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 March 31, 1997
-------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
Commission file number 0-994
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NORTHWEST NATURAL GAS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-0256722
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N. W. Second Avenue, Portland, Oregon 97209
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 226-4211
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
At May 9, 1997, 22,634,358 shares of the registrant's Common Stock, $3-1/6 par
value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
March 31, 1997
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page Number
-----------
Item 1. Financial Statements
(1) Consolidated Statements of Income for the 3
three-month periods ended March 31, 1997 and 1996,
and Consolidated Statements of Earnings Invested
in the Business for the three-month periods ended
March 31, 1997 and 1996.
(2) Consolidated Balance Sheets at March 31, 1997 4
and 1996 and December 31, 1996.
(3) Consolidated Statements of Cash Flows for the 5
three-month periods ended March 31, 1997 and 1996.
(4) Consolidated Statements of Capitalization at
March 31, 1997 and 1996 and December 31, 1996. 6
(5) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 17
<PAGE 2>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended
March 31,
---------------------
1997 1996
---- ----
Net Operating Revenues:
Operating revenues .............................. $ 134,347 $ 137,561
Cost of sales ................................... 50,308 54,057
--------- ---------
Net operating revenues ..................... 84,039 83,504
--------- ---------
Operating Expenses:
Operations and maintenance ...................... 19,442 20,000
Taxes other than income taxes ................... 6,879 7,867
Depreciation, depletion and amortization ........ 10,242 12,704
--------- ---------
Total operating expenses ................... 36,563 40,571
--------- ---------
Income from Operations ............................... 47,476 42,933
--------- ---------
Other Income (Expense) ............................... (652) 2,481
--------- ---------
Interest Charges - net ............................... 6,722 6,496
--------- ---------
Income Before Income Taxes ........................... 40,102 38,918
Income Taxes ......................................... 15,349 15,562
--------- ---------
Net Income ........................................... 24,753 23,356
Redeemable preferred and preference stock dividend
requirements ........................................ 673 691
--------- ---------
Earnings Applicable to Common Stock .................. $ 24,080 $ 22,665
========= =========
Average Common Shares Outstanding .................... 22,590 22,274
Earnings per share of common stock:
Primary ......................................... $ 1.07 $ 1.02
Fully-Diluted ................................... $ 1.04 $ 1.00
Dividends Per Share of Common Stock .................. $ 0.30 $ 0.30
See Notes to Consolidated Financial Statements
================================================================================
Consolidated Statements of Earnings Invested in the Business
(Thousands, Three-Month Periods Ended March 31)
(Unaudited)
1997 1996
---- ----
Balance at Beginning of Period ....................... $ 98,376 $ 105,651
Net Income ........................................... 24,753 23,356
Cash dividends:
Redeemable preferred and preference stock ........ (673) (691)
Common stock ..................................... (6,770) (6,675)
Foreign currency translation and capital stock expense (97) (426)
--------- ---------
Balance at End of Period ............................ $ 115,589 $ 121,215
========= =========
See Notes to Consolidated Financial Statements
<PAGE 3>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
Mar. 31, Mar. 31, Dec. 31,
1997 1996 1996
---------- ----------- -------
Assets:
Plant and Property in Service:
Utility plant in service .................. $1,072,615 $ 994,763 $1,055,112
Less accumulated depreciation ............. 344,042 317,156 336,141
---------- ---------- ----------
Utility plant - net .................. 728,573 677,607 718,971
Non-utility property ...................... 47,567 45,113 45,689
Less accumulated depreciation and depletion 20,282 17,784 19,388
---------- ---------- ----------
Non-utility property - net ........... 27,285 27,329 26,301
---------- ---------- ----------
Total plant and property in service .. 755,858 704,936 745,272
---------- ---------- ----------
Investments and Other:
Investments ............................... 32,785 32,624 33,008
Long-term notes receivable ................ 1,157 3,373 1,715
---------- ---------- ----------
Total investments and other .......... 33,942 35,997 34,723
Current Assets:
Cash and cash equivalents ................. 9,121 25,253 8,219
Accounts receivable - net ................. 39,191 37,478 40,833
Accrued unbilled revenue .................. 12,075 12,373 22,340
Inventories of gas, materials and supplies 7,596 10,909 14,439
Prepayments and other current assets ...... 9,532 9,360 12,483
---------- ---------- ----------
Total current assets ................. 77,515 95,373 98,314
Regulatory Tax Assets .......................... 57,940 60,430 57,940
---------- ---------- ----------
