Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 0-994
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NORTHWEST NATURAL GAS COMPANY
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-0256722
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N. W. Second Avenue, Portland, Oregon 97209
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 226-4211
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
At August 6, 1996, 14,937,152 shares of the registrant's Common
Stock, $3-1/6 par value (the only class of Common Stock) were
outstanding.
NORTHWEST NATURAL GAS COMPANY
June 30, 1996
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Number
------
(1) Consolidated Statements of Income for
the three and six month periods ended
June 30, 1996 and 1995 and Consolidated
Statements of Earnings Invested in the
Business for the six month periods ended
June 30, 1996 and 1995. 3
(2) Consolidated Balance Sheets at June 30,
1996 and 1995 and December 31, 1995. 4
(3) Consolidated Statements of Cash Flows for
the six month periods ended June 30, 1996
and 1995. 6
(4) Consolidated Statements of Capitalization
at June 30, 1996 and 1995 and December 31,
1995. 7
(5) Notes to Consolidated Financial Statements. 8
Independent Accountants' Report 10
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial
Condition 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signature 24
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------
1996 1995 1996 1995
------- ------- -------- -------
Net Operating Revenues:
Operating revenues $71,884 $71,029 $209,445 $196,418
Cost of sales 25,701 29,224 79,758 80,768
------- ------- -------- --------
Net operating revenues 46,183 41,805 129,687 115,650
------- ------- -------- --------
Operating Expenses:
Operations and maintenance 18,114 18,550 38,114 36,131
Taxes other than income taxes 5,028 5,936 12,895 13,390
Depreciation, depletion and
amortization 10,730 9,780 23,434 19,689
------- ------- -------- --------
Total operating expenses 33,872 34,266 74,443 69,210
------- ------- -------- --------
Income from Operations 12,311 7,539 55,244 46,440
------- ------- -------- --------
Other Income 2,525 4,267 5,006 3,180
------- ------- -------- --------
Interest Charges - net 6,276 6,361 12,772 12,923
------- ------- -------- --------
Income Before Income Taxes 8,560 5,445 47,478 36,697
Income Taxes 3,052 1,937 18,614 14,137
------- ------- -------- --------
Net Income 5,508 3,508 28,864 22,560
Preferred and preference stock
dividend requirements 685 690 1,376 1,425
------- ------- -------- --------
Earnings Applicable to Common Stock $ 4,823 $ 2,818 $ 27,488 $ 21,135
======= ======= ======== ========
Average Common Shares Outstanding 14,895 14,700 14,872 14,308
Primary Earnings Per Share of
Common Stock $0.32 $0.19 $1.85 $1.48
Fully-Diluted Earnings Per Share
of Common Stock $0.32 * $1.82 $1.45
Dividends Per Share of Common Stock $0.45 $0.44 $0.90 $0.88
*Anti-dilutive
See accompanying Notes to Consolidated Financial Statements.
=============================================================================
Consolidated Statements of Earnings Invested in the Business
(Thousands, Six Month Periods Ended June 30)
1996 1995
-------- --------
Balance at Beginning of Period $105,651 $ 97,275
Net Income 28,864 22,560
Cash Dividends:
Preferred and preference stock (1,388) (1,455)
Common stock (13,369) (12,375)
Capital stock expense and other (548) (1,402)
-------- --------
Balance at End of Period $119,210 $104,603
======== ========
See accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
June 30, June 30, Dec. 31,
1996 1995 1995
---------- -------- --------
Assets:
Plant and Property in Service:
Utility plant in service $1,010,180 $936,695 $969,075
Less accumulated depreciation 322,384 293,789 308,702
---------- -------- --------
Utility plant - net 687,796 642,906 660,373
Non-utility property 43,697 52,211 53,807
Less accumulated depreciation
and depletion 14,397 25,985 16,997
---------- -------- --------
Non-utility property - net 29,300 26,226 36,810
---------- -------- --------
Total plant and property
in service 717,096 669,132 697,183
---------- -------- --------
Investments and Other:
Investments 31,258 32,934 34,126
Long-term notes receivable 3,404 4,551 3,756
---------- -------- --------
Total investments and other 34,662 37,485 37,882
---------- -------- --------
Current Assets:
Cash and cash equivalents 3,355 18,686 7,782
Accounts receivable - net 25,909 19,253 34,385
Accrued unbilled revenue 5,058 5,843 21,493
Inventories of gas, materials
and supplies 14,531 14,387 14,254
Prepayments and other current
assets 8,747 6,160 12,396
---------- -------- --------
