
Unrealized gain from price risk management activities 430 43095 95 - -
------------------------------- -----------------------------------------------------------------------------------------
Comprehensive income $ 34,87731,550 $ 25,907
===========30,772
============ ===========
Balance at end of period $ 55(280) $ -
============================== =============
--------------------------------------------------
See Notes to Consolidated Financial Statements
4
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
March 31, March 31,June 30, June 30,
2002 2001 Dec. 31,
Thousands Unaudited)(Unaudited) (Unaudited) 2001
----------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------------
Assets:Assets"
Plant and property:
Utility plant $ 1,478,7251,494,819 $ 1,420,2741,438,183 $ 1,465,079
Less accumulated depreciation 525,805 486,261537,152 497,489 514,629
----------- ----------- ----------------------- ------------ ------------
Utility plant - net 952,920 934,013957,667 940,694 950,450
----------- ----------- ----------------------- ------------ ------------
Non-utility property 18,494 8,64820,793 8,653 18,203
Less accumulated depreciation and depletion 3,774 3,4743,863 3,499 3,677
----------- ----------- ----------------------- ------------ ------------
Non-utility property - net 14,720 5,17416,930 5,154 14,526
----------- ----------- ----------------------- ------------ ------------
Total plant and property 967,640 939,187974,597 945,848 964,976
----------- ----------- ----------------------- ------------ ------------
Other investments 25,074 14,31013,290 13,877 23,233
----------- ----------- ----------------------- ------------ ------------
Current assets:
Cash and cash equivalents 30,084 12,19634,519 17,812 10,440
Accounts receivable 81,503 57,87631,320 30,698 66,684
Allowance for uncollectible accounts (3,648) (2,708)(2,731) (2,257) (1,962)
Accrued unbilled revenue 39,860 26,59113,133 10,346 57,749
Inventories of gas, materials and supplies 33,396 19,56230,793 32,274 49,337
Prepayments and other current assets 24,100 20,55422,281 19,683 28,086
----------- ----------- ----------------------- ------------ ------------
Total current assets 205,295 134,071129,315 108,556 210,334
----------- ----------- ----------------------- ------------ ------------
Regulatory assets:
Income tax asset 48,469 49,515 48,469
Deferred gas costs receivable -- 16,491 --- 15,241 -
Unrealized loss on non-trading derivatives 48,666 --41,408 76,502 111,641
Unamortized loss on debt redemption 6,855 7,3176,739 7,202 6,970
Other 4,232 7,2604,430 6,540 5,302
----------- ----------- ----------------------- ------------ ------------
Total regulatory assets 108,222 80,583101,046 155,000 172,382
----------- ----------- ----------------------- ------------ ------------
Other assets:
Investment in life insurance 53,418 49,49954,140 51,098 53,033
Other 11,168 10,22512,266 11,046 11,064
----------- ----------- ----------------------- ------------ ------------
Total other assets 64,586 59,72466,406 62,144 64,097
----------- ----------- ----------------------- ------------ ------------
Total assets $ 1,370,8171,284,654 $ 1,227,8751,285,425 $ 1,435,022
=========== =========== ===========
--------------------------------------------------
See Notes To============ ============ ============
--------------------------------------------------
See Notes to Consolidated Financial Statements
5
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
March 31, March 31,June 30, June 30,
2002 2001 Dec. 31,
Thousands (Unaudited) (Unaudited) 2001
-------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------
Capitalization and liabilities:
Capitalization:
Common stock $ 80,13080,638 $ 79,59579,502 $ 79,889
Premium on common stock 242,245 237,970245,324 238,246 240,697
Earnings invested in the business 173,850 149,875162,254 145,460 147,950
Accumulated other comprehensive income (loss) 55(280) - (375)
----------- ---------- ----------------------- ------------ ------------
Total common stock equity 496,280 467,440487,936 463,208 468,161
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 8,250 9,000 9,750 9,000
Long-term debt 438,236 400,664416,183 408,498 378,377
----------- ---------- ----------------------- ------------ ------------
Total capitalization 968,516 902,854937,369 905,706 880,538
----------- ---------- ----------------------- ------------ ------------
Current liabilities:
Notes payable 163 22,470- 17,961 108,291
Accounts payable 59,592 60,22548,590 47,692 70,698
Long-term debt due within one year 40,000 20,00050,000 30,000 40,000
Taxes accrued 30,280 17,8182,057 10,020 22,539
Interest accrued 9,847 9,9042,887 2,689 3,658
Other current and accrued liabilities 26,673 24,23225,497 24,825 28,396
----------- ---------- ----------------------- ------------ ------------
Total current liabilities 166,555 154,649129,031 133,187 273,582
----------- ---------- ----------------------- ------------ ------------
Regulatory liabilities:
Customer advances 1,824 1,7091,879 1,766 1,985
Deferred gas costs payable 30,26210,315 - 10,089
----------- ---------- ----------------------- ------------ ------------
Total regulatory liabilities 32,086 1,70912,194 1,766 12,074
----------- ---------- ----------------------- ------------ ------------
Other liabilities:
Deferred income taxes 128,886 142,810137,965 142,185 130,424
Fair value of non-trading derivatives 48,463 -41,540 76,502 111,868
Deferred investment tax credits 8,138 9,0638,070 8,983 8,682
Other 18,173 16,79018,485 17,096 17,854
----------- ---------- ----------------------- ------------ ------------
Total other liabilities 203,660 168,663206,060 244,766 268,828
----------- ---------- ----------------------- ------------ ------------
Total capitalization and liabilities $ 1,370,817 $1,227,875 $1,435,022
=========== ========== ===========
--------------------------------------------------
See Notes To1,284,654 $ 1,285,425 $ 1,435,022
============ ============ ============
--------------------------------------------------
See Notes to Consolidated Financial Statements
6
(NORTHWESTNORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Cash Flows
(Unaudited)
ThreeSix Months Ended March 31,
-------------------------------June 30,
----------------------------
Thousands 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Operating activities:---------------------------------------------------------------------------------------------------------
Operating activities:
Net income from operations $ 34,44731,455 $ 25,90730,772
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization 12,814 12,12825,598 24,415
Gain on sale of assets (221) ---
Loss reserve for PGE acquisition costs 13,699 -
Unrealized gain from price risk management activities 430 --95 -
Deferred income taxes and investment tax credits (2,082) 6796,929 (26)
Equity in (earnings) losses of investments (138) 142(615) 233
Allowance for funds used during construction (148) (191)(273) (414)
Deferred gas costs - net 20,173 482226 1,732
Other 424 2,186(776) 964
---------- ----------
Cash from operations before working capital changes 65,699 41,33376,117 57,676
Changes in operating assets and liabilities:
Accounts receivable - net of uncollectible accounts (13,133) 5,58536,133 32,312
Accrued unbilled revenue 17,889 19,02844,616 35,273
Inventories of gas, materials and supplies 15,941 27,32118,544 14,609
Accounts payable (11,106) (50,473)(22,108) (63,006)
Accrued interest and taxes 13,930 16,960(21,253) 1,947
Other current assets and liabilities 2,097 2,7822,740 4,338
---------- ----------
Cash provided by operating activities 91,317 62,536134,789 83,149
---------- ----------
Investing activities:
Acquisition and construction of utility plant assets (15,039) (17,095)(32,356) (35,815)
Investment in non-utility property (291) --
Deferred(2,590) (4)
PGE acquisition costs for pending purchase of PGE (2,334) --(4,142) -
Proceeds from sale of assets 500 ---
Other investments 518 167888 416
---------- ----------
Cash used in investing activities (16,646) (16,928)(37,700) (35,403)
Financing activities:
Common stock issued 1,648 1,2903,682 2,440
Common stock repurchased -- (3,772)- (5,792)
Redeemable preferred stock retired (750) (750)
Long-term debt issued 60,000 --18,000
Long-term debt retired (10,500) -
Change in short-term debt (108,128) (33,793)(108,291) (38,302)
Cash dividend payments:
Redeemable preferred and preference stock (594) (608)(1,194) (1,221)
Common stock (7,953) (7,812)(15,957) (15,592)
---------- ----------
Cash used in financing activities (55,027) (44,695)(73,010) (41,217)
Increase in cash and cash equivalents 19,644 91324,079 6,529
Cash and cash equivalents - beginning of period 10,440 11,283
---------- ----------
Cash and cash equivalents - end of period $ 30,08434,519 $ 12,19617,812
========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,92317,357 $ 1,04116,213
Income taxes $ 14,11127,912 $ 4,00213,402
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures $ 1411,694 $ 126
292
--------------------------------------------------
See Notes to Consolidated Financial Statements
7
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) Consolidated Statements of Capitalization
March 31,June 30, 2002 March 31,June 30, 2001
Thousands, except share amounts (Unaudited) (Unaudited) Dec. 31, 2001
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------
Common Stock Equity:
Common stock - par value $3-1/6 per share $ 80,13080,638 $ 79,59579,502 $ 79,889
Premium on common stock 242,245 237,970245,324 238,246 240,697
Earnings invested in the business 173,850 149,875162,254 145,460 147,950
Accumulated other comprehensive income (loss) 55(280) - (375)
--------- --------- -------------------- ------------ ----------
Total common stock equity 496,280487,936 52% 463,208 51% 467,440 52% 468,161 53%
Redeemable Preference Stock:
$6.95 Series, stated value $100 per share 25,000 3% 25,000 3% 25,000 3%
Redeemable Preferred Stock:
$7.125 Series, stated value $100 per share 9,0008,250 1% 9,7509,000 1% 9,000 1%
Long-Term Debt:
Medium-Term Notes
-----------------
First Mortgage Bonds:
6.620% Series B due 2001 - 10,000 -
8.050% Series A due 2002 10,000- 10,000 10,000
6.750% Series B due 2002 10,000 10,000 10,000
5.550% Series B due 2002 20,000 20,000 20,000
6.400% Series B due 2003 20,000 20,000 20,000
6.340% Series B due 2005 5,000 5,000 5,000
6.380% Series B due 2005 5,000 5,000 5,000
6.450% Series B due 2005 5,000 5,000 5,000
6.050% Series B due 2006 8,000 -8,000 8,000
6.310% Series B due 2007 20,000 - -
6.800% Series B due 2007 10,0009,500 10,000 10,000
6.500% Series B due 2008 5,000 5,000 5,000
7.450% Series B due 2010 25,000 25,000 25,000
6.665% Series B due 2011 10,000 -10,000 10,000
7.130% Series B due 2012 40,000 - -
8.260% Series B due 2014 10,000 10,000 10,000
7.000% Series B due 2017 40,000 40,000 40,000
6.600% Series B due 2018 22,000 22,000 22,000
8.310% Series B due 2019 10,000 10,000 10,000
7.630% Series B due 2019 20,000 20,000 20,000
9.050% Series A due 2021 10,000 10,000 10,000
7.250% Series B due 2023 20,000 20,000 20,000
7.500% Series B due 2023 4,000 4,000 4,000
7.520% Series B due 2023 11,000 11,000 11,000
7.720% Series B due 2025 20,000 20,000 20,000
6.520% Series B due 2025 10,000 10,000 10,000
7.050% Series B due 2026 20,000 20,000 20,000
7.000% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2028 10,000 10,000 10,000
7.740% Series B due 2030 20,000 20,000 20,000
7.850% Series B due 2030 10,000 10,000 10,000
Unsecured:
8.470% Series A due 2001 - 10,000 -
Convertible Debentures
----------------------
7-1/4% Series due 2012 8,236 8,6646,683 8,498 8,377
--------- --------- ---------
478,236 420,664------------ ------------- ----------
466,183 438,498 418,377
Less long-term debt due within one year 50,000 30,000 40,000
20,000 40,000
--------- ---- --------- ---- --------- ---------------- ------------- ----------
Total long-term debt 438,236416,183 44% 408,498 45% 400,664 44% 378,377 43%
--------- ---- --------- ---- --------- ---------------- ------------- ----------
Total Capitalization $ 968,516937,369 100% $ 902,854905,706 100% $ 880,538 100%
===================== ==== ====================== ==== =================== ====
-----------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial StatementsStatement
8
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(6) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements
The information presented in the consolidated financial statements is
unaudited, but includes all material adjustments, consisting of onlyincluding 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 2001 Annual Report on Form 10-K (2001
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.
