SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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 No. 0-994
[LOGO] NW NATURAL
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (503) 226-4211
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
At May 8, 2001, 25,052,330 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, 2001
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-month
periods ended March 31, 2001 and 2000 3
(2) Consolidated Statements of Earnings Invested in the
Business for the three-month periods ended
March 31, 2001 and 2000 4
(3) Consolidated Balance Sheets at March 31, 2001 and 2000
and Dec. 31, 2000 5
(4) Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 2001 and 2000 7
(5) Consolidated Statements of Capitalization at
March 31, 2001 and 2000 and Dec. 31, 2000 8
(6) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature 21
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, 2001 2000
- --------------------------------------------------------------------------------
Operating Revenues:
Gross operating revenues $ 217,341 $ 186,649
Cost of sales 125,688 93,561
--------- ---------
Net operating revenues 91,653 93,088
Operating Expenses:
Operations and maintenance 21,043 19,006
Taxes other than income taxes 9,694 8,664
Depreciation, depletion and amortization 12,128 11,439
--------- ---------
Total operating expenses 42,865 39,109
--------- ---------
Income from Operations 48,788 53,979
Other Income 606 689
Interest Charges - net 8,260 8,565
--------- ---------
Income Before Income Taxes 41,134 46,103
Income Taxes 15,227 16,911
--------- ---------
Net Income from Continuing Operations 25,907 29,192
Discontinued Segment:
Gain on sale of discontinued segment - net of tax - 2,470
--------- ---------
Net Income 25,907 31,662
Redeemable preferred and preference stock dividend
requirements 608 622
--------- ---------
Earnings Applicable to Common Stock $ 25,299 $ 31,040
========= =========
Average Common Shares Outstanding 25,207 25,129
Basic Earnings Per Share of Common Stock:
From continuing operations $ 1.00 $ 1.14
From gain on sale of discontinued segment - 0.10
--------- ---------
Total basic earnings per share $ 1.00 $ 1.24
========= =========
Diluted Earnings Per Share of Common Stock:
From continuing operations $ 0.99 $ 1.12
From gain on sale of discontinued segment - 0.10
--------- ---------
Total diluted earnings per share $ 0.99 $ 1.22
========= =========
Dividends Per Share of Common Stock $ 0.31 $ 0.31
========= =========
--------------------------------------------------
See Notes to Consolidated Financial Statements
3
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Statements of Earnings Invested in the Business
(Thousands of Dollars)
(Unaudited)
Three Months Ended March 31, 2001 2000
- --------------------------------------------------------------------------------
Earnings Invested in the Business:
Balance at Beginning of Period $ 134,189 $ 118,711
Net Income 25,907 $ 25,907 31,662 $ 31,662
Cash Dividends Paid:
Redeemable preferred and preference stock (608) (622)
Common stock (7,812) (7,782)
Common Stock Repurchased (1,801) -
--------- ---------
Balance at End of Period $ 149,875 $ 141,969
========= =========
Accumulated Other Comprehensive Income (Loss):
Balance at Beginning of Period $ - $ (3,181)
Other comprehensive income - net of tax:
Unrealized gain on securities - - 51 51
Recognition of foreign currency
translation adjustment included
in gain on sale of discontinued segment - - 3,181 3,181
------------------ -------------------
Comprehensive Income $ 25,907 $ 34,894
========= ==========
Balance at End of Period $ - $ 51
========= =========
--------------------------------------------------
See Notes to Consolidated Financial Statements
4
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
March 31, March 31, Dec. 31,
2001 2000 2000
- --------------------------------------------------------------------------------
Assets:
Plant and Property :
Utility plant $ 1,420,274 $ 1,347,485 $ 1,406,970