Total current assets 57,600 64,329 90,310
---------- -------- --------
Regulatory Tax Assets 60,430 60,430 60,430
---------- -------- --------
Deferred Debits and Other 47,205 45,555 43,472
---------- -------- --------
Total Assets $ 916,993 $876,931 $929,277
========== ======== ========
See accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
June 30, June 30, Dec. 31,
1996 1995 1995
-------- -------- --------
Capitalization and Liabilities:
Capitalization:
Common stock $221,117 $215,133 $217,901
Earnings invested in the business 119,210 104,603 105,651
-------- -------- --------
Total common stock equity 340,327 319,736 323,552
Preference stock 25,000 25,000 25,000
Redeemable preferred stock 13,749 14,840 14,840
Long-term debt 253,499 276,066 279,945
-------- -------- --------
Total capitalization 632,575 635,642 643,337
-------- -------- --------
Current Liabilities:
Notes payable 21,301 16,321 28,832
Accounts payable 36,214 27,903 41,784
Long-term debt due within one year 32,000 16,000 21,000
Taxes accrued 5,859 5,335 10,281
Interest accrued 4,536 4,574 4,617
Other current and accrued
liabilities 13,425 11,793 13,204
-------- -------- --------
Total current liabilities 113,335 81,926 119,718
-------- -------- --------
Deferred Investment Tax Credits 11,952 12,877 12,493
-------- -------- --------
Deferred Income Taxes 123,675 116,990 118,692
-------- -------- --------
Regulatory Balancing Accounts and
Other 35,456 29,496 35,037
-------- -------- --------
Commitments and Contingent
Liabilities - - -
-------- -------- --------
Total Capitalization and
Liabilities $916,993 $876,931 $929,277
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousands of Dollars)
Six Months Ended
June 30,
-------------------
1996 1995
------- -------
Operating Activities:
Net income $28,864 $22,560
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation, depletion and amortization 23,434 19,689
Gain on sale of assets (2,897) -
Deferred income taxes and investment tax credits 4,442 3,904
Equity in losses of investments 291 455
Allowance for funds used during construction (653) (272)
Regulatory balancing accounts and other - net (3,314) (3,650)
Cash from operations before working ------- -------
capital changes 50,167 42,686
Changes in operating assets and liabilities:
Accounts receivable 8,476 22,899
Accrued unbilled revenue 16,435 14,477
Inventories of gas, materials and supplies (277) 571
Accounts payable (5,570) (20,614)
Accrued interest and taxes (4,503) (1,245)
Other current assets and liabilities 3,870 3,917
------- -------
Cash Provided By Operating Activities 68,598 62,691
------- -------
Investing Activities:
Acquisition and construction of utility plant assets (36,411) (31,412)
Investment in non-utility plant (3,386) (2,881)
Investments and other 2,929 (843)
------- -------
Cash Used In Investing Activities (36,868) (35,136)
------- -------
Financing Activities:
Common stock issued 2,770 36,922
Preference stock retired - (174)
Preferred stock retired (1,091) (1,110)
Long-term debt retired (26,000) (10)
Change in short-term debt 3,469 (37,333)
Cash dividend payments:
Preferred and preference stock (1,388) (1,455)
Common stock (13,369) (12,375)
Capital stock expense and other (548) (1,402)
------- -------
Cash Used For Financing Activities (36,157) (16,937)
------- -------
Increase (Decrease) in Cash and Cash Equivalents (4,427) 10,618
Cash and Cash Equivalents - Beginning of Period 7,782 8,068
------- -------
Cash and Cash Equivalents - End of Period $ 3,355 $18,686
======= =======
=============================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $12,723 $12,752
Income Taxes $16,700 $12,504
=============================================================================
Supplemental Disclosure of Noncash Financing Activities
Conversion to common stock:
$2.375 Series of Convertible Preference Stock $ - $ 1,078
7-1/4 percent Series of Convertible Debentures $ 446 $ -
=============================================================================
See accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands, except share amounts)
Jun. 30, 1996 Jun. 30, 1995 Dec. 31, 1995
- ---------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6
per share $ 47,273 $ 46,674 $ 46,958
Premium on common stock 173,844 168,459 170,943
Earnings invested in business 119,210 104,603 105,651
-------- -------- --------
Total common stock equity 340,327 54% 319,736 50% 323,552 50%
-------- ---- -------- ---- -------- ----
PREFERENCE STOCK:
$6.95 Series, stated value
$100 per share 25,000 25,000 25,000
-------- -------- --------
Total preference stock 25,000 4% 25,000 4% 25,000 4%
-------- ---- -------- ---- -------- ----