As referred to herein, the "Company" consists of Northwest Natural Gas
Company (NW Natural), a regulated utility, and non-regulated subsidiary
businesses, NNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary, and Northwest Energy Corporation (Northwest Energy or Holding
Company)Energy), which was
formed in 2001 to serve as the holding company for NW Natural and Portland
General Electric Company (PGE) if the acquisition of PGE ishad been completed (see
Note 6)7).
Certain amounts from prior periods have been reclassified to conform
with the 2002 presentation. These reclassifications had no impact on prior year
results of operations.
2. Use of Financial Derivatives
NW Natural utilizes derivative instruments to manage commodity price
risks related to natural gas purchases, foreign currency exchange rate risks
related to gas purchase commitments from Canada, oil or propane commodity price
risks related to gas sales and transportation services under rate schedules
pegged to these commodities, and interest rate risks related to long-term debt
maturing or expected to be issued in less than five years. NW Natural does not
enter into derivative instruments for trading purposes. See Part II, Item 7.,
"Accounting for Derivative Instruments and Hedging Activities," and Part II,
Item 8., Notes 1 and 11, "Notes to Consolidated Financial Statements," in the
2001 Form 10-K.
At March 31,June 30, 2002, NW Natural had the following derivatives outstanding
covering its exposures to commodity and foreign currency prices: a series of 1820
natural gas price swap contracts and five72 foreign currency forward contracts. Each
of these contracts was designated as a cash flow hedge. The estimated fair
values and the notional amounts of derivative instruments outstanding were as
follows:
Jan. 1, 2002 March 31,June 30, 2002
---------------------------- --------------------------
------------------------
Fair valueValue Notional Fair valueValue Notional
Thousands Gain (loss)(Loss) Amount Gain (loss)(Loss) Amount
-------------------------- ------------------------- -------------------------------------------------------------------------------------------------------------
Thousands
Fixed-price natural gas commodity price swaps $ (110,935) $ 254,209 $ (48,428)(42,122) $ 264,031229,204
Fixed-price natural gas call options (832) 6,390 - -
Physical supply contract with embedded option - - 453 45
Foreign currency forward purchase contracts (101) 10,223 (35) 8,353129 8,852
---------------------------- -------------------------- ------------------------
Total $ (111,868) $ 270,822 $ (48,463)(41,540) $ 272,384238,101
============================ ========================== ========================
3. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143, which is effective for fiscal years
beginning after June 15, 2002, requires that obligations associated with the
retirement of a tangible long-lived asset be recorded as a liability when those
9
obligations are incurred, with the amount of the liability initially measured at
9
fair value. The liability for the asset retirement obligation is recorded as a
capitalized cost increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period and the
capitalized cost is depreciated over the useful life of the related asset. The
adoption of SFAS No. 143, effective Jan. 1, 2003, is not expected to have a
material impact on the Company's financial condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS No. 145, which updates, clarifies and simplifies existing
accounting pronouncements, addresses the reporting of debt extinguishments and
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which replaces Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities, such as lease
termination costs and certain employee severance costs, when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The primary
effect of applying SFAS No. 146, which is effective for all exit or disposal
activities initiated after Dec. 31, 2002, will be on the timing of recognition
of costs associated with exit or disposal activities.
The Company is currently evaluating the impact of this statementthe adoption of SFAS
No. 145 and SFAS No. 146 upon its financial positioncondition and results of operations.
4. Adoption of New Accounting Standards
Effective Jan. 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. It also specifies the
types of acquired intangible assets that are required to be recognized and
reported separately from goodwill. SFAS No. 142 requires goodwill, of which the
Company had none as of March 31,June 30, 2002, and other intangibles with indefinite
lives to be tested for impairment at least annually rather than being amortized
as previously required. The adoption of SFAS No. 141 and SFAS No. 142 did not
have a material impact on the Company's financial positioncondition or results of
operations.
The Company also adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," effective Jan. 1, 2002. SFAS No. 144
establishes a single accounting model for recognition and measurement of the
impairment of long-lived assets to be held and used, the measurement of
long-lived assets to be disposed of by sale and for segments of a business to be
disposed of. SFAS No. 144 also expands the scope of discontinued operations to
include all components of an entity that can be distinguished from the rest of
the entity and will be eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of SFAS No. 144 did not have a material
impact on the Company's financial positioncondition or results of operations.
5. Segment Information
The Company principally operates in a segment of business, "Utility",
consisting of the distribution of natural gas. Another segment, "Gas Storage",
represents natural gas storage services provided to upstream customers using
storage capacity not required from time to time for service to core utility
customers. The remaining segment, "Other", primarily consists of non-regulated
investments in alternative energy projects in California, a Boeing 737-300
aircraft leased to Continental Airlines and deferred costs inrelating to the
pending
purchaseacquisition of PGE.
10
The following table presents information about the reportable segments
for the three and six months ended March 31,June 30, 2002 and 2001. Inter-segment
transactions are insignificant.
Three Months Ended March 31,
--------------------------------------------------------June 30, Six Months Ended June 30,
---------------------------------------------- ----------------------------------------------
Thousands Utility Gas Storage Other Total Utility Gas Storage Other Total
- ---------------------------------------------------------------------------------------------------------------
2002
- ------------------------------------------------------------------------------- ----------------------------------------------
2002
- ----
Net operating revenues $ 108,83854,077 $ 1,7742,444 $ 5443 $ 110,66656,564 $ 162,915 $ 4,218 $ 97 $ 167,230
Depreciation, depletion and
amortization 12,723 91 -- 12,81412,685 99 - 12,784 25,408 190 - 25,598
Other operating expenses 33,900 249 22 34,17126,785 248 52 27,085 60,685 497 74 61,256
Income (loss) from operations 62,221 1,428 32 63,68114,601 2,103 (9) 16,695 76,822 3,531 23 80,376
Income from financial
investments -- -- 138 138- - 477 477 - - 615 615
Net income 33,453 786 208 34,447(loss) 3,652 1,192 (7,836) (2,992) 37,105 1,978 (7,628) 31,455
Assets 1,326,968 14,453 29,396 1,370,8171,250,435 16,572 17,647 1,284,654 1,250,435 16,572 17,647 1,284,654
2001
- ----
Net operating revenues $ 90,38453,936 $ 1,223769 $ 4621 $ 91,65354,726 $ 144,320 $ 1,992 $ 67 $ 146,379
Depreciation, depletion and
amortization 12,10412,263 24 -- 12,128- 12,287 24,367 48 - 24,415
Other operating expenses 30,795 31 (89) 30,73727,177 55 19 27,251 57,972 86 (70) 57,988
Income from operations 47,485 1,168 135 48,78814,496 690 2 15,188 61,981 1,858 137 63,976
Income (loss) from financial
investments -- -- (142) (142)- - (91) (91) - - (233) (233)
Net income 25,059 693 155 25,9074,246 392 227 4,865 29,305 1,085 382 30,772
Assets 1,201,355 4,895 21,625 1,227,8751,259,914 4,871 20,640 1,285,425 1,259,914 4,871 20,640 1,285,425
6. Restated Stock Option Plan
At the Company's Annual Meeting in May, the shareholders approved an
amendment to the Restated Stock Option Plan that increased the total number of
shares authorized for option grants from 1,200,000 to 2,400,000 shares. At June
30, 2002, options on 1,433,600 shares were available for grant and options to
purchase 469,214 shares were outstanding.
