SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORMForm 10-Q
[X]
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from ________ to ________
Commission File No. 0-994
[GRAPHIC OMITTED][NW NATURAL]
NORTHWEST NATURAL GAS COMPANY
(Exact
(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.)
Oregon | 93-0256722 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
220 N.W. SECOND AVENUE, PORTLAND, OREGONSecond Avenue, Portland, Oregon 97209
(Address
(Address of principal executive offices) (Zip Code)
Registrant's
Registrant’s Telephone Number, including area code: (503) 226-4211
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x]x No [ ]
¨
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x]x No [ ]
¨
At November 7, 2003, 25,858,818May 5, 2004, 27,297,974 shares of the registrant'sregistrant’s Common Stock, $3-1/$3 1/6 par value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
September 30, 2003
Summary of Information Reported
The registrant submits herewith
For the following information:
Quarterly Period Ended March 31, 2004
PART I. FINANCIAL INFORMATION
Page
Item 1. Consolidated Financial Statements Number
Consolidated Statements of Income for the three-month
and nine-month periods ended Sept. 30, 2003 and 2002 3
(Unaudited)
Three Months Ended March 31, | |||||||
Thousands, except per share amounts | 2004 | 2003 | |||||
Operating revenues: | |||||||
Gross operating revenues | $ | 254,450 | $ | 206,539 | |||
Cost of sales | 142,416 | 107,951 | |||||
Net operating revenues | 112,034 | 98,588 | |||||
Operating expenses: | |||||||
Operations and maintenance | 25,510 | 24,071 | |||||
Taxes other than income taxes | 12,453 | 10,817 | |||||
Depreciation and amortization | 13,906 | 13,166 | |||||
Total operating expenses | 51,869 | 48,054 | |||||
Income from operations | 60,165 | 50,534 | |||||
Other income (expense) | 23 | (584 | ) | ||||
Interest charges - net of amounts capitalized | 8,944 | 8,946 | |||||
Income before income taxes | 51,244 | 41,004 | |||||
Income taxes | 18,632 | 14,600 | |||||
Net income | 32,612 | 26,404 | |||||
Redeemable preferred stock dividend requirements | — | 147 | |||||
Earnings applicable to common stock | $ | 32,612 | $ | 26,257 | |||
Average common shares outstanding: | |||||||
Basic | 25,972 | 25,617 | |||||
Diluted | 26,314 | 25,975 | |||||
Earnings per share of common stock: | |||||||
Basic | $ | 1.26 | $ | 1.03 | |||
Diluted | $ | 1.24 | $ | 1.01 |
See Notes to Consolidated Financial Statements
PART I. FINANCIAL INFORMATION
Consolidated Statements of Earnings Invested in the Business for the nine-month periods ended Sept. 30, 2003 and 2002 4
Consolidated Balance Sheets at Sept. 30, 2003 and 2002
and Dec. 31, 2002 5
Consolidated Statements of Cash Flows for the nine-month
periods ended Sept. 30, 2003 and 2002 7
Consolidated Statements of Capitalization at Sept. 30, 2003
and 2002 and Dec. 31, 2002 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 34
Signature 34
2
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Consolidated Statements of
Comprehensive Income
(Unaudited)
Three Months Ended March 31, | ||||||||||||||
Thousands | 2004 | 2003 | ||||||||||||
Earnings invested in the business: | ||||||||||||||
Balance at beginning of period | $ | 170,053 | $ | 157,136 | ||||||||||
Net income | 32,612 | $ | 32,612 | 26,404 | $ | 26,404 | ||||||||
Cash dividends paid: | ||||||||||||||
Redeemable preferred stock | — | (147 | ) | |||||||||||
Common stock | (8,434 | ) | (8,063 | ) | ||||||||||
Balance at end of period | $ | 194,231 | $ | 175,330 | ||||||||||
Accumulated other comprehensive income (loss): | ||||||||||||||
Balance at beginning of period | $ | (1,016 | ) | — | $ | (3,084 | ) | — | ||||||
Comprehensive income | $ | 32,612 | $ | 26,404 | ||||||||||
Balance at end of period | $ | (1,016 | ) | $ | (3,084 | ) | ||||||||
See Notes to Consolidated Financial Statements
3
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
Thousands | March 31, 2004 (Unaudited) | March 31, 2003 (Unaudited) | Dec. 31, 2003 | |||||||||
Assets: | ||||||||||||
Plant and property: | ||||||||||||
Utility plant | $ | 1,679,267 | $ | 1,563,162 | $ | 1,659,089 | ||||||
Less accumulated depreciation | 481,829 | 445,316 | 471,716 | |||||||||
Utility plant - net | 1,197,438 | 1,117,846 | 1,187,373 | |||||||||
Non-utility property | 23,861 | 22,176 | 23,395 | |||||||||
Less accumulated depreciation and amortization | 4,969 | 4,518 | 4,855 | |||||||||
Non-utility property - net | 18,892 | 17,658 | 18,540 | |||||||||
Total plant and property | 1,216,330 | 1,135,504 | 1,205,913 | |||||||||
Other investments | 13,801 | 12,462 | 12,635 | |||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 2,788 | 44,323 | 4,706 | |||||||||
Accounts receivable | 70,330 | 61,541 | 53,976 | |||||||||
Allowance for uncollectible accounts | (2,638 | ) | (2,709 | ) | (1,763 | ) | ||||||
Accrued unbilled revenue | 31,788 | 30,548 | 59,109 | |||||||||
Inventories of gas, materials and supplies | 38,006 | 32,873 | 50,859 | |||||||||
Prepayments and other current assets | 19,705 | 23,735 | 32,661 | |||||||||
Total current assets | 159,979 | 190,311 | 199,548 | |||||||||
Regulatory assets: | ||||||||||||
Income tax asset | 64,475 | 47,975 | 63,449 | |||||||||
Deferred gas costs receivable | 9,544 | — | — | |||||||||
Unamortized costs on debt redemptions | 7,685 | 6,392 | 7,803 | |||||||||
Other | 3,917 | 4,665 | 6,020 | |||||||||
Total regulatory assets | 85,621 | 59,032 | 77,272 | |||||||||
Other assets: | ||||||||||||
Investment in life insurance | 60,531 | 55,264 | 59,710 | |||||||||
Fair value of non-trading derivatives | 36,069 | 22,264 | 23,885 | |||||||||
Other | 12,903 | 12,381 | 12,369 | |||||||||
Total other assets | 109,503 | 89,909 | 95,964 | |||||||||
Total assets | $ | 1,585,234 | $ | 1,487,218 | $ | 1,591,332 | ||||||
See Notes To Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
Thousands | March 31, (Unaudited) | March 31, (Unaudited) | Dec. 31, 2003 | |||||||||
Capitalization and liabilities: | ||||||||||||
Capitalization | ||||||||||||
Common stock | $ | 82,342 | $ | 81,214 | $ | 82,137 | ||||||
Premium on common stock | 258,033 | 249,340 | 255,871 | |||||||||
Earnings invested in the business | 194,231 | 175,330 | 170,053 | |||||||||
Unearned stock compensation | (852 | ) | (875 | ) | (729 | ) | ||||||
Accumulated other comprehensive income (loss) | (1,016 | ) | (3,084 | ) | (1,016 | ) | ||||||
Total common stock equity | 532,738 | 501,925 | 506,316 | |||||||||
Redeemable preferred stock | — | 8,250 | — | |||||||||
Long-term debt | 500,130 | 485,926 | 500,319 | |||||||||
Total capitalization | 1,032,868 | 996,101 | 1,006,635 | |||||||||
Current liabilities: | ||||||||||||
Notes payable | 22,900 | — | 85,200 | |||||||||
Accounts payable | 78,669 | 77,250 | 86,029 | |||||||||
Long-term debt due within one year | — | 20,000 | — | |||||||||
Taxes accrued | 8,186 | 7,348 | 8,605 | |||||||||
Interest accrued | 11,241 | 11,073 | 2,998 | |||||||||
Other current and accrued liabilities | 31,944 | 30,745 | 31,589 | |||||||||
Total current liabilities | 152,940 | 146,416 | 214,421 | |||||||||
Regulatory liabilities: | ||||||||||||
Accrued asset removal costs | 138,309 | 128,039 | 135,638 | |||||||||
Customer advances | 1,560 | 1,790 | 1,564 | |||||||||
Deferred gas costs payable | — | 12,908 | 5,627 | |||||||||
Unrealized gain on non-trading derivatives | 36,069 | 22,264 | 23,885 | |||||||||
Total regulatory liabilities | 175,938 | 165,001 | 166,714 | |||||||||
Other liabilities: | ||||||||||||
Deferred income taxes | 190,332 | 146,684 | 171,797 | |||||||||
Deferred investment tax credits | 6,367 | 7,286 | 6,945 | |||||||||
Other | 26,789 | 25,730 | 24,820 | |||||||||
Total other liabilities | 223,488 | 179,700 | 203,562 | |||||||||
Commitments and Contingencies (see Note 7) | — | — | — | |||||||||
Total capitalization and liabilities | $ | 1,585,234 | $ | 1,487,218 | $ | 1,591,332 | ||||||
See Notes To Consolidated Financial Statements
PART I. FINANCIAL INFORMATION
Consolidated Statements of Earnings Invested in the Business
Cash Flows
(Unaudited)
Three Months Ended March 31, | ||||||||
Thousands | 2004 | 2003 | ||||||
Operating activities: | ||||||||
Net income | $ | 32,612 | $ | 26,404 | ||||
Adjustments to reconcile net income to cash provided by operations: | ||||||||
Depreciation and amortization | 13,906 | 13,166 | ||||||
Deferred income taxes and investment tax credits | 17,957 | 4,414 | ||||||
Undistributed losses from equity investments | 381 | 260 | ||||||
Allowance for funds used during construction | (236 | ) | (189 | ) | ||||
Deferred gas costs - net | (15,171 | ) | 2,273 | |||||
Other | 1,805 | 1,033 | ||||||
Cash from operations before working capital changes | 51,254 | 47,361 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable - net of allowance for uncollectible accounts | (15,479 | ) | (11,896 | ) | ||||
Accrued unbilled revenue | 27,321 | 13,521 | ||||||
Inventories of gas, materials and supplies | 12,853 | 25,157 | ||||||
Accounts payable | (7,360 | ) | 2,814 | |||||
Accrued interest and taxes | 14,187 | 16,949 | ||||||
Other current assets and liabilities | 6,825 | 4,483 | ||||||
Cash provided by operating activities | 89,601 | 98,389 | ||||||
Investing activities: | ||||||||
Acquisition and construction of utility plant assets | (22,450 | ) | (23,503 | ) | ||||
Investment in non-utility property | (466 | ) | (1,344 | ) | ||||
Other investments | (47 | ) | (19 | ) | ||||
Cash used in investing activities | (22,963 | ) | (24,866 | ) | ||||
Financing activities: | ||||||||
Common stock issued | 2,178 | 1,484 | ||||||
Long-term debt issued | — | 40,000 | ||||||
Change in short-term debt | (62,300 | ) | (69,802 | ) | ||||
Cash dividend payments: | ||||||||
Redeemable preferred stock | — | (147 | ) | |||||
Common stock | (8,434 | ) | (8,063 | ) | ||||
Cash used in financing activities | (68,556 | ) | (36,528 | ) | ||||
Increase (decrease) in cash and cash equivalents | (1,918 | ) | 36,995 | |||||
Cash and cash equivalents - beginning of period | 4,706 | 7,328 | ||||||
Cash and cash equivalents - end of period | $ | 2,788 | $ | 44,323 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 684 | $ | 737 | ||||
Income taxes | $ | — | $ | — | ||||
Supplemental disclosure of non-cash financing activities: | ||||||||
Conversion to common stock: | ||||||||
7 1/4% Series of Convertible Debentures | $ | 189 | $ | 19 |
See Notes to Consolidated Financial Statements
4
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
(Unaudited)
Thousands, except share amounts | March 31, 2004 (Unaudited) | March 31, 2003 (Unaudited) | Dec. 31, 2003 | ||||||||||||||||||
Common stock equity: | |||||||||||||||||||||
Common stock - par value $3 1/6 per share | $ | 82,342 | $ | 81,214 | $ | 82,137 | |||||||||||||||
Premium on common stock | 258,033 | 249,340 | 255,871 | ||||||||||||||||||
Earnings invested in the business | 194,231 | 175,330 | 170,053 | ||||||||||||||||||
Unearned stock compensation | (852 | ) | (875 | ) | (729 | ) | |||||||||||||||
Accumulated other comprehensive income (loss) | (1,016 | ) | (3,084 | ) | (1,016 | ) | |||||||||||||||
Total common stock equity | 532,738 | 52 | % | 501,925 | 50 | % | 506,316 | 50 | % | ||||||||||||
Redeemable preferred stock: | |||||||||||||||||||||
$7.125 Series, stated value $100 per share | — | 0 | % | 8,250 | 1 | % | — | 0 | % | ||||||||||||
Long-term debt: | |||||||||||||||||||||
Medium-Term Notes | |||||||||||||||||||||
First Mortgage Bonds: | |||||||||||||||||||||
6.400% Series B due 2003 | — | 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 | 20,000 | 20,000 | ||||||||||||||||||
6.800% Series B due 2007 | 9,500 | 9,500 | 9,500 | ||||||||||||||||||
6.500% Series B due 2008 | 5,000 | 5,000 | 5,000 | ||||||||||||||||||
4.110% Series B due 2010 | 10,000 | — | 10,000 | ||||||||||||||||||
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 | 40,000 | 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 | ||||||||||||||||||
5.620% Series B due 2023 | 40,000 | — | 40,000 | ||||||||||||||||||
7.250% Series B due 2023 | — | 20,000 | — | ||||||||||||||||||
7.500% Series B due 2023 | — | 4,000 | — | ||||||||||||||||||
7.520% Series B due 2023 | — | 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 | ||||||||||||||||||
5.820% Series B due 2032 | 30,000 | 30,000 | 30,000 | ||||||||||||||||||
5.660% Series B due 2033 | 40,000 | 40,000 | 40,000 | ||||||||||||||||||
Convertible Debentures | |||||||||||||||||||||
7 1/4% Series due 2012 | 5,630 | 6,426 | 5,819 | ||||||||||||||||||
500,130 | 505,926 | 500,319 | |||||||||||||||||||
Less long-term debt due within one year | — | 20,000 | — | ||||||||||||||||||
Total long-term debt | 500,130 | 48 | % | 485,926 | 49 | % | 500,319 | 50 | % | ||||||||||||
Total capitalization | $ | 1,032,868 | 100 | % | $ | 996,101 | 100 | % | $ | 1,006,635 | 100 | % | |||||||||
See Notes to Consolidated Financial Statements
7
PART I. FINANCIAL INFORMATION
Consolidated Statements of Capitalization
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, including normal recurring accruals, that the management of the Company considers necessary for a fair presentation of the results for each period reported. These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's 2002Company’s 2003 Annual Report on Form 10-K (2002(2003 Form 10-K). A significant part of the business of the Company is of a seasonal nature; therefore, results of operations for interim periods are not necessarily indicative of the results for a full year.