REDEEMABLE PREFERRED STOCK, stated
value $100 per share:
$4.68 Series 391 552 552
$4.75 Series 608 788 788
$7.125 Series 12,750 13,500 13,500
-------- -------- --------
Total redeemable preferred stock 13,749 2% 14,840 2% 14,840 2%
-------- ---- -------- ---- -------- ----
LONG-TERM DEBT:
First Mortgage Bonds
--------------------
9-3/4% Series due 2015 50,000 50,000 50,000
9-1/8% Series due 2019 24,000 25,000 24,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
4.80% Series A due 1996 - 5,000 5,000
7.38% Series A due 1997 20,000 20,000 20,000
7.69% Series A due 1999 10,000 10,000 10,000
5.96% Series B due 2000 5,000 5,000 5,000
5.98% Series B due 2000 5,000 5,000 5,000
8.05% Series A due 2002 10,000 10,000 10,000
6.40% Series B due 2003 20,000 20,000 20,000
6.34% Series B due 2005 5,000 5,000 5,000
6.38% Series B due 2005 5,000 5,000 5,000
6.45% Series B due 2005 5,000 5,000 5,000
6.50% Series B due 2008 5,000 5,000 5,000
8.26% Series B due 2014 10,000 10,000 10,000
8.31% Series B due 2019 10,000 10,000 10,000
9.05% Series A due 2021 10,000 10,000 10,000
7.25% Series B due 2023 20,000 20,000 20,000
7.50% Series B due 2023 4,000 4,000 4,000
7.52% Series B due 2023 11,000 11,000 11,000
6.52% Series B due 2025 10,000 - 10,000
Unsecured:
4.90% Series A due 1996 - 10,000 10,000
8.69% Series A due 1996 5,000 5,000 5,000
7.40% Series A due 1997 5,000 5,000 5,000
8.93% Series A due 1998 5,000 5,000 5,000
8.95% Series A due 1998 10,000 10,000 10,000
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
----------------------
7-1/4% Series due 2012 11,499 12,066 11,945
-------- -------- --------
285,499 292,066 300,945
Less long-term debt due within
one-year 32,000 16,000 21,000
-------- -------- --------
Total long-term debt 253,499 40% 276,066 44% 279,945 44%
-------- ---- -------- ---- -------- ----
TOTAL CAPITALIZATION $632,575 100% $635,642 100% $643,337 100%
======== ==== ======== ==== ======== ====
- ----------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
(5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of financial statements
The information presented in the consolidated financial
statements is unaudited, but includes all adjustments, consisting
of only normal recurring accruals, which the management of the
Company considers necessary for a fair presentation of the
results of such periods. These consolidated financial statements
should be read in conjunction with the financial statements and
related notes included in the Company's 1995 Annual Report on
Form 10-K. A significant part of the business of the Company is
of a seasonal nature; therefore, results of operations for the
three and six month periods ended June 30, 1996 and 1995 are not
indicative of the results for a full year.
Certain amounts from the prior year have been
reclassified to conform with the 1996 presentation.
2. Accounting Pronouncements
In the first quarter of 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever the
carrying amount of the asset may not be recoverable, and requires
that assets committed to be disposed of be recorded at the lower
of the carrying amount or fair value less cost to sell. As a
result of adopting SFAS No. 121, Oregon Natural Gas Development
Corporation (Oregon Natural), a wholly-owned subsidiary of the
Company, recorded an impairment loss with respect to producing
wells of $1.3 million, equivalent to a loss of $0.05 per share,
during the first quarter of 1996. No impairment was recorded for
certain other operating wells held for sale because, in the
opinion of management, the fair value of this group of wells is
greater than the carrying amount. In addition, in accordance
with SFAS No. 19, "Financial Accounting and Reporting by Oil and
Gas Producing Companies," Oregon Natural recorded write-downs of
unproven gas properties equivalent to $0.04 per share, also in
the first quarter of 1996.
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 requires expanded disclosures of stock-based
compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair
value of the equity instrument awarded. Companies are permitted,
however, to continue to apply Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," which
recognizes compensation cost based on the intrinsic value of the
equity instrument awarded. The Company will continue to apply
APB Opinion No. 25 to its stock-based compensation awards to
employees and will disclose the required pro forma effect on net
income and earnings per share in its 1996 annual report.
3. Contingent Liabilities
See Part I, Item 2., "Environmental Matters" below, and
Part II, Item 7., "Contingent Liabilities" and "Environmental
Matters" in the Company's 1995 Annual Report on Form 10-K.