Deferred Debits and Other ...................... 60,366 45,881 52,620
---------- ---------- ----------
Total Assets ......................... $ 985,621 $ 942,617 $ 988,869
========== ========== ==========
Capitalization and Liabilities:
Capitalization:
Common stock .............................. $ 250,049 $ 219,227 $ 248,402
Earnings invested in the business ......... 115,589 121,215 98,376
---------- ---------- ----------
Total common stock equity ............ 365,638 340,442 346,778
Redeemable preference stock ............... 25,000 25,000 25,000
Redeemable preferred stock ................ 13,749 14,840 13,749
Long-term debt ............................ 270,724 279,919 271,838
---------- ---------- ----------
Total capitalization ................. 675,111 660,201 657,365
---------- ---------- ----------
Current Liabilities:
Notes payable ............................. 48,905 15,559 50,058
Accounts payable .......................... 37,494 43,276 64,795
Long-term debt due within one year ........ 25,000 21,000 26,000
Taxes accrued ............................. 10,178 13,831 3,196
Interest accrued .......................... 8,517 7,760 5,396
Other current and accrued liabilities ..... 19,961 13,493 19,418
---------- ---------- ----------
Total current liabilities ............ 150,055 114,919 168,863
Deferred Investment Tax Credits ................ 12,324 12,022 11,668
---------- ---------- ----------
Deferred Income Taxes .......................... 133,375 122,927 123,625
---------- ---------- ----------
Regulatory Accounts and Other .................. 14,756 32,548 27,348
---------- ---------- ----------
Commitments and Contingencies .................. -- -- --
---------- ---------- ----------
Total Capitalization and Liabilities . $ 985,621 $ 942,617 $ 988,869
========== ========== ==========
See Notes to Consolidated Financial Statements.
<PAGE 4>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
Three Months Ended
March 31,
--------------------
1997 1996
---- ----
Operating Activities:
Net income ............................................................ $ 24,753 $ 23,356
Adjustments to reconcile net income to cash provided by
operations:
Depreciation, depletion and amortization ......................... 10,242 12,704
Gain on sale of assets ............................................ -- (2,897)
Deferred income taxes and investment tax credits .................. 10,406 3,764
Equity in losses of investments ................................... 1,228 1,202
Allowance for funds used during construction ...................... (472) (276)
Regulatory accounts and other - net ............................... (7,746) (4,898)
-------- --------
Cash from operations before working capital changes .......... 38,411 32,955
Changes in operating assets and liabilities:
Accounts receivable .......................................... 1,642 (3,093)
Accrued unbilled revenue ..................................... 10,265 9,120
Inventories of gas, materials and supplies ................... 6,843 3,345
Accounts payable ............................................. (27,301) 1,492
Accrued interest and taxes ................................... 10,103 6,693
Other current assets and liabilities ......................... (8,991) 4,025
-------- --------
Cash Provided By Operating Activities ............................. 30,972 54,537
-------- --------
Investing Activities:
Acquisition and construction of utility plant assets .................. (18,476) (17,020)
Investment in non-utility plant ....................................... (1,880) (964)
Investments and other ................................................. (554) 683
-------- --------
Cash Used In Investing Activities ................................. (20,910) (17,301)
-------- --------
Financing Activities:
Common stock issued ................................................... 1,533 1,300
Long-term debt retired ................................................ (2,000) --
Change in short-term debt ............................................. (1,153) (13,273)
Cash dividend payments:
Redeemable preferred and preference stock ......................... (673) (691)
Common stock ...................................................... (6,770) (6,675)
Foreign currency translation and capital stock expense ................ (97) (426)
-------- --------
Cash Used For Financing Activities ................................ (9,160) (19,765)
-------- --------
Increase In Cash and Cash Equivalents ...................................... 902 17,471
Cash and Cash Equivalents - Beginning of Period ............................ 8,219 7,782
-------- --------
Cash and Cash Equivalents - End of Period .................................. $ 9,121 $ 25,253
======== ========
===================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest .......................................................... $ 3,692 $ 3,290
Income Taxes ...................................................... -- $ 7,000
===================================================================================================
Supplemental Disclosure of Noncash Financing Activities
Conversion to common stock:
7-1/4 percent Series of Convertible Debentures .................... $ 114 $ 26
===================================================================================================
See Notes to Consolidated Financial Statements.