As referred to in this report, the Company consists of Northwest Natural Gas Company (NW Natural), a regulated utility, and non-regulated wholly-owned subsidiary businesses NNG Financial Corporation (Financial Corporation) and Northwest Energy Corporation (Northwest Energy). Northwest
Energy was formed in 2001 to serve as the holding company for NW Natural and
Portland General Electric Company (PGE) if the acquisition of PGE had been
completed.
Certain amounts from prior periods have been reclassified to conform, for comparison purposes, with the current financial statement presentation. These reclassifications had no impact on prior period consolidated results of operations.
2. New Accounting Standards
Adopted Standards
-----------------
Effective Jan. 1, 2003, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the recognition of an Asset Retirement
Obligation (ARO) for legal obligations associated with the retirement of
tangible long-lived assets, including the recording of fair value of the
liability, if reasonably estimable, for an ARO in the period in which it is
incurred. The ARO liability 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.
In the Company's
judgment, it does not have any material legal obligations associated with the
retirement of its tangible long-lived assets, except for certain assets with
indefinite system lives for which the Company cannot estimate the ARO because
the settlement date is indeterminable. In addition, NW Natural continues to
accrue for future asset retirement costs (removal costs) on many long-lived
assets through a charge to depreciation expense allowed in rates, and the
resulting regulatory liabilities are recognized as accruals to accumulated
depreciation. At the time when removal costs are incurred, accumulated
depreciation is charged with the costs of removal and the book cost of the asset
being retired in accordance with industry practice. Because estimated removal
costs meet the requirements of SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," the Company's accumulated removal costs are not
classified as liabilities, except for future retirements which meet the criteria
of legal obligations under SFAS No. 143. At Sept. 30, 2003, the Company had $133
million of estimated removal costs in excess of normal depreciation costs
included in accumulated depreciation in the consolidated balance sheets. The
adoption of SFAS No. 143 did not have a material impact on the Company's
financial condition or results of operations.
9
Effective Jan. 1, 2003, the Company also adopted SFAS No. 145,
"Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections," and SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which replaces Emerging Issues
Task Force 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. 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. 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 was
effective for all exit or disposal activities initiated after Dec. 31, 2002, is
on the timing of recognition of costs associated with exit or disposal
activities. The adoption of SFAS Nos. 145 and 146 did not have a material impact
on the Company's financial condition or results of operations.
In AprilDecember 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 149, "Amendment132 (revised) requires expanded disclosures about pension plans and other postretirement benefit plans in the Company’s consolidated financial statements for annual and interim periods ending on and after Dec. 15, 2003. The Company adopted the annual disclosure requirements with the 2003 Form 10-K (see Part II, Item 8., Note 7 in the 2003 Form 10-K) and provides in this report the quarterly disclosures required for interim financial reports, including the amount of Statement 133 on Derivative Instrumentsnet periodic benefit cost recognized for each period presented and Hedging
Activities."the amount of contributions paid or expected to be paid during the current fiscal year (see Note 6). SFAS No. 149 primarily amends132 (revised) does not change the measurement or recognition of pension and other postretirement benefit plans as required by SFAS No. 133, "Accounting87, “Employers’ Accounting for Derivative InstrumentsPensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Hedging Activities,"Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The adoption of this new standard did not have an effect on the Company’s consolidated financial statements.
In December 2003, the FASB revised FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities” (FIN 46R), to clarify the definitionapplication of a
derivativeAccounting Research Bulletin No. 51, “Consolidated Financial Statements.” FIN 46R provides additional guidance for identification and consolidation of variable interest entities (VIEs), and for financial reporting by enterprises involved with VIEs. The Company adopted the original provisions of FIN 46 during 2003, stating that it did not have significant variable interests in any VIEs. The Company has certain equity investments that are variable interests and some of these entities are potentially VIEs. However, because the Company is not the primary beneficiary of these entities, it is not required to require derivative instruments that include up-front cash
payments to be classified as financing activityconsolidate the VIEs. The Company’s variable interests primarily consist of limited liability interests with investments in alternative energy projects, low income housing and other real estate, which were entered into between the years 1988 and 2000 and have been accounted for under the equity
method or cost method (see Part II, Item 8., Note 9, in the statement of cash flows.
SFAS No. 1492003 Form 10-K). The Company’s maximum exposure to loss for these investments is effective for contracts entered into$6.7 million at March 31, 2004, an amount that represents the Company’s investment balance or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003.net realizable value. The Company’s investment risk is limited to the investment balance or net realizable value because all such investments are non-recourse to the Company. The adoption of SFAS No. 149 did not have aFIN 46R had no material impact on the Company'sCompany’s financial condition or results of operations.
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
financial statements certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires an issuer to classify a financial
instrument that is within the scope of the Statement as a liability if that
financial instrument embodies an obligation of the issuer. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim periods
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic entities. The adoption of SFAS No. 150 resulted in the
Company reclassifying dividends on its redeemable preferred stock as interest
expense, thus affecting the Company's reported net income (loss) for the current
three- and nine- month periods only. The reclassification did not have a
material impact on the Company's financial condition or results of operations. A
transition adjustment of $178,000 was recorded upon adoption of SFAS No. 150 in
order to recognize the redemption premium for the redeemable preferred stock.
The redemption premium was deferred and is included in unamortized costs on debt
redemptions in the accompanying Consolidated Balance Sheets.
In November 2002,January 2004, the FASB issued FASB InterpretationStaff Position (FSP) No. (FIN) 45,
"Guarantor's AccountingFAS 106-1, “Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the
requirements of FASB Statement No. 5, "Accounting for Contingencies," relatingRelated to the guarantor'sMedicare Prescription Drug, Improvement and Modernization Act of 2003.” FSP No. FAS 106-1 provides guidance which permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for and disclosurethe effects of the issuanceMedicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). Regardless of whether the sponsor elects the deferral, the FSP requires certain typesdisclosures pending further consideration of guarantees. A guarantor must recognize a liabilitythe underlying accounting issues. The guidance in this FSP is effective for the fair value
of an obligation assumed under a guarantee. FIN 45 also provides for additional
disclosures by a guarantor in its interimquarterly and annual financial statements about
the obligations associated with guarantees issued. The recognition provisions of
FIN 45 are effective for any guarantees issued or modifiedfiscal years ending after Dec. 31, 2002.
In connection with7, 2003.
The Act, signed into law on Dec. 8, 2003, introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company has not developed estimates of the settlementimpact of litigation involving leasesthe Act on its cash flows, accumulated postretirement benefit obligation (APBO), or net periodic postretirement benefit cost and it has not determined whether to change its postretirement medical plan in the Mist gas
storage field, NW Natural agreed to defend and indemnify a party against claims
relatingresponse to the validity and enforceability of certain transferred leases.
However, NW Natural will have no obligation to defend or indemnify the party
from any claims for recovery of punitive or other exemplary damages.
Accordingly, the application of FIN 45 didAct. FSP No. FAS No. 106-1 does not have a material impact on the
Company's financial condition or results of operations.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 providesprovide guidance on how and when the identification of, and the
financial reporting for, entities over which control is achieved through means
other than voting rights, known as variable interest entities. FIN 46 provides
guidance for determining whether consolidation is requiredfederal subsidy should be accounted for. As provided under the controlling
financial interest modelFSP, the Company has elected to defer accounting for the impact of Accounting Bulletin No. 51. Certain variable
10
interest entities must be consolidatedthe Act until such guidance is provided by the primary beneficiary if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 was effective immediately for all new variable interest
entities created or acquired after Jan. 31, 2003. The Company did not have
interests in any variable interest entities during any of the current reporting
periods, such that the application of FIN 46 had no impact on the Company's
financial condition or results of operations.
FASB.
3. Stock-Based Compensation
NW Natural has stock-based compensation plans including the Long-Term Incentive Plan (LTIP), the Restated Stock Option Plan (Restated SOP), the Employee Stock Purchase Plan (ESPP) and the Non-Employee Directors Stock Compensation Plan (see(NEDSCP). For a more detailed description of these plans, and accounting for stock-based compensation, see Part II, Item 8., Note 4, in the 20022003 Form 10-K).10-K. These plans are designed to promote stock ownership in NW Natural by employees, officers and, in the case of the NEDSCP, non-employee directors.
During 2003,the first quarter of 2004, NW Natural granted LTIP awards covering a new three-year performance period (2003-05)(2004-06). The aggregate target award and maximum award were 30,00035,000 and 60,00070,000 shares, respectively. Following the end of the performance period, actual awards are distributed based on the attainment of certain total shareholder return on equitygoals in comparison to a peer group of companies, and other performance goals. During the performance period, the Company recognizes compensation expense and liability for the LTIP awards based on performance levels achieved or expected to be achieved and the estimated market value of the common stock as of the distribution date. At Sept. 30, 2003,March 31, 2004, no compensation expense or liability had been accrued for the new LTIP grant.
In December 2002,grant because the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123," which amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effectamount of the method used on reported results. SFAS No. 123 encourages,
but does not require, companies to record compensation expenseestimated awards earned for stock-based
compensation plans at fair value.
The Company adopted the SFAS No. 148 disclosure requirements but has
continued to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," for its stock-based employee compensation. quarter was immaterial.
Under the Restated SOP, NW Natural grants employee stock options for a fixed number of
shares to officers and certain key employees with an exercise price equal to or
greater than the market value of the shares at the date of grant. Because NW
Natural grants stock options at market value, no compensation expense was
recognized in the results of operations for the nine months ended Sept. 30,
2003.
As of Sept. 30, 2003, options on 1,429,5001,244,700 shares were available for grant and options to purchase 354,244493,644 shares were outstanding under the Restated
SOP.as of March 31, 2004. Options granted generally have 10-year terms and vest ratably over a three-year period following the date of grant. TheDuring the first quarter of 2004, the Company did not grant anygranted 184,800 options to purchase shares duringat an exercise price of $31.34, equal to the nine months ended Sept. 30, 2003.
11
The Company adopted the disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123,” but has continued to account for stock-based compensation using the intrinsic value method prescribed in Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” for its stock-based employee compensation. In accordance with APB No. 25, no compensation expense is recognized for options granted under the Restated SOP or shares issued under the ESPP. If compensation expense for all stock-based compensationawards under these two plans had been determined consistent withbased on fair value at the method prescribed by SFAS No. 123, the Company'sgrant dates, net income and earnings per share would have been reduced to the pro forma amounts shown below:
Pro Forma Effect of applying SFAS No. 123 toStock-Based Options and ESPP:
Three Months Ended March 31, | ||||||||
Thousands, except per share amounts | 2004 | 2003 | ||||||
Net income as reported | $ | 32,612 | $ | 26,404 | ||||
Pro forma stock-based compensation expense determined under the fair value based method - net of tax | (100 | ) | (61 | ) | ||||
Redeemable preferred stock dividends | — | (147 | ) | |||||
Pro forma earnings applicable to common stock - basic | 32,512 | 26,196 | ||||||
Debenture interest less taxes | 62 | 71 | ||||||
Pro-forma earnings applicable to common stock - diluted | $ | 32,574 | $ | 26,267 | ||||
Basic earnings per share | ||||||||
As reported | $ | 1.26 | $ | 1.03 | ||||
Pro forma | $ | 1.25 | $ | 1.02 | ||||
Diluted earnings per share | ||||||||
As reported | $ | 1.24 | $ | 1.01 | ||||
Pro forma | $ | 1.24 | $ | 1.01 | ||||
For purposes of the pro forma disclosures may not
be representative ofabove, the effects on reported net income for future periods until
all options outstanding are included in the pro forma disclosures. For purposes
of pro forma disclosures, the estimated market value of stock options is amortized to expense over the vesting period.
4. Use of Financial Derivatives
NW Natural utilizes derivative instruments to manage commodity prices related to natural gas purchases, foreign currency prices related to gas purchase commitments from Canada and interest rate risks related to long-term debt maturing in less than five years or expected to be issued in future periods. Use of derivatives is permitted only after the commodity price, exchange rate, and interest rate exposures have been identified, are determined to exceed acceptable tolerance levels and are considered to be unavoidable because they are necessary to support normal business activities. NW Natural does not enter into derivative instruments for trading purposes and believes that any increase in market risk created by holding derivatives should be offset by the exposures they modify. See Part II, Item 7., "Accounting for Derivative
Instruments and Hedging Activities," and Part II, Item 8., Notes 1 and 11, in the 20022003 Form 10-K.