Less accumulated depreciation 486,261 446,419 478,138
------------ ------------ ------------
Utility plant - net 934,013 901,066 928,832
------------ ------------ ------------
Non-utility property 8,648 8,548 8,649
Less accumulated depreciation
and depletion 3,474 7,676 3,451
------------ ------------ ------------
Non-utility property - net 5,174 872 5,198
------------ ------------ ------------
Total plant and property 939,187 901,938 934,030
------------ ------------ ------------
Investments and Other 14,310 16,087 14,526
Current Assets:
Cash and cash equivalents 12,196 24,749 11,283
Accounts receivable 57,876 59,096 62,620
Allowance for doubtful accounts (2,708) (2,201) (1,867)
Accrued unbilled revenue 26,591 19,289 45,619
Inventories of gas, materials
and supplies 19,562 17,717 46,883
Property held for sale - 16,712 -
Prepayments and other current assets 20,554 16,350 22,834
------------ ------------ ------------
Total current assets 134,071 151,712 187,372
Regulatory Income Tax Assets 49,515 51,060 49,515
------------ ------------ ------------
Deferred Gas Costs Receivable 16,491 17,472 16,973
------------ ------------ ------------
Regulatory Assets and Other 74,301 75,820 76,297
------------ ------------ ------------
Total Assets $ 1,227,875 $ 1,214,089 $ 1,278,713
============ ============ ============
--------------------------------------------------
See Notes To Consolidated Financial Statements
5
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
March 31, March 31, Dec. 31,
2001 2000 2000
- --------------------------------------------------------------------------------
Capitalization and Liabilities:
Capitalization:
Common stock $ 317,565 $ 315,560 $ 318,120
Earnings invested in the business 149,875 141,969 134,189
Accumulated other comprehensive income - 51 -
---------- ---------- ----------
Total common stock equity 467,440 457,580 452,309
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 9,750 10,564 9,750
Long-term debt 400,664 396,276 400,790
---------- ---------- ----------
Total capitalization 902,854 889,420 887,849
---------- ---------- ----------
Current Liabilities:
Notes payable 22,470 16,493 56,263
Accounts payable 60,225 63,294 110,698
Long-term debt due within one year 20,000 10,000 20,000
Taxes accrued 17,818 23,101 8,066
Interest accrued 9,904 9,372 2,696
Other current and accrued liabilities 24,232 40,408 23,638
---------- ---------- ----------
Total current liabilities 154,649 162,668 221,361
Deferred Investment Tax Credits 9,063 9,932 9,538
---------- ---------- ----------
Deferred Income Tax Liabilities 142,810 136,081 141,656
---------- ---------- ----------
Regulatory Liabilities and Other 18,499 15,988 18,309
---------- ---------- ----------
Commitments and Contingencies - - -
---------- ---------- ----------
Total Capitalization and Liabilities $1,227,875 $1,214,089 $1,278,713
========== ========== ==========
--------------------------------------------------
See Notes To Consolidated Financial Statements
6
(NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
Three Months Ended March 31, 2001 2000
- --------------------------------------------------------------------------------
Operating Activities:
Net income from continuing operations $ 25,907 $ 29,192
Adjustments to reconcile net income to cash provided
by operations:
Depreciation, depletion and amortization 12,128 11,439
Deferred income taxes and investment tax credits 679 (530)
Equity in earnings of investments (142) (234)
Allowance for funds used during construction (191) (120)
Deferred gas costs receivable 482 3,478
Regulatory accounts and other - net 2,186 944
---------- ----------
Cash from operations before working capital changes 41,049 44,169
Changes in operating assets and liabilities:
Accounts receivable - net 5,585 (13,546)
Accrued unbilled revenue 19,028 12,261
Inventories of gas, materials and supplies 27,321 16,202
Accounts payable (50,473) (4,869)
Accrued interest and taxes 16,960 23,699
Other current assets and liabilities 2,782 148
---------- ----------
Cash Provided By Continuing Operating Activities 62,252 78,064