<PAGE 5>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands)
(Unaudited) (Unaudited)
Mar. 31, 1997 Mar. 31, 1996 Dec. 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 71,647 $ 47,091 $ 71,425
Premium on common stock 178,402 172,136 176,977
Earnings invested in the business 115,589 121,215 98,376
-------- ---- -------- ---- -------- ----
Total common stock equity $365,638 54% $340,442 52% $346,778 53%
-------- ---- -------- ---- -------- ----
REDEEMABLE PREFERENCE STOCK:
$6.95 Series, stated value $100 per share 25,000 25,000 25,000
-------- ---- -------- ---- -------- ----
Total redeemable preference stock 25,000 4% 25,000 4% 25,000 4%
-------- ---- -------- ---- -------- ----
REDEEMABLE PREFERRED STOCK, stated value $100 per share:
$4.68 Series 391 552 391
$4.75 Series 608 788 608
$7.125 Series 12,750 13,500 12,750
-------- ---- -------- ---- -------- ----
Total redeemable preferred stock 13,749 2% 14,840 2% 13,749 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 20,000 24,000 22,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
4.80% Series A due 1996 - 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 10,000
7.05% Series B due 2026 20,000 - 20,000
Unsecured:
4.90% Series A due 1996 - 10,000 -
8.69% Series A due 1996 - 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 10,724 11,919 10,838
-------- -------- --------
295,724 300,919 297,838
Less long-term debt due within one year 25,000 21,000 26,000
-------- ---- -------- ---- -------- ----
Total long-term debt 270,724 40% 279,919 42% 271,838 41%
-------- ---- -------- ---- -------- ----
TOTAL CAPITALIZATION $675,111 100% $660,201 100% $657,365 100%
======== ==== ======== ==== ======== ====
See Notes to Consolidated Financial Statements.
<PAGE 6>
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 1996 Annual Report on Form 10-K (1996
Form 10-K). A significant part of the business of the Company is of a seasonal
nature; therefore, results of operations for the interim periods are not
necessarily indicative of the results for a full year.
Certain amounts from prior periods have been reclassified to conform
with the 1997 presentation.
2. Earnings Per Share
All share and per share data for the prior interim period have
been restated to reflect a three-for-two split of the Company's common stock, in
the form of a 50 percent stock dividend, which was effective September 6, 1996.
3. Recently Issued Accounting Standard
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share and Disclosure of Information About Capital Structure." SFAS No. 128
applies to entities with publicly held common stock and is effective for
financial statements issued for periods ending after December 15, 1997. SFAS No.
128 replaces Accounting Principles Board Opinion No. 15 "Earnings Per Share",
and simplifies the computation of earnings per share by replacing the
presentation of primary earnings per share with a presentation of basic earnings
per share. The impact of the SFAS No. 128 calculation for the first quarter of
1997 is not material.
4. Contingencies
See Part II, Item 7., "Contingent Liabilities" and
"Environmental Matters" in the 1996 Form 10-K.
<PAGE 7>
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:
NNG Financial Corporation (Financial Corporation)
Canor Energy, Ltd. (Canor)
One other subsidiary, Oregon Natural Gas Development
Corporation (Oregon Natural), was dissolved during 1996.
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 1996 Annual Report
on Form 10-K (1996 Form 10-K)).
The following is management's assessment of the Company's
financial condition including the principal factors that affect results of
operations. The discussion refers to the consolidated activities of the Company
for the three months ended March 31, 1997 and 1996.
Forward-Looking Statements
- --------------------------
This report and other presentations made by the Company from
time to time may contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance, and other statements which are other than
statements of historical facts. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis. However, each such forward-looking statement involves
uncertainties and is qualified in its entirety by reference to the following
important factors that could cause the actual results of the Company to differ
materially from those projected in such forward-looking statements: (i)
prevailing governmental policies and regulatory actions, including those of the
Oregon Public Utility Commission (OPUC) and the Washington Utilities and
Transportation Commission (WUTC), with respect to allowed rates of return,
industry and rate structure, purchased gas and investment recovery, acquisitions
and dispositions of assets and facilities, operation and construction of plant
facilities, present or prospective wholesale and retail competition, changes in
tax laws and policies and changes in and compliance with environmental and
safety laws and policies; (ii) weather conditions and other natural phenomena;
(iii) unanticipated population growth or decline, and changes in market demand
and demographic patterns; (iv) competition for retail and wholesale customers;
(v) pricing of natural gas relative to other energy sources; (vi) unanticipated
changes in interest rates or in rates of inflation; (vii) unanticipated changes
in operating expenses and capital expenditures; (viii) capital market
conditions; (ix) competition for new energy development
<PAGE 8>
opportunities; and (x) legal and administrative proceedings and settlements.
All subsequent forward-looking statements, whether written or oral and whether
made by or on behalf of the Company, also are expressly qualified by these
cautionary statements.
Any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
Earnings and Dividends
- ----------------------
Earnings from consolidated operations were $1.07 per share for
the quarter ended March 31, 1997, compared to $1.02 per share in last year's
first quarter. The Company's earnings applicable to common stock were $24.1
million in the quarter ended March 31, 1997, up 6 percent from $22.7 million in
the first quarter of 1996.
Northwest Natural earned $1.08 per share from utility
operations in the first quarter of 1997, compared to $1.04 per share in the same
period in 1996. The improved results reflect the effects of a customer growth
rate of 5.7 percent and weather conditions in Northwest Natural's service
territory which were 3 percent colder than average but 2 percent warmer than the
first quarter of 1996. The Company estimates that the weather-related addition
to gross margin revenues (margin) during the first quarter of 1997 was
equivalent to about 7 cents per share compared to a similar period with average
weather. Weather conditions in the first quarter of 1996 were 5 percent colder
than average resulting in an estimated additional 7 cents per share in margin.
These estimates are derived from the Company's internal planning model (see Part
II, Item 7., "Earnings and Dividends" in the 1996 Form 10-K). The model also
estimates that customer growth in the residential and commercial segments since
March 31, 1996 contributed $4.7 million of margin revenues during the first
quarter of 1997.