At Sept. 30, 2003,March 31, 2004, NW Natural had 30the following derivatives outstanding covering its exposures to commodity and foreign currency prices: a series of 14 natural gas price swap contracts, threeno natural gas call option contracts, and 6976 foreign currency forward contracts covering its exposures to natural gas commodity prices and foreign
currency exchange rates, respectively.contracts. Each of these contracts was designated as a cash flow hedge. The estimated fair values and the notional amounts of derivative instruments (unrealized gains and losses) outstanding were as follows:
March 31, 2004 | Dec. 31, 2003 | |||||||||||
Thousands | Fair Value Gain | Notional Amount | Fair Value Gain | Notional Amount | ||||||||
Fixed-price natural gas commodity swap contracts | $ | 35,982 | $ | 205,802 | $ | 23,285 | $ | 284,317 | ||||
Fixed-price natural gas call option contracts | — | — | 366 | 19,761 | ||||||||
Foreign currency forward purchase contracts | 87 | 6,031 | 234 | 6,417 | ||||||||
Total | $ | 36,069 | $ | 211,833 | $ | 23,885 | $ | 310,495 | ||||
5. Long Term Debt and Redeemable Preferred Stock
NW Natural has redeemed certain of its long-term debt, including all $4
million of the 7.50% Series B Medium-Term Notes (MTNs) due 2023, all $11 million
of the 7.52% Series B MTNs due 2023, and all $20 million of the 7.25% Series B
MTNs due 2023. These MTNs were redeemed in the third quarter of 2003 at 103.75
percent, 103.76 percent and 103.65 percent of their respective principal
amounts. The Company redeemed these MTNs with available cash or with the
proceeds from sales of commercial paper. The Company also gave notice, in
October 2003, that it was exercising the early redemption provision applicable
to all of the remaining shares of its $7.125 Series of Redeemable Preferred
Stock with an aggregate stated value of $7.5 million, at a redemption price
equivalent to 102.375 percent, effective as of Nov. 14, 2003. Early redemption
premiums are recognized as unamortized costs on debt redemptions pursuant to
SFAS No. 71. The Company intends to re-finance the preferred stock and the
long-term debt redeemed earlier this year through the sale of new long-term debt
in the fourth quarter of 2003, and the early redemption premiums will be
amortized to expense over the life of the new debt.
The maturities on the long-term debt and redeemable preferred stock
outstanding, for each of the 12-month periods through Sept. 30, 2008 amount to:
$7.7 million in 2004, including optional redemption premiums; $15 million in
2005; $8 million in 2006; $29.5 million in 2007; and $5 million in 2008. Holders
of certain MTNs have put options that, if exercised, would accelerate the
maturity of long-term debt by $10 million and $20 million in the 12-month
periods ending Sept. 30, 2006 and 2007, respectively.
6. Segment Information
The Company principally operates in a segment of business, "Utility,"“Utility,” consisting of the distribution of natural gas. Another segment, "Gas“Gas Storage,"” represents natural gas storage services provided to interstate customers and asset optimization services under a contract with an independent energy trading company. The remaining segment, "Other,"“Other,” primarily consists of non-regulated investments in alternative energy projects in California and a Boeing 737-300 aircraft leased to Continental Airlines, and includes costs relating to the
terminated acquisition of PGE.
13
The following table presents information about the reportable segments for the three-three months ended March 31, 2004 and nine-month periods ended Sept. 30, 2003 and 2002.2003. Inter-segment transactions are insignificant.
Three Months Ended March 31, | |||||||||||||
Thousands | Utility | Gas Storage | Other | Total | |||||||||
2004 | |||||||||||||
Net operating revenues | $ | 110,198 | $ | 1,796 | $ | 40 | $ | 112,034 | |||||
Depreciation and amortization | 13,792 | 114 | — | 13,906 | |||||||||
Other operating expenses | 37,746 | 205 | 12 | 37,963 | |||||||||
Income from operations | 58,660 | 1,477 | 28 | 60,165 | |||||||||
Income (loss) from financial investments | �� | 817 | — | (381 | ) | 436 | |||||||
Net income (loss) | 31,881 | 790 | (59 | ) | 32,612 | ||||||||
Total assets at March 31, 2004 | 1,552,165 | 18,650 | 14,419 | 1,585,234 | |||||||||
2003 | |||||||||||||
Net operating revenues | $ | 96,005 | $ | 2,544 | $ | 39 | $ | 98,588 | |||||
Depreciation and amortization | 13,052 | 114 | — | 13,166 | |||||||||
Other operating expenses | 34,683 | 183 | 22 | 34,888 | |||||||||
Income from operations | 48,270 | 2,247 | 17 | 50,534 | |||||||||
Income (loss) from financial investments | 445 | — | (260 | ) | 185 | ||||||||
Net income (loss) | 25,159 | 1,275 | (30 | ) | 26,404 | ||||||||
Total assets at March 31, 2003 | 1,451,838 | 17,634 | 17,746 | 1,487,218 |
6. Pension and Other Postretirement Benefits
Net Periodic Benefit Cost
The following table provides the components of net periodic benefit cost for the Company’s pension and other postretirement benefit plans for the three months ended March 31, 2004 and 2003. See Part II, Item 8., Note 7, in the 2003 Form 10-K for the assumptions used in measuring these benefit costs.
Pension Benefits | Other Postretirement | |||||||||||||
March 31, | March 31, | |||||||||||||
Thousands | 2004 | 2003 | 2004 | 2003 | ||||||||||
Service cost | $ | 1,410 | $ | 1,215 | $ | 132 | $ | 114 | ||||||
Interest cost | 3,200 | 3,040 | 364 | 334 | ||||||||||
Expected return on plan assets | (3,310 | ) | (3,062 | ) | — | — | ||||||||
Amortization of transition obligation | — | — | 103 | 103 | ||||||||||
Amortization of prior service cost | 273 | 283 | — | — | ||||||||||
Recognized actuarial loss | 436 | 188 | 118 | 100 | ||||||||||
Net periodic benefit cost | $ | 2,009 | $ | 1,664 | $ | 717 | $ | 651 | ||||||
Employer Contributions
The Company is required to make future cash contributions and benefit payments for its pension and other postretirement benefit plans (see Part II, Item 8., Note 7, in the 2003 Form 10-K).
7. Commitments and Contingencies
Environmental Matters
---------------------
NW Natural accruesowns or previously owned properties currently being investigated that may require environmental response. See Part II, Item 8., Note 12, in the 2003 Form 10-K. NW Natural has accrued all material loss contingencies relating to environmental matters that it believes to be probable of assertion and reasonably estimable.
NW Natural previously owned property adjacent to the Gasco site that now is the location of a manufacturing plant owned by Wacker Siltronic Corporation (the Wacker site). See Part II, Item 8., Note 12, in the 20022003 Form 10-K. DuePursuant to an order from the Oregon Department of Environmental Quality (ODEQ), consultant studies have been conducted to determine the nature and extent of releases of hazardous substances from the Wacker site. Recently the studies indicated some benzene is present in the soil at the Wacker site, and the ODEQ has requested that NW Natural conduct further tests of groundwater and indoor air quality. NW Natural has not determined to what extent additional testing will be required. At March 31, 2004, NW Natural’s estimated liabilities were $50,000 for its costs of further investigation on the Wacker site.
NW Natural continues to work with the U.S. Environmental Protection Agency (EPA) and other potentially responsible parties on developing an environmental work plan for the Portland Harbor, including investigation, feasibility study and field sampling plan. See Part II, Item 8., Note 12, in the 2003 Form 10-K. NW Natural’s share of the current estimate for completing the work plan is $1.6 million to $2.0 million. In addition, on March 1, 2004 the Company received a letter from the EPA requesting that it enter into an Administrative Order on Consent (AOC) providing for early action removal of a body of tar in the river sediments adjacent to the preliminary natureGasco site. The Company negotiated the form of several of these environmental investigations,AOC with the EPA and it was executed on April 23, 2004. Although the work plan for the removal action has not been developed, the Company has preliminarily estimated the removal cost to be in the range of any$1.0 million to $4.6 million. NW Natural recorded an additional possible loss contingency cannot be currently estimated.
Ontotaling $2.0 million in the first quarter of 2004 for the revised
estimate of the work plan and the new estimate of environmental remediation costs for the Portland Harbor. This additional amount results in a reserve balance of $2.6 million at March 31, 2004, representing the amount estimated to complete the feasibility study and work plan at the lower end of the range and early remediation of the tar at the lower end of the range.
In May 27, 2003, the Oregon Public Utility Commission of Oregon (OPUC) approved NW Natural'sNatural’s request for deferral of environmental costs associated with five specific sites, including the Gasco, Wacker, Portland Gas and Portland Harbor sites. See Part II, Item 8., Note 12, in the 2002 Form 10-K. The authorization, effective for a 12-month period beginningwhich was extended through April 7, 2003,2005, allows NW Natural to defer and seek recovery of unreimbursed environmental costs in a future general rate case. Through Sept. 30, 2003, NW Natural has recorded $0.7 million of these
costs in a deferred regulatory account. Additionally, onOn a cumulative basis through Sept. 30, 2003,March 31, 2004, the Company has accrued environmental costs totaling
$7.9paid out a total of $1.1 million relating to the five sites including $5.7 million that has already
been disbursed. In addition,since the Companyeffective date of the deferral authorization, which would be proposed for regulatory recovery if not recoverable from insurance.
Due to the preliminary nature of these environmental investigations, the range of any additional possible loss contingency cannot be currently estimates insurance
recoveries related to these sites of $3.6 million and has recorded this amount
as a receivable.estimated. NW Natural will first seek to recover the costs of further investigation and remediation for which it may be responsible with respect to the Gasco, site, the Wacker, site, the Portland Harbor site and the Portland Gas site,sites, if any, from insurance. If these costs are not recovered from insurance, then NW Natural will seek recovery through future rates.
On June 30, 2003,rates subject to approval by the Company filedOPUC. At March 31, 2004, NW Natural had a Feasibility Scoping Plan and$5.7 million receivable representing an Ecological and Human Health Risk Assessment with the Oregon Department of
Environmental Quality (ODEQ), which outlined a range of remedial alternatives
for the most contaminated portionestimate of the Gasco site. See Part II, Item 8., Note
12, in the 2002 Form 10-K.environmental costs NW Natural will work with the ODEQexpects to determine the
appropriate remedial actionincur and recover from among
14
the alternatives. Based upon the proposed actions in the draft plan, the Company
estimates its range of liability,insurance, including the cost of investigation, from
feasible alternatives at between $1.7$2.5 million and $7 million. NW Natural has a
recorded liability of $1.7 million, excluding regulatory deferredfor costs of $0.1
million, as of Sept. 30, 2003, for its estimated costs of investigation and
remediation relatedrelating to the Gasco site. See Item 2., "Management's Discussionsite and Analysis of Results of Operations and Financial Condition - Application of
Critical Accounting Policies - Critical Estimates."
Litigation
----------
$3.2 million for costs relating to the Portland Harbor site.
8. Subsequent Event
In April 2003, NW Natural settled and agreed with Cascade Resources
Corporation and Al Curry (collectively, Cascade) to dismiss their respective
claims in Northwest Natural Gas Company v. Cascade Resources Corporation and
Curry, et al. (United States District Court for the District of Oregon, Case No.
CV 01-1620 HU) (the Action). See Part I, Item 3., "Legal Proceedings," in the
2002 Form 10-K and Part II, Item 1., "Legal Proceedings," in the Company's Form
10-Q for the quarters ended March 31 and June 30, 2003. In June 2003, the court
denied the motion of Enerfin Resources Northwest Limited Partnership (Enerfin),
the remaining defendant in the Action, seeking to allow it to make cross-claims
against Cascade in the case. In July, Enerfin filed a Motion for Summary
Judgment seeking dismissal of claims made by NW Natural against it. The Company
opposed the motion and a final decision is pending.
On March 13, 2003, the Oregon Energy Facility Siting Council (EFSC)
issued a Final Order and Site Certificate (Site Certificate) pursuant to which
the EFSC approved construction of the Company's proposed South Mist Pipeline
Extension (SMPE) along a designated route. See Part II, Item 7., "Financial
Condition - Investing Activities," in the 2002 Form 10-K. In May, two parties in
the contested case before EFSC separately appealed the issuance of the Site
Certificate to the Oregon Supreme Court. (Supreme Court Nos. 550428 and 550434
(consolidated)). The appeals were argued before the Supreme Court on July 22,
2003. On Nov. 6, 2003, the Supreme Court ruled on the appeals, affirming EFSC's
issuance of the Site Certificate.
The Company is subject to other claims and litigation arising in the
ordinary course of business. Although the final outcome of any such legal
proceeding cannot be predicted with certainty,2004, the Company does not expect
dispositionissued and sold 1,290,000 shares of these mattersits common stock in an underwritten public offering and used the net proceeds of $38.5 million from the offering primarily to have a material impact on the Company's
financial condition or results of operations.
Enron Gas Supply Contract
-------------------------
On Oct. 16, 2003,fund, in part, NW Natural received a demand letter from Enron North
America Corp. (Enron) seeking payment of $1.1 million allegedly owed pursuantNatural’s utility construction program and to a gas supply contract between NW Natural and Enron which was in effect when
Enron filed for bankruptcy in December 2001. The contract was terminated upon
the bankruptcy and NW Natural does not believe that any amounts are owed to
Enron under the contract.
15
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Item | 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION |
The following is management'smanagement’s assessment of Northwest Natural Gas Company'sCompany’s financial condition including the principal factors that affect results of operations. The discussion refers to the consolidated activities of the Company for the three and nine months ended Sept. 30, 2003March 31, 2004 and 2002.2003. Unless otherwise indicated, references in the discussion to Notes are to the notes to the consolidated financial statements in Part II, Item 8. of the Company's 2002Company’s 2003 Annual Report on Form 10-K (2002(2003 Form 10-K).
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated wholly-owned subsidiary businesses:
subsidiaries of NW Natural:
NNG Financial Corporation (Financial Corporation), and its wholly-owned subsidiaries
Northwest Energy Corporation (Northwest Energy), and its wholly-owned subsidiary
Together these businesses are referred to herein as the Company (see "Non-utility“Results of Operations—Non-utility Operations,"” below, and Note 2 in the 20022003 Form 10-K).