---------- ----------
Investing Activities:
Acquisition and construction of utility plant assets (17,095) (17,334)
Investment in non-utility property - -
Proceeds from sale of discontinued segment - 34,695
Investments and other 451 749
---------- ----------
Cash Provided By (Used In) Investing Activities (16,644) 18,110
---------- ----------
Financing Activities:
Common stock issued 1,290 1,391
Common stock repurchased (3,772) -
Change in short-term debt (33,793) (77,656)
Cash dividend payments:
Redeemable preferred and preference stock (608) (622)
Common stock (7,812) (7,782)
Foreign currency translation and capital stock expense - 3,231
---------- ----------
Cash Used in Financing Activities (44,695) (81,438)
---------- ----------
Increase In Cash and Cash Equivalents 913 14,736
Cash and Cash Equivalents - Beginning of Period 11,283 10,013
---------- ----------
Cash and Cash Equivalents - End of Period $ 12,196 $ 24,749
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 1,041 $ 3,806
Income Taxes $ 4,002 $ 4,342
Supplemental Disclosure of Non-cash Financing Activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures $ 126 $ 103
--------------------------------------------------
See Notes to Consolidated Financial Statements
7
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) Consolidated Statements of Capitalization
(Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
March 31, 2001 March 31, 2000 Dec. 31, 2000
- -----------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 79,595 $ 79,688 $ 79,905
Premium on common stock 237,970 235,872 238,215
Earnings invested in the business 149,875 141,969 134,189
Accumulated other comprehensive income - 51 -
--------- --------- ---------
Total common stock equity 467,440 52% 457,580 51% 452,309 51%
--------- --------- ---------
PREFERENCE STOCK:
$6.95 Series, stated value $100 per share 25,000 3% 25,000 3% 25,000 3%
--------- --------- ---------
Total redeemable preference stock 25,000 25,000 25,000
REDEEMABLE PREFERRED STOCK:
Stated value $100 per share:
$4.75 Series - 64 -
$7.125 Series 9,750 10,500 9,750
--------- --------- ---------
Total redeemable preferred stock 9,750 1% 10,564 1% 9,750 1%
--------- --------- ---------
LONG-TERM DEBT:
First Mortgage Bonds
9-3/4% Series due 2015 - 50,000 -
Medium-Term Notes
First Mortgage Bonds:
5.96% Series B due 2000 - 5,000 -
5.98% Series B due 2000 - 5,000 -
6.62% Series B due 2001 10,000 10,000 10,000
8.05% Series A due 2002 10,000 10,000 10,000
6.75% Series B due 2002 10,000 10,000 10,000
5.55% Series B due 2002 20,000 20,000 20,000
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
7.45% Series B due 2010 25,000 - 25,000
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 22,000 22,000
8.31% Series B due 2019 10,000 10,000 10,000
7.63% Series B due 2019 20,000 20,000 20,000
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
7.72% Series B due 2025 20,000 - 20,000
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 20,000
6.65% Series B due 2028 10,000 10,000 10,000
7.74% Series B due 2030 20,000 - 20,000
7.85% Series B due 2030 10,000 - 10,000
Unsecured:
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 8,664 9,276 8,790
--------- --------- ---------
420,664 406,276 420,790
Less long-term debt due within one year 20,000 10,000 20,000
--------- --------- ---------
Total long-term debt 400,664 44% 396,276 45% 400,790 45%
--------- ---- --------- ---- --------- ----
TOTAL CAPITALIZATION $ 902,854 100% $ 889,420 100% $ 887,849 100%
========= ==== ========= ==== ========= ====
----------------------------------------------------
See Notes to Consolidated Financial Statements
8
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(6) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements
The information presented in the consolidated financial statements is
unaudited, but includes all 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 2000 Annual Report on Form 10-K (2000
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 2001 presentation.