7. Commitments and Contingencies
Acquisition of Portland General Electric Company
------------------------------------------------
OnAs previously reported, on Oct. 5, 2001, NW Natural and Enron Corp., an Oregon corporation
(Enron), entered into an agreementa Stock Purchase Agreement (the Stock Purchase Agreement)
providing for the acquisition, by a wholly-ownedwholly owned subsidiary of NW Natural formed
to serve as a holding company, (Holding Company), of all of the issued and outstanding common stock
of PGE, an Oregon corporation anda wholly-owned subsidiary of Enron.
See
Part I, Item 1., "AcquisitionOn Dec. 2, 2001, Enron filed for reorganization under Chapter 11 of
Portland General Electric Company," and Part
II, Item 8., Note 12,the United States Bankruptcy Code in U.S. Bankruptcy Court for the 2001 Form 10-K, and Part I, Item 2., "AcquisitionSouthern
District of Portland General Electric Company," in this Form 10-Q.
The Stock Purchase Agreement provides that, if the closingNew York (the Bankruptcy Court). PGE has not occurred by Dec. 8,filed for
reorganization under Chapter 11.
On May 17, 2002, NW Natural and Holding Company haveEnron entered into a Termination
Agreement (the Termination Agreement) providing for the obligationtermination of the Stock
Purchase Agreement. The termination of the Stock Purchase Agreement became
effective on July 1, 2002 following (a) the entry of an order by the Bankruptcy
Court approving the Termination Agreement and (b) the consent of the lenders
from whom Enron has obtained debtor-in-possession financing. The Termination
Agreement also provided for mutual releases from any legal action associated
with the Stock Purchase Agreement.
11
NW Natural's results of operations for the three months and six months
ended June 30, 2002 include a non-recurring charge to use their besta loss reserve for NW
Natural's costs incurred through June 30, 2002 in its efforts to obtain an extensionacquire PGE
from Enron, based on its judgment that the acquisition is no longer considered
probable. The amount of the Financing Commitmentcharge was $13.7 million, or enter into or extend$8.3 million after tax,
equivalent to 32 cents a new financing commitment which provides for similar
financing,diluted share, representing NW Natural's deferred costs
including financial advisory and Holding Company shall accept any such extended Financing
Commitment or new financing commitment if the funding conditionslegal fees, loan arrangement fees and other
terms
are not materially adverse to Holding Company in comparisoncosts relating to the Financing
Commitment originally issued.acquisition effort.
In May 2002, Enron announced its intention to consummate a transaction
in which its significant physical gas and power assets, including PGE, would be
separated from the bankruptcy estate as an integrated, asset-based energy
company (currently referred to as OpCo). Enron has stated that, as part of this
transaction, Enron will conduct an auction of these assets pursuant to the
bankruptcy code. NW Natural has advised Enron that, notwithstanding the
termination of the Stock Purchase Agreement, NW Natural would still be
interested in acquiring PGE if PGE were offered for sale and if contingent
liability issues relating to PGE were satisfactorily addressed. NW Natural
intends to conduct a further examination of PGE to determine whether to bid in
the auction process.
Environmental Matters
---------------------
NW Natural has accrued all material loss contingencies relating to
environmental matters which it believes to be probable of assertion.assertion and
reasonably estimable. See Part II, Item 8., Note 12, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K. However, dueDue to the preliminary nature of
these environmental investigations, the range of any additional possible loss
contingency cannot be currently estimated. NW Natural expects that its costs of
further investigation and remediation for which it may be responsible with
respect to the Linnton site, the Wacker site and the Portland Harbor Superfund
site, if any, 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.
11
Litigation
----------
The Company is party to certain 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.
12
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
Northwest Energy Corporation (Northwest Energy or
Holding Company)Energy), a wholly-owned
subsidiary formed in 2001
Together these businesses are referred to herein as the "Company" (see
"Non-utility Operations," below, and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements," in the Company's 2001 Annual Report on Form
10-K (2001 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 six months ended March 31,June 30, 2002 and 2001.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock were $33.9 million in
the quarter ended March 31, 2002, up from $25.3 million in the quarter ended
March 31, 2001.
Earnings per diluted share from consolidated operations were $1.32 a
share in the first quarter of 2002, compared to 99 cents a share in last year's
first quarter.
NW Natural earned $1.28 a diluted share from gas utility operations in
the first quarter of 2002, compared to 96 cents in the same period in 2001.
Weather conditions in NW Natural's service territory in the first quarter of
2002 were 5 percent colder than the 20-year average and 2 percent colder than
the first quarter of 2001. Residential and commercial customers' consumptions
per heating degree day were an estimated 8 percent and 12 percent lower,
respectively, during the first quarter of 2002 than average consumptions prior
to significant increases in gas commodity prices during 2000 and 2001. The
Company estimates that the lower consumptions per degree day reduced residential
and commercial sales in the first quarter of 2002 by about 21 million therms and
margin revenues (gross revenues minus cost of sales) by about $6.0 million,
equivalent to 14 cents a share.
Non-utility operating results for the first quarter of 2002 were
earnings of 4 cents a share, compared to earnings of 3 cents a share from these
operations in the first quarter of 2001. See "Non-utility Operations," below.
Dividends paid on common stock were 31.5 cents a share for the
three-month period ended March 31, 2002 and 31 cents a share for the three-month
period ended March 31, 2001. In April 2002, the Company's Board of Directors
declared a quarterly dividend of 31.5 cents a share on the common stock, payable
May 15, 2002, to shareholders of record of April 30, 2002. The current indicated
annual dividend rate is $1.26 a share.
13
Application of Critical Accounting Policies
- -------------------------------------------
In preparing the Company's financial statements using generally
accepted accounting principles in the United States of America (GAAP),
management exercises judgment in the selection and application of accounting
principles, including making estimates and assumptions. Management considers its
critical accounting policies to be those which are most important to the
representation of the Company's financial condition and results of operations
and which require management's most difficult and subjective or complex
judgments, including those which could result in materially different amounts if
the Company reported under different conditions or using different assumptions.
Management considers its current critical accounting policies to be in the areas
of regulatory accounting, revenue recognition, and derivative and hedging activities
(see "Part II, Item 7., "Critical Accounting Policies - Regulatory Accounting,
Revenue Recognition and Accounting for Derivative Instruments and Hedging
Activities," in the Company's 2001 Form 10-K). There have, and loss contingencies.
Contingencies
-------------
The Company records loss contingencies when it is probable that a loss
has been incurred and the amount of the loss is reasonably estimable. Estimating
probable losses requires analysis of uncertainties that often depend upon
judgments about potential actions by third parties. In the normal course of
business, NW Natural's accruals for loss contingencies include allowances for
uncollectible accounts, environmental claims and property damage claims. In
addition, NW Natural records receivables for anticipated recoveries under
existing insurance contracts when recovery is probable.
In the quarter ended June 30, 2002, the Company recorded a $13.7
million loss reserve, before tax, for transaction costs incurred in connection
with its efforts to acquire Portland General Electric Company (PGE) based upon
its judgment that the acquisition is no material changeslonger considered probable. However,
PGE's parent, Enron Corp. (Enron), now is expected to conduct an auction process
for its assets, including the potential sale of PGE, and NW Natural intends to
conduct a further examination of PGE to determine whether to bid in the policies management considers its critical accounting
policies.
In addition to the accounting policies referred to above, management
believes that Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets,"
and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," could become critical accounting policies in the event that NW Natural
completes its acquisitionauction
process (see "Acquisition of Portland General Electric Company, (PGE)" below).
13
Earnings and Dividends
- ----------------------
The Company reported a loss applicable to common stock of $3.6
million, or 14 cents a diluted share, for the quarter ended June 30, 2002. The
reported results for the second quarter of 2002 include a non-recurring charge
to a loss reserve for NW Natural's transaction costs incurred through June 30,
2002 in its efforts to acquire PGE from Enron. The amount of the charge was
$13.7 million, or $8.3 million after tax, equivalent to 32 cents a diluted
share. The charge represents NW Natural's deferred costs including financial
advisory and legal fees, loan arrangement fees and other costs relating to the
acquisition effort. (See "Acquisition of Portland General Electric Company,"
below.) Excluding this charge, earnings applicable to common stock were $4.8
million, or 18 cents a share, compared to earnings of $4.3 million, or 17 cents
a share, in the quarter ended June 30, 2001.
NW Natural earned 12 cents a diluted share from gas utility operations
in the second quarter of 2002, compared to 14 cents a share in the same period
in 2001. Weather conditions in its service territory in the second quarter of
2002 were 8 percent colder than the 20-year average, but 8 percent warmer than
the second quarter of 2001. Residential and commercial customers' consumptions
per heating degree day were an estimated 4 percent and 2 percent lower,
respectively, during the second quarter of 2002 than in the second quarter of
2001. The Company estimates that the lower average consumptions per degree day
reduced residential and commercial sales in the second quarter of 2002 by about
13.5 million therms and margin revenues (gross revenues minus cost of sales) by
about $4.0 million, equivalent to 10 cents a share.