In addition to presenting results of operations and earnings amounts in total, certain measures are expressed in cents per share on a diluted basis (see
Note 1 in the 2002 Form 10-K).share. These amounts reflect factors that directly impact the Company'sCompany’s earnings. The Company believes this per share information is useful because it enables readers to better understand the impact of these factors on the Company'sCompany’s earnings. All references in this report to earnings per share are on the basis of diluted shares (see Note 1, “Earnings Per Share,” in the 2003 Form 10-K).
Application of Critical Accounting Policies - -------------------------------------------
Management's discussion and analysis ofEstimates
In preparing the Company's results of
operations and financial condition are based upon the consolidatedCompany’s financial statements which have been prepared in accordance withusing generally accepted accounting principles in the United States of America. The preparationAmerica (GAAP), management exercises judgment in the selection and application of these
financial statements requires management to make, and from time to time to
update or revise, assumptions,accounting principles, including making estimates and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosures.
disclosures in the financial statements.
Management considers its critical accounting policies to be those which are most important to the representation of the Company'sCompany’s financial condition and results of operations and which require management'smanagement’s most difficult and subjective or complex judgments, including thoseaccounting estimates that could result in materially different amounts if the Company reported under different conditions or usedusing different assumptions. TheseThe Company’s most critical accounting policies are described in the
2002 Form 10-Kestimates or judgments involve regulatory cost recovery, unbilled revenues, derivative instruments, pension assumptions and environmental contingencies (see Part II, Item 7., "Application“Application of Critical Accounting Policies - Regulatory Accounting, Revenue Recognition, Accounting for Derivative
Instruments and Hedging Activities, Accounting for Pensions, and Contingencies,"Estimates,” in the 20022003 Form 10-K). Management has discussed the estimates and judgments used in the application of critical accounting policies with the Audit Committee of the Board. Because of the uncertainty inherent in these matters, actual results could differ materially from the estimates developed from applying these critical accounting policies.
Critical Estimates
------------------
Within the context of the Company'sCompany’s critical accounting policies and estimates, management is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
16
In addition to critical accounting estimates described in the 20022003 Form 10-K, NW Natural recorded an additional loss contingency totaling $1.7$2.0 million in the secondfirst quarter of 20032004 for an estimate of environmental remediation costs at its Gasco sitefor the Portland Harbor (see Note 7 to the accompanying Consolidated Financial Statements)Statements and Note 12 in the 2003 Form 10-K). The amount of NW Natural'sNatural’s current accrual is based on estimates at the lower end of the range of liability, the amount that NW Natural determined is probable, liability for the costs of remedial alternatives outlined in the Feasibility Scoping Plan and the Ecological and
Human Health Risk Assessment.under review. If the costs of remedial activity were assumed at the higher end of the range, then the Company would have accrued an additional $5.3$4.0 million liability. However, the Company does not believe that a change in the estimate would have a material impact on the Company'sCompany’s financial condition or results of operations, because NW Natural expects to recoverbelieves it is probable that these additional costs will be recovered from insurance. As a consequence of the anticipated recovery from insurance, NW Natural has recorded a corresponding receivable. In the event that additionalthese costs are not recovered from insurance, then NW Natural will seek to recover those costs through future utility rates, subject to approval by the Oregon Public Utility Commission (OPUC). The OPUC granted NW Natural the ability to defer its environmental costs
at the Gasco site, effective for a 12-month period beginning April 7, 2003,
which allows it to seek recovery of unreimbursed costs (see Note 7 to the
accompanying Consolidated Financial Statements)Oregon (OPUC). Although NW Natural expects to recover its deferred costs from insurance or future utility rates, there can be no assurance that the OPUC will approve future recovery.
Earnings and Dividends
- ----------------------
The Company incurred a loss applicable to common stock of $6.5 million
in the quarter ended Sept. 30, 2003, compared to a loss of $6.6 million in the
third quarter of 2002. The loss for the third quarter of 2003 was equivalent to
25 cents a diluted share, compared to a loss of 26 cents a diluted share for the
third quarter of 2002. A third quarter loss is customary for NW Natural,
reflecting low summertime use of natural gas.
Gas utility margin and income from non-utility operations were higher
in the third quarter of 2003 than in the third quarter of 2002, and interest
expense was lower, but these improvements were approximately offset by higher
utility operating expenses.
NW Natural lost $7.8 million or 30 cents a diluted share from gas
utility operations in the third quarter of 2003, compared to a loss of $7.5
million or 29 cents a share in the third quarter of 2002. The Company earned
$1.0 million or 4 cents a diluted share from its gas storage business segment in
this year's third quarter, compared to $0.4 million or 1 cent a share from the
gas storage segment in the third quarter of 2002. The Company also earned $0.3
million or about 1 cent a diluted share from its subsidiary and other
non-utility operations in the third quarter of 2003, compared to earnings of
$0.5 million or 2 cents a share in the third quarter of 2002.
For the nine months ended Sept. 30, 2003, the Company'sCompany’s earnings applicable to common stock were $24.0$32.6 million or 93 cents a diluted share,in the quarter ended March 31, 2004, compared to earnings of $23.7$26.3 million also equivalent to 93 centsin the quarter ended March 31, 2003. Earnings per share from consolidated operations were $1.24 a diluted share in the first nine monthsquarter of 2002.
2004 and $1.01 a share in last year’s first quarter.
NW Natural earned $19.9 million or 77 cents$1.21 a diluted share from gas utility operations in the first nine monthsquarter of 2003,2004, compared to $28.3 million
or $1.11$0.97 a share in the first nine months of 2002. Weather conditionssame period in NW
Natural's service territory2003. Gas deliveries and utility net operating revenues (margin) were higher in the first nine monthscurrent quarter in both the Company’s temperature-sensitive residential and commercial markets and in its industrial market. Cooler weather, the effects of a general rate increase in Oregon and customer growth contributed to the year were 6 percent
warmer than average and 10 percent warmer than last year. improved results from utility operations. See “Results of Operations,” below.
The Company earned $3.4 million or 133 cents a diluted share from itsnon-utility operations, including the Company’s non-utility gas storage business segment
inoperations as well as its subsidiaries, for the first nine months of 2003,quarter ended March 31, 2004, compared to $2.4 million or 9earnings of 4 cents a share in the first nine monthssame period of 2002; and earned $0.7 million or about 3 cents a
diluted share from its subsidiary and other non-utility operations in the first
three quarters of this year, compared to a loss of $7.1 million or 27 cents a
share in the first three quarters of last year. The results for the first nine
months of 2002 included a charge of $13.7 million before tax, equivalent to 32
cents a diluted share, for the Company's transaction costs incurred in
connection with its efforts to acquire Portland General Electric Company (PGE)
from Enron Corp.
2003. See “Non-utility Operations,” below.
Dividends paid on common stock were 32.5 cents and 31.5 cents a share for each ofin the three-month periods ended Sept. 30,March 31, 2004 and 2003, and 2002.respectively. In October 2003,April 2004, the Company'sCompany’s Board of Directors declared a quarterly dividend of 32.5 cents a share on the common stock, payable Nov.May 14, 20032004, to shareholders of record on Oct. 31,
2003. With this increase, theApril 30, 2004. The current indicated annual dividend rate is $1.30 a share.
17
Results of Operations
- ---------------------
Regulatory Developments
-----------------------
General Rate Cases
In August 2003, the OPUC entered an order covering all of the issues in NW Natural’s general rate case filed in November 2002 (see Part II, Item 7., “Results of Operations—Regulatory Matters—General Rate Cases,” in the 2003 Form 10-K). Pursuant to the order, on Sept. 1, 2003, NW Natural raised rates to increase revenues by approximately $6.2 million per year. Also pursuant to the order, on Nov. 12, 2003, NW Natural commenced deferred revenue treatment for an additional $2.8 million per year when the first 11.7-mile segment of the South Mist Pipeline Extension (SMPE) went into service. The rate increases and the deferred revenue from the SMPE contributed about $4.7 million of margin in the first quarter of 2004, equivalent to 11 cents a share of earnings. NW Natural expects to raise rates or to implement further deferred revenue treatment reflecting the cost of service associated with the remaining 50 miles of the SMPE when all or portions of that segment are completed and go into service which is expected to occur in the fourth quarter of 2004.
In November 2002,2003, NW Natural filed a general rate case with the OPUC,in Washington proposing a revenue increase of $38$7.9 million per year from OregonWashington operations through rate increases averaging 6.815 percent (see Part II, Item 7., "Results“Results of Operations - Operations—Regulatory Matters,"Matters—General Rate Cases,” in the 20022003 Form 10-K). On Aug. 22, 2003, the OPUC entered an order approving stipulations
filed by NW Natural with the OPUC Staff and other parties covering all of the
issuesSettlement conferences were held in the Oregon general rate case. The order includes, among other things,
(i) the settlement of NW Natural's cost of service, including all operations and
maintenance expenses, (ii) projected investments for the prospective test year,
(iii) a capital structure including 49.5 percent common equity, (iv) a return on
equity of 10.2 percent, (v) a rate redesign that shifted $4 million of margin
revenue requirement from industrial rate schedules to residential and commercial
rate schedules, and (vi) the adoption of a weather normalization mechanism. The
order authorized a revenue increase of $13.9 million per year, of which $6.2
million went into effect on Sept. 1, 2003, and the remainder will go into effect
as all or portions of NW Natural's South Mist Pipeline Extension (SMPE) project
and its Coos County distribution system project are completed and go into
service between Dec. 1, 2003 and Dec. 1, 2004.
The weather normalization mechanism approved by the OPUC will be
applied to NW Natural's Oregon residential and commercial customers' bills
between November and May of each heating season, beginning in November 2003. The
mechanism adjusts customers' bills to reflect "normal" weather using the 25-year
average temperature of each day of the billing period. The mechanism is intended
to stabilize NW Natural's recovery of its fixed costs and to reduce fluctuations
in customers' bills due to colder- or warmer-than-average weather.
On Sept. 23, 2003, the OPUC approved rate increases effective Oct. 1,
2003 averaging 4.5 percent for NW Natural's Oregon residential sales customers,April and, on Sept. 24, 2003,April 29, 2004, the parties to the rate case filed a Joint Notice of Settlement in Principle and Motion for Extension of Time to File Testimony with the Washington Utilities and Transportation Commission (WUTC) approvedfor the purpose of finalizing a rate increase effective Oct. 1, 2003settlement in the case. The filing requests a deadline of 5.5 percentMay 14, 2004 for NW
Natural's Washington residential sales customers.filing the final terms of the proposed settlement. In the event a settlement is not filed by that date, the notice requests that the WUTC extend the deadlines in the original schedule for direct and rebuttal testimony to May 21 and June 18, 2004, respectively. The rate increases in OregonCompany is unable to determine whether the final terms of a settlement will be agreed upon and, Washington reflect changes in NW Natural's cost of gas under its Purchased
Gas Adjustment (PGA) mechanisms,if so, the application of temporary rate adjustmentsextent to amortize regulatory balancing accounts, and the removal of temporary rate
adjustments effective the previous year. These changes are all part of NW
Natural's annual PGA tariff filing (see "Comparison of Gas Operations--Cost of
Gas," below). In addition to the PGA increase, Washington rates were affectedwhich a settlement will be accepted by the removalWUTC.
Rate Mechanisms
On May 27, 2003, the OPUC approved NW Natural’s request for deferral of environmental costs associated with five specific sites, including the Gasco, Wacker, Portland Gas and Portland Harbor sites. See Note 12 in the 2003 Form 10-K. The authorization, which has been extended through April 2005, allows NW Natural to defer and seek recovery of unreimbursed environmental costs in a credit to customers for the refund of the previous year's gas
cost savings, resulting in an additional 11.3 percent average increase in rates.
The Company intends to file afuture general rate case with the WUTCcase. Through March 31, 2004, NW Natural has recorded $1.1 million of these costs in the
fourth quarter of 2003, enabling a full review of NW Natural's cost and rate
structures, with new rates expected to be implemented by the end of 2004. The
amount of the general rate increase to be requested has not been determined.
18
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes and revenues for the three months ended March 31, 2004 and nine months ended Sept. 30, 2003 and 2002:
(Thousands, except customers and degree days) | 2004 | 2003 | ||||||||||||
Utility gas sales and transportation volumes - therms: | ||||||||||||||
Residential and commercial sales | 274,364 | 236,323 | ||||||||||||
Unbilled volumes | (31,888 | ) | (16,562 | ) | ||||||||||
Weather-sensitive volumes | 242,476 | 62 | % | 219,761 | 64 | % | ||||||||
Industrial firm sales | 18,510 | 5 | % | 14,554 | 4 | % | ||||||||
Industrial interruptible sales | 24,376 | 6 | % | 3,685 | 1 | % | ||||||||
Total gas sales | 285,362 | 73 | % | 238,000 | 69 | % | ||||||||
Transportation deliveries | 102,958 | 27 | % | 109,160 | 31 | % | ||||||||
Total volumes sold and delivered | 388,320 | 100 | % | 347,160 | 100 | % | ||||||||
Utility operating revenues - dollars: | ||||||||||||||
Residential and commercial sales | $ | 252,524 | $ | 200,513 | ||||||||||
Unbilled revenues | (27,534 | ) | (13,940 | ) | ||||||||||
Weather-sensitive revenues | 224,990 | 89 | % | 186,573 | 91 | % | ||||||||
Industrial firm sales | 12,294 | 5 | % | 8,666 | 4 | % | ||||||||
Industrial interruptible sales | 11,974 | 5 | % | 1,844 | 1 | % | ||||||||
Total gas sales | 249,258 | 99 | % | 197,083 | 96 | % | ||||||||
Transportation revenues | 3,295 | 1 | % | 5,805 | 3 | % | ||||||||
Other revenues | 45 | 0 | % | 1,051 | 1 | % | ||||||||
Total utility operating revenues | $ | 252,598 | 100 | % | $ | 203,939 | 100 | % | ||||||
Cost of gas sold | $ | 142,400 | $ | 107,934 | ||||||||||
Utility net operating revenues (margin) | $ | 110,198 | $ | 96,005 | ||||||||||
Total number of customers (end of period) | 583,582 | 565,892 | ||||||||||||
Actual degree days | 1,807 | 1,683 | ||||||||||||
25-year average degree days | 1,852 | 1,857 | ||||||||||||
Residential and Commercial Sales
- --------------------------------
NW Natural continues to experience strong customer growth, with 17,84417,690 customers added since Sept. 30, 2002,March 31, 2003, for a growth rate of 3.33.1 percent. In the three years ended Dec. 31, 2002,2003, more than 58,00054,000 customers were added to the system, representing an average annual growth rate of 3.93.5 percent.