DELOITTE & TOUCHE LLP
--------------------------------------------------------
3900 US Bancorp Tower Telephone: (503) 222-1341
111 SW Fifth Avenue Facsimile: (503) 224-2172
Portland, OR 97204-3698
INDEPENDENT ACCOUNTANTS' REPORT
Northwest Natural Gas Company
Portland, Oregon
We have made a review of the accompanying consolidated balance sheets and
statements of capitalization of Northwest Natural Gas Company and
subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of income for the three- and six-month periods ended June 30,
1996 and 1995, and the consolidated statements of earnings invested in
the business and cash flows for the six-month periods ended June 30, 1996
and 1995. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such consolidated financial statements for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet and statement of
capitalization of Northwest Natural Gas Company and subsidiaries as of
December 31, 1995, and the related consolidated statements of income,
earnings invested in the business, and cash flows for the year then ended
(not presented herein), and in our report dated February 20, 1996, we
expressed an unqualified opinion on those consolidated financial
statements which includes an explanatory paragraph relating to the change
in the Company's method of accounting for income taxes and postretirement
benefits. In our opinion, the information set forth in the accompanying
consolidated balance sheet and consolidated statement of capitalization
as of December 31, 1995 is fairly stated, in all material respects, in
relation to the consolidated financial statements from which it has been
derived.
DELOITTE & TOUCHE LLP
July 25, 1996
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The consolidated financial statements include:
Regulated Utility:
Northwest Natural Gas Company (Northwest Natural)
Non-regulated wholly-owned businesses:
Oregon Natural Gas Development Corporation (Oregon
Natural) - (merged with and into Northwest Natural
during the second quarter of 1996)
Canor Energy, Ltd. (Canor)
NNG Financial Corporation (Financial Corporation)
Two other subsidiaries, Pacific Square Corporation
(Pacific Square) and NNG Energy Systems, Inc. (Energy Systems)
were dissolved during 1995.
Together these businesses are referred to herein as the
"Company" (see "Subsidiary Operations" below and Part II,
Item 8., Note 2, "Notes to Consolidated Financial Statements", in
the Company's 1995 Annual Report on Form 10-K).
The following is management's assessment of the
Company's financial condition including the principal factors
that impact results of operations. The discussion refers to the
consolidated activities of the Company for the three and six
months ended June 30, 1996 and 1995.
Earnings and Dividends
- ----------------------
The Company earned $4.8 million, or $0.32 per share, in
its second quarter ended June 30, 1996, compared to $2.8 million,
or $0.19 per share, in last year's second quarter. Northwest
Natural's results improved by $2.5 million while subsidiary
results were lower by $0.5 million.
Northwest Natural earned $0.25 per share from utility
operations in the second quarter of 1996, compared to $0.09 per
share in the same period in 1995. The utility's improved results
in the second quarter are primarily due to 5.2 percent customer
growth since June 30, 1995, which contributed an estimated $0.08
per share in net operating revenues (margin), and a gain
equivalent to $0.06 per share from the settlement of an appeal
relating to property taxes in Oregon. The Company estimates that
cooler weather conditions improved margin in the second quarter
by the equivalent of $0.01 per share over last year's results.
Subsidiary net income was $1.0 million for the quarter
ended June 30, 1996, compared to $1.6 million in last year's
second quarter. The subsidiaries' earnings for the quarter were
equivalent to $0.07 per share, down from $0.10 per share for the
same period in 1995. The 1995 subsidiary results included a gain
equivalent to $0.06 per share resulting from a final distribution
to Energy Systems under the bankruptcy reorganization plan of its
California cogeneration subsidiary.
The Company earned $27.5 million, or $1.85 per share,
and $21.1 million, or $1.48 per share, for the six months ended
June 30, 1996 and June 30, 1995, respectively. Year-to-date,
Northwest Natural earned $1.81 per share from utility operations,
compared to $1.45 per share in the same period in 1995. The
improved results for the year-to-date are primarily due to
weather that was colder than last year, adding an estimated $0.40
per share to margin over last year's results.
The estimates of margin impacts on three-month and six-
month results due to weather conditions and customer growth are
derived from the Company's internal planning model (see Part II,
Item 7., "Earnings and Dividends," in the Company's 1995 Annual
Report on Form 10-K).
Dividends paid on common stock were $0.45 per share for
the three-month period ended June 30, 1996 and $0.44 per share
for the three-month period ended June 30, 1995. The Board of
Directors of the Company has declared a quarterly dividend of
$0.45 per share on its common stock, payable August 15, 1996, to
shareholders of record on July 31, 1996. The current indicated
annual dividend rate is $1.80 per share.