Northwest Natural's subsidiaries lost 1 cent per share during
the first quarter of 1997, compared to a loss of 2 cents in the first quarter of
1996. See "Subsidiary Operations".
Dividends paid on common stock were 30 cents per share for
each of the three-month periods ended March 31, 1997 and 1996. In April 1997,
the Company's Board of Directors declared a quarterly dividend of 30 cents per
share on its common stock, payable May 15, 1997, to shareholders of record on
April 30, 1997. The current indicated annual dividend rate is $1.20 per share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility
volumes and revenues for the three months ended March 31:
<PAGE 9>
1997 1996
---- ----
Gas Sales and Transportation Volumes - Therms (000's):
Residential and commercial sales ....... 239,705 226,544
Unbilled volumes ....................... (21,013) (17,812)
--------- ---------
Weather-sensitive volumes ......... 218,692 208,732
Industrial firm sales .................. 24,661 27,101
Industrial interruptible sales ......... 15,399 22,208
--------- ---------
Total gas sales ................... 258,752 258,041
Transportation deliveries .............. 110,470 104,777
--------- ---------
Total volumes sold and delivered ....... 369,222 362,818
========= =========
Utility Operating Revenues - Dollars (000's):
Residential and commercial revenues .... $ 121,384 $ 120,383
Unbilled revenues ...................... (10,678) (9,120)
--------- ---------
Weather-sensitive revenues ........ 110,706 111,263
Industrial firm sales revenues ......... 7,875 9,276
Industrial interruptible sales revenues 4,046 6,033
--------- ---------
Total gas sales revenues .......... 122,627 126,572
Transportation revenues ................ 5,950 5,435
Other revenues ......................... 3,278 3,217
--------- ---------
Total utility operating revenues ....... $ 131,855 $ 135,224
========= =========
Cost of gas - Dollars (000's) ............... $ 50,226 $ 54,057
========= =========
Total number of customers (end of period) ... 439,897 416,005
========= =========
Actual degree days .......................... 1,908 1,948
========= =========
20-year average degree days ................. 1,861 1,864
========= =========
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, variations in temperatures between
periods will affect volumes of gas sold to these customers. Average weather
conditions are calculated from the most recent 20 years of temperature data
measured by heating degree days. Weather conditions were 3 percent colder than
average in the first quarter of 1997, but 2 percent warmer than in the first
quarter of 1996.
Northwest Natural continues to experience rapid customer
growth, with 23,892 customers added since March 31, 1996 for a growth rate of
5.7 percent. In the three years ended December 31, 1996, almost 61,000 customers
were added to the system, representing an average annual growth rate of 5.2
percent.
Volumes of gas sold to residential and commercial customers
were higher by 10 million therms, or 5 percent, in the first quarter of 1997
compared to the first quarter of 1996. Related revenues decreased $0.6 million,
or less than 1 percent, due to rate reductions in 1996. Effective December 1,
1996, the OPUC and the WUTC approved rate decreases which averaged 3.6 percent
in Oregon and 4.9 percent in Washington, reflecting lower projected gas costs.
<PAGE 10>
In order to match revenues with related purchased gas costs, Northwest
Natural records unbilled revenues for gas delivered to customers through the end
of the period but not yet billed.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial firm, industrial
interruptible, and transportation customers were 3.6 million therms, or 2
percent, lower in the first quarter of 1997 than in the same period of 1996.
Margin revenues from these customers decreased by 4 percent to $14.3 million in
the first quarter of 1997 from $15.0 million in the first quarter of 1996, due
to transfers of some of these customers from higher margin to lower margin rate
schedules or contract rates.
Other revenues, which relate primarily to accumulations or
amortizations of regulatory accounts (see Part II, Item 8., Note 1, "Notes to
Consolidated Financial Statements" in the 1996 Form 10-K), increased $61,000, or
2 percent, during the first quarter of 1997 compared to the first quarter of
1996. The principal factors were an increase in amortizations of property tax
savings ($1.0 million), offset by a decrease ($0.9 million) relating to final
amortizations from a discontinued balancing account.
Cost of Gas
-----------
Total cost of gas sold was 7 percent lower during the first
quarter of 1997 than in the first quarter of 1996. The cost of gas sold includes
gas drawn from storage, equalization, deferrals, and company use. However, the
average cost per therm of gas purchased in the first quarter was 33 percent
higher than in the first three months of 1996, due to a continuation in January
and February 1997 of high prices Northwest Natural paid in November and December
1996 for the portion of its gas supplies tied to monthly market price indexes.
Northwest Natural absorbed 20 percent of the higher cost of
gas purchased, as compared to projections, under its Purchased Gas Adjustment
(PGA) tariff in Oregon, reducing earnings in the first quarter by the equivalent
of 7 cents per share. The remaining 80 percent of such higher gas costs
experienced between November 1996 and February 1997, or about $18.4 million, was
recorded as deferred debits (regulatory assets) to be recovered under the Oregon
PGA tariff through temporary rate surcharges commencing in December 1997.
Northwest Natural's ability to recover these amounts is subject to a review by
the OPUC to determine whether its weather-normalized earnings during the 12
months ending June 30, 1997, are higher than a reasonable cost of equity capital
during that period, so as to warrant an absorption of some or all of such excess
costs.
<PAGE 11>
Subsidiary Operations
---------------------
The following table summarizes financial information for the
Company's consolidated wholly-owned subsidiaries:
Three Months Ended
March 31,
------------------
1997 1996
---- ----
Consolidated Subsidiaries (Thousands):
Net Operating Revenues .................... $ 2,411 $ 2,337
Operating Expenses ........................ 1,878 4,595
------- -------
Income (Loss) from Operations ............. $ 533 ($2,258)
Income (Loss) from Financial Investments .. (1,228) (1,221)
Other Income (Expense) and Interest Charges 39 3,138
------- -------
Income (Loss) Before Income Taxes ......... (656) (341)
Income Tax Expense (Benefit) .............. (237) 77
------- -------
Net Income (Loss) ......................... $ (419) ($ 418)
======= =======
Results of operations for the individual subsidiaries for the
first quarter of 1997 were net income of $0.2 million for Canor and a net loss
of $0.6 million for Financial Corporation. Results for Canor were better than
last year by the equivalent of 3 cents a share. Canor benefited from higher gas
prices and more favorable drilling experience. Results for Financial Corporation
were about the same as last year. Financial Corporation normally shows a loss in
the first quarter due to seasonality in revenues from its investments in solar
and windpower plants in California.
Oregon Natural's results for the first quarter of 1996 included one-
time events that generated a net gain of 2 cents per share. These events were a
gain of $2.9 million, equivalent to 8 cents per share, from Oregon Natural's
sale of its one-third interest in underground gas storage assets in the Mist
Field in northwest Oregon to Northwest Natural; a $1.3 million impairment loss
on Oregon Natural's producing wells, equivalent to a loss of 4 cents per share,
resulting from the adoption of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of"; and a write-down of unproven properties
of $1.0 million, equivalent to a loss of 2 cents per share, in accordance with
SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies."
The following discussion summarizes operating expenses, other
income (expense), interest charges - net, and income taxes.
<PAGE 12>
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $0.6 million, or 3
percent, lower in the first quarter of 1997 compared to the same period in 1996.
The first quarter of 1996 included costs associated with extraordinary
maintenance activities due to flood conditions ($0.3 million). Subsidiary
operating expenses decreased by $0.3 million primarily due to decreased gas and
oil exploration and production costs. Northwest Natural's expenses were $0.2
million lower in the first quarter of 1997, primarily due to a lower accrual for
annual employee bonuses ($0.4 million), offset by increased costs relating to
customer growth ($0.2 million) and a higher accrual for extraordinary claims
($0.2 million).
Taxes Other than Income
-----------------------
Taxes other than income decreased $1.0 million, or 13 percent.
Property tax expense in the first quarter was lower than last year because of
settlements reached in 1996 relating to property valuations and regulatory
treatment of reduced property taxes.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation expense decreased $2.5 million, or
19 percent, as compared to the first quarter of 1996 primarily due to
non-recurring charges for impairment ($1.3 million) and abandonment ($1.0
million) recorded by Oregon Natural in 1996 pursuant, respectively, to the
adoption of SFAS No. 121 and the write-down of unproven properties. Depreciation
expense for Northwest Natural decreased by $0.1 million, despite an increase of
more than $50 million in net utility plant in service, due to lower depreciation
rates approved in 1996.
Other Income (Expense)
----------------------
The Company's other income was $3.1 million lower in the first
quarter of 1997 compared with the same period in 1996, primarily reflecting the
one-time $2.9 million gain recorded in the first quarter of 1996 from the sale
of Oregon Natural's underground gas storage assets to Northwest Natural. (See
"Subsidiary Operations", above.) 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 OPUC, and the approximate sales price which resulted
in the intercompany gain is expected to be recovered through rates as an
allowable cost.
Interest Charges - net
----------------------
The Company's net interest expense increased $0.2 million, or
3 percent, in the first quarter of 1997 compared to the same period in 1996.
Average commercial paper balances were higher than in the first quarter of 1996
primarily due to increased gas purchase costs and construction expenditures.
<PAGE 13>
Income Taxes
------------
The effective corporate income tax rates for the three months
ended March 31, 1997 and 1996 were 38 percent and 40 percent, respectively,
which approximate the Company's statutory tax rates for these periods.
Financial Condition
- -------------------
Capital Structure
-----------------
Northwest Natural's capital expenditures are primarily related
to utility construction resulting from 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 revenue derived from gas usage by
Northwest Natural's residential and commercial customers influences the
Company's financing requirements from one quarter to the next. Short-term
liquidity is satisfied primarily through the sale of commercial paper, which is
supported by commercial bank lines of credit (see Part II, Item 8., Note 6,
"Notes to Consolidated Financial Statements" in the 1996 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 1996 Form 10-K).
Cash Flows
----------
Operating Activities
--------------------
Cash provided by operating activities was $23.6 million, or 43
percent, lower in the first quarter of 1997 compared to the same period in 1996.
The reduction was primarily due to a decrease in accounts payable ($27.3
million) related to year-end accruals for gas costs and employee bonuses paid in
the first quarter of 1997, and rate changes effective in December 1996 to
amortize credit balances in regulatory accounts ($7.9 million). Offsetting the
reduction in accounts payable were increases in accrued interest ($3.1 million)
related to increased interest expense and payments on long-term debt and accrued
income taxes ($7.0 million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Part II, Item 8., Note 13, "Notes to Consolidated Financial Statements" in the
1996 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first
quarter of 1997 totaled $18.5 million, up $1.5 million, or 9 percent, from the
first quarter of 1996. The increase
<PAGE 14>
resulted largely from construction of new mains and services ($1.4 million)
and the development of a new customer information system ($0.2 million).
Northwest Natural's construction expenditures are estimated at
$110 million for 1997. Over the five year period 1997 through 2001, these
expenditures are estimated at between $500 and $550 million. The high capital
expenditures during the next five years reflect projected customer growth, a
higher level of system reinforcement and the development of additional
underground storage facilities. It is anticipated that approximately 50 percent
of the funds required for these expenditures will be internally generated, and
that the remainder will be funded through the sale of long-term debt and equity
securities with short-term debt providing liquidity and bridge financing.
In the first quarter of 1997, non-utility expenditures
totaling $1.9 million were incurred by Canor to invest in Canadian exploration
and production properties. Canor expects to invest a total of $3 million, in
addition to internally generated funds, in Canadian gas exploration and
production properties during the current year. During the first quarter of 1997,
Northwest Natural invested $3 million in Canor for such activities. (See Part
II, Item 7. Financial Condition, "Investing Activities," in the 1996 Form 10-K.)
Financing Activities
--------------------
In the first quarter of 1997, internally generated cash was
used to reduce short-term debt by $1.2 million and long-term debt by $2.0
million. During the first quarter of 1996, short-term debt was reduced by $13.3
million.
Lines of Credit
---------------
Northwest Natural has available through September 30, 1997,
committed lines of credit with five commercial banks totaling $100 million,
consisting of a primary fixed amount of $50 million plus an excess amount of up
to $50 million available as needed, at Northwest Natural's option, on a monthly
basis. Financial Corporation has available through September 30, 1997, committed
lines of credit with two commercial banks totaling $20 million, consisting of a
primary fixed amount of $15 million plus an excess amount of up to $5 million
available as needed, at Financial Corporation's option, on a monthly basis.
Financial Corporation's lines are supported by the guaranty of Northwest
Natural.
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
on either the Northwest Natural or Financial Corporation lines of credit as of
March 31, 1997 or March 31, 1996.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial
paper. Both Northwest Natural and Financial Corporation issue commercial paper,
which is supported by the bank lines discussed above, under agency agreements
with a commercial bank. Financial Corporation's commercial paper is supported by
the guaranty of Northwest Natural (see Part II, Item 8., Note 6, "Notes to
Consolidated Financial Statements" in the 1996 Form 10-K).
<PAGE 15>
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended March 31, 1997 and December 31, 1996,
the Company's ratios of earnings to fixed charges, computed by the Securities
and Exchange Commission method, were 3.54 and 3.53, 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.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Chase Gardens Litigation
------------------------
In July 1995, a jury in an Oregon state court returned a
verdict against Northwest Natural in the case of Northwest Natural Gas Company
-----------------------------
v. Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). The
- ----------------------
Oregon Court of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed
the trial court decision in February 1997. (See Part I, Item 3, "Legal
Proceedings" and Part II, Item 8., Note 13, "Commitments and Contingencies" in
the 1996 Form 10-K). Both parties to the Chase Gardens litigation sought
reconsideration of the Court of Appeals' decision. On April 30, 1997, the Court
of Appeals issued an opinion allowing both motions for reconsideration,
modifying the former opinion, and adhering to the former opinion as modified.
The Court's decision on reconsideration had no effect on the judgment against
Northwest Natural. Northwest Natural still plans to petition for review of the
Court of Appeals' decision by the Oregon Supreme Court.
Item 5. OTHER INFORMATION
Medium-Term Note Program
------------------------
On May 2, 1997, Northwest Natural entered into a Distribution
Agreement relating to an additional $165 million of its Medium-Term Notes,
Series B, which will be sold from time to time over the next several years.
Labor-Management Agreement
--------------------------
On March 20, 1997, the Bargaining Unit employees, members of
Office and Professional Employees International Union (OPEIU), Local 11,
AFL-CIO, representing about 75 percent of Northwest Natural's employees,
approved a new labor agreement. The agreement continues the unique "Joint
Accord" partnership established by Northwest Natural and OPEIU in 1989 and
renewed in 1992. The term of the agreement is seven years, effective April 1,
1997. Under the agreement, there will be no layoff of any regular employee who
was employed before April 1, 1997.
Under the new Joint Accord, wage scales were adjusted to
market-based rates for each job category, effective April 1, 1997. In addition,
employees will receive wage increases of 3.25 percent per year for the first
four years of the contract and 85 percent of
<PAGE 16>
the All Cities Index, Urban Wage Earners and Clerical Workers, with a minimum
of 3.25 percent, during the last three years.
The agreement also provides for improved pension benefits
including a 6 percent increase in retirement benefits and a reduction in early
retirement discounts.
The new Joint Accord gives Northwest Natural additional
flexibility to make changes necessary to improve productivity and performance.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Statement re: Computation of Per Share Earnings.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter
ended March 31, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: May 14, 1997 /s/ D. James Wilson
-----------------------
D. James Wilson
Principal Accounting Officer,
Controller and Treasurer
<PAGE 17>
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
March 31, 1997
Exhibit
Document Number
- -------- -------
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Financial Data Schedule 27