The volumes of gas sold to residential and commercial customers in the first three months of 2004 were 22.7 million therms, or 10 percent, higher than in the first three months of 2003, primarily reflecting 7 percent colder weather than in the first quarter of 2003. Related revenues increased $38.4 million, or 21 percent, primarily due to the higher volumes and rate increases in Oregon effective in the fall of 2003.
Typically, 80 percent or more of NW Natural'sNatural’s annual operating revenues are derived from gas sales to weather-sensitive residential and commercial customers. Accordingly,Although variations in temperatures between periods will affect volumes of gas sold to these customers. The third (summer)customers, the effect on margin and net income has been significantly reduced with the implementation of the weather normalization mechanism in Oregon in November 2003. Although the first quarter of 2004 was colder than the first quarter of 2003, it was warmer than average and warmer than the third quarter of 2002. Weather in the
first nine months of 2003 was 6 percent warmer than average, compared to 4
percent colder than average in the first nine months of 2002. Average weather
conditions are calculated for this purpose from the most recent 20 years of
temperature data measured by heating degree-days.average. The OPUC has approved a weather normalization mechanism that will be
applied to NW Natural's Oregon residential and commercial customers' bills
between November and May of each heating season beginning in November 2003 (see
"Results of Operations - Regulatory Developments," above). Customers may opt out
of the mechanism during a defined period each year. NW Natural expects less than
10 percent of its residential and commercial customers to opt out of the
mechanism during its first year.
Volumes of gas sold to residential and commercial customers in the
third quarter of 2003 were 7.1 million therms, or 13 percent, lower than in the
third quarter of 2002, reflecting the warmer weather and weak economic
conditions in the commercial market, partially offset by customer growth and the
price elasticity effects of lower rates. Related revenues decreased $12.8
million, or 21 percent, primarily due to lower volumes and rates effective Oct.
1, 2002.
Gas sales to residential and commercial customers in the first nine
months of 2003 were 23.6 million therms, or 6 percent, lower than in the first
nine months of 2002, reflecting warmer weather that was partially offset by
customer growth and the price elasticity effects of lower rates. Related
revenues decreased $51.5 million, or 14 percent, primarily due to lower volumes
and the lower rates effective Oct. 1, 2002. Excluding the impact of gas cost
refunds of $26.6 million to Oregon customers in the nine months ended Sept. 30,
2002 (see "Comparison of Gas Operations," above), related revenues decreased
$78.1 million or 19 percent. These refunds reduced gross operating revenues by
$30.4 million in the first nine months of 2002 compared to the same period in
2003, but the impact on net operating revenues was less than $1 million and the
impact on net income was negligible. See "Comparison of Gas Operations," above.
NW Natural's rate decreases in October 2002 were primarily related to
substantial reductions in gas commodity costs and were applied through the
Company's PGA mechanisms in Oregon and Washington (see Part II, Item 7.,
"Results of Operations - Regulatory Matters," in the 2002 Form 10-K). At the
same time, NW Natural also applied small, partially offsetting rate increases in
Oregon designed to recover the margin lost due to changes in residential and
commercial consumption patterns in recent years. These rate increases
contributed an estimated $0.5 million of margin in the third quarter of 2003 and
$6.5$2.7 million of margin in the first nine monthsquarter of 2003,2004 due to the warmer-than-average weather. The contribution was equivalent to about 1
cent6 cents a diluted share of earnings, making up a significant portion of the lost margin that otherwise would have resulted from the warmer-than-average-weather.
In order to match revenues with related purchased gas costs, NW Natural records revenues for gas delivered and sold to customers, but not yet billed, through the end of the period. These amounts are reported as unbilled revenues to reflect the increase or decrease in the third quarterbalance of unbilled revenues over the prior reporting periods. Weather conditions, rate changes and 15 cents a share incustomer billing dates from one period to the nine-monthnext affect the balance of unbilled revenues at the end of each period.
20
Industrial Sales and Transportation Revenues
--------------------------------------------
The following table summarizes the delivered volumes and margin in the industrial and electric generation markets:
(Thousands) | 2004 | 2003 | ||||
Delivered volumes - therms: | ||||||
Industrial sales and transportation | 145,844 | 125,732 | ||||
Electric generation | — | 1,667 | ||||
Total volumes | 145,844 | 127,399 | ||||
Margin - dollars: | ||||||
Industrial sales and transportation | $ | 10,921 | $ | 9,746 | ||
Electric generation | — | 6 | ||||
Total margin | $ | 10,921 | $ | 9,752 | ||
Total volumes delivered to industrial and electric generation customers in the third quarter of 2003 were 4.618 million therms, or 414 percent, higher in the first quarter of 2004 than in the same period of 2002.2003. Combined margins from these customers were $1.2 million, or 12 percent, higher in the thirdfirst quarter of 2003 were $0.4 million, or 5 percent, lower than in2004 compared to the same period of 2002. The increase in volumes was primarily due to deliveries to a
high-volume customer served on a new, low-margin contract for gas transportation
to a cogeneration facility, while the decline in margin was due to shifts by
other customers from higher-margin to lower-margin sales or transportation
schedules.
Total volumes delivered to industrial and electric generation customers
in the nine months ended Sept. 30, 2003 were 25 million therms, or 6 percent,
lower than in the same period in 2002. Combined margins were $8.0 million, or 22
percent, lower. The decline in volumes was due to a combination of warmer
weather and weaker economic conditions. The greater percentage decline in margin
was due to shifts by some customers during 2002 and 2003 from higher-margin
sales or transportation schedules to lower-margin transportation schedules, and
to the inclusion of $4.6 million of margin from electric generation customers,
equivalent to 11 cents a share of earnings, in the results for the first nine
months of 2002. One-year contracts for service to two customers in the electric
generation market went into effect in the second half of 2001 and expired on
June 30, 2002.
2003.
Volumes delivered to end-use industrial sales and transportation customers excluding electric generation customers,were 15 percent higher and margin was 12 percent higher in the nine months ended
Sept. 30, 2003 were 6 percent lowerfirst quarter of 2004 than in the same period in 2002. Margin from
these customers in the nine months ended Sept. 30, 2003 was 11 percent lower
than in the same period in 2002. The decline in volumes was due to the warmer
weather and weaker economic conditions, while the greater percentage decline in
margin was due to customers' shifts from higher-margin to lower-margin sales or
transportation schedules. Sales in the industrial interruptible market were up
10 percent in the nine-month period, however, and up substantially in the
three-month period, due to transfers by some interruptible transportation
customers to sales service in the secondfirst quarter of 2003 when commodity prices
in the spot gas market rose to levels2003. The higher than the gas price built into NW
Natural's interruptible sales rates.
NW expects the overallvolumes and margin decline in the industrial market to
continue, duereflect the addition of a large customer, cooler weather and an improved economy, offset in part to a $4 million shift from industrialby some rate schedules to
residential and commercial rate schedules based on an analysis of cost of
service that wasdesign changes approved in the Oregon general rate case. 21
Other Revenues
--------------
Other revenues include revenues recognized from a variety of sources
other than the sale and transportation of gas (see Note 1 in the 2002 Form
10-K), includingmiscellaneous fee income as well as revenue adjustments reflecting deferrals to, andor amortizations from, regulatory asset or liability accounts other than deferrals relating to gas costs and miscellaneous customer fees.
Other revenues contributed $2.1 million to utility operating revenues
in the third quarter of 2003, compared to $0.4 million in the third quarter of
2002. The $1.7 million increase in other revenues in the third quarter of 2003
came primarily from revenue deferrals under NW Natural's partial decoupling
mechanism ($1.5 million)non-utility gas storage (see Part II, Item 7., "Results“Application of Operations -
Critical Accounting Policies and Estimates—Regulatory Matters,"Accounting,” in the 20022003 Form 10-K). Other revenues contributed $7.3 million to utility operating revenueswere negligible in the first nine monthsquarter of 2003,2004, compared to $2.4$1.1 million in the first nine
monthsquarter of 2002. The $4.9 million increase was primarily due to higher2003. Higher revenue deferrals in the first quarter of 2004 under the partialNW Natural’s decoupling mechanism ($3.0 million)in Oregon (see Part II, Item 7., “Results of
Operations—Regulatory Matters—Rate Mechanisms,” in the 2003 Form 10-K) and deferrals for recovery of costs relating to the first segment of the SMPE (see “Regulatory Developments–General Rate Cases,” above) were more than offset by amortizations from the decoupling mechanism and by higher amounts of interstate storage credits ($1.8 million).
amortizations relating to conservation programs and Year 2000 technology costs. The following table summarizes other revenues by primary category for the three months ended March 31, 2004 and 2003:
(Thousands) | 2004 | 2003 | ||||||
Revenue adjustments: | ||||||||
Current deferrals: | ||||||||
Decoupling | $ | 1,005 | $ | 534 | ||||
SMPE | 1,101 | — | ||||||
Other | (118 | ) | 77 | |||||
Current amortizations: | ||||||||
Decoupling | (1,554 | ) | — | |||||
Conservation programs | (1,390 | ) | (906 | ) | ||||
Year 2000 technology costs | (572 | ) | (196 | ) | ||||
Other | 192 | 255 | ||||||
Net revenue adjustments | (1,336 | ) | (236 | ) | ||||
Miscellaneous revenues: | ||||||||
Customer fees | 1,214 | 1,098 | ||||||
Other | 167 | 189 | ||||||
Total miscellaneous revenues | 1,381 | 1,287 | ||||||
Total other revenues | $ | 45 | $ | 1,051 | ||||
Cost of Gas -----------
Sold
Natural gas commodity prices have fluctuated dramatically in recent years. NW Natural has sought to mitigateyears (see Part II, Item 7., “Results of Operations—Comparison of Gas Operations—Cost of Gas Sold,” in the effect of price volatility on core
utility customers through the use of its underground storage facilities, by
entering into gas commodity-based financial hedge contracts, and by crediting
gas costs with margin revenues derived from sales of commodity and released
transportation capacity to on-system or off-system customers through negotiated
short-term transactions in periods when core utility customers do not fully
utilize firm pipeline capacity and gas supplies.
As of June 30, 2003 the Company had replaced all of its expiring
long-term contracts with supply contracts for gas purchases of similar aggregate
volume levels. All of the replacement contracts have terms of five years or less
and contain commodity price provisions that are tied directly to monthly market
index prices for the term of the contract. The Company engages in financial
swaps that are intended to have the effect of converting these monthly market
index prices into fixed prices for most of its gas purchases under these
contracts.Form 10-K). The cost per therm of gas sold was 3010 percent lowerhigher during the thirdfirst quarter of 20032004 than in the third quartersame period of 2002. Year-to-date, the cost per
therm of2003, primarily due to higher natural gas sold was 16 percent lower than in the first nine months of 2002.commodity prices. The cost per therm of gas sold includes current gas purchases, gas drawn from storage inventory, gains or losses from commodity hedges, margin from off-system gas sales, demand cost equalization,balancing adjustments (demand equalization), regulatory deferrals and company use.
Results for the nine months ended Sept. 30, 2002 include an adjustment reducing
cost of gas by $29.5 million (see "Comparison of Gas Operations," above).
Excluding the impact of this adjustment, cost per therm of gas sold was 25
percent lower in the first nine months of 2003 compared to the same period in
2002.
Results for the nine months ended Sept. 30, 2002 also included
adjustments reducing cost of gas relating to 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 2002, of which $2.6 million or 6 cents a share applied to
periods prior to 2002. The rate methodology represented in the adjustments
continues to be applied in the Company's accounting for pipeline demand charges.
NW Natural'sNatural’s recorded amount of unaccounted-for gas for the nine months
ended Sept. 30, 2003 was 0.20negative 0.12 percent of gas receipts,sendout in the first three months of 2004, compared to 0.61a positive 0.16 percent for the nine months ended Sept. 30, 2002.in same period of 2003. Unaccounted-for gas is the difference between the amount of gas the Company receives from all sources, including pipeline deliveries and withdrawals from storage, and the amount of gas it delivers to customers or other delivery points. Unaccounted-for gas may be caused in part by physical gas leakage, but it also may be due to cumulative inaccuracies in gas metering, estimates of unbilled gas or other causes. The
CompanyNW Natural considers a normal amount of unaccounted-for gas to be 0.50 percent of its total gas receiptssendout during a period, but the amount may vary within a range around this estimate. InDuring the first nine monthsquarter of 2003,2004, the lower estimated amount of unaccounted-for gas had the effect of reducing cost of gas and 22
$1.7$0.4 million as compared to the equivalent nine-monthsame period a year earlier. In the third quarter of 2003, NW Natural revised its
estimate of unbilled gas from the second quarter of 2003 with the net effect of
reducing margin for the third quarter by a total of about $0.8 million.
Reflecting this revision, the margin reduction due to unaccounted-for gas was
$0.4 million higher in the third quarter of 2003 than in the third quarter of
2002.
2003.
NW Natural uses a natural gas commodity-price hedge program under the terms of its Derivatives Policy to help manage its variable price gas commodity contracts (see Part II, Item 7., "Critical“Application of Critical Accounting Policies - and Estimates—Accounting for Derivative Instruments and Hedging Activities,"” in the 20022003 Form 10-K). NW Natural recorded net hedging gains of $5$8 million and $36$23 million from commodity swap and
call option contractsthis program during the three-first three months of March 31, 2004 and nine-month periods ended Sept. 30,
2003, respectively, compared to net losses of $25 million and $70 million in the
same periods in 2002. Gainsrespectively. Hedging gains and losses fromrelating to gas commodity hedgespurchases are included in cost of gas and the majority of suchfactored into NW Natural’s annual Purchased Gas Adjustment (PGA) rate changes and therefore these gains and losses are reflected in annual
PGA rate adjustments.
have no material impact on net income.