2. Derivatives Policy
NW Natural's Derivatives Policy allows up to a 100 percent hedge
position in currency derivatives to match and lock in prices on individual
Canadian natural gas purchase transactions; interest rate derivatives to match
specific outstanding debt instruments maturing in less than five years; and
natural gas commodity derivatives to lock in or cap prices on gas purchased for
a future period under contracts with market-indexed pricing. The policy requires
derivatives to be used within prescribed limitations and only in order to reduce
price risk, so as to qualify for hedge accounting treatment. The policy also has
specific requirements in terms of counterparty credit-worthiness. Changes in
market values of foreign currency contracts, and gains or losses on commodity
derivative contracts, are deferred and recognized as adjustments to gas purchase
costs upon concurrent settlement of these contracts (see Part II, Item 8., Note
11, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K).
3. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedge accounting. It
requires that an entity measure all derivatives at fair value and recognize
those derivatives as either assets or liabilities on the balance sheet. If the
derivative is designated as a fair value hedge, the changes in the fair value of
the derivative and of the hedged item attributable to the hedged risk are
recognized in current earnings. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in current earnings. Some
of the Company's gas purchase, sales and transportation contracts are derivative
instruments as defined under SFAS No. 133.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," amending portions of
SFAS No. 133. Among other things, SFAS No. 138 provides an exception for
contracts intended for the normal purchase and normal sale of something other
than a financial instrument or derivative instrument, for which physical
delivery is probable.
9
4. Adoption of New Accounting Standards
The Company adopted SFAS No. 133, as amended, on Jan. 1, 2001. The
Company's primary derivatives hedging activities are being accounted for as cash
flow hedges under this statement. Pursuant to SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation," effective portions of changes in the
fair value of these derivative instruments are being deferred or accrued as a
regulatory asset until realized, rather than recorded in OCI.
As required upon adoption of SFAS No. 133, the Company recorded a
one-time transition adjustment by debiting receivables from counterparties (a
regulatory asset account) and crediting recoverable gas costs (an offsetting
regulatory asset account) on the balance sheet for approximately $165 million.
This transition adjustment on the balance sheet represents the initial
recognition of the fair values of hedge derivatives outstanding on the adoption
date. The fair value of these instruments at March 31, 2001 was $41.0 million,
with all instruments maturing prior to Dec. 31, 2001. The net decrease in fair
value between Jan. 1 and March 31, 2001 ($124 million), reflects gains of $74
million realized as reductions to the cost of gas upon settlement of cash flow
hedges and an adjustment of $50 million due to changes in the market value of
contracts outstanding at the end of the first quarter. If any portion of the
hedge derivatives relating to gas commodity purchases or foreign currency had
been determined to be ineffective, that portion would have been charged to cost
of gas, but all outstanding derivative instruments in these categories at March
31, 2001 were determined to be 100 percent effective (see Part I, Item 2.,
"Results of Operations - Cost of Gas," below).
The Company also recorded a $0.1 million loss in the first quarter of
2001, representing the change in value of an embedded derivative relating to a
contract for an equipment financing program under which NW Natural guarantees a
minimum level of return for the lender.
5. Segment Reporting
The Company principally operates in a segment of business ("Utility")
consisting of the distribution of natural gas. Another segment ("Gas Storage"),
which was immaterial prior to Jan. 1, 2001, represents natural gas storage
services provided to upstream customers using storage capacity not required from
time to time for service to utility customers. The remaining segment ("Other")
primarily consists of non-regulated investments in alternative energy projects
in California, the discontinued oil and gas exploration business and a Boeing
737-300 aircraft which is leased to Continental Airlines.
10
The following table presents information about the reportable segments
for the three months ended March 31, 2001 and 2000. Inter-segment transactions
are insignificant.