The Company reported consolidated earnings applicable to common stock
of $30.3 million, or $1.18 a diluted share, for the six months ended June 30,
2002. Results before the non-recurring charge for the PGE transaction costs were
earnings of $38.6 million, or $1.50 a diluted share, compared to earnings of
$29.6 million, or $1.16 a share, for the six months ended June 30, 2001.
Year-to-date, NW Natural earned $1.40 a diluted share from utility operations
compared to earnings of $1.10 a share in the same period in 2001. Weather in the
first half of the year was 6 percent colder than the 20-year average and 1
percent warmer than in 2001. Residential and commercial customers' consumptions
per heating degree day were an estimated 11 percent and 14 percent lower,
respectively, during the first six months of 2002 than average consumptions
prior to the significant increases in gas commodity prices experienced and
tracked into rates during 2000 and 2001. The Company estimates that the lower
average consumptions per degree day reduced residential and commercial sales in
the first half of 2002 by about 34 million therms and margin revenues by about
$10.0 million, equivalent to 24 cents a share.
Excluding the non-recurring charge taken in the second quarter of
2002, non-utility operating results for the quarter were earnings of 6 cents a
share compared to earnings of 3 cents a share from these operations in 2001.
Also excluding this non-recurring charge, non-utility operating results
year-to-date were earnings of 10 cents a share compared to earnings of 6 cents a
share from these operations during the comparable period in 2001. See
"Non-utility Operations," below.
Dividends paid on common stock were 31.5 cents and 31 cents a share,
respectively, for the three-month periods ended June 30, 2002 and 2001. In July
2002, the Company's Board of Directors declared a quarterly dividend of 31.5
cents a share on the common stock, payable Aug. 15, 2002, to shareholders of
record on July 31, 2002. The current indicated annual dividend rate is $1.26 a
share.
Acquisition of Portland General Electric Company
- ------------------------------------------------
OnAs previously reported, on Oct. 5, 2001, NW Natural and Enron Corp., an Oregon corporation
(Enron), entered
into an agreementa Stock Purchase Agreement (the Stock Purchase Agreement) providing for the
acquisition, by a wholly-ownedwholly owned subsidiary of NW Natural formed to serve as a
holding company, (Holding Company), of all of the issued and outstanding common stock of PGE, an Oregon corporation anda
wholly-owned subsidiary of Enron. See
Part I, Item 1., "Acquisition of Portland General Electric Company," in the 2001
Form 10-K.
On Dec. 2, 2001, Enron along with certain of its subsidiaries, filed
petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern
District of New York.York (the Bankruptcy Court). PGE has not filed for
reorganization under Chapter 11.
At this time, it continues to be difficult to assess14
On May 17, 2002, NW Natural and Enron entered into a Termination
Agreement (the Termination Agreement) providing for the impacttermination of Enron's bankruptcy filing on PGE. It is possible that Enron's situation could
adversely affect PGE, because, as a subsidiarythe Stock
Purchase Agreement. The termination of Enron, PGE has relationships
with Enron that could expose PGE to liabilities. At this time, the potential
magnitude of any such liabilities has not been determined.
Notwithstanding Enron's bankruptcy, the Stock Purchase Agreement remains a valid contractual obligationbecame
effective on July 1, 2002 following (a) the entry of an order by the Bankruptcy
Court approving the Termination Agreement and (b) the consent of the lenders
from whom Enron to sell, andhas obtained debtor-in-possession financing. The Termination
Agreement also provided for Holding Company
to acquire, the common stock of PGE. However, in the Enron bankruptcy case,
Enron must decide to either assume or rejectmutual releases from any legal action associated
with the Stock Purchase Agreement.
If
Enron electsNW Natural's results of operations for the three months and six months
ended June 30, 2002 include a non-recurring charge to reject the Stock Purchase Agreement, Enron could either retain
ownership ofa loss reserve for NW
Natural's costs incurred through June 30, 2002 in its efforts to acquire PGE
or sell PGE to another party. Enron's determination whether to
assume or reject the Stock Purchase Agreement is a business judgment to be made
by Enron on the basisfrom Enron. The amount of the best interests of the bankruptcy estatecharge was $13.7 million, or $8.3 million after
tax, equivalent to 32 cents a diluted share, representing NW Natural's deferred
costs including financial advisory and Enron's
creditors. Furthermore, the decision is subject to approval by the Bankruptcy
Court.
On May 3, 2002, Enron publicly announced that it had presented a
process to its Unsecured Creditors' Committee which contemplated the
establishment of a new energy infrastructure company focused on the
transportation, distribution, generationlegal fees, loan arrangement fees and
production of natural gas and
electricity. Enron disclosed that the new company, currently called OpCo Energy
Company, would be a holding company which may own PGE. Although Enron has stated
that it believes the OpCo Energy Company process is feasible whether or not PGE
is owned by such company, Enron has indicated its preference to retain PGE as
part of such company.
14
NW Natural understands that the Unsecured Creditors' Committee is
reviewing Enron's proposal and has not determined whether or not it will support
the OpCo Energy Company process.
NW Natural is in discussions with Enron to seek to determine whether
the parties should agree to mutually terminate the Stock Purchase Agreement or
should continue to pursue the transaction. NW Natural understands that Enron
will consult with its debtor-in-possession lenders and the Unsecured Creditors'
Committee in reaching such a determination. Any agreement by Enron and NW
Natural to terminate the Stock Purchase Agreement would be subject to approval
by the Bankruptcy Court.
Through March 31, 2002, NW Natural has recorded approximately $11.9
million ofother costs relating to the acquisition effort.
In May 2002, Enron announced its intention to consummate a transaction
in which its significant physical gas and power assets, including PGE, would be
separated from the bankruptcy estate as deferred costs foran integrated, asset-based energy
company (currently referred to as OpCo). Enron has stated that, as part of this
transaction, Enron will conduct an auction of these assets pursuant to the
purchasebankruptcy code. NW Natural has advised Enron that, notwithstanding the
termination of PGE. If the acquisition is not completed,Stock Purchase Agreement, NW Natural would recognize these
costs incurred as current expense.still be
interested in acquiring PGE if PGE were offered for sale and if contingent
liability issues relating to PGE were satisfactorily addressed. NW Natural
intends to conduct a further examination of PGE to determine whether to bid in
the auction process.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenuesrevenues. Separate schedules have been presented for "Utility Operating
Revenues - Dollars" to reflect the three months ended March 31:impact of the one-time billing credits of
$29.9 million discussed below:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------------
(Thousands, except customers and degree days) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ------------------------
Gas Sales and Transportation Volumes - Therms:
- ----------------------------------------------
Residential and commercial sales 262,937 258,873130,355 127,105 393,292 385,978
Unbilled volumes (18,622) (24,223)(27,907) (20,678) (46,529) (44,901)
-------- --------- --------- --------
Weather-sensitive volumes 244,315 62% 234,650 61%102,448 106,427 346,763 341,077
Industrial firm sales 23,755 6% 23,464 6%15,675 18,830 39,430 42,294
Industrial interruptible sales 14,375 4% 13,798 4%5,905 14,761 20,280 28,559
-------- --------- ----- --------- ------------
Total gas sales 282,445 72% 271,912 71%124,028 140,018 406,473 411,930
Transportation deliveries 110,732 28% 112,473 29%106,616 91,866 217,348 204,339
-------- --------- ----- --------- ------------
Total volumes sold and delivered 393,177 100% 384,385 100%230,644 231,884 623,821 616,269
======== ========= ===== ========= ============
Utility Operating Revenues -
Dollars:Dollars (with $29.9 million
credit adjustments):
- ------------------------------------------------------------------
Residential and commercial sales $105,064 $ 259,491107,406 $ 198,232364,555 $318,287
Unbilled revenues (17,895) (5,690)(26,731) (15,645) (44,626) (33,984)
-------- --------- --------- --------
Weather-sensitive revenues 241,596 88% 192,542 89%78,333 91,761 319,929 284,303
Industrial firm sales 17,865 6% 13,658 6%9,026 11,008 26,891 24,666
Industrial interruptible sales 9,896 4% 7,225 3%2,675 7,273 12,571 14,498
-------- --------- ----- --------- ------------
Total gas sales 269,357 98% 213,425 98%90,034 110,042 359,391 323,467
Transportation revenues 6,452 2% 4,419 2%7,431 4,299 13,883 8,718
Other revenues 173 -- (1,782) --1,906 (466) 2,079 (2,248)
-------- --------- ----- --------- ------------
Total utility operating revenues $ 275,982 100%99,371 $ 216,062 100%113,875 $ 375,353 $329,937
======== ========= ===== ========= ============
Cost of gas sold $ 167,14445,294 $ 125,67859,939 $ 212,438 $185,617
======== ========= ========= ========
Net operating revenues (utility margin) $ 54,077 $ 53,936 $ 162,915 $144,320
======== ========= ========= ========
15
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------------
(Thousands, except customers and degree days) 2002 2001 2002 2001
- ------------------------------------------------------------------------- ------------------------
Utility Operating Revenues -
Dollars (without $29.9 million
credit adjustments):
- --------------------------------
Residential and commercial sales $130,996 $ 120,055 $ 390,487 $318,287
Unbilled revenues (26,731) (28,294) (44,626) (33,984)
-------- --------- --------- --------
Weather-sensitive revenues 104,265 91,761 345,861 284,303
Industrial firm sales 11,956 11,008 29,821 24,666
Industrial interruptible sales 3,669 7,273 13,565 14,498
-------- --------- --------- --------
Total gas sales 119,890 110,042 389,247 323,467
Transportation revenues 7,431 4,299 13,883 8,718
Other revenues 1,906 (466) 2,079 (2,248)
-------- --------- --------- --------
Total utility operating revenues $129,227 $ 113,875 $ 405,209 $329,937
======== ========= ========= ========
Cost of gas sold $ 74,248 $ 59,939 $ 241,392 $185,617
======== ========= ========= ========
Net operating revenues (utility margin) $ 54,979 $ 53,936 $ 163,817 $144,320
======== ========= ========= ========
Total number of customers (end of period) 546,806 528,008548,589 528,602 548,589 528,602
======== ========= ========= ========
Actual degree days 1,920 1,890729 796 2,649 2,686
======== ========= ========= ========
20-year average degree days 1,836 1,827674 670 2,510 2,497
======== ========= ========= =================
15NW Natural refunded approximately $29.9 million of deferred gas cost
savings to its Oregon customers through billing credits in June 2002. The
refunds were the customers' 67 percent portion of gas cost savings realized
between October 2001 and March 2002 and had been deferred, with interest,
pursuant to NW Natural's Purchased Gas Adjustment (PGA) tariff in Oregon (see
"Cost of Gas," below). The refunds reduced gross operating revenues for the
first six months of 2002 by $29.9 million, cost of gas by $29.0 million and
deferred gas costs payable by $29.0 million. The refunds also reduced margin
revenues by about $0.9 million, but this amount was approximately offset by
corresponding reductions in franchise tax expense and uncollectible expense such
that the effect of the refunds on net income was negligible.