Under NW Natural'sNatural’s PGA tariff in Oregon, net income from Oregon operations is affected within defined limits by changes in purchased gas costs.costs (see Part II, Item 7., “Results of Operations—Comparison of Gas Operations,” in the 2003 Form 10-K). 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 is
recorded as deferred regulatory assets or liabilities for recovery from or
refund to customers in future rates. NW Natural'sNatural’s gas costs in the third quarterfirst three months of 2004 were slightly higher than the gas costs embedded in rates, with the effect that NW Natural’s share of the higher costs decreased margin by $1.0 million, equivalent to a loss of 2 cents a share. In the same period of 2003, NW Natural’s gas costs were slightly lower than the gas costs embedded in rates, with the effect that NW Natural'sNatural’s share of the lower gas costs increased margin by $0.1$0.6 million, equivalent to less thanearnings of about 1 cent a share of earnings. For the third
quarter of 2002, NW Natural's gas costs were much lower than the projected costs
built into rates and the Company's share of the savings realized from gas
commodity purchases contributed $0.9 million of margin, equivalent to 2 cents a
share of earnings. In the first nine months of 2003, NW Natural's gas costs were
slightly lower than the gas costs embedded in rates, despite rising gas prices
in the spot market, with the effect that NW Natural's share of savings realized
from gas commodity purchases contributed $0.4 million of margin, equivalent to 1
cent a share of earnings. The equivalent result in the first nine months of 2002
was net savings of $11 million, equivalent to 26 cents a share of earnings.
Due to the warm weather and the reduced gas requirements of its
industrial sales customers during the first nine months of 2003, share.
NW Natural wasis able to use gas supplies that wereare under contract for the winter season, but wereare not required for delivery to core market (residential, commercial and industrial firm) customers to make off-system gas
sales. The Company's purchase prices for this gas had been locked in through
commodity swap and call option agreements entered into last year at levels lower
than current market prices. Under the PGA tariff in Oregon, NW Natural retains 33 percent of the marginmargins realized from theseits off-system gas sales is
treatedand records the remaining 67 percent as a reduction to the cost of gas, with the effect that 67 percent is
deferred regulatory asset or liability for recovery from or refund to customers in future rates. NW Natural's customers and the remaining 33 percent is
retained by the Company. NW Natural'sNatural’s share of the marginloss from off-system gas sales in the thirdfirst quarter of 2004 reduced margin by $0.3 million, equivalent to a loss of less than 1 cent a share. NW Natural’s share of the gain from off-system sales in the first quarter of 2003, was $0.4 million, equivalentwhen these sales were significantly higher due to 1 cent a
sharethe lower requirements of earnings, compared to margin of $0.7 million or 2 cents a share of
earnings in the third quarter of 2002. In the first nine months of 2003, NW Natural's share of the margin from off-system gas sales contributed $4.9Natural’s core market customers, were $4.0 million of margin, equivalent to 129 cents a share of earnings. The equivalent result in
Non-utility Operations
At March 31, 2004 and 2003, the first nine months of 2002 was margin of $0.8 million, or 2 cents a share of
earnings.
Non-utility Operations
----------------------
At Sept. 30, 2003 and 2002, the Company'sCompany’s non-utility operations consisted of gas storage operations and two wholly-owned subsidiaries, Financial Corporation and Northwest Energy. Only Financial Corporation had active operations during the first three months of 2003 and 2004.
Gas Storage
-----------
NW Natural realized net income from its non-utility gas storage business segment (see Part II, Item 7., “Results of Operations—Non-utility Operations—Gas Storage,” in the 2003 Form 10-K), after regulatory sharing and income taxes, of $1.0$0.8 million or 43 cents a share in the three months ended Sept. 30, 2003,March 31, 2004, compared to $0.4$1.3 million or 1 cent5 cents a share forin the comparable periodthree months ended March 31, 2003. Earnings from this business segment were lower in 2002. For the first nine
monthsquarter of 2004 than in the first quarter of 2003, operating results were net income of $3.4 million, compared to
net income of $2.4 million for the comparable period in 2002. Gas storage
services are provided to off-system interstate customers using storage capacity
that has been developed in advance of core utility customers' requirements. NW
Natural retains 80 percent of the income before tax from gas storage services
23
and credits the remaining 20 percentprimarily due to a deferred regulatory account for
distribution to its core utility customers.
Results for the gas storage business segment also include revenues, net
of amounts shared with core utility customers,lower contribution from a contract with an independent energy trading company that seeks to optimize the use of NW Natural'sNatural’s assets by trading temporarily unused portions of its gas storage
capacity and upstream pipeline transportation capacity and gas storage capacity. NW Natural retains 80
percent of the pre-tax incomeThe lower contribution was primarily due to shrinkage in market price differentials from the optimization of storage and pipeline
transportation capacity when the costs of such capacity have not been included
in core utility rates, or 33 percent of the pre-tax income from such capacity
when the costs have been included in core utility rates. The remaining 20
percent and 67 percent, respectively, are credited2003 to a deferred regulatory
account for distribution to NW Natural's core utility customers.
2004.
Financial Corporation
---------------------
Financial Corporation'sCorporation’s operating results for the three months ended Sept. 30, 2003March 31, 2004 were a net incomeloss of about $0.2 million, compared to a net incomeloss of $0.5about $0.1 million for the comparablesame period in 2002.2003. The resultslosses in the thirdboth quarters of
both 2003 and 2002 wereare equivalent to less than 1 cent a share of earnings for the
Company. For the first nine months of 2003, operating results were net income of
$0.6 million, compared to $1.2 million for the comparable period in 2002.share. The lower net income in the current nine-month periodfirst quarter of 2004 was primarily due to lower income from Financial Corporation's investments in limited partnerships in wind and solar electric generation projects in CaliforniaCalifornia. These investments generate the majority of their operating revenues during the second and lower miscellaneous
receivables.third quarters; therefore, results of operations from the first quarter are not necessarily indicative of the results for a full year. The Company'sCompany’s investment balances in Financial Corporation at Sept.
30,March 31, 2004 and 2003 and 2002 were $9.7$7.7 million and $9.1$9.0 million, respectively. Northwest Energy
----------------
Northwest EnergyThe reduced investment in Financial Corporation at March 31, 2004, was formed in 2001primarily due to serve as the holding company fora $4.2 million cash dividend that Financial Corporation paid to NW Natural in the fourth quarter of 2003.
Operating Expenses
Operations and PGE if the acquisition of PGE had been completed. Northwest
Energy recorded nominalMaintenance
Operations and maintenance expenses for corporate development activities in the first nine monthsquarter of 2004 were $25.5 million, 6 percent higher than in the first quarter of 2003. Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses increased $3.1The $1.4 million or 16 percent, and $8.1 million, or 13 percent, in the three- and nine-
month periods ended Sept. 30, 2003, respectively, compared to the same periods
in 2002.
For the three-month period ended Sept. 30, 2003, the increase includes:
$1.5 million for wage and salary increases, vacation accruals and incentive
bonus accruals; $1.1 millionwas primarily due to higher pensionpayroll and payroll-related expenses resulting from employee additions, pay increases and higher benefit costs including($0.7 million), higher costs for gas technology research ($0.4 million) and higher administrative expenses associated with compliance activities relating to the impactSarbanes-Oxley Act of changes in actuarial assumptions and lower returns on pension assets; $0.2
million due to higher insurance premiums for health care and prescription drug
coverage; and $0.2 million due to higher premiums for business risk insurance;
offset by a decrease of $0.3 million in uncollectible accounts expense. Vacation
accruals in the three-month period include a $0.5 million charge in connection
with the termination of a vacation banking benefit for non-union employees.
The nine-month period includes increases of: $3.2 million due to wage
and salary increases, vacation accruals and incentive bonus accruals; $2.8
million due to higher pension costs, including the impact of changes in
actuarial assumptions and lower returns on pension assets; $0.9 million due to
higher insurance premiums for health care and prescription drug coverage; and
$0.7 million due to higher business risk insurance renewal premiums. These cost
increases were partially offset by a decrease in uncollectible accounts expense
of $1.2 million due to lower net write-offs of accounts receivable compared to
last year when customer bills and subsequent write-offs were impacted by higher
gas prices and colder weather.
24
Taxes Other than Income Taxes
-----------------------------
Taxes other than income taxes, which are principally comprised of franchise, property and payroll taxes, decreased $0.1increased $1.6 million, or 1 percent, and
$0.7 million, or 315 percent, in the three- and nine- month periods ended Sept.
30, 2003, respectively, compared to the same periods in 2002.2004 over 2003. For the three-month period ended Sept. 30, 2003,March 31, 2004, franchise taxes, which are based on gross revenues, decreased $0.2increased $1.2 million, or 1024 percent, reflecting lowerhigher gross revenues primarily due to lowerhigher rates warmer weather and other factors.
Payroll taxes increased $0.1 million, or 15 percent, due to wage and salary
increases.colder weather. Property taxes increased by $0.1$0.3 million, or 38 percent, due to an increase in utility plant additions. For the nine-month period ended Sept. 30, 2003, franchisePayroll taxes decreased $1.1increased $0.2 million, or 10 percent, reflecting lower gross revenues due to
lower rates, warmer weather and other factors. Property taxes increased $0.4
million, or 421 percent, due to an increase in utility plant additions.
wage and salary increases.
Depreciation and Amortization
-----------------------------
Depreciation and amortization expense increased $0.5 million, or 4
percent, and $1.4 million, or 4 percent, in the three- and nine- month periods
ended Sept. 30, 2003, respectively, compared to the same periods in 2002. Total
depreciable plant and property in service at Sept. 30, 2003 was up 5 percent
from a year earlier. As a percentage of average plant and property,
The Company’s depreciation and amortization expense was approximately 3 percenttotaled $13.9 million for each of the nine-month
periods ended Sept. 30, 2003 and 2002.
Other Income (Expense)
----------------------
Other income (expense) improved by $0.5 million and $15.7 million in
the three- and nine-month periods ended Sept. 30, 2003, respectively, compared
to the same periods in 2002. Excluding the effect of the $13.7 million charge
for costs incurred in the effort to acquire PGE, the Company's other income was
$2.0 million higher in the ninethree months ended Sept. 30, 2003, than inMarch 31, 2004, an increase of $0.7 million, or 6 percent, over the same period in 2002,2003. The increased expense reflects additional investments in utility plant that were made to meet continuing customer growth, including the Company’s investment in the portion of the SMPE that was put into service in November 2003.
Other Income (Expense)
Other income was negligible in the first quarter of 2004, compared to $0.6 million of other expense in the first quarter of 2003. The improvement was primarily due to reductions inlower interest charges on deferred regulatory account balances ($0.3 million) reflecting lower credit balances in these accounts, and an increase inhigher gains from Company-owned life insurance. Interest expense on deferred regulatory account balancesinsurance ($0.4 million) due to increases during the quarter in the three- and nine-month periods ended Sept. 30, 2003 was $0.2 million and $0.7
million, respectively, compared to $0.4 million and $2.3 million in the same
periodsmarket value of 2002. These improvements reflect lower net credit balances
outstanding in deferred regulatory accounts. Gains from Company-ownedequity-based life insurance were $1.5 million higherinvestments. Partially offsetting these factors was a decrease in the first nine months of 2003 than in the
first nine months of 2002, whileearnings from equity investments ($0.1 million) due to lower income from limited partnership investments held by Financial Corporation was $0.7 million lower.
Corporation.
Interest Charges -– net
----------------------
The Company's netCompany’s interest expense decreased by $0.2charges of $8.9 million or 3
percent, infor the three months ended Sept. 30, 2003. The Company reclassified
dividends of $0.1 million on its redeemable preferred stock as interest expense
in the three months ended Sept. 30, 2003 (see Note 2 to the accompanying
Consolidated Financial Statements). The Company's net interest expense increased
by $1.1 million, or 4 percent, in the nine months ended Sept. 30, 2003, compared
toMarch 31, 2004 were relatively unchanged from the same period in 2002, primarily2003. The effect of the increase in the average balance of debt outstanding in 2004 was due to recent capital expenditures offset by lower weighted average interest costs on such borrowings and slightly higher average balancesinterest credits from the allowance for funds used during construction (see Part II, Item 7., “Results of long-term debt outstanding duringOperations – Interest Charges – Net,” in the period.
2003 Form 10-K).
Income Taxes
------------
The effective corporate income tax rates were 41.9rate from operations was 36.4 percent and 33.4
percent for the three- and nine- month periods ended Sept. 30, 2003,
respectively. The effective corporate income tax rates were 39.0 percent and
35.4 percent for the three- and nine-month periods ended Sept. 30, 2002. In the
nine-month period ended Sept. 30, 2002, the Company recorded a $13.7 million
PGE-related charge. Excluding the effect of this charge, the effective corporate
income tax rate would have been 36.3 percent.
25
For the three- and nine-month periods ended Sept. 30, 2003, the
effective corporate tax rate was impacted by tax benefits associated with the
exercise of non-qualified stock options, dividends reinvested in certain
employer stock and gains recognized on company-owned life insurance. These tax
benefits increased $0.9 million and $1.6 million for the three- and nine-month
periods ended Sept. 30, 2003, compared to comparable periods in 2002. For the three-month period ended Sept. 30, 2003,March 31, 2004, compared to 35.6 percent for the higher book loss combined with the
increased tax benefit resulted in an effective tax rate that is not necessarily
indicative of an effective tax rate on a year-to-date basis. For the nine-monththree-month period ended Sept. 30, 2003, the increased tax benefit resulted in a combined
federal and state tax savings of approximately $0.7 million. Excluding these
increased tax benefits recognized in the nine-month period ended Sept. 30, 2003,
the effective corporate income tax rate would have been 35.2 percent.
March 31, 2003.
Financial Condition
- -------------------
Capital Structure
-----------------
The Company'sCompany’s goal is to maintain a capital structure comprised of 45 to 50 percent common stock equity, up to 105 percent preferred 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 stock redemption requirements and to pay down outstanding commercial paper notes payable (see "Liquidity“Liquidity and Capital Resources,"” below, and Notes 3, 5 and 56 in the 20022003 Form 10-K).
Liquidity and Capital Resources
-------------------------------
At Sept. 30, 2003,March 31, 2004, the Company had $7.0$2.8 million in cash and cash equivalents, compared to $19.7$44.3 million at Sept. 30, 2002.March 31, 2003 and $4.7 million at Dec. 31, 2003. Cash and cash equivalents in the first quarter of 2003 was higher due to the Company’s sale of $40 million in long-term debt. Short-term liquidity is generally 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. The Company has available through Sept. 30, 2005, committed lines of credit with four commercial banks (see "Lines“Lines of Credit,"” below, and Note 6 in the 20022003 Form 10-K).
NW Natural'sNatural’s capital expenditures are primarily related to utility construction resulting from customer growth and system improvements (see "Cash
Flows - “Cash Flows—Investing Activities,"” below). In addition, NW Natural has certain contractual commitments under capital leases, operating leases, and gas supply purchase contracts and other contracts 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.
Neither
In December 2003, the U.S. Department of Transportation’s Office of Pipeline Safety issued a final rule that specifies the detailed requirements for transmission pipeline integrity management programs (IMPs) as mandated by the Pipeline Safety Improvement Act of 2002 (Pipeline Safety Act). NW Natural's MortgageNatural estimates that its IMP will cost up to $5 million in 2004, and Deed$5 million to $15 million per year beginning in 2005, totaling $50 million to $100 million over the first 10 years of Trust nor the indentures
under which other long-term debt is issued contain credit rating triggers or
stock price provisions that require the acceleration of debt repayment. Also,
there are no rating triggers or stock price provisions contained in contracts or
other agreements with third parties, except for agreements with certain
counter-parties under NW Natural's Derivatives Policy which require the affected
party to provide substitute collateral such as cash, guaranty or letter of
credit if credit ratings are lowered to non-investment grade, or in some cases
if the mark-to-market value exceeds a certain threshold.
program ending Dec. 17, 2012.
Off-Balance Sheet Arrangements
------------------------------
The
Except for certain lease and purchase commitments (see “Contractual Obligations,” below), the Company has no material off-balance sheet financing arrangements.
26
Contractual Obligations
-----------------------
The following table shows
During the present value of NW Natural's long-term
contractual obligations by maturity and type of obligation:
On March 12, 2004, NW Natural employees who are members of the Office and 2007,
respectively.
Professional Employees International Union (OPEIU), Local 11, AFL-CIO, representing about 75 percent of NW Natural’s employees, approved a Joint Accord labor agreement covering wages, benefits and working conditions. Key elements of the agreement include an average 3.5 percent wage increase, no layoff of any regular union employee who was employed before April 1, 2004 and, effective January 1, 2005, a contribution of $0.25 per compensable hour on behalf of each union employee to the Western States Office and Professional Employees
Pension Fund, which contributions will increase 3 percent each year, up to $0.30 per compensable hour. The new labor agreement will expire on May 31, 2009. The new agreement is not expected to have a material impact on the Company’s financial condition or results of operations.
Commercial Paper
----------------
The Company'sCompany’s primary source of short-term funds is from the sale of commercial paper notes payable. Both NW Natural and Financial Corporation issuehave the ability to sell commercial paper under agency agreements with a commercial bank. NW Natural'sNatural’s commercial paper outstanding is supported by its committed bank lines of credit (see "Lines“Lines of Credit,"” below), while Financial Corporation'sCorporation’s commercial paper is supported by committed bank lines of credit and the guaranty of NW Natural (see Note 6 in the 20022003 Form 10-K). NW Natural had $85.2 million in commercial paper notes outstanding at
Sept. 30, 2003, compared to none outstanding at Sept. 30, 2002 and $69.8 million
outstanding at Dec. 31, 2002. Financial Corporation had no commercial paper notes outstanding at Sept. 30,March 31, 2004 or 2003 or 2002, or at Dec. 31, 2002.
2003. NW Natural had $22.9 million in commercial paper notes outstanding at March 31, 2004, compared to no commercial paper notes outstanding at March 31, 2003 and $85.2 million outstanding at Dec. 31, 2003. Commercial paper balances are typically lower at the end of the first quarter compared to year-end due to collections from higher sales during the winter heating season.
Lines of Credit
---------------
NW Natural has lines of credit with four commercial banks totaling $150 million. Half of the credit facility with each bank, totaling $75 million, is committed and available through Sept. 30, 2004, and the other $75 million is committed and available through Sept. 30, 2005. NW Natural has the authority required from the OPUC and the WUTC to draw upon the two-year portions of the credit lines, if needed.
In addition, Financial Corporation has available through Sept. 30, 2004, committed lines of credit with two commercial banks totaling $10 million. Financial Corporation'sCorporation’s lines are supported by the guaranty of NW Natural.
Under the terms of these lines of credit (see Note 6 in the 2003 Form 10-K), 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, if any, are based on current market rates. There were no outstanding balances on either the NW Natural or Financial Corporation lines of credit as of Sept. 30,at March 31, 2004 or 2003, or 2002, or at Dec. 31, 2002.
2003.
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 senior
unsecured debt ratings. A change in NW Natural's credit 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
27
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.
TheNatural’s lines of credit require the Company to maintain an indebtedness to total capitalization ratio of 65 percent or less and to maintain a consolidated net worth at least equal to 80 percent of its net worth at Sept. 30, 2003, plus 50 percent of the Company'sCompany’s net income for each subsequent fiscal quarter. Failure to comply with either of these covenants would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding. The CompanyNW Natural was in compliance with both of these covenants at Sept. 30,March 31, 2004, and at Dec. 31, 2003, and with the equivalent covenants in the prior year'syear’s lines of credit at Dec.March 31, 2002.
NW Natural may be unable to draw upon the two-year portions of the
credit lines, totaling $75 million, until its notes relating to the two-year
commitments are approved by the OPUC or the WUTC, or both. NW Natural expects
that it will be able to secure such approvals, if required.
2003.
Optional Redemptions of Long-Term Debt and Redeemable Preferred Stock
---------------------------------------------------------------------
In 2003, the third quarter of 2003, NW NaturalCompany exercised early redemption provisions applicable to certain of its long-term debt including all $4 millionand redeemable preferred stock (see Part II, Item 7, “Financial Condition—Liquidity and Capital Resources—Optional Redemptions of the 7.50% Series B MTNs due 2023, all $11 million of the 7.52% Series B MTNs
due 2023,Long-Term Debt and all $20 million of the 7.25% Series B MTNs due 2023. These MTNs
were redeemableRedeemable Preferred Stock,” in the third quarter of 2003 at 103.75 percent, 103.76 and
103.65 percent of their respective principal amounts.Form 10-K). The Company redeemed each
of the series of MTNslong-term debt and the preferred stock with available cash or with the proceeds from sales of commercial paper. The Company also gave notice, in October 2003, that it was
exercising the early redemption provision applicable to all of the remaining
shares of its $7.125 Series of Redeemable Preferred Stock with an aggregate
stated value of $7.5 million, at a redemption price equivalent to 102.375
percent, effective as of Nov. 14, 2003. The Company intends to redeem the
preferred stock with the proceeds from sales of commercial paper, and to
re-financere-financed this long-term debt and preferred stock through the sale of new long-term debt in the fourth quarter of 2003. The Company had no preferred stock outstanding following these redemptions.
Cash Flows
----------
Operating Activities
--------------------
Cash provided by operating activities was $110.4$89.6 million in the ninethree months ended Sept. 30, 2003,March 31, 2004, compared to $127.4$98.4 million in the first ninethree months of 2002.2003. The $17.0$8.8 million, or 139 percent, decrease was due to a decreasereduced cash flow from working capital sources ($12.7 million), partially offset by an increase in cash from operations before working capital changes ($25.83.9 million), partially
offset by .
The primary factors contributing to the overall decrease in cash flow from operations included:
partially offset by:
The Company has lease and purchase commitments relating to its operating activities that are financed with cash flows from operations by that amount, but the reduction was more than offset by other
factors affecting cash flows(see “Liquidity and Capital Resources,” above, and Note 12 in the first nine months of 2002.
2003 Form 10-K).
Investing Activities
--------------------
Cash requirements for investing activities in the first ninethree months of 20032004 totaled $92.0$23.0 million, updown from $57.9$24.9 million in the same period of 2002.2003. Cash requirements for utility construction totaled $90.0$22.5 million, up $36.8
28
ninethree months of 2002.2003. The increasedecrease in cash requirements for utility construction in the first ninethree months of 20032004 was primarily the result of slightly lower capital expenditures relating to NW Natural'sNatural’s SMPE project to extend the pipeline from its Mist gas storage field ($20.50.9 million) and other special projects to serve new customer load or new service areas ($7.01.2 million).
Investments in non-utility property during the first ninethree months of 20032004 totaled $2.1$0.5 million, down from $2.6$1.3 million during the first ninethree months of 2002.2003.
The SMPE project has a scheduled completion date in late 2004. NW Natural's utilityNatural must obtain easements and rights-of-way for the construction expenditures in 2003 currently are
estimated to total $129 million, up from $85 million in 2002. Projected utility
construction in 2003 includes $36 million for customer growth, up from $29
million in 2002; $31 million for system improvement and support, up from $25
million in 2002; $31 million for this year's portion of the SMPE projectpipeline and related gas storage facilities, up from $9 million in 2002; and $6 million for
this year's portionis using condemnation proceedings to secure some of a project to construct a gas distribution system in Coos
County, Oregon, up from $1 million in 2002. Following denial by the Oregon
Supreme Court of a motion by the appellants to stay the effect of the SMPE
project site certificate, them.
NW Natural proceededentered into a stipulation with constructionthe OPUC in 2001 for an enhanced pipeline safety program that includes an accelerated bare steel replacement program and a geo-hazard safety program. The bare steel replacement program accelerates the replacement of an initial
segmentNW Natural’s bare steel piping over 20 years instead of 40 years. The geo-hazard safety program includes the SMPE project pending resolutionidentification, assessment and remediation of appeals fromrisks to piping infrastructure created by landslides, washouts, earthquakes or similar occurrences. The stipulation allowed NW Natural to receive deferred accounting rate treatment commencing Oct. 1, 2002, for costs associated with the order
approving its site certificate for the project (see Note 7 to the accompanying
Consolidated Financial Statements).
During the five-year period 2003 through 2007, utility construction
expenditures are estimated at between $500bare steel replacement program exceeding $3 million and $600 million. The level
of capital expenditures over the next five years reflects projected customer
growth, system improvement projects resulting in part from requirements under
the Pipeline Safety Improvement Act of 2002,per year and the SMPE project to extendactual costs associated with the pipeline that moves gas from NW Natural's Mist gas storage field into growing
portions of its service area. See Part II, Item 8., "Financial Condition - Cash
Flows - Investing Activities," in the 2002 Form 10-K. An estimated 60 percent of
the required funds aregeo-hazard safety program, expected to be internally generated over the five-year
period; the remainder will be funded through a combination of long-term debt and
equity securities with short-term debt providing liquidity and bridge financing.
approximately $1.5 million annually.
Financing Activities
--------------------
Cash used in financing activities in the first ninethree months of 20032004 totaled $18.6$68.6 million, downup from $60.2$36.5 million in the same period of 2002.2003. Factors contributing to the $41.6$32.1 million difference were an increasethe issuance of $40 million in MTNs in the first quarter of 2003, partially offset by a smaller decrease in short-term debt in the first ninethree months of 20032004 ($15.47.5 million), compared to a
reductionthe same period in 2003.
In April 2004, the first nine months of 2002 ($108.3 million), partially offset by
a $50 million decrease in long-term debtCompany issued and a $34.5 million increase in
long-term debt retired.
In February 2003, NW Natural sold $40 million1,290,000 shares of its 5.66% Series B
secured MTNs due 2033common stock in an underwritten public offering and used the net proceeds together with internally generated
cash,of $38.5 million from the offering primarily to fund, in part, NW Natural’s utility construction program and to reduce short-term debtindebtedness by $69.8 million in the first quarter of 2003.
In March 2002, NW Natural sold $60 million of secured MTNs and used the
proceeds, together with internally generated cash, to reduce short-term debt by
$108.1 million in the first quarter of 2002.
about $29 million.
In 2000, NW Natural commenced a program to repurchase up to 2 million shares, or up to $35 million in value, of NW Natural'sNatural’s common stock through a repurchase program that has been extended through May 2004 (see Part II, Item
7., "Financial Condition - Cash Flows - Financing Activities,"2005. The purchases are made in the 2002 Form
10-K).open market or through privately negotiated transactions. No shares were repurchased in 20022003 or in the first nine monthsquarter of 2003.2004. Since the program'sprogram’s inception the Company has repurchased 355,400 shares of common stock at a total cost of $8.2 million. 29
Ratios of Earnings to Fixed Charges
-----------------------------------
For the ninethree months and 12 months ended Sept. 30, 2003March 31, 2004 and the 12 months ended Dec. 31, 2002,2003, the Company'sCompany’s ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 2.29, 2.716.41, 3.11 and 2.85,2.83, respectively. For this purpose, earnings consist of net income before taxes plus fixed charges, and fixed charges consist of interest on all indebtedness, dividends on all preferred and preference stock, the amortization of debt expense and discount or premium and the estimated interest portion of rentals charged to income. A significant part of the business of the Company is of a seasonal nature; therefore, the ratio of earnings to fixed charges for the interim period is not necessarily indicative of the results for a full year.
Contingent Liabilities
- ----------------------
Environmental Matters
---------------------
NW Natural accrues all material loss contingencies relating
The Company is subject to federal, state and local laws and regulations related to environmental matters. These evolving laws and regulations may require expenditures over a long timeframe to control environmental impacts. The Company believes, at this time, that appropriate investigation or remediation is being undertaken at all the relevant sites. Based on existing knowledge, the Company does not expect that the ultimate resolution of these matters that it believeswill have a material adverse effect on its financial condition, results of operations or cash flows. See Note 7 to be probable of assertionthe accompanying Consolidated Financial Statements and
reasonably estimable. See Note 12 in the 20022003 Form 10-K. Due to the preliminary
nature of several of these environmental investigations, the range of any
additional possible loss contingency cannot be currently estimated.
On May 27, 2003, the OPUC approved NW Natural's request for deferral of
environmental costs associated with five specific sites, including the Gasco,
Wacker, Portland Gas and Portland Harbor sites. See Note 12 in the 2002 Form
10-K. The authorization, effective for a 12-month period beginning April 7,
2003, allows NW Natural to defer and seek recovery of unreimbursed environmental
costs in a future general rate case. Through Sept. 30, 2003, NW Natural has
recorded $0.7 million of these costs in a deferred regulatory account.
NW Natural will first seek to recover the costs of further
investigation and remediation for which it may be responsible with respect to
the Gasco site, the Wacker site, the Portland Harbor site and the Portland Gas
site, if any, from insurance. If these costs are not recovered from insurance,
then NW Natural will seek recovery through future rates.
On June 30, 2003, the Company filed a Feasibility Scoping Plan and an
Ecological and Human Health Risk Assessment with the Oregon Department of
Environmental Quality (ODEQ), which outlined a range of remedial alternatives
for the most contaminated portion of the Gasco site. See Note 12 in the 2002
Form 10-K. NW Natural will work with the ODEQ to determine the appropriate
remedial action from among the alternatives. Based upon the proposed actions in
the draft plan, the Company estimates its range of liability, including the cost
of investigation, from feasible alternatives at between $1.7 million and $7
million. NW Natural has a recorded liability of $1.7 million, excluding
regulatory deferred costs of $0.1 million, as of Sept. 30, 2003, for its
estimated costs of investigation and remediation related to the Gasco site. See
"Application of Critical Accounting Policies - Critical Estimates," above.
Enron Gas Supply Contract
-------------------------
On Oct. 16, 2003, NW Natural received a demand letter from Enron North
America Corp. (Enron) seeking payment of $1.1 million allegedly owed pursuant to
a gas supply contract between NW Natural and Enron which was in effect when
Enron filed for bankruptcy in December 2001. The contract was terminated upon
the bankruptcy and NW Natural does not believe that any amounts are owed to
Enron under the contract.
30
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'sCompany’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, among others, that could cause the actual results of the Company to differ materially from those projected in such forward-looking statements: (i) prevailing state and federal governmental policies and regulatory actions, including those of the OPUC, the WUTC and the U.S. Department of Transportation'sTransportation’s Office of Pipeline Safety, 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, the maintenance of pipeline integrity, present or prospective wholesale and retail competition, changes in tax laws and policies and changes in and compliance with environmental and safety laws, regulations and policies; (ii) weather conditions and other natural phenomena; (iii) unanticipated population growth or decline, and changes in market demand andcaused by changes in demographic or customer consumption patterns; (iv) competition for retail and wholesale customers; (v) pricing of natural gas relative to other energy sources; (vi) risks relating to dependence on a single pipeline transportation provider for natural gas supply; (vii) risks resulting from uninsured property damage to Company property, intentional or otherwise; (vii)(viii) unanticipated changes in interest or foreign currency exchange rates or in rates of inflation; (viii)(ix) economic factors that could cause a severe downturn in certain key industries, thus affecting demand for natural gas; (ix)(x) unanticipated changes in operating expenses and capital expenditures; (x)(xi) unanticipated changes in future liabilities relating to employee benefit plans; (xi)(xii) capital market conditions, including their effect on pension costs; (xii) competition for new energy development opportunities; (xiii)(xiv) potential inability to obtain permits, rights of way, easements, leases or other interests or other necessary authority to construct pipelines, develop storage or complete other system expansions; and (xiv)(xv) legal and administrative proceedings and settlements. All subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, also are expressly qualified by these cautionary statements.
Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for the Company to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.
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“Quantitative and Qualitative Disclosures About Market Risk,"” in the 20022003 Form 10-K.
With respect to interest rate risk, during the three-month period ended
Sept. 30, 2003 the Company redeemed $35 million in long-term debt securities
with an average coupon rate of 7.36 percent and original maturities in 2023,
pursuant to optional redemption provisions. The Company used available cash or
the proceeds from sales of commercial paper to redeem these debt securities. The
Company intends to refinance this debt through the sale of new long-term debt
securities during the fourth quarter of 2003. The Company has not entered into
derivative financial transactions such as Treasury locks to hedge interest rate
changes during the period before the debt is refinanced. Therefore, it is
uncertain whether the Company's refinancing cost will be lower than the cost of
the securities redeemed. The Company does not expect, however, that there would
be a material impact on its results of operations, cash flows or financial
condition if there were to be a sudden increase in market interest rates before
the refinancing is completed.
31
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of Sept. 30, 2003,March 31, 2004, the principal executive officer and principal financial officer of the Company have evaluated the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, the principal executive officer and principal financial officer of the Company have concluded that such disclosure controls and procedures are effective in timely alerting them to any material information relating to the Company and its consolidated subsidiaries required to be included in the Company'sCompany’s reports filed with or furnished to the Securities and Exchange Commission under the Exchange Act.
(b) Changes in Internal Control Over Financial Reporting
There has been no significant change in the Company'sCompany’s internal control over financial reporting that occurred during the Company'sCompany’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
Litigation
- ----------
In April 2003,November 2001, NW Natural settled and agreed with Cascade Resources
Corporation and Al Curry (collectively, Cascade) to dismiss their respective
claims in commenced a lawsuit,Northwest Natural Gas Company v. Cascade Resources Corporation and Curry, etet. al. (United(United States District Court for the District of Oregon, Case No. CV 01-1620 HU) (the Action). See, alleging that the defendants violated obligations regarding the use and disclosure of confidential information and used such information to solicit and secure underground gas storage leases in areas of interest to the Company (see Part I, Item 3., "Legal“Legal Proceedings,"” in the 20022003 Form 10-K10-K). On March 11, 2004, NW Natural and Part II, Item 1., "Legal Proceedings," in the Company's Form
10-Q for the quarters ended March 31 and June 30, 2003. In June 2003, the court
denied the motion of Enerfin Resources Northwest Limited Partnership (Enerfin), settled their claims in this case. Under the remaining defendantterms of the settlement, the lawsuit was dismissed. Enerfin agreed to pay NW Natural $465,000, and NW Natural agreed to transfer to Enerfin certain oil and gas production rights that were acquired from Cascade Resources in the Action, seeking to allow it to make cross-claims
against Cascadesettlement of the original claims in this case. In addition, NW Natural purchased from Enerfin and its partner certain interests in two reservoirs in the case.Mist gas field for $1 million. In July,the settlement, Enerfin filed a Motion for Summary
Judgment seeking dismissal of claims made byalso agreed to dismiss its counterclaims against NW Natural against it. Thein litigation with Longview Fibre Company opposed the motion(Longview Fibre Company v. Enerfin Resources Northwest Limited Partnership and a final decision is pending.
On March 13, 2003, theNorthwest Natural Gas Company(US District Court – Oregon Energy Facility Siting Council (EFSC)
issued a Final Order and Site Certificate (Site Certificate) pursuant to which
the EFSC approved construction of the Company's proposed South Mist Pipeline
Extension (SMPE) along a designated route. SeeDistrict)) (see Part II,I, Item 7.3., "Financial
Condition - Investing Activities,"“Legal Proceedings,” in the 20022003 Form 10-K. In May, two parties in
the contested case before EFSC separately appealed the issuance of the Site
Certificate to the Oregon Supreme Court. (Supreme Court Nos. 550428 and 550434
(consolidated))10-K). The appeals were argued before the Supreme Court on July 22,
2003. On Nov. 6, 2003, the Supreme Court ruled on the appeals, affirming EFSC's
issuance of the Site Certificate.
The Company is subject to other claims and litigation arising in the ordinary course of business. Although the final outcome of any such legal proceeding cannot be predicted with certainty, the Company does not expect disposition of these matters to have a material impactmaterially adverse effect on the Company'sCompany’s financial condition orposition, results of operations.
32
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
(e) The following table provides information about purchases by the Company during the quarter ended March 31, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
(a) | (b) | (c) | (d) | |||||||
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||
01/01/04-01/31/04 | 5,850 | $ | 30.804 | — | $ | 26,800,000 | ||||
02/01/04-02/29/04 | — | — | — | — | ||||||
03/01/04-03/31/04 | — | — | — | — | ||||||
Total | 5,850 | $ | 30.804 | — | $ | 26,800,000 | ||||
(1) | During the three months ended March 31, 2004, the Company repurchased an aggregate of 5,850 shares of its common stock pursuant its Non-Employee Directors Stock Compensation Plan (NEDSCP), as amended Feb. 26, 2004. The Company purchases shares awarded pursuant to the NEDSCP in the open market at the time of award. |
(2) | On May 25, 2000, the Company announced 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 that has been extended annually. The purchases are made in the open market or through privately negotiated transactions. Since the program’s inception, the Company has repurchased 355,400 shares of common stock at a total cost of $8.2 million. On April 22, 2004, NW Natural’s Board of Directors extended the program through May 31, 2005. |
Officer Retirement
On May 7, 2004, the Company Information
-------------------announced that its senior vice president and chief financial officer, Bruce R. DeBolt, intends to retire from NW Natural on Oct. 1, 2004 after 24 years of service with the Company. The Company's Internet website (www.nwnatural.com) now features a
Corporate Governance moduleCompany expects that includesMr. DeBolt will resign his officer positions effective July 31, 2004.
Director Nominations
There have been no changes to the following corporate governance
materials:
o Corporate Governance Standards;
o Statementprocedures by which the Company’s shareholders may recommend nominees to the Company’s Board of Policy on Director Independence Standards;
o Board Committee Charters;
o Code of Ethics;
o Standards of Conduct;
o Financial Code of Ethics;
o Inside Information and Trading Policy; and
o Information for contactingDirectors since the Company's non-management directors.
33
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit (3) - Bylaws of the Company, as amended September 25, 2003
Exhibit (11) - Statement re: Computation of Per Share Earnings
Exhibit (12) - Computation of Ratio of Earnings to Fixed Charges
Exhibit (31.1) - Rule 13a - 14(a)/15d-14(a) Certification of
Principal Executive Officer (required by Section 302
of the Sarbanes-Oxley Act of 2002).
Exhibit (31.2) - Rule 13a - 14(a)/15d-14(a) Certification of
Principal Financial Officer (required by Section 302
of the Sarbanes-Oxley Act of 2002).
Exhibit (32.1) - Section 1350 Certification of Principal
Executive Officer and Principal Financial Officer
(required by Section 906 of the Sarbanes-Oxley Act
of 2002).
(b) Reports on Form 8-K
On July 29, Aug. 22, and Nov. 4, 2003, respectively, the Company filed
or furnished, as applicable, its Current Reports on Form 8-K relating to: (a)
earnings for the quarter and six months ended June 30, 2003 (unaudited); (b) the
entering of an order by the Oregon Public Utility Commission (OPUC) approving
the stipulations as filed by the Company with the OPUC staff and other parties
covering all of the issues in the Company's Oregon general rate case; and (c)
earnings for the quarter and nine months ended Sept. 30, 2003 (unaudited).
(a) | Exhibits |
Exhibit (11) | - | Statement re: Computation of Per Share Earnings | ||
Exhibit (12) | - | Computation of Ratio of Earnings to Fixed Charges | ||
Exhibit (31.1) | - | Rule 13a - 14(a)/15d-14(a) Certification of Principal Executive Officer (required by Section 302 of the Sarbanes-Oxley Act of 2002). | ||
Exhibit (31.2) | - | Rule 13a - 14(a)/15d-14(a) Certification of Principal Financial Officer (required by Section 302 of the Sarbanes-Oxley Act of 2002). | ||
Exhibit (32.1) | - | Section 1350 Certification of Principal Executive Officer and Principal Financial Officer (required by Section 906 of the Sarbanes-Oxley Act of 2002). |
(b) | Reports on Form 8-K |
(a) | On January 29, 2004, the Company furnished its Current Report on Form 8-K relating to earnings for the quarter and twelve months ended December 31, 2003 (unaudited); |
(b) | On April 2, 2004 the Company filed its Current Report on Form 8-K, filing as an exhibit the Underwriting Agreement, dated March 30, 2004, between the Company and A.G. Edwards & Sons, Inc., Edward D. Jones & Co., L.P., Janney Montgomery Scott LLC, Stifel, Nicolaus & Company, Incorporated and Wells Fargo Securities, LLC, relating to the issuance and sale of 1,290,000 shares of the Company’s Common Stock; and |
(c) | On April 23, 2004, the Company furnished its Current Report on Form 8-K relating to earnings for the quarter ended March 31, 2004 (unaudited). |
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 7, 2004 | /s/ Stephen P. Feltz | |
Stephen P. Feltz | ||
Principal Accounting Officer | ||
Treasurer and Controller |
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: November 12, 2003 /s/ Stephen P. Feltz
-----------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
34
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
Sept. 30, 2003
Exhibit
Document Number
- -------- ------
Bylaws of the Company, as amended September 25, 2003 (3)
Statement re: Computation of Per Share Earnings (11)
Computation of Ratio of Earnings to Fixed Charges (12)
Certification of Principal Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a), Section 302 of the
Sarbanes-Oxley Act of 2002 (31.1)
Certification of Principal Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a), Section 302 of the
Sarbanes-Oxley Act of 2002 (31.2)
Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (32.1)
March 31, 2004
Document | Exhibit Number | |
Statement re: Computation of Per Share Earnings | (11) | |
Computation of Ratio of Earnings to Fixed Charges | (12) | |
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002 | (31.1) | |
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002 | (31.2) | |
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | (32.1) |