Results of Operations
- ---------------------
Comparison of Gas Utility Operations
------------------------------------
The following table summarizes the composition of gas
utility volumes and revenues:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
Gas Sales and Transportation
Volumes - Therms (000's):
Residential and commercial sales 104,344 95,408 330,888 287,295
Unbilled volumes (14,773) (11,176) (32,585) (26,742)
------- ------- ------- -------
Weather-sensitive volumes 89,571 84,232 298,303 260,553
Industrial firm sales 22,568 19,992 49,669 43,724
Industrial interruptible sales 14,311 19,725 36,519 43,744
------- ------- ------- -------
Total gas sales 126,450 123,949 384,491 348,021
Transportation deliveries 97,133 92,837 201,910 190,667
------- ------- ------- -------
Total volumes sold and delivered 223,583 216,786 586,401 538,688
======= ======= ======= =======
Utility Operating Revenues
- Dollars (000's):
Residential and commercial
revenues $57,885 $56,600 $178,268 $166,077
Unbilled revenues (7,314) (5,866) (16,434) (14,477)
------- ------- -------- --------
Weather-sensitive revenues 50,571 50,734 161,834 151,600
Industrial firm sales revenues 7,618 7,569 16,894 16,691
Industrial interruptible sales
revenues 3,827 5,649 9,860 12,513
------- ------- -------- --------
Total gas sales revenues 62,016 63,952 188,588 180,804
Transportation revenues 5,401 3,964 10,836 7,777
Other revenues 1,979 1,553 5,196 4,160
------- ------- -------- --------
Total utility operating revenues $69,396 $69,469 $204,620 $192,741
======= ======= ======== ========
Cost of gas $25,701 $29,224 $ 79,758 $ 80,768
======= ======= ======== ========
Total number of customers (end
of period) 417,200 396,500 417,200 396,500
======= ======= ======= ========
Actual degree days 705 649 2,653 2,339
======= ======= ======= ========
20-year average degree days 679 689 2,543 2,563
======= ======= ======= ========
Residential and Commercial
--------------------------
Typically, 75 percent or more of Northwest Natural's
annual operating revenues are derived from gas sales to weather-
sensitive residential and commercial customers. Accordingly,
shifts in temperatures from one period to the next will affect
the volumes of gas sold to these customers. Normal weather
conditions are based upon a 20-year average measured by heating
degree days.
Weather conditions were four percent cooler than
average in the second quarter of 1996, and nine percent cooler
than in the second quarter of 1995. Year-to-date weather
conditions in 1996 were four percent cooler than the 20-year
average, and 13 percent cooler than year-to-date in 1995.
Besides the effect of the cooler weather, the volumes
of gas sold also were increased by the addition of 20,700 new
customers since June 30, 1995. Customer growth continues at a
rapid rate relative to others in the industry. The residential
and commercial customers added since June 30, 1995, represent a
growth rate of 5.2 percent. In the three years ended
December 31, 1995, almost 57,000 customers were added to the
system, representing an average growth rate over that period of
5.1 percent.
Although the volumes of gas sold attributable to
residential and commercial customers were 14 percent higher in
the current six-month period, related revenues for the six-month
period increased only seven percent due to rate decreases
reflecting lower gas costs effective in December 1995 which
averaged 6.7 percent in Oregon and 8.0 percent in Washington.
Volumes sold to residential and commercial customers
increased by six percent for the three-month period ended
June 30, 1996, compared to the same period in 1995, while
corresponding revenues were unchanged, due to the same factors
discussed for the year-to-date results.
Unbilled revenues are a recognition of revenues for all
gas consumption by customers through the end of the period,
regardless of the meter reading date, in order to better match
revenues with related gas costs.
Industrial, Transportation and Other
------------------------------------
Total volumes delivered to industrial firm, industrial
interruptible and transportation customers were 1.5 million
therms, or one percent, higher in the second quarter of 1996, and
10.0 million therms, or four percent, higher for the six months
ended June 30, 1996, compared to the same periods in 1995.
The combined margin from industrial firm and
interruptible sales and transportation customers increased by
nine percent, from $11.6 million in the second quarter of 1995 to
$12.6 million in the second quarter of 1996. For the current
six-month period, margin from these customers increased 11
percent, from $24.8 million in 1995 to $27.6 million in 1996. The
margin increases were primarily due to more deliveries in the
higher margin-per-therm industrial firm customer category.
Other revenues are primarily related to additions to or
amortization of regulatory balancing accounts (see Part II,
Item 8., Note 1, "Notes to Consolidated Financial Statements", in
the Company's 1995 Annual Report on Form 10-K).