16
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with 18,79819,987
customers added since March 31,June 30, 2001, for a growth rate of 3.63.8 percent. In the
three years ended Dec. 31, 2001, more than 63,000 customers were added to the
system, representing an average annual growth rate of 4.4 percent.
Typically, 80 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 in the second quarter of 2002 were 58
percent colder than average, but 8 percent warmer than in the firstsecond quarter of
2001. For the first six months of 2002, and 2weather was 6 percent colder than
average, but 1 percent warmer than in the first quartersix months of 2001.
Volumes of gas sold to residential and commercial customers were 9.74.0
million therms, or 43.7 percent, higherlower in the firstsecond quarter of 2002 than in the
firstsecond quarter of 2001. Related revenues, increased $49.1including the impact of the $29.9
million refunded to customers in June, decreased $13.4 million, or 2514.6 percent.
Excluding the impact of the refunds, related revenues actually increased $12.5
million, or 13.6 percent, partially due to higher sales volumes but more significantlyprimarily due to rate increases effective Oct. 1,
2001. (See Part II, Item 7, "Results of Operations - Regulatory Matters," in the
2001 Form 10-K.) Customer growth in the residential and commercial segments
since March 31,June 30, 2001, contributed an estimated 79.8 million therms in sales
volumes and $2.7$4.0 million in additional margin during the first quartersix months of
2002.
NW Natural believes that reductions in recent years in its customers'
gas consumptions per degree day (see "Earnings and Dividends," above) were
caused by the higher cost of purchased gas, which is passed on to customers as
rate increases, and to efforts throughout the region to conserve energy. NW
Natural filed with the Oregon Public Utility Commission (OPUC) in 2001 for
approval of a new regulatory mechanism that is intended to stabilize margin
revenues in the face of variable consumption patterns. The proposed regulatory
mechanism is intended to stabilize margin revenues to assure NW Natural of fixed
cost recovery and more predictable shareholder earnings. NW Natural has proposed
that this be accomplished through a balancing account that would compare actual
usage of residential and commercial customers against their normal usage levels
and treat any variations as refunds or collections of revenues. In February
2002, the administrative law judge in this proceeding issued a memorandum to the
parties advising them that the OPUC has decided to hold the docket regarding NW
Natural's proposed regulatory mechanism in abeyance, along with a docket
involving a similarabeyance; the filing by PGE, pending its review of NW Natural's
application to acquire PGE.is currently
suspended through mid-September 2002. NW Natural estimates that if customers'
gas consumption patterns as experienced in 2001 and early 2002 were to continue
for the full year 2002, but a margin stabilization mechanism were not approved,
it could reduce margin revenues for the last ninesix months of this year by the
equivalent of 1310 to 1815 cents a share compared to results with such a mechanism
in place.
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. End of period balances are affected by weather conditions, rate
changes and customer billing dates from one period to the next.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial and electric generation
customers in the firstsecond quarter of 2002 were 148.1128 million therms, down 1an increase of
2 percent from the same period of 2001. Combined margin from these customers
increased however,
from $11.7$10.3 million in the firstsecond quarter of 2001 to $14.7$11.5 million in
the firstsecond quarter of 2002.2002, an increase of 11 percent from the same period of
2001. The higher margin was mostly due to services to electric generation
customers.
17
In the industrial market, volumes delivered to industrial sales and
transportation customers in the firstsecond quarter of 2002 were 144.9127 million therms.
This was 30.64.5 million therms, or 274 percent, higher than in the firstsecond quarter of
2001. Several large customers switched back to gas after having used oil during
the same period last year. Related margins in the industrial market increaseddecreased, however, from $11.3$10.3
million to $12.4 million.
16
$9.3 million, due to migrations of some industrial customers from
firm to interruptible service.
In the electric generation market, volumes delivered in the firstsecond
quarter of 2002 were 3.20.1 million therms. This was 31.32.1 million therms, or 9195
percent, lower than in the firstsecond quarter of 2001. Margin in thisfrom the electric
generation market increased, however, from $0.4was $2.2 million in the firstsecond quarter of 20012002, however,
compared to $2.3
millionno margin from this market in the firstsecond quarter of 2002.2001. The margin
contribution from the electric generation market in the second quarter of 2002
was equivalent to about 5 cents a share of earnings. A customer served on a
contract with low fixed charges and relatively high volumetric charges used 34.52.2 million
therms during the firstsecond quarter of 2001 but only about 3 million thermsand none during the firstsecond quarter of
2002. On the other hand, two new electric generation customers added in mid-2001
used only about 0.30.1 million therms in the firstsecond quarter of 2002, but generated
$2.3$2.2 million in margin because they arewere served on contracts with high fixed charges and
low volumetric charges. The contracts with theseContracts for service to the two new customers will continue in placethis
market went into effect in the second half of 2001 and expired at least through the end of the
second quarter of 2002.
Other revenues include amortizations from regulatory accounts and
miscellaneous fee income (see Part II, Item 8., Note 1, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K). Other revenues amounted to a net
increase to utility operating revenues of $0.2increased $2.4
million during the firstsecond quarter of 2002 inludingcompared to the second quarter of
2001. Year-to-date, other revenues increased revenues from customer late payment and collection
fees ($1.1 million) and miscellaneous revenues ($0.4 million), partially offset
by$4.3 million compared to the first
six months of 2001. Factors contributing to the increase in the first six months
of 2002 were reduced amortizations from regulatory accounts covering
conservation programs ($0.82.4 million), refunds due to sharing of income from
interstate storage service ($1.2 million), reduced property tax amortizations
($0.2 million) and Year 2000 costs ($0.5 million). Amortizations of regulatory
accounts for conservation programs amounted to $2.4 million for the three months
ended March 31, 2002, which accounted for the $2.0 million increase in otherhigher revenues from the three months ended March 31, 2001.customer late payment and reconnection
fees ($0.2 million).
Cost of Gas
-----------
The cost per therm of gas sold was 2815 percent higherlower during the firstsecond
quarter of 2002 than in the firstsecond quarter of 2001, primarily due to higher
natural gas commodity prices. The2001. Year-to-date, the cost per
therm of gas sold was 16 percent higher than the first six months of 2001. The
cost of gas sold includes current gas purchases, gas drawn from storage
inventory, gains or losses from commodity hedges, demand costs,cost equalization,
regulatory deferrals and company use.
Results for the three months ended June 30, 2002 include an adjustment
reducing cost of gas by $29.0 million (see "Comparison of Gas Operations,"
above). Excluding the impact of the $29.0 million adjustment, cost per therm of
gas sold was 40 percent higher during the second quarter of 2002 than in the
second quarter of 2001 and 32 percent higher year-to-date, primarily due to
higher prices in the natural gas commodity market. Results for the three months
ended June 30, 2002, also include adjustments reducing cost of gas relating to
corrections in the amounts of deferred expenses for the recovery of pipeline
demand charges under NW Natural's PGA mechanism. These adjustments totaled $2.9
million, contributing 7 cents a share to earnings in the second quarter. Of the
total amount, $0.3 million or about 1 cent a share applied to deferrals in the
first and second quarters of 2002, while the balance of $2.6 million or 6 cents
a share applied to prior periods from Dec. 1, 1999, through Dec. 31, 2001. The
methodology represented in the corrections will continue to be applied in the
future.
Results for the three months ended June 30, 2001 included an
adjustment reducing the cost of gas and a partially offsetting adjustment
reducing interest income (see "Other Income (Expense)," below). These
adjustments were based on a clarification of the treatment of gas storage
inventory, approved by the OPUC effective June 30, 2001, under NW Natural's PGA
mechanism in Oregon. Under an agreement between the Company and the OPUC staff,
the methodology applied in this adjustment to cost of gas also will continue to
be applied in the future.
NW Natural uses an active natural gas commodity hedge program under
the terms of its Derivatives Policy (see Part II, Item 7., "Critical Accounting
Policies -- Accounting for Derivative Instruments"Management's
Discussion and Hedging Activities,Analysis of Results of Operations and Financial Condition," in
the Company's 2001 Form 10-K) to help manage its gas commodity costs. NW Natural
recorded net losses from commodity swap and call option contracts of $28$18 million
in the firstsecond quarter of 2002, compared to net gains of $74$13 million in the
firstsecond quarter of 2001. Gains (losses) from commodity hedges are recorded as
reductions (increases) to the cost of gas.
18
NW Natural has a Purchased Gas Adjustment (PGA)PGA tariff under which its net income from Oregon
operations is affected 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 projected costs built
into rates. 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. Net savings realized from
gas commodity purchases in the firstsecond quarter of 2002 contributed $8.7$1.5 million
of margin, equivalent to 213 cents a share of earnings. The Company creditedequivalent result in
the remaining portion of its first quarter 2002 purchased
gas costs savings, about $17.4 million, plus interest, to a deferred account for
future refund to Oregon customers. In the firstsecond quarter of 2001 NW Natural
absorbed $1.4was shared savings and margins of $0.4 million,
equivalent to 1 cent a share of earnings. Year-to-date, net savings realized
from gas commodity purchases contributed $10.4 million of excess gas costs, generatingmargin, equivalent to
25 cents a share of earnings. The equivalent result in the first half of 2001
was a negative $0.8 million, equivalent to a loss of 32 cents a share.share, primarily
representing the absorption of $1.2 million in excess gas costs.
Under an agreement with the OPUC, revenues from off-system gas sales
are treated as a reduction of gas costs. These sales reduced the cost of gas
sold by $0.7$0.4 million and $0.6$1.2 million for the first quartershalf of 2002 and 2001,
respectively.
Non-utility Operations
----------------------
At March 31,June 30, 2002 and 2001, the Company had one active wholly-owned
subsidiary, Financial Corporation. Northwest Energy which was formed in 2001 to serve
as the holding company for NW Natural and PGE if the acquisition of PGE is
completed, has had no active operations since its inceptionbeen
completed. The loss reserve for the costs relating to the acquisition of PGE
($13.7 million, before tax) was recorded by Northwest Energy in 2001.
17
the second
quarter of 2002.
Financial Corporation
---------------------
Financial Corporation's operating results for the three months ended
March 31,June 30, 2002 and 2001, were net income of $0.5 million and $0.2 million,
compared to income of $0.1
million for the first quarter of 2001. Earnings wererespectively, equivalent to 1 cent a share forin each of the three-month periods ended March 31,respective quarters.
Year-to-date, operating results were net income of $0.7 million in 2002,
andcompared to net income of $0.3 million for the comparable period in 2001.
Financial Corporation's net assets at March 31,June 30, 2002 and 2001, were $8.1$8.6 million
and $7.4$7.6 million, respectively.
Gas Storage Services
--------------------
NW Natural realized net income from gas storage services after
regulatory sharing and income tax from gas storage services of $0.8$1.2 million, or 35 cents a share, in the
three months ended March 31,June 30, 2002, up from $0.7$0.4 million, or 2 cents1 cent a share, in
the three months ended March 31,June 30, 2001. Year-to-date, operating results were net
income of $2.0 million, compared to net income of $1.1 million for the
comparable period in 2001. Gas storage services are provided to customers using
storage capacity not required from time to time for utility services. NW Natural
retains 80 percent of the income before tax from storage services and credits
the remaining 20 percent to a deferred regulatory account for refund to its core
utility customers.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $1.1decreased $0.8
million, or 54 percent, higherand increased $0.4 million, or 1 percent, in the first quarter ofthree-
and six-month periods ended June 30, 2002, respectively, compared to the same
periodperiods in 2001. TheIn the six-month period, the increase was caused primarily bydue to higher net pension
costs ($1.6 million), customer service expenses ($0.4 million) and employee
benefit costs ($0.2 million), partially offset by lower costs in information
services ($1.2 million) and market services ($0.6 million). In the three-month
period, the decrease was primarily due to lower information technology ($0.7
million) due to reduced earnings on pension assets; higherand market services ($0.1 million) costs and lower uncollectible
expense ($0.5 million) due to economic conditions in the Northwest and the
impact of, partially offset by higher customer gas bills resulting from recent rate increases; and
higher payrollpension costs ($0.30.8 million) due to wage and salary increases..
19
Taxes Other than Income Taxes
-----------------------------
Taxes other than income taxes, which are comprised of property,
franchise, payroll and other taxes, were $2.3$2.9 million, or 2418 percent, higher in
the first quartersix months of 2002 compared to the same period in 2001. Property tax
expense increased $1.3 million, or 25 percent, due to higher property tax rates
and an increase in utility plant. Franchise taxes, which are based on gross
revenues, increased $1.7$1.3 million, or 3518 percent, reflecting higher revenues due
to an increase in NW Natural's customer base and rate increases effective in
late 2001. PropertyRegulatory fees and payroll tax expenseexpenses also increased $0.6
million, or 22 percent, due to higher property tax rates and an increase in
utility plant.slightly.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation,The Company's depreciation, depletion and amortization expense in the
first six months of 2002 increased $0.7$1.2 million, or 64 percent, compared to the
first quarterhalf of 2001. The increase was primarily due to a 5 percent increase in
utility plant in service. As a percentage of
average plant and property, depreciation,Depreciation, depletion and amortization expense was
approximately 12 percent of average plant and property for each of the threesix months ended
March 31,June 30, 2002 and 2001.
Other Income (Expense)
----------------------
OtherThe Company's other income (expense) decreased $1.5$13.5 and $15.0 million
in the first quarter ofthree- and six- month periods ended June 30, 2002, respectively, compared
to the first quartersame periods in 2001. Excluding the effect of the $13.7 million charge to
a loss reserve for costs incurred in the effort to acquire PGE, the Company's
other income (expense) increased $0.2 million and decreased $1.3 million in the
three- and six-month periods ended June 30, 2002, respectively, compared to the
same periods in 2001. The decrease for the six months ended June 30, 2002, was primarily
due to a
changean increase in interest incomeexpense on deferred regulatory account balances.balances
($2.1 million) and a decrease in other interest income ($0.3 million), partially
offset by an increase in earnings from investments ($0.8 million). The first quartersix
months of 2002 included interest expense of $0.9$2.0 million on deferred gas cost
liabilityregulatory
account balances, totaling $30.3 million as of March 31, 2002, compared to interest income of $0.2 million on receivable balancesin the first half
of $16.5 million as2001. During the three months ended June 30, 2001, an adjustment relating to
the treatment of March 31, 2001. The change in deferred gas cost balances, from an asset as of
March 31, 2001 to a liability at March 31, 2002, resulted in a combined decrease
of $1.2 million in interest on deferred regulatory accounts. The first quarter
of 2001 also includedstorage inventory under NW Natural's PGA mechanism reduced
interest income on short-term investmentsby $0.4 million (see "Cost of $0.4 million.
18
Gas," above).
Interest Charges - net
----------------------
The Company's net interest expense decreased $0.1increased by $0.7 million, or 18
percent, and $0.5 million, or 3 percent, in the first quarter ofthree-month and six-month
periods ended June 30, 2002, respectively, compared to the first quarter of 2001.
Interest expense on commercial paper was $0.2 million lowersame periods in 2001,
primarily due to a lowerhigher average balancebalances of commercial paper outstanding during the period.long-term debt outstanding.
Income Taxes
------------
The effective corporate income tax rates for the three months ended
June 30, 2002 and 2001, were 45.0 percent and 32.9 percent, respectively. The
higher rate from continuing operationsin the three-month period ended June 30, 2002, is primarily due to
the $13.7 million charge to a loss reserve for costs incurred in the effort to
acquire PGE. Year-to-date, the effective corporate income tax rate was 37.036.1
percent, compared to 36.4 percent for both three-monththe first six months of 2001. Excluding
the effect of the $13.7 million charge to a loss reserve incurred in the effort
to acquire PGE, the effective corporate income tax rates for the three- and
six-month periods ended March 31,June 30, 2002, were 35.2 percent and 2001.36.7 percent,
respectively.
20
Financial Condition
- -------------------
Capital Structure
-----------------
The Company's 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, debt or equity securities are issued depending upon both
the target capital structure and market conditions. These sources also are used
to meet long-term debt and preferred and preference stock redemption
requirements (see Part II, Item 8., Notes 3 and 5, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K).
Liquidity and Capital Resources
-------------------------------
At March 31,June 30, 2002, the Company had $30.1$34.5 million in cash and cash
equivalents compared to $12.2$17.8 million at March 31,June 30, 2001. Short-term liquidity is
provided by cash from operations and from the sale of the Company's commercial
paper notes, which are supported by commercial bank lines of credit (see Part
II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the
Company's 2001 Form 10-K). The Company has available through Sept. 30, 2002,
committed lines of credit totaling $170 million (see "Cash Flows - Lines of
Credit," below). The Company's lines of credit are renewed annually.
The following table shows NW Natural's contractual obligations by
maturity and type of obligation:
Commercial
Thousands Paper Capital Long-term Gas Total
Payments Due in Years Supported by Preferred and Long-term Lease Operating Supply Purchase Contractual
Ending June 30, Lines of Credit Preference Stock Debt Obligations Leases Obligations Cash Obligations
- -----------------------------------------------------------------------------------------------------------------------------------
2003 $ - $ 25,750 $ 50,000 $ 459 $ 2,898 $82,009 $ 161,116
2004 - 750 - 81 2,722 58,790 62,343
2005 - 750 - - 2,620 45,955 49,325
2006 - 750 15,000 - 1,939 43,107 60,796
2007 - 750 38,000 - 158 41,912 80,820
------------------------------------------------------------------------------------------------------
Total 2003 - 2007 - 28,750 103,000 540 10,337 271,773 414,400
Thereafter - 4,500 363,183 - 3,397 229,631 600,711
Less: imputed interest - - - (35) - (106,612) (106,647)
------------------------------------------------------------------------------------------------------
Total $ - $ 33,250 $ 466,183 $ 505 $ 13,734 394,792 $ 908,464
======================================================================================================
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth and system improvements (see "Cash
Flows - Investing Activities," below). In addition, NW Natural has certain
long-term contractual obligations, such as capital lease obligations, operating
leases and long-term gas supply purchase obligations that require an adequate
source of funding. These capital and contractual expenditures are financed
through cash from operations and from the issuance of short-term debt, which is
periodically refinanced through the sale of long-term debt or equity securities.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper
notes payable. Both NW Natural and Financial Corporation issue commercial paper
under agency agreements with a commercial bank. NW Natural's commercial paper is
supported by its committed bank lines of credit (see below), while Financial
Corporation's commercial paper is supported by committed bank lines of credit
and the guaranty of NW Natural (see Part II, Item 8., Note 6, "Notes to
Consolidated Financial Statements," in the 2001 Form 10-K). NW Natural had no
commercial paper notes outstanding at June 30, 2002, compared to $18.0 million
and $108.3 million at June 30, 2001 and Dec. 31, 2001, respectively. Financial
Corporation had no commercial paper notes outstanding at June 30, 2002.
21
Lines of Credit
---------------
NW Natural has available through Sept. 30, 2002, committed lines of
credit with four commercial banks totaling $150 million. In addition, Financial
Corporation has available through Sept. 30, 2002, 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, 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 Dec. 31,
2001, or June 30, 2002 or 2001.
NW Natural's lines of credit require that credit ratings be maintained
in effect at all times and that notice be given of any change in its commercial
paper ratings. A change in NW Natural's commercial paper rating is not an event
of default, nor is the maintenance of a specific minimum level of credit rating
a condition to drawing upon the lines of credit. However, interest rates on any
loans outstanding under NW Natural's bank lines are tied to credit ratings,
which would increase or decrease the cost of bank debt, if any, when ratings are
changed. The lines of credit require NW Natural not to maintainexceed a specified ratio
(65 percent) of indebtedness to total capitalization.capitalization, as defined in the credit
agreement. Failure to comply with this covenant would entitle the banks to
terminate their lending commitments and to accelerate the maturity of all
amounts outstanding. At March 31,June 30, 2002, NW Natural was in compliance with this
covenant.
19
The following table shows NW Natural's contractual obligations by
maturity and typecovenant, with a ratio of obligation:
Commercial Preferred Long-term Total
Thousands Paper and Capital Gas Supply Contractual
Payments Due in Years Supported by Preference Long-term Lease Operating Purchase Cash
Ending March 31, Lines of Credit Stock Debt Obligations Leases Obligations Obligations
- --------------------------------------------------------------------------------------------------------------------------------
2002 $ 163 $ 25,750 $ 40,000 $ 569 $ 2,966 $ 82,104 $ 151,552
2003 - 750 20,000 132 2,753 67,391 91,026
2004 - 750 - 5 2,641 46,467 49,863
2005 - 750 15,000 - 2,585 43,926 62,261
2006 - 750 28,000 - 365 41,912 71,027
-------------------------------------------------------------------------------------------------------
Total 2002 - 2006 163 28,750 103,000 706 11,310 281,800 425,729
Thereafter - 5,250 375,236 - 3,423 239,940 623,849
Less: imputed interest - - - (32) - (111,540) (111,572)
-------------------------------------------------------------------------------------------------------
Total $ 163 $ 34,000 $ 478,236 $ 674 $ 14,733 $ 410,200 $ 938,006
=======================================================================================================
47 percent.
One of Financial Corporation's lines of credit in the amount of $10
million, which is guaranteed by NW Natural, provides that it is an event of
default if any governmental authority takes action which the bank believes has a
material adverse effect on NW Natural's financial condition or ability to repay,
or if a material adverse change occurs in NW Natural's business condition.
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth and system improvements (see "Cash
Flows - Investing Activities," below). In addition, NW Natural has certain
long-term contractual obligations such as capital lease obligations, operating
leases and long-term gas supply purchase obligations that require an adequate
source of funding. These capital and contractual expenditures are financed
through cash from operations and from the issuance of short-term debt, which is
periodically refinanced through the sale of long-term debt or equity securities.
Cash Flows
----------
Operating Activities
--------------------
OperationsContinuing operations provided net cash of $91.3$134.8 million in the threesix
months ended March 31,June 30, 2002, compared to $62.5$83.1 million in the first threesix months of
2001. The $28.8 million, or 4662 percent increase was due to increased cash from operations before
working capital changes ($24.418.4 million) and lower working capital requirements
($4.433.2 million). The increase in cash from continuing operations before working
capital changes was primarily due to the reduction in net income from the loss
reserve for the PGE acquisition costs ($13.7 million), combined with an increase
in deferred gas costs payable in the
first quarter of 2002income taxes and investment tax credits ($19.77.0 million), an increase in income from operations
($8.5 million) and an increase
in depreciation, depletion and amortization ($1.2 million) and an increase in
income from operations ($0.7 million), partially offset by a decrease in deferred investment tax credits and
income taxesother
adjustments ($2.81.7 million) and, a decrease in other adjustmentsdeferred gas costs ($1.81.5 million) and
an increase in earnings of investments accounted for on an equity basis ($0.8
million). The decrease in working capital requirements was primarily due to a
smaller decreasereduction in accounts payable ($39.440.9 million), a larger reduction in
accrued unbilled revenue ($9.3 million), a larger reduction in inventories ($3.9
million) and a larger reduction in accounts receivable ($3.8 million), partially
offset by an increase in
accounts receivable ($18.7 million), a smaller increasedecrease in accrued interest and taxes ($3.023.2 million), and a
smaller decrease in inventoriesother current assets and liabilities ($11.41.6 million).
NW Natural's refunds to customers of approximately $29.9 million of
deferred gas cost savings in June 2002 (see "Results of Operations - Comparison
of Gas Operations," above) reduced cash flows from operations by that amount,
but the reduction was more than offset by the other factors affecting cash flows
cited above. Accordingly, the Company's current cash position (cash and cash
equivalents minus notes payable) improved by $4.6 million between March 31 and
June 30, 2002, and by $34.7 million between June 30, 2001, and June 30, 2002.
22
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 12, "Notes to Consolidated Financial Statements," in the
2001 Form 10-K).
20
Investing Activities
--------------------
Cash requirements for investing activities in the first quartersix months of
2002 totaled $16.6$37.7 million, downup from $16.9$35.4 million in the same period of 2001.
The increase was primarily due to $4.1 million in costs relating to the proposed
acquisition of PGE. Cash requirements for utility construction totaled $15.0$32.4
million, down $2.1$3.5 million from the first quartersix months of 2001. The decrease in cash requirements for utility
construction in 2002 was primarily the result of the completion of another phase
in the expansion of NW Natural's Mist gas storage system in December 2001.
NW Natural's utility construction expenditures are estimated to total
$83 million for 2002. Over the five-year period 2002 through 2006, these
expenditures are estimated at between $450 million and $500 million. The level
of capital expenditures over the next five years reflects projected customer
growth, system replacement and reinforcement projects, and the development of
additional gas storage facilities including the extension of a pipeline that
moves gas from NW Natural's Mist Storage Field into growing portions of its
service area. An estimated 60 percent of the required funds is expected to be
internally generated over the five-year period, with the remainder funded
through a combination of long-term debt and equity securities with short-term
debt providing liquidity and bridge financing.
Investments in non-utility property during the first quartersix months of
2002 totaled $0.3$2.6 million, and wereup from a negligible duringamount in the first quartersame period of
2001. Investing activities duringThe increase was due to greater investments in facilities used for
underground gas storage, a business segment treated for accounting purposes as
separate from the first three months of 2002 also
included $2.3Company's utility operations (see Note 5, "Notes to
Consolidated Financial Statements," above).
The $4.1 million in cash used forcosts relating to the proposed acquisition of PGE
included financial advisory and legal fees, loan arrangement fees and other
costs relating to the Company's contract for the
purchase of PGE.costs. In the event that the acquisition is not completed,June 2002, the Company would recognizerecorded a non-recurring charge to a loss
reserve ($13.7 million) for all of NW Natural's costs accumulatedincurred and deferred
through June 30, 2002, in its efforts to dateacquire PGE from Enron. (See
"Acquisition of $11.9 million as current expenses.Portland General Electric," above.)
Financing Activities
--------------------
Cash used infor financing activities in the first quartersix months of 2002
totaled $55.0$73.0 million, compared to $44.7an increase of $31.8 million infrom the first quartersix months of
2001. The increase was primarily due to a larger use of funds to pay down
long-term and short-term debt, partially offset by a larger amount of new
long-term debt issued.
NW Natural sold $60 million of its secured Medium-Term Notes, Series B
(MTNs) in March 2002 and used the proceeds, together with internally generated
cash, to reduce short-term debt by $108.1$108.3 million in the first quartersix months of
2002. InternallyProceeds from the sales of $18 million of Medium-Term Notes, Series B, in
June 2001, together with internally generated cash, waswere used to reduce
short-term debt by $33.8$38.3 million in the first quartersix months of 2001.
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 which has been extended through May 2003. The
purchases are made in the open market or through privately negotiated
transactions. The Company used $5.8 million for the repurchase of 246,700 shares
under the program induring the first six months of 2001. No shares were
repurchased during the six months ended Dec. 31, 2001, while the Company was
negotiating the purchase of PGE, or during the threesix months ended March 31,June 30, 2002.
Since the program's inception in 2000, the Company has repurchased 355,400
shares of common stock at a total cost of $8.2 million.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper
notes payable. Both NW Natural and Financial Corporation issue commercial paper
under agency agreements with a commercial bank. NW Natural's commercial paper is
supported by its committed bank lines of credit (see below), while Financial
Corporation's commercial paper is supported by committed bank lines of credit
and the guaranty of NW Natural (see Part II, Item 8., Note 6, "Notes to
Consolidated Financial Statements," in the 2001 Form 10-K). NW Natural had $0.2
million of commercial paper notes outstanding at March 31, 2002, compared to
$22.5 million and $108.3 million at March 31 and Dec. 31, 2001, respectively.
Financial Corporation had no commercial paper notes outstanding at March 31,
2002.
21
Lines of Credit
---------------
NW Natural has available through Sept. 30, 2002, committed lines of
credit with four commercial banks totaling $150 million. In addition, Financial
Corporation has available through Sept. 30, 2002, 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, 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 March
31, 2002 or 2001.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the six months and 12 months ended March 31,June 30, 2002, and the 12
months ended Dec. 31, 2001, the Company's ratios of earnings to fixed charges,
computed using the Securities and Exchange Commission method, were 3.523.77, 3.14
and 3.14, respectively. 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.
23
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 that are other than statements of
historical facts. The Company's expectations, beliefs and projections are
expressed in good faith and are believed 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) risks and
uncertainties relating to delays in obtaining, or adverse conditions contained
in, regulatory approvals necessary for the plan of reorganization and
acquisition of PGE; (iii) failure to realize the synergies and other benefits
expected from the acquisition of PGE, if completed; (iv) risks relating to the
interest rate environment as it may affect the financing commitment and interest
rates borne by the debt financing for the PGE transaction, if completed; (v)
weather
conditions and other natural phenomena; (vi)(iii) unanticipated population growth or
decline, and changes in market demand and demographic patterns; (vii)(iv) competition
for retail and wholesale customers; (viii)(v) pricing of natural gas relative to other
energy sources; (ix)(vi) changes in customer consumption patterns due to gas
commodity price changes; (x)(vii) unanticipated changes in interest or foreign
currency exchange rates or in rates of inflation; (xi)(viii) economic factors that
could cause a severe downturn in certain key industries, thus affecting demand
for natural gas; (xii)(ix) unanticipated changes in operating expenses and capital
expenditures; (xiii)(x) capital market conditions; (xiv)(xi) competition for new energy
development opportunities; (xv)(xii) legal and administrative proceedings and
settlements; and (xvi)(xiii) risks relating to the potential negotiation of a new
agreement for the acquisition of PGE, including risks and uncertainties relating
to the impact of Enron's bankruptcy filing on PGE, obtaining regulatory approvals,
securing financing at reasonable interest rates and onrealizing expected synergies
and other benefits from the proposed acquisition, of PGE.if completed. 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.
22
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.
24
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information provided in
Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk,"
in the 2001 Form 10-K.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NW Natural's Annual Meeting of Shareholders was held in Portland,
Oregon on May 23, 2002. At the meeting, two Class III director-nominees were
elected to three-year terms, as follows:
Term Share Votes Share Votes
Director-nominee Expiring For Withheld
- ----------------------------------------------------------------------------
Thomas E. Dewey, Jr. 2005 21,745,662 334,054
Richard G. Reiten 2005 19,168,227 2,911,489
The other eight directors whose terms of office as directors continued
after the Annual Meeting are: Tod R. Hamachek, Wayne D. Kuni, Randall C. Pape,
Robert L. Ridgley, Dwight A. Sangrey, Melody C. Teppola, Russell F. Tromley and
Richard L. Woolworth. In accordance with the Company's Bylaws, Benjamin R.
Whiteley retired as a director at the conclusion of the meeting following nearly
13 years of distinguished service. Mary Arnstad did not stand for election to
another term in order to pursue other opportunities.
The shareholders approved a proposal to amend the Restated Stock
Option Plan to increase the number of shares authorized to be issued under the
Plan from 1,200,000 to 2,400,000 shares; to modify the eligibility requirements
for stock option grants to include all employees; and to increase the annual per
employee limit on stock option grants from 75,000 to 200,000. The shareholders
also re-approved the Plan. The vote on this proposal was as follows: 20,296,412
shares voted for; 1,379,867 shares voted against; and 402,382 shares abstained
from voting. There were 1,055 broker non-votes on this proposal.
The shareholders also elected PricewaterhouseCoopers LLP, certified
public accountants, as NW Natural's independent auditors for the year 2002 by
the following vote: 21,317,585 shares for; 602,665 against; and 159,466
abstained.
There were no broker non-votes on either the election of directors or
independent auditors at the 2002 annual meeting.
Item 5. OTHER INFORMATION
Effective July 25, 2002, the Board of Directors elected John D. Carter
and C. Scott Gibson as Class III directors to serve until the 2003 Annual
Meeting of Shareholders at which time their names will be submitted to the
shareholders for election. The Board appointed Mr. Carter to serve on the
Board's Audit Committee and its Finance Committee, and appointed Mr. Gibson to
serve as a member of the Board's Organization and Executive Compensation
25
Committee, the Environmental Policy Committee and the newly-formed Public
Affairs Committee.
Mr. Carter, 56, served from 1997 to 2002 as an Executive Vice
President of Bechtel Group, where he was responsible for corporate services,
including legal, finance, information systems and technology, external affairs
and shared services. He also served as a director of Bechtel Group, Inc., from
1988 to 2002. In July 2002, Mr. Carter became a partner in the consulting firm
of Goldschmidt Imeson Carter, which focuses on strategic planning and problem
solving for national and international businesses.
Mr. Gibson, 50, is President of Gibson Enterprises, a venture
capitalist firm, and is co-founder and former President of Sequent Computer
Systems. He currently serves as a director of seven high-tech companies,
including TriQuint Semiconductor, Radisys Corporation, Pixelworks, Livebridge,
Inc., and several emerging-stage companies.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3 - Bylaws of the Company, as amended May 23, 2002
Exhibit 10 - Amendment No. 1 to the Directors Deferred Compensation
Plan (Restated as of December 1, 2001)
Exhibit 11 - Statement re: Computation of Per Share Earnings
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 99 - Certificate Pursuant to Section 906 of Sarbanes - Oxley
Act of 2002
(b) Reports on Form 8-K
On March 1,May 20, 2002, the Company filed its Current Report on Form 8-K
relating to: 1) a litigation decision adverse to the Company; 2)Termination Agreement dated May 17, 2002, entered into between
the Company's
2001 earnings; 3) a regulatory development;Company and 4)Enron Corp. providing for the statustermination of the Company's
proposed acquisition of Portland General Electric Company.Stock Purchase
Agreement dated Oct. 5, 2001.
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: May 14,August 13, 2002 /s/ Stephen P. Feltz
------------------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
2326
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
March 31,June 30, 2002
Exhibit
Document Number
Document- -------- ------
Bylaws of the Company as amended May 23, 2002 3
Amendment No. 1 to the Directors Deferred
Compensation Plan (Restated as of December 1, 2001) 10
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Certificate Pursuant to Section 906 of Sarbanes - 99
Oxley Act of 2002
EXHIBIT 11
NORTHWEST NATURAL GAS COMPANY
Statement re: Computation of Per Share Earnings
(Unaudited)
Thousands, except per share amounts Three Months Ended March 31,
- --------------------------------------------------------------------------------
2002 2001
----------------------------
Earning Applicable to Common Stock $ 33,852 $ 25,299
Debenture Interest Less Taxes 91 96
---------- ----------
Net Income Available for Diluted Common
Stock $ 33,943 $ 25,395
========== ==========
Average Common Shares Outstanding 25,266 25,207
Stock Options 54 41
Convertible Debentures 414 435
---------- ----------
Diluted Common Shares 25,734 25,683
========== ==========
Diluted Earnings per Share of Common Stock $ 1.32 $ 0.99
========== ==========
EXHIBIT 12
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed Charges
January 1, 1997 - March 31, 2002
(Thousands, except ratio of earnings to fixed charges)
(Unaudited)
12 Months Three Months
Year Ended December 31, Ended Ended
------------------------------------------------------------ March 31, March 31,
1997 1998 1999 2000 2001 2002 2002
------------------------------------------------------------ ---------- ------------
Fixed Charges, as Defined:
Interest on Long-Term Debt $ 24,904 $ 27,389 $ 27,728 $ 29,987 $ 30,224 $ 30,047 $ 7,343
Other Interest 4,500 4,909 2,778 3,628 3,772 3,812 769
Amortization of Debt
Discount and Expense 730 714 699 735 768 751 185
Interest Portion of
Rentals 2,111 1,986 1,707 1,628 1,572 1,558 393
-------- -------- --------- --------- --------- --------- --------
Total Fixed Charges, as
defined $ 32,245 $ 34,998 $ 32,912 $ 35,978 $ 36,336 36,168 $ 8,690
======== ======== ========= ========= ========= ========= ========
Earnings, as Defined:
Net Income $ 43,059 $ 27,301 $ 45,296 $ 50,224 $ 50,187 58,727 $ 34,447
Taxes on Income 21,034 14,604 24,591 26,829 27,553 32,541 20,215
Fixed Charges, as above 32,245 34,998 32,912 35,978 36,336 36,168 8,690
-------- -------- --------- --------- --------- --------- --------
Total Earnings, as defined $ 96,338 $ 76,903 $ 102,799 $ 113,031 $ 114,076 $ 127,436 $ 63,352
======== ======== ========= ========= ========= ========= ========
Ratio of Earnings to Fixed
Charges 2.99 2.20 3.12 3.14 3.14 3.52 7.29
======== ======== ========= ========= ========= ========= ========