SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------------------------
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N. W. Second Avenue, Portland, Oregon 97209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 226-4211
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
At November 10, 1998, 24,804,098 shares of the registrant's Common Stock, $3-1/6
par value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
September 30, 1998
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 three and 3
nine month periods ended September 30, 1998 and 1997,
and Consolidated Statements of Earnings Invested in
the Business for the nine-month periods ended
September 30, 1998 and 1997.
(2) Consolidated Balance Sheets at September 30, 1998 4
and 1997 and December 31, 1997.
(3) Consolidated Statements of Cash Flows for the 5
nine-month periods ended September 30, 1998 and 1997.
(4) Consolidated Statements of Capitalization at 6
September 30, 1998 and 1997 and December 31, 1997.
(5) Notes to Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of 9
Results of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
Operating Revenues:
Gross operating revenues ................ $ 53,810 $ 46,068 $273,161 $245,993
Cost of sales ........................... 19,350 14,171 110,391 86,991
-------- -------- -------- --------
Net operating revenues ............ 34,460 31,897 162,770 159,002
Operating Expenses:
Operations and maintenance ............. 20,941 18,481 61,082 57,613
Taxes other than income taxes .......... 4,361 3,493 16,372 15,003
Depreciation, depletion and amortization 13,496 10,875 38,137 31,797
-------- -------- -------- --------
Total operating expenses .......... 38,798 32,849 115,591 104,413
-------- -------- -------- --------
Income (Loss) from Operations ............... (4,338) (952) 47,179 54,589
Other Income ................................ 2,550 2,189 7,237 3,690
Interest Charges - net ...................... 7,647 7,320 23,615 20,765
-------- -------- -------- --------
Income (Loss) Before Income Taxes ........... (9,435) (6,083) 30,801 37,514
Income Taxes ................................ (3,515) (3,635) 9,442 12,849
-------- -------- -------- --------
Net Income (Loss) ........................... (5,920) (2,448) 21,359 24,665
Redeemable preferred and preference stock
dividend requirements ..................... 638 653 1,939 1,992
-------- -------- -------- --------
Earnings (Loss) Applicable to Common Stock .. $ (6,558) $ (3,101) $ 19,420 $ 22,673
======== ======== ======== ========
Average Common Shares Outstanding ........... 24,763 22,734 24,037 22,662
Earnings (Loss) Per Share of Common Stock:
Basic .................................. $ (0.26) $ (0.14) $ 0.81 $ 1.00
Diluted ................................ $ (0.26) $ (0.14) $ 0.80 $ 0.99
Dividends Per Share of Common Stock ......... $ 0.305 $ 0.30 $ 0.915 $ 0.90
See Notes to Consolidated Financial Statements.
================================================================================
Consolidated Statements of Earnings Invested in the Business
(Thousands,Unaudited)
Nine Months Ended September 30,
1998 1997
------------------ ----------------------
Earnings invested in the business:
Balance at Beginning of Period $113,098 $100,026
Net Income 21,359 $21,359 24,665 $24,665
Dividends Declared or Paid:
Redeemable preferred and preference stock (1,949) (2,006)
Common stock (22,050) (20,373)
Common Stock Expense (1,697) -
-------- -------
Balance at End of Period $108,761 $102,312
========= ========
Accumulated Other Comprehensive Income:
Balance at Beginning of Period $ (2,235) $ (1,650)
Other comprehensive income-
Foreign currency translation adjustment 167 167 (1) (1)
-------- ------- -------- -------
Comprehensive Income $21,526 $24,664
======= =======
Balance at End of Period $ (2,068) $ (1,651)
======== ========
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
September 30, September 30, Dec. 31,
1998 1997 1997
----------- ----------- -----------
Assets:
Plant and Property:
Utility plant ............................. $ 1,218,380 $ 1,122,500 $ 1,164,499
Less accumulated depreciation ............. 395,323 359,378 366,607
----------- ----------- -----------
Utility plant - net .................. 823,057 763,122 797,892
Non-utility property ...................... 90,901 52,252 52,422
Less accumulated depreciation and depletion 27,731 21,577 22,843
----------- ----------- -----------
Non-utility property - net ........... 63,170 30,675 29,579
----------- ----------- -----------
Total plant and property ............. 886,227 793,797 827,471
----------- ----------- -----------
Investments and Other:
Investments ............................... 34,022 35,230 34,148
Long-term notes receivable ................ 794 1,211 978
----------- ----------- -----------
Total investments and other .......... 34,816 36,441 35,126
Current Assets:
Cash and cash equivalents ................. 6,469 4,332 6,731
Accounts receivable - net ................. 21,791 19,165 39,420
Accrued unbilled revenue .................. 7,180 6,467 23,911
Inventories of gas, materials and supplies 23,310 18,779 17,385
Prepayments and other current assets ...... 10,126 9,047 17,226
----------- ----------- -----------
Total current assets ................. 68,876 57,790 104,673
Regulatory Tax Assets .......................... 56,860 59,640 56,860
Deferred Gas Costs Receivable .................. 28,499 14,133 28,628
Deferred Debits and Other ...................... 65,643 55,894 58,859
----------- ----------- -----------
Total Assets ......................... $ 1,140,921 $ 1,017,695 $ 1,111,617
=========== =========== ===========
Capitalization and Liabilities:
Capitalization:
Common stock .............................. $ 306,802 $ 253,353 $ 255,402
Earnings invested in the business ......... 108,761 102,312 113,098
Accumulated other comprehensive income .... (2,068) (1,651) (2,235)
----------- ----------- -----------
Total common stock equity ............ 413,495 354,014 366,265
Redeemable preference stock ............... 25,000 25,000 25,000
Redeemable preferred stock ................ 11,499 12,429 12,429
Long-term debt ............................ 346,953 325,396 344,303
----------- ----------- -----------
Total capitalization ................. 796,947 716,839 747,997
----------- ----------- -----------
Minority Interest .............................. 17,672 -- --
----------- ----------- -----------
Current Liabilities:
Notes payable ............................. 75,056 60,850 89,317
Accounts payable .......................... 37,788 32,980 58,775
Long-term debt due within one year ........ 10,000 15,000 16,000
Taxes accrued ............................. 371 (56) 4,656
Interest accrued .......................... 9,809 8,939 6,058
Other current and accrued liabilities ..... 21,889 20,289 21,390
----------- ----------- -----------
Total current liabilities ............ 154,913 138,002 196,196
Deferred Investment Tax Credits ................ 11,525 12,344 11,949
Deferred Income Taxes .......................... 142,629 135,295 139,953
Regulatory Liabilities and Other ............... 17,235 15,215 15,522
Commitments and Contingencies .................. -- -- --
----------- ----------- -----------
Total Capitalization and Liabilities . $ 1,140,921 $ 1,017,695 $ 1,111,617
=========== =========== ===========
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
Nine Months Ended
September 30,
--------------------
1998 1997
-------- --------
Operating Activities:
Net income ..................................................... $ 21,359 $ 24,665
Adjustments to reconcile net income to cash provided
by operations:
Depreciation, depletion and amortization ................... 38,137 31,797
Gain on sale of assets ..................................... (3,794) --
Deferred income taxes and investment tax credits ........... 2,252 12,346
Equity in (earnings) of investments ........................ (399) (1,143)
Allowance for funds used during construction ............... (1,109) (1,261)
Deferred gas costs receivable .......................... 129 (22,191)
Regulatory liabilities (assets) and other - net ............ (5,071) (9,049)
-------- --------
Cash from operations before working capital changes ... 51,504 35,164
Changes in operating assets and liabilities:
Accounts receivable ................................... 17,629 21,668
Accrued unbilled revenue .............................. 16,731 15,873
Inventories of gas, materials and supplies ............ (5,925) (4,340)
Accounts payable ...................................... (20,987) (31,815)
Accrued interest and taxes ............................ (534) 291
Other current assets and liabilities .................. 7,499 4,407
-------- --------
Cash Provided By Operating Activities ...................... 65,917 41,248
-------- --------
Investing Activities:
Acquisition and construction of utility plant assets ........... (56,735) (71,520)
Investment in non-utility property ............................. (17,583) (7,541)
Investments and other .......................................... 809 (675)
-------- --------
Cash Used In Investing Activities .......................... (73,509) (79,736)
-------- --------
Financing Activities:
Common stock issued ............................................ 51,050 4,509
Redeemable preferred stock retired ............................. (930) (1,320)
Long-term debt issued .......................................... 32,000 70,000
Long-term debt retired ......................................... (35,000) (27,000)
Change in short-term debt ...................................... (14,261) 10,792
Cash dividend payments:
Redeemable preferred and preference stock .................. (1,949) (2,006)
Common stock ............................................... (22,050) (20,373)
Foreign currency translation and capital stock expense ......... (1,530) (1)
-------- --------
Cash Provided By Financing Activities ...................... 7,330 34,601
-------- --------
Increase (Decrease) In Cash and Cash Equivalents .................... (262) (3,887)
Cash and Cash Equivalents - Beginning of Period ..................... 6,731 8,219
-------- --------
Cash and Cash Equivalents - End of Period ........................... $ 6,469 $ 4,332
======== ========
============================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest ................................................... $ 20,444 $ 17,718
Income taxes ............................................... $ 8,205 $ 7,284
============================================================================================
Supplemental Disclosure of Noncash Financing Activities:
Conversion to common stock:
7-1/4 percent Series of Convertible Debentures ............. $ 350 $ 442
============================================================================================
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
September 30, 1998 September 30, 1997 Dec. 31, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 78,512 $ 72,105 72,404
Premium on common stock 228,290 181,248 182,998
Earnings invested in the business 108,761 102,312 113,098
Accumulated other comprehensive income (2,068) (1,651) (2,235)
-------- -------- -------
Total common stock equity 413,495 52% 354,014 50% 366,265 49%
-------- ---- -------- ---- ------- ----
REDEEMABLE PREFERENCE STOCK:
$6.95 Series, stated value $100 per share 25,000 25,000 25,000
-------- -------- ------
Total redeemable preference stock 25,000 3% 25,000 3% 25,000 3%
-------- ---- -------- ---- -------- ----
REDEEMABLE PREFERRED STOCK, stated value $100 per share:
$4.75 Series 249 429 429
$7.125 Series 11,250 12,000 12,000
-------- -------- -------
Total redeemable preferred stock 11,499 1% 12,429 2% 12,429 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 20,000
Medium-Term Notes
First Mortgage Bonds:
7.69% Series A due 1999 10,000 10,000 10,000
5.96% Series B due 2000 5,000 5,000 5,000
5.98% Series B due 2000 5,000 5,000 5,000
8.05% Series A due 2002 10,000 10,000 10,000
6.40% Series B due 2003 20,000 20,000 20,000
6.34% Series B due 2005 5,000 5,000 5,000
6.38% Series B due 2005 5,000 5,000 5,000
6.45% Series B due 2005 5,000 5,000 5,000
6.80% Series B due 2007 10,000 10,000 10,000
6.50% Series B due 2008 5,000 5,000 5,000
8.26% Series B due 2014 10,000 10,000 10,000
7.00% Series B due 2017 40,000 40,000 40,000
6.60% Series B due 2018 22,000 - -
8.31% Series B due 2019 10,000 10,000 10,000
9.05% Series A due 2021 10,000 10,000 10,000
7.25% Series B due 2023 20,000 20,000 20,000
7.50% Series B due 2023 4,000 4,000 4,000
7.52% Series B due 2023 11,000 11,000 11,000
6.52% Series B due 2025 10,000 10,000 10,000
7.05% Series B due 2026 20,000 20,000 20,000
7.00% Series B due 2027 20,000 20,000 20,000
6.65% Series B due 2027 20,000 - 20,000
6.65% Series B due 2028 10,000 - -
Unsecured:
8.93% Series A due 1998 - 5,000 5,000
8.95% Series A due 1998 - 10,000 10,000
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 9,953 10,396 10,303
-------- -------- --------
356,953 340,396 360,303
Less long-term debt due within one year 10,000 15,000 16,000
-------- -------- --------
Total long-term debt 346,953 44% 325,396 45% 344,303 46%
-------- ---- -------- ---- -------- ----
TOTAL CAPITALIZATION $796,947 100% $716,839 100% $747,997 100%
======== ==== ======== ==== ======== ====
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of financial statements
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation), a
wholly-owned subsidiary
Canor Energy, Ltd. (Canor), a majority-owned
subsidiary
Together these businesses are referred to herein as the
"Company." Intercompany accounts and transactions have been eliminated.
The information presented in the consolidated financial
statements is unaudited, but includes all adjustments, consisting of only normal
recurring accruals, which the management of the Company considers necessary for
a fair presentation of the results of such periods. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 1997 Annual Report on Form 10-K (1997
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 1998 presentation.
2. Recently Issued Accounting Standards
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of elements of
comprehensive income, including foreign currency translation adjustments,
unrealized gains and losses on certain investments in debt and equity securities
and minimum pension liability adjustments.
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which requires disclosure of segment data based on how management
makes decisions about allocating resources to segments and measuring
performance. The Company principally operates in a single line of business
consisting of the distribution of natural gas. Therefore, management does not
believe SFAS No. 131 will have a significant impact on the Company's financial
reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." This standard is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. Adoption of this standard may result in additional financial
disclosures but the impact of SFAS No. 132 for both the three month and nine
month periods ended September 30, 1998 is immaterial.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This standard is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999 (January
1, 2000 for the Company). SFAS No. 133 requires that all derivative instruments
be recorded on the balance sheet at their fair value. Changes in the fair value
of derivatives will be recorded each period either in current earnings or in
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if so designated, what type of hedge
transaction it is. Management anticipates that the adoption of SFAS No. 133 will
not have a significant effect on the Company's results of operations or its
financial position.
3. Minority Interest
The Company reported a minority interest of $17.7 million in
the Consolidated Balance Sheet at September 30, 1998, resulting from a
transaction involving its Canadian energy exploration and production subsidiary,
Canor Energy, Ltd. (Canor). In March 1998, Canor acquired all of the capital
stock of Southlake Energy, Inc. (Southlake), an indirect subsidiary of NIPSCO
Industries, Inc. (NI), in exchange for shares of common stock representing a 34
percent interest in Canor. After the acquisition, Southlake was amalgamated with
Canor. The transaction resulted in a $3.5 million gain to the Company,
equivalent to 15 cents a share, due to Canor's assets having represented a lower
percentage of the total assets of the amalgamated corporation than the Company's
resulting percentage interest in Canor's common stock. The minority interest in
Canor, formerly held by NIPSCO Energy Services Canada Ltd. (NESCL), was
transferred to NI Canada ULC (NICULC), effective as of August 31, 1998. Both
NESCL and NICULC are indirect subsidiaries of NI. For financial reporting
purposes, the assets, liabilities and earnings of Canor are consolidated in the
Company's financial statements, and NICULC's common stock interest has been
recorded as "Minority Interest" in the Balance Sheet.
4. Income Taxes
No U.S. taxes were provided for a gain in the first quarter of
1998 from the combination of Canor and Southlake (see Note 3, "Minority
Interest"), since it is the Company's intention to indefinitely reinvest Canor's
earnings. Determination of the amount of unrecognized deferred tax liability on
these unremitted earnings is not practicable. Undistributed net earnings of the
Company's foreign subsidiary were $1.1 million at September 30, 1998. The amount
of foreign withholding taxes that would be payable upon remittance of those
earnings is approximately $0.1 million.
5. Contingencies
See Part II, Item 7., "Contingent Liabilities" and
"Environmental Matters" in the 1997 Form 10-K and Part II, Item 5,
"Environmental Matters," below.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation),
a wholly-owned subsidiary
Canor Energy, Ltd. (Canor), a majority-owned
subsidiary
Together these businesses are referred to herein as the
"Company" (see "Subsidiary Operations" below and Part II, Item 8., Note 2,
"Notes to Consolidated Financial Statements," in the Company's 1997 Annual
Report on Form 10-K (1997 Form 10-K)).
The following is management's assessment of the Company's
financial condition including the principal factors that affect results of
operations. The discussion refers to the consolidated activities of the Company
for the three and nine months ended September 30, 1998 and 1997.
Forward-Looking Statements
- --------------------------
This report and other presentations made by the Company from
time to time may contain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance, and other statements which are other than
statements of historical facts. The Company's expectations, beliefs and
projections are expressed in good faith and are believed by the Company to have
a reasonable basis. However, each such forward-looking statement involves
uncertainties and is qualified in its entirety by reference to the following
important factors that could cause the actual results of the Company to differ
materially from those projected in such forward-looking statements: (i)
prevailing governmental policies and regulatory actions, including those of the
Oregon Public Utility Commission (OPUC) and the Washington Utilities and
Transportation Commission (WUTC), with respect to allowed rates of return,
industry and rate structure, purchased gas and investment recovery, acquisitions
and dispositions of assets and facilities, operation and construction of plant
facilities, present or prospective wholesale and retail competition, changes in
tax laws and policies and changes in and compliance with environmental and
safety laws and policies; (ii) weather conditions and other natural phenomena;
(iii) unanticipated population growth or decline, and changes in market demand
and demographic patterns; (iv) competition for retail and wholesale customers;
(v) pricing of natural gas relative to other energy sources; (vi) unanticipated
changes in interest or foreign currency exchange rates or in rates of inflation;
(vii) unanticipated changes in operating expenses and capital expenditures;
(viii) capital market conditions; (ix) competition for new energy development
opportunities; and (x) legal and administrative proceedings and settlements. 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
- ----------------------
The Company incurred a loss of 26 cents a diluted share for
the quarter ended September 30, 1998, compared to a loss of 14 cents a diluted
share in last year's third quarter. The loss applicable to common stock was $6.6
million in the third quarter of 1998 and $3.1 million in the third quarter of
1997. A third quarter loss is customary for NW Natural, reflecting low
summertime use of natural gas.
NW Natural lost 28 cents a diluted share from utility
operations in the third quarter of 1998, compared to a loss of 19 cents a
diluted share in the same period in 1997. The higher loss from utility
operations in the third quarter was due to a non-recurring benefit in the third
quarter of 1997 from adjustments reconciling the Company's federal and state tax
accruals to the prior year's returns as filed (5 cents), an increase in
depreciation expense for the new Customer Information System (CIS) (2 cents), a
decrease in net operating revenues (margin) from an industrial schedule in which
rates vary with oil prices (2 cents), an increase in interest charges (1 cent)
and revenue reductions required by the OPUC (1 cent), offset by an increase in
margin due to customer growth (3 cents).
The Company earned $19.4 million, or 80 cents a diluted share,
and $22.7 million, or 99 cents a diluted share, for the nine months ended
September 30, 1998 and 1997, respectively. Year-to-date, NW Natural earned 67
cents a diluted share from utility operations compared to 92 cents a diluted
share in the same period in 1997. Weather in the first nine months of the year
was 4 percent warmer in 1998 than in 1997, resulting in a decrease in margin
from residential and commercial customers equivalent to an estimated 15 cents a
share. Other factors affecting utility earnings were an increase in interest
charges (7 cents), a non-recurring benefit in 1997 from adjustments reconciling
the Company's federal and state tax accruals to the prior year's return as filed
(5 cents), an increase in depreciation expense for CIS (4 cents) and other
additional depreciation expense (6 cents), a decrease in margin from an
industrial schedule in which rates vary with oil prices (5 cents) and revenue
reductions required by the OPUC (4 cents). Partially offsetting these negative
factors was NW Natural's residential and commercial customer growth in the past
year which contributed higher margin equivalent to an estimated 20 cents a share
in the first nine months of 1998.
Earnings from NW Natural's non-utility operations in the first
quarter of 1998 included 15 cents a share due to a transaction involving Canor,
the Company's Canadian gas and oil exploration and production subsidiary (see
"Other Income (Expense)," below).
NW Natural's subsidiaries earned 1 cent a share during the
third quarter of 1998, and 5 cents in the third quarter of 1997. Year-to-date
subsidiary results were a loss of 1 cent a share for 1998 compared to income of
8 cents a share for 1997. See "Subsidiary Operations," below.
Dividends paid on common stock were 30.5 cents and 30 cents a
share for the three-month periods ended September 30, 1998 and 1997,
respectively. In October 1998, the Company's Board of Directors declared a
quarterly dividend of 30.5 cents a share on the common stock, payable November
13, 1998, to shareholders of record on October 30, 1998. The current indicated
annual dividend rate is $1.22 a share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility
volumes and revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Gas Sales and Transportation Volumes
- - Therms (000's):
Residential and commercial sales ............. 48,337 46,626 388,468 387,258
Unbilled volumes ............................. 1,876 2,725 (37,426) (32,953)
--------- --------- --------- ---------
Weather-sensitive volumes ............... 50,213 49,351 351,042 354,305
Industrial firm sales ........................ 17,353 17,862 64,906 62,086
Industrial interruptible sales ............... 11,643 11,879 38,608 39,317
--------- --------- --------- ---------
Total gas sales ......................... 79,209 79,092 454,556 455,708
Transportation deliveries .................... 106,644 105,617 340,690 319,495
--------- --------- --------- ---------
Total volumes sold and delivered ............. 185,853 184,709 795,246 775,203
========= ========= ========= =========
Utility Operating Revenues - Dollars (000's):
Residential and commercial revenues .......... $ 33,403 $ 27,704 $ 227,713 $ 202,968
Unbilled revenues ............................ 1,102 1,274 (17,769) (16,522)
--------- --------- --------- ---------
Weather-sensitive revenues .............. 34,505 28,978 209,944 186,446
Industrial firm sales revenues ............... 7,056 5,658 25,233 19,861
Industrial interruptible sales revenues ...... 3,298 2,958 11,345 9,981
--------- --------- --------- ---------
Total gas sales revenues ................ 44,859 37,594 246,522 216,288
Transportation revenues ...................... 4,914 5,232 15,050 16,395
Other revenues ............................... 292 1,079 2,295 6,484
--------- --------- --------- ---------
Total utility operating revenues ............. $ 50,065 $ 43,905 $ 263,867 $ 239,167
========= ========= ========= =========
Cost of gas sold - Dollars (000's) ................ $ 19,303 $ 13,710 $ 110,257 $ 86,047
========= ========= ========= =========
Total number of customers (end of period) ......... 463,743 441,906 463,743 441,906
========= ========= ========= =========
Actual degree days ................................ 48 49 2,460 2,565
========= ========= ========= =========
20-year average degree days ....................... 100 106 2,617 2,638
========= ========= ========= =========
Residential and Commercial
--------------------------
Typically, 75 percent or more of NW Natural's annual operating
revenues are derived from gas sales to weather-sensitive residential and
commercial customers. Accordingly, variations in temperatures between periods
will affect volumes of gas sold to these customers. Average weather conditions
are calculated from the most recent 20 years of temperature data measured by
heating degree days. Weather conditions as measured in degree days (see Part II,
Item 7, "Earnings and Dividends," in the 1997 Form 10-K) were 52 percent warmer
than average in the third quarter of 1998 and 2 percent warmer than in the third
quarter of 1997.
NW Natural continues to experience rapid customer growth, with
21,837 customers added since September 30, 1997, for a growth rate of 4.9
percent. In the three years ended December 31, 1997, more than 66,000 customers
were added to the system, representing an average annual growth rate of 5.4
percent.
Volumes of gas delivered to residential and commercial
customers increased 0.9 million therms, or 2 percent, in the third quarter of
1998 compared to the third quarter of 1997. Margin from these customer
categories was $1.0 million, or 4 percent, higher primarily due to customer
growth.
Volumes of gas delivered to residential and commercial
customers were 3.3 million therms, or 1 percent, lower in the first nine months
of 1998 than in the first nine months of 1997. Related margin was lower by $0.1
million, or less than 1 percent. The increased margin from customer growth was
offset by weather that was 4 percent warmer than in the first nine months of
1997.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial firm, industrial
interruptible, and transportation customers were 0.3 million therms, or less
than 1 percent, higher in the three months ended September 30, 1998 than in the
same period of 1997. Transportation volumes increased 1.0 million therms while
gas sales to industrial firm and interruptible customers decreased 0.7 million
therms as compared to the third quarter of 1997. Margin from these customers
decreased 8 percent from $11.4 million in the third quarter of 1997 to $10.5
million in the third quarter of 1998, due in part to the effect of low oil
prices on an industrial schedule in which rates vary with oil prices.
For the current nine-month period, total volumes delivered to
industrial and transportation customers increased 23.3 million therms from 1997.
However, margin from these customers was $2.0 million, or 5 percent, lower than
in the first nine months of 1997 due to the effect of low oil prices on the
industrial schedule in which rates vary with oil prices, and transfers of some
industrial customers to rate schedules or special contracts with lower margins.
Other revenues, which include amortizations of regulatory
account balances (see Part II, Item 8., Note 1, "Notes to Consolidated Financial
Statements," in the 1997 Form 10-K), were $0.8 million, or 73 percent, lower
during the third quarter of 1998 and $4.2 million, or 65 percent, lower
year-to-date compared to 1997. The principal factors were a decrease in
amortization of property tax savings ($2.6 million) and deferrals of revenue
reductions required under a settlement approved by the OPUC as part of the
January 1, 1998 rate change ($1.5 million).
Cost of Gas
-----------
The average cost per therm of gas purchased was 13 percent
higher in the third quarter of 1998, and was 7 percent higher year-to-date, than
in the same period last year. The increase was due to higher prevailing prices
in the natural gas commodity market.
Total cost per therm of gas sold was 41 percent higher during
the third quarter of 1998, and 28 percent higher year-to-date, than in the same
periods of 1997. The changes in cost of gas sold between respective periods are
greater than the changes in cost of gas purchased due to higher regulatory
deferrals of gas costs in 1997, accounted for as credits to cost of gas. The
cost of gas sold includes current gas purchases, gas drawn from storage, demand
cost equalization, regulatory deferrals, and company use. NW Natural made
off-system sales of $1.7 million and $1.0 million for the first nine months of
1998 and 1997, respectively. Under an agreement with the OPUC, net proceeds from
these sales are treated as a reduction of gas costs.
Under NW Natural's Purchased Gas Adjustment (PGA) tariff in
Oregon, its net income from Oregon operations is affected only within defined
limits by changes in purchased gas costs. In 1997, NW Natural absorbed 20
percent of the higher cost of gas purchased, as compared to projections, under
this tariff. The remaining 80 percent of higher gas costs was recorded as
deferred debits (regulatory assets). Effective January 1, 1998, the incentive
formula for deferred gas costs was modified so that NW Natural now absorbs 33
percent of the difference between actual and projected gas costs and the
remaining 67 percent is deferred for recovery from or refund to customers in
future rates.
Subsidiary Operations
---------------------
The following table summarizes financial information for the
Company's consolidated subsidiaries:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
Consolidated Subsidiaries (Thousands):
Net Operating Revenues ............... $ 3,699 $ 2,293 $ 9,160 $ 7,133
Operating Expenses ................... 4,879 2,123 10,914 6,110
-------- -------- -------- --------
Income (Loss) from Operations ........ (1,180) 170 (1,754) 1,023
Income from Financial Investments .... 1,228 1,250 399 1,143
Other Income and Interest Charges .... 42 102 415 227
Minority Interest .................... 389 -- 470 --
-------- -------- -------- --------
Income (Loss) Before Income Taxes ... 479 1,522 (470) 2,393
Income Tax Expense (Benefit) ......... 138 380 (258) 633
-------- -------- -------- --------
Net Income (Loss) .................... $ 341 $ 1,142 $ (212) $ 1,760
======== ======== ======== ========
Results of operations for the individual subsidiaries for the
third quarter of 1998 were a net loss of $0.8 million for Canor, down from net
income of $0.1 million for the same period last year, and net income of $1.1
million for Financial Corporation, up from $1.0 million in the third quarter of
1997. Canor's results were lower than last year due to low oil prices, lower
than expected gas production and charges equivalent to 2 cents a share due to
unsuccessful drilling efforts during the quarter.
For the nine months ended September 30, 1998, the
subsidiaries' net results were a loss of $0.2 million, compared to net income of
$1.8 million in the first nine months of 1997. These results are equivalent to a
loss of 1 cent a share in 1998 compared to net income of 8 cents a share in
1997. The portion of Canor's results applicable to the Company decreased from
net income of $0.5 million in the first nine months of 1997 to a loss of $0.9
million in the first nine months of 1998. Financial Corporation earned $0.7
million, compared to net income of $1.3 million in the first nine months of
1997.
The same factors that reduced Canor's and Financial
Corporation's earnings in the first nine months of 1998 are expected to continue
to depress their operating results during the remaining months of 1998.
In March 1998, Canor purchased the stock of Southlake Energy,
Inc. (Southlake), an indirect subsidiary of NIPSCO Industries, Inc. (NI). Canor
was then amalgamated with Southlake. The resulting company is owned 66 percent
by NW Natural and 34 percent by NI Canada ULC, another indirect subsidiary of
NI. For financial reporting purposes, Canor's operating revenues and expenses
are included in full in the Company's Statements of Income. The 34 percent
portion of Canor's results applicable to the minority interest is included in
Other Income (Expense) as a reduction in the case of earnings, or as an increase
in the case of losses.
The Company's equity investments in its subsidiaries at
September 30, 1998, were $34.1 million for Canor and $18.0 million for Financial
Corporation, up from $20.1 million for Canor and $17.0 million for Financial
Corporation at September 30, 1997. The $14.0 million increase in the Company's
equity investment in Canor includes $11.8 million converted to equity from
intercompany debt in the first quarter of 1998.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $3.5 million, or 6
percent, higher in the nine months ended September 30, 1998 compared to the same
period in 1997. NW Natural's operations and maintenance expenses increased $1.0
million due primarily to increased information systems costs for network and
communication system upgrades; application service maintenance, including
maintenance of NW Natural's new CIS, and other information system expenses.
Subsidiary operating expenses increased by $2.5 million primarily due to the
combined expenses for Canor following the Canor/Southlake amalgamation.
Taxes Other than Income
-----------------------
Taxes other than income were $1.4 million, or 9 percent,
higher for the nine months ended September 30, 1998. NW Natural's property tax
expense increased $0.8 million due to more plant in service. Franchise taxes,
which are based on gross revenues, increased $0.6 million, reflecting higher
revenues due to rate increases effective January 1 and April 1, 1998.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation expense for the nine months ended
September 30, 1998 increased $6.3 million, or 20 percent, compared to the first
nine months of 1997. NW Natural's depreciation expense increased by $4.0 million
due to the placement into service in November 1997 of its new CIS ($1.7
million), Mobile Data Terminals ($0.2 million), investments in computer
equipment ($0.4 million) and additional utility plant ($1.6 million). Canor's
depreciation expense increased $2.3 million due to the increase in total assets
after the Canor/Southlake amalgamation and increased dry hole and abandonment
expense of $0.8 million in the first nine months of 1998 as compared to $0.4
million in the same period in 1997.
Other Income (Expense)
----------------------
The Company's other income was $3.5 million higher in the
first nine months of 1998 than in the same period in 1997. In the first quarter
of 1998, NW Natural recorded as other income a $3.5 million gain, equivalent to
15 cents a share, from the amalgamation of Canor with Southlake. The resulting
gain was not subject to U.S. income tax (see Item 1, Notes 3 and 4, "Notes to
Consolidated Financial Statements," above).
Other income now includes interest income on deferred
regulatory accounts; other income for the comparable periods in 1997 has been
reclassified to conform to this presentation. Prior to January 1, 1998, interest
earned on deferred regulatory accounts was included in miscellaneous operating
income or was treated as a reduction in the cost of gas. Interest income on
deferred regulatory accounts was $1.2 million higher in the first nine months of
1998 than in the same period in 1997, while other interest income decreased $0.3
million. This net increase was offset by a decrease in the Allowance for Funds
Used During Construction (AFUDC) ($0.2 million), a decrease in net merchandise
revenue ($0.5 million), and a decrease in the income from Financial
Corporation's investments ($0.7 million).
Interest Charges - net
----------------------
The Company's interest charges - net increased $2.9 million,
or 14 percent, in the first nine months of 1998 compared to the same period in
1997. The increase was due to interest charges that were capitalized last year
as AFUDC, plus interest on a $16.6 million increase in long-term debt over the
prior year and a $5.4 million increase in average commercial paper balances
outstanding compared to the first nine months of 1997. The higher commercial
paper balances were due to increased gas costs, construction spending to fund
customer growth and other spending for general corporate purposes.
Income Taxes
------------
The effective corporate income tax rates for the nine months
ended September 30, 1998 and 1997 were 30.7 percent and 34.3 percent,
respectively. The lower 1998 rate was due primarily to the non-taxable gain from
Canor's amalgamation with Southlake (see Item 1, Notes 3 and 4, "Notes to
Consolidated Financial Statements," and "Other Income (Expense)," above), and in
part to permanent tax savings resulting from a change in book depreciation rates
and increased tax credits. The 1997 effective tax rate was lower than statutory
rates due to the adjustments of the 1996 income tax accruals to actual and the
flow through treatment of property tax refunds. Last year's third quarter
results included a non-recurring benefit equivalent to 5 cents a share due to
adjustments reconciling the Company's federal and state tax accruals to the
prior year's return as filed.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to
utility construction resulting from customer growth and system improvements. NW
Natural finances these expenditures from cash provided by operations and from
short-term borrowings which are periodically refinanced through the sale of
long-term debt or equity securities. In addition to its capital expenditures,
the weather-sensitive nature of revenue derived from gas usage by NW Natural's
residential and commercial customers influences the Company's financing
requirements from one quarter to the next. Short-term liquidity is satisfied
primarily through the sale of commercial paper, which is supported by commercial
bank lines of credit (see Part II, Item 8., Note 6, "Notes to Consolidated
Financial Statements," in the 1997 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 1997 Form 10-K). In March
and June 1998, NW Natural issued and sold $22 million and $10 million,
respectively, of its Medium-Term Notes, Series B. In April 1998, NW Natural
issued and sold, through a negotiated public offering, 1,725,000 shares of its
common stock.
Cash Flows
----------
Operating Activities
--------------------
Operating activities provided net cash of $65.9 million for
the first nine months of 1998, compared to $41.2 million for the first nine
months of 1997. The increase of $24.6 million, or 60 percent, was due to
increased cash from operations ($16.3 million) and lower working capital
requirements ($8.3 million). The increase in cash from operations over the same
period last year was primarily due to lower deferred gas cost receivables ($22.3
million) and an increase in depreciation, depletion and amortization expense
($6.3 million), partially offset by lower net income ($3.3 million) and a
reduction in deferred income taxes and investment tax credits ($10.1 million).
The reduction in working capital requirements was due to a $10.8 million smaller
reduction in accounts payable and a $3.1 million greater increase in other
current assets and liabilities during the current nine-month period, partially
offset by a $4.0 million smaller increase in accounts receivable and a $1.6
million greater reduction in inventories of gas, materials and supplies.
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
1997 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first nine
months of 1998 totaled $56.7 million, a decrease of $14.8 million, or 21
percent, from the first nine months of 1997. The decrease resulted largely from
a reduction of construction expenditures relating to the completion of the CIS
($5.9 million) and several other special projects ($4.0 million), lower
equipment and structures expenditures ($1.6 million), reduced replacement and
reinforcement expenditures ($1.7 million) and lower construction overhead ($0.9
million).
NW Natural's construction expenditures are estimated to total
$90 million for 1998. Over the five-year period 1998 through 2002, these
expenditures are estimated at between $500 million and $550 million. The
projected level of capital expenditures during the next five years reflects
forecasted customer growth, the development of additional underground storage
facilities and a major system reinforcement project. It is anticipated that
approximately 50 percent of the funds required for these expenditures will be
internally generated, and that the remainder will be funded through the sale of
long-term debt and equity securities with short-term debt providing liquidity
and bridge financing.
In the first nine months of 1998, non-utility capital
expenditures totaled $17.6 million. Canor invested $13.0 million in Canadian
exploration and production properties. NW Natural's non-utility expenditures
totaling $4.6 million included expenditures relating to a contract for the
construction of a new headquarters building for the Port of Portland on land
currently owned by NW Natural ($4.3 million) and additions to existing
facilities ($0.3 million). During the first quarter of 1998, NW Natural
converted $11.8 million of intercompany loans to Canor to equity.
Financing Activities
--------------------
Cash provided by financing activities in the first nine months
of 1998 totaled $7.3 million, compared to $27.3 million during the first nine
months of 1997. Proceeds from the sales of $22 million and $10 million of
Medium-Term Notes, Series B, in March and June 1998, respectively, and $44.7
million from the negotiated public offering and sale of 1,725,000 shares of NW
Natural's common stock in April 1998, were used in part to reduce short-term
debt ($14.2 million) and long-term debt ($35.0 million). NW Natural issued $38.0
million less long-term debt in the first nine months of 1998 than in the first
nine months of 1997. Short-term debt balances went down $14.3 million in the
current nine-month period, compared to a $10.8 million increase in short-term
debt in the same period last year.
Lines of Credit
---------------
NW Natural has available through September 30, 1999, committed
lines of credit with five commercial banks totaling $100 million, consisting of
a primary fixed amount of $50 million plus an excess amount of up to $50 million
available as needed, at NW Natural's option, on a monthly basis. Financial
Corporation has available through September 30, 1999, committed lines of credit
with two commercial banks totaling $20 million, consisting of a primary fixed
amount of $15 million plus an excess amount of up to $5 million available as
needed, at Financial Corporation's option, on a monthly basis. Financial
Corporation's lines are supported by the guaranty of NW Natural.
Under the terms of these lines of credit, which are used as
backup lines for commercial paper programs, NW Natural and Financial Corporation
pay commitment fees but are not required to maintain compensating bank balances.
The interest rates on borrowings under these lines of credit are based on
current market rates as negotiated. There were no outstanding balances on either
the NW Natural or Financial Corporation lines of credit as of September 30, 1998
or 1997.
In April 1998, NW Natural entered into an additional $18
million line of credit with a commercial bank for the purpose of constructing
the new headquarters building for the Port of Portland (see "Investing
Activities," above). This line of credit is available through November 30, 1999.
The outstanding balance at September 30, 1998 was $4.4 million.
Canor has a $30 million (Canadian) revolving credit facility
available for its normal business operations through a Canadian commercial bank.
The amount of the facility declines by $1.2 million per quarter, subject to a
re-setting annually based upon an analysis of gas and oil reserves as of March
31 each year. Canor had $5.8 million (U.S.) of its bank line of credit
outstanding at September 30, 1998.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial
paper. Both NW Natural and Financial Corporation issue commercial paper, which
is supported by the bank lines discussed above, under agency agreements with a
commercial bank. Financial Corporation's commercial paper is supported by the
guaranty of NW Natural (see Part II, Item 8., Note 6, "Notes to Consolidated
Financial Statements," in the 1997 Form 10-K). NW Natural had $64.8 million of
commercial paper notes outstanding at September 30, 1998. Financial Corporation
had no commercial paper notes outstanding at that date.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended September 30, 1998 and December 31,
1997, the Company's ratios of earnings to fixed charges, computed using the
Securities and Exchange Commission method, were 2.63 and 2.99, respectively. For
this purpose, earnings consist of net income before taxes plus fixed charges,
and fixed charges consist of interest on all indebtedness, the amortization of
debt expense and discount or premium and the estimated interest portion of
rentals charged to income.
Contingent Liabilities
----------------------
The Company has identified and is in the process of correcting
the information technology (IT) and non-IT systems within its control that could
be affected by the Year 2000 issue. See Part II, Item 7., "Contingent
Liabilities," in the 1997 Form 10-K. It completed an assessment of these issues
in July 1997, in which its consultant estimated that the cost of renovating its
remaining applications that were not yet Year 2000-ready would be about $4.0
million.
In early 1997, NW Natural established a Year 2000 Project
Office with technical specialists experienced in the Year 2000 issue, sponsored
by two senior executives. The project office has achieved various stages of
correction for impacted IT systems and non-IT equipment and, overall, NW Natural
has maintained and expects to continue its planned schedule for correction. NW
Natural plans to complete renovations of of its internal applications with the
highest risk ratings by June 30, 1999, and to evaluate and develop appropriate
plans to address risks of failure in its remaining lower-risk systems by the end
of 1999. The Company has not quantified its worst-case exposure from the Year
2000 issue, but the project office intends to make such estimates while
prioritizing the highest-risk systems for correction.
The Company's objective in its Year 2000 program is to reduce
the risk of business disruption or serious financial loss due to IT and non-IT
systems failures relating to the Year 2000 issue. In November 1997, NW Natural
replaced its largest operating system, its customer information system,
incorporating billing, customer order, credit and other programs, with a fully
Year 2000-ready system. The program for its remaining systems which commenced in
October 1997 includes maintaining and managing the inventory of its
date-sensitive IT and non-IT systems; researching and managing the degree of
Year 2000 readiness of IT and non-IT systems of the suppliers and vendors with
whom it has material relationships; identifying and assessing the cost of
renovating or replacing non-IT systems within its control that could be affected
by the Year 2000 issue; assigning risk ratings to its IT and non-IT systems in
order to prioritize renovation and replacement efforts; and developing
contingency plans for high-risk systems or vendor products where products are
known to be non-compliant or readiness levels cannot be independently verified.
NW Natural's costs in 1997 for Year 2000 assessment, planning
and renovation were $0.4 million. Its costs in 1998 through September 30 for
renovation, vendor management and other Year 2000 activities were $2.3 million.
These amounts do not include the costs incurred in replacing its customer
information system or costs for other IT systems that will be replaced rather
than renovated.
Despite the Company's efforts, there can be no assurance that
all material Year 2000 risks relating to systems within its control will have
been adequately identified and corrected before the end of 1999. In addition,
while the Company is in the process of researching the Year 2000 readiness of
its suppliers and vendors, the Company can make no assurances regarding the Year
2000 compliance status of systems or parties outside its control, and currently
cannot assess the effect on it of any non-compliance by such systems or parties.
However, as a result of its Year 2000 program and the replacement of the
customer information system, the Company does not believe that, in the
aggregate, Year 2000 issues will be material to its business, operations or
financial condition.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently not applicable.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
General and PGA Rate Cases
--------------------------
In October 1998, NW Natural filed its first general rate case
in Oregon since 1989. The filing proposes a revenue increase of $14.7 million
per year from Oregon operations through rate increases averaging 3.8 percent.
The proposed increase is designed to cover the costs of the additional gas
storage at Mist, NW Natural's new CIS, and making NW Natural's computer systems
compliant with Year 2000 requirements.
Also in October 1998, NW Natural filed its annual rate
adjustments under its PGA tariffs in Oregon and Washington. These filings
propose rate increases averaging 7 percent in Oregon and 5.8 percent in
Washington. The increases are due to higher costs of natural gas to be purchased
under contracts with gas producers during the coming year, and an increase in
temporary rate surcharges for recovery of balances in deferred gas cost and
other regulatory accounts.
All three filings propose that rate increases go into effect
on December 1, 1998. NW Natural expects the OPUC and the WUTC to approve the PGA
filings on approximately the terms proposed, while it expects the OPUC,
following normal procedures, to suspend the general rate case filing for
investigation and hearings.
Even assuming the residential rates proposed to be effective
December 1, 1998, NW Natural would continue to enjoy a significant price
advantage over competing fuels. Compared with rates charged by the electric
utility which serves approximately half of NW Natural's customers, gas would
cost about 50 percent less annually for space heating and about 41 percent less
annually for water heating, assuming typical consumption and appliance
efficiencies.
Environmental Matters
---------------------
NW Natural owns property in Linnton, Oregon, that is the site
of a former gas manufacturing plant that was closed in 1956. In 1993, pursuant
to Oregon Department of Environmental Quality (ODEQ) procedures, NW Natural
submitted a notice of intent to participate in ODEQ's Voluntary Cleanup Program
and in 1994, the site was listed on ODEQ's confirmed Release List and Inventory.
During 1995, initial tests revealed environmental contamination, but the extent
or the estimated cost of remediation cannot yet be determined. The ODEQ and the
U. S. Environmental Protection Agency (EPA) have recently completed a study of
sediments in a 5.5 mile segment of the Willamette River that includes the area
adjacent to the site. Remediation of the site may be affected by the sediments
management plan now being developed in response to the ODEQ/EPA sediments study.
NW Natural expects that its costs of investigation and any
remediation at the Linnton site for which it may be responsible should be
recoverable, in large part, from insurance. In the event these costs are not
recovered from insurance, NW Natural will seek recovery through future rates.
During the period from 1993 through the third quarter of 1998, NW Natural
recorded as expense a total of $1.6 million for the estimated costs of
consultants' fees, ODEQ oversight and the voluntary investigation.
Medium-Term Note Program
------------------------
In November 1998, NW Natural issued and sold $20 million of
Secured Medium-Term Notes, Series B, with a coupon rate of 5.55 percent. These
notes mature in 2002; they have no call or put options.
On September 30, 1998, NW Natural filed a Registration
Statement on Form S-3 with the Securities and Exchange Commission relating to an
additional $143 million of its Medium-Term Notes, Series B, which NW Natural
intends to sell from time to time over the next several years.
Gas Storage
-----------
Effective November 1, 1998, NW Natural placed into service the
$30 million Calvin Creek I phase of the storage facility at Mist, Oregon, the
first of several planned expansions totaling $120 million in NW Natural's
underground gas storage field. Additional phases are planned over the next eight
years to meet growing customer needs.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(a) - Amendment 1998-1 to the Company's Executive
Supplemental Retirement Income Plan (1995 Restatement).
Exhibit 10(b) - ESRIP Change in Control Amendment to the Company's
Executive Supplemental Retirement Income Plan (1995
Restatement).
Exhibit 10(c) - Amendment No. 4 to the Company's Executive Deferred
Compensation Plan, effective September 24, 1998.
Exhibit 10(d) - Amendment No. 1 to the Company's Directors Deferred
Compensation Plan (December 1, 1997 Restatement), effective
September 24, 1998.
Exhibit 10(e) - Amendment dated September 24, 1998 to employee
agreement dated November 2, 1995, as previously amended,
between the Company and an executive officer.
Exhibit 10(f) - Form of amended and restated executive change in
control severance agreement between the Company and each of
10 executives.
Exhibit 10(g) - Amendment dated September 24, 1998 to employment
agreement dated July 2, 1997, as previously amended, between
the Company and an executive officer.
Exhibit 11 - Statement re: Computation of Per Share Earnings.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter
ended September 30, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: November 16, 1998 /s/ D. James Wilson
---------------------------------
D. James Wilson
Principal Accounting Officer,
Controller and Treasurer
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
September 30, 1998
Exhibit
Document Number
- -------- --------
Amendment 1998-1 to the Company's Executive Supplemental
Retirement Income Plan (1995 Restatement) 10(a)
ESRIP Change in Control Amendment to the Company's Executive
Supplemental Retirement Income Plan (1995 Restatement) 10(b)
Amendment No. 4 to the Company's Executive Deferred Compensation
Plan, effective September 24, 1998 10(c)
Amendment No. 1 to the Company's Directors Deferred Compensation Plan
(December 1, 1997 Restatement), effective September 24, 1998 10(d)
Amendment dated September 24, 1998 to employee agreement dated
November 2, 1995, as previously amended, between the
Company and an executive officer 10(e)
Form of amended and restated executive change in control severance
agreement between the Company and each of 10 executives 10(f)
Amendment dated September 24, 1998 to employment agreement dated
July 2, 1997, as previously amended, between the Company and
an executive officer 10(g)
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Financial Data Schedule 27