Cost of Gas
-----------
The cost of gas sold was $25.7 million during the
second quarter of 1996, down from $29.2 million during the second
quarter of 1995. Although total gas sales volumes were two
percent higher in the second quarter of 1996 than in the second
quarter of 1995, the cost of gas per therm was 14 percent lower.
The cost of gas sold was one percent lower during the
six-month period ended June 30, 1996 compared to the same period
in 1995. The decrease was due to the combined effect of a
10 percent increase in gas sales volumes and an 11 percent
decrease in the cost of gas per therm.
Subsidiary Operations
---------------------
The following table summarizes financial information for the
Company's consolidated wholly-owned subsidiaries:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
Consolidated Subsidiaries
(Thousands): 1996 1995 1996 1995
- ---------------------------- ---- ---- ---- ----
Net Operating Revenues $2,488 $1,560 $4,825 $3,677
Operating Expenses 2,273 2,534 6,868 4,870
------ ------ ------ ------
Income(Loss) from Operations 215 (974) (2,043) (1,193)
Income(Loss) from Financial
Investments 893 1,044 (328) (494)
Other Income and Interest
Charges 374 2,318 3,512 2,376
------ ------ ------ ------
Income Before Income Taxes 1,482 2,388 1,141 689
Income Tax Expense 464 835 541 260
------ ------ ------ ------
Net Income $1,018 $1,553 $ 600 $ 429
====== ====== ====== ======
Consolidated subsidiary results for the three months ended
June 30, 1996 and 1995, were net income equivalent to $0.07 per
share and $0.10 per share, respectively. Net income for the
individual subsidiaries for the second quarter of 1996 was
$0.6 million for Financial Corporation and $0.4 million for Oregon
Natural.
At the end of the second quarter of 1996, Oregon Natural
transferred all of its assets to Financial Corporation, other than
cash, intercompany receivables, the stock of Canor (previously a
wholly-owned subsidiary of Oregon Natural), and its ownership
interest in a Boeing 747 jet leased to Continental Airlines. The
transferred assets are primarily interests in certain gas-producing
properties in the western United States. Oregon Natural then was
merged with and into Northwest Natural, with the result that Canor
became a wholly-owned subsidiary of Northwest Natural.
The following discussion summarizes operating expenses,
other income, interest charges - net, and income taxes.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $2.0 million, or
six percent, higher for the six months ended June 30, 1996, than for
the same period in 1995. Northwest Natural's expenses increased
$2.5 million primarily due to work relating to cold weather and
flood conditions ($0.5 million); higher accruals for uncollectible
accounts ($0.3 million); an accrual for environmental investigation
costs ($0.4 million); and increased employee bonus accruals ($1.0
million). Subsidiary expenses decreased $0.5 million primarily due
to a decline in Oregon Natural's production costs.
Taxes Other Than Income Taxes
-----------------------------
Taxes other than income taxes decreased $0.4 million, or
four percent, in the first six months of 1996 compared to the same
period in 1995, due to a reduction in property tax expense.
Northwest Natural recorded an adjustment in the second
quarter reducing property tax expense by $0.4 million, representing
the current-year effect of refunds of property taxes under the
settlement of a property valuation appeal in Oregon. The settlement
reduced Northwest Natural's assessed property values for the current
and prior property tax years by an average of about nine percent.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation, depletion and amortization
expense increased $3.7 million, or 19 percent, in the first six
months of 1996 compared to the same period in 1995. This increase
was primarily due to impairment ($1.3 million) and abandonment ($1.0
million) expenses recorded by Oregon Natural, pursuant to the
adoption of SFAS No. 121 and the write-down of unproven properties,
respectively. Northwest Natural's depreciation expense increased
$1.2 million as a result of additional utility plant in service.
Other Income
------------
Other income for the six-month period ended June 30, 1996,
was $1.8 million higher than in the same period in 1995. Oregon
Natural recognized a $2.9 million gain in the first quarter of 1996
from the sale of underground gas storage assets to Northwest
Natural. In accordance with SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," the profit from this sale,
although intercompany in nature, was not eliminated during
consolidation since the sales price was approved by the Public
Utility Commission of Oregon and the approximate sales price which
resulted in the intercompany gain is expected to be recovered
through rates as an allowable cost. Northwest Natural recorded a
$0.8 million pre-tax gain in the second quarter of 1996, due to the
prior-year portion of refunds of property taxes under the settlement
of a property valuation appeal in Oregon (see "Taxes Other Than
Income Taxes," above). In the second quarter of 1995, Energy
Systems recorded a $2.0 million pre-tax gain due to a final
distribution under the reorganization plan of its California
subsidiary.
Interest Charges - Net
----------------------
Interest charges decreased $0.1 million and $0.2 million,
respectively, for the three- and six-month periods ended June 30,
1996 compared to the same periods in 1995, primarily due to a
reduction in short-term borrowings.
Income Taxes
------------
The effective corporate income tax rate was 39.2 percent
for the six-month period ended June 30, 1996, and 38.5 percent for
the six-month period ended June 30, 1995. These rates approximate
the Company's statutory tax rates for those periods.
Financial Condition
- -------------------
Capital Structure
-----------------
Northwest Natural's capital expenditures are required for
utility construction relating to customer growth and system
improvements. Northwest Natural finances these expenditures from
cash provided by operations, and from short-term borrowings which
are periodically refinanced through the sale of long-term debt or
equity securities. In addition to its capital expenditures, the
weather-sensitive nature of gas usage by Northwest Natural's
residential and commercial customers influences the Company's
financial condition, including its financing requirements, from one
quarter to the next. Short-term liquidity is satisfied primarily
through the sale of commercial paper, which is supported by
commercial bank lines of credit (see Part II, Item 8., Note 6,
"Notes to Consolidated Financial Statements", in the Company's 1995
Annual Report on Form 10-K).
The Company's long-term goal is to maintain a capital
structure comprised of 45 to 50 percent common stock equity, 5 to 10
percent preferred and preference stock and 45 to 50 percent short-
term and long-term debt. When additional capital is required, the
Company issues debt or equity securities depending upon both the
target capital structure and market conditions. The Company also
uses these sources to meet long-term debt and preferred stock
redemption requirements (see Part II, Item 8., Notes 3 and 5, "Notes
to Consolidated Financial Statements", in the Company's 1995 Annual
Report on Form 10-K).
Cash Flows
----------
Operating Activities
--------------------
Cash provided from operating activities was $5.9 million,
or nine percent, higher in the first six months of 1996 than in the
same period in 1995, primarily due to cooler weather during the
first six months of 1996 and the resulting increases in gas
deliveries and related margins from weather-sensitive customers.
The Company has lease and purchase commitments related to
its operating activities which are financed with cash flows from
operations (see Part II, Item 8., Note 12, "Notes to Consolidated
Financial Statements", in the Company's 1995 Annual Report on
Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first
six months of 1996 totaled $36.4 million, up $5.0 million, or 16
percent, from the first six months of 1995. The increase included
higher amounts for gas distribution system investments in areas
experiencing significant growth ($1.5 million); system reinforcement
($1.3 million); and development of a new customer information system
($0.6 million).
Northwest Natural's construction expenditures are
estimated at $80 million for 1996. Over the five-year period 1996
through 2000, these expenditures are estimated at $450 million. The
increased level of capital expenditures during the next five years
reflects projected customer growth plus the development of
additional underground storage facilities with related system
reinforcement. It is anticipated that approximately 50 percent of
the funds required for these expenditures will be internally
generated, and that the remainder will be funded through short-term
borrowings which will be refinanced periodically through the sale of
long-term debt and equity securities.
During the first six months of 1996 and 1995, non-utility
capital expenditures were primarily for exploration and development
of Canor's Canadian properties. During the first quarter of 1995,
the Company invested $4 million for such activities. (See Part II,
Item 7. Financial Condition, "Investing Activities", in the
Company's 1995 Annual Report on Form 10-K.)
Financing Activities
--------------------
Cash used for financing activities in the first six months
of 1996 totaled $36.2 million, up $19.2 million from the first six
months of 1995, primarily due to the retirement of $15.0 million of
long-term debt.
Lines of Credit
---------------
Northwest Natural has available through September 30,
1996, committed lines of credit totaling $80 million, consisting of
a primary fixed amount of $40 million plus an excess amount of up to
$40 million available as needed, at Northwest Natural's option, on a
monthly basis. Financial Corporation has available through
September 30, 1996, committed lines of credit totaling $20 million,
consisting of a primary fixed amount of $15 million plus an excess
amount of up to $5 million available as needed, at Financial
Corporation's option, on a monthly basis. Financial Corporation's
lines are supported by the guaranty of Northwest Natural. Northwest
Natural and Financial Corporation anticipate extending these lines
for an additional year during the third quarter.
Under the terms of these lines of credit, which are used
as backup lines for commercial paper programs, Northwest Natural and
Financial Corporation pay commitment fees, but are not required to
maintain compensating bank balances. The interest rates on
borrowings under these lines of credit are based on current market
rates as negotiated. There were no outstanding balances under
either the Northwest Natural or the Financial Corporation lines of
credit as of June 30, 1996 or June 30, 1995.
Commercial Paper
----------------
The Company's primary source of short-term funds is
commercial paper. Both Northwest Natural and Financial Corporation
issue domestic commercial paper, which is supported by the committed
bank lines discussed above, under agency agreements with a
commercial bank. Financial Corporation's commercial paper is
supported by the guaranty of Northwest Natural (see Part II, Item
8., Note 6, "Notes to Consolidated Financial Statements", in the
Company's 1995 Annual Report on Form 10-K).
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended June 30, 1996, and December 31,
1995, the Company's ratios of earnings to fixed charges, computed by
the Securities and Exchange Commission method, were 3.54 and 3.15,
respectively. Earnings consist of net income to which has been
added taxes on income and fixed charges. Fixed charges consist of
interest on all indebtedness, amortization of debt expense and
discount or premium, and the estimated interest portion of rentals
charged to income.
Environmental Matters
- ---------------------
The Company previously reported that the City of Salem had
requested Northwest Natural's participation in its review of an
environmental assessment of riverfront property in Salem to be
developed as a park, including a block previously owned by Northwest
Natural which was the site of a former manufactured gas plant. The
City had determined that there is environmental contamination on the
site, and that a remediation process involving Northwest Natural and
other prior owners of the block would be required.
In May 1996, Northwest Natural agreed to a settlement of
the City's claim under which Northwest Natural paid $170,000 to the
City as a contribution toward development of the park, in return for
a release from any further liability for costs incurred by the City
for remediation of the site.
The Company also has reported that Northwest Natural may
be required to participate in environmental remediation processes
for another, currently-owned site in Linnton, Oregon, and that in
1993, the Company recorded an expense of $0.5 million for the
estimated costs of consultants' fees, regulatory oversight cost
reimbursements, and legal fees in connection with the voluntary
investigation at that site. In June 1996, the Company recorded an
additional $0.4 million of expense for estimated costs of the
continuing investigation.
For further information concerning these and other matters
with respect to which there have been no material developments
during the first half of 1996, see Part II, Item 7., "Environmental
Matters," in the Company's 1995 Annual Report on Form 10-K.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Northwest Natural's Annual Meeting of Shareholders was
held in Portland, Oregon on May 23, 1996. At the meeting, four
director-nominees were elected to three year terms, as follows:
Share
Term Share Votes Votes
Director-nominee Expiring For Withheld
- ---------------- -------- ----------- --------
Mary Arnstad 1999 12,496,030 341,375
Thomas E. Dewey, Jr. 1999 12,496,834 340,571
Richard G. Reiten 1999 12,492,179 345,226
Benjamin R. Whiteley 1999 12,501,402 336,003
There were no broker non-votes with respect to the
election of the director-nominees.
The other eight directors whose terms of office as
directors continued after the annual meeting are: Tod R. Hamachek,
Richard B. Keller, Wayne D. Kuni, Robert L. Ridgley, Dwight A.
Sangrey, Melody C. Teppola, Russell F. Tromley and William R. Wiley.
The shareholders also elected Deloitte & Touche LLP,
certified public accountants, as Northwest Natural's auditors for
the year 1996 by the following vote: 12,668,441 shares for; 50,317
against; and 118,647 abstained. There were no broker non-votes on
this item.
Item 5. Other Information
-----------------
The Company's Board of Directors has approved a three-
for-two stock split of the Company's Common Stock. One additional share
of the Common Stock will be issued for every two shares outstanding
as of the record date. The stock split will be accomplished by
means of a 50 percent stock dividend payable on September 6, 1996,
to shareholders of record on August 23, 1996.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit 3 - Bylaws of Northwest Natural Gas Company
Exhibit 11 - Statement re: computation of per share earnings.
Exhibit 12 - Computation of ratio of earnings to fixed charges.
Exhibit 15 - Letter re: unaudited interim financial information.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter
ended June 30, 1996.
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
/s/ D. James Wilson
Dated: August 9, 1996 ------------------------------
D. James Wilson
Principal Accounting Officer,
Corporate Controller and Treasurer
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
to
Quarterly Report on Form 10-Q
For Quarter Ended
June 30, 1996
Exhibit
Document Number
- -------- -------
Bylaws of Northwest Natural Gas Company 3
Statement Re: Computation of Per Share Earnings 11
Computation of Ratio of Earnings to Fixed Charges 12
Letter Re: Unaudited Interim Financial Information 15
Financial Data Schedule 27