Three Months Ended March 31,
---------------------------------------------
Thousands Utility Gas Storage Other Total
---------------------------------------------------------------------------------------
2001
----
Net operating revenues $ 90,384 $ 1,223 $ 46 $ 91,653
Depreciation, depletion and amortization 12,104 24 - 12,128
Other operating expenses 30,795 31 (89) 30,737
Income from operations 47,485 1,168 135 48,788
Net income from continuing operations 25,059 693 155 25,907
Income (loss) from financial investments - - (142) (142)
Assets 1,201,355 4,895 21,625 1,227,875
2000
----
Net operating revenues $ 93,003 $ - $ 85 $ 93,088
Depreciation, depletion and amortization 11,417 - 22 11,439
0ther operating expenses 27,729 - (59) 27,670
Income from operations 53,857 - 122 53,979
Net income from continuing operations 28,944 - 248 29,192
Income (loss) from financial investments - - (78) (78)
Gain on sale of discontinued segment - - 2,470 2,470
Assets 1,192,887 - 21,202 1,214,089
6. Property Held for Sale
Property held for sale at March 31, 2000 consisted of a new
headquarters building that was constructed for the Port of Portland. This
property was subsequently sold during the third quarter of 2000 (see Part II,
Item 7., "Financial Condition - Cash Flows - Port of Portland Building," in the
2000 Form 10-K).
7. Discontinued Segment
On Jan. 26, 2000, the Company sold its interest in Canor Energy, Ltd.
(Canor), an Alberta, Canada corporation engaged in natural gas and oil
exploration, development and production in Alberta and Saskatchewan, Canada. As
of March 31, 2000, the Company realized an after-tax gain resulting from the
sale of Canor of $2.5 million, net of Canadian tax on dividends ($0.6 million)
and U.S. income tax ($2.8 million). Additional closing costs were recorded
during the fourth quarter of 2000, resulting in a year-end after-tax gain from
the sale of Canor of $2.4 million (see Part II, Item 8., Note 2, "Canor Energy,
Ltd.," in the 2000 Form 10-K).
Proceeds from the sale of Canor are reflected in the statement of cash
flows (Investing Activities) as proceeds from sale of discontinued segment.
8. Contingencies
Environmental Matters
---------------------
The Company owns property in Linnton, Oregon that is the site of a
former gas manufacturing plant that was closed in 1956 (the Linnton site). The
Company previously owned property adjacent to the Linnton site that now is the
location of a manufacturing plant owned by Wacker Siltronic Corporation (the
11
Wacker site). The Linnton site and the Wacker site have been under investigation
by the Company under program oversight by the Oregon Department of Environmental
Quality (ODEQ). In 1998, the ODEQ and the U.S. Environmental Protection Agency
(EPA) completed a study of sediments in a 5.5 mile segment of the Willamette
River (the Portland Harbor) that includes the area adjacent to the Linnton site
and the Wacker site. In 2000, the EPA listed the Portland Harbor as a Superfund
site. See Part II, Item 8., Note 12, "Notes to Consolidated Financial
Statements," in the 2000 Form 10-K.
NW Natural expects that its costs of investigation and any remediation
for which it may be responsible with respect to the Linnton site, the Wacker
site and the Portland Harbor Superfund site 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.
Litigation
----------
NW Natural is party to a lawsuit, Northwest Natural Gas Company v.
Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370), involving
claims by a commercial customer. In 1999, the Oregon Supreme Court ruled in the
Company's favor on the larger of the two claims in the case and the Oregon Court
of Appeals ruled in the Company's favor on the smaller (contract) claims. The
Oregon Supreme Court initially declined to review the Court of Appeals' decision
on the contract claims, including a verdict against the Company in the amount of
$2.0 million plus interest. On reconsideration, however, in December 2000 the
Supreme Court agreed to review the Court of Appeals' decision on the contract
claims and is expected to issue an opinion in 2001. See Part I, Item 3., "Legal
Proceedings," in the 2000 Form 10-K.
12
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary
Canor Energy, Ltd. (Canor), a majority-owned subsidiary,
reclassified as a discontinued segment and sold in the first
quarter of 2000
Together these businesses are referred to herein as the "Company" (see
"Non-utility Operations," below, and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements," in the Company's 2000 Annual Report on Form
10-K (2000 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, 2001 and 2000.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock were $25.3 million
in the quarter ended March 31, 2001, down from $31.0 million in the first
quarter of 2000. The results for the first quarter of 2000 included a gain of
$2.5 million from the sale of a discontinued segment (Canor).
Diluted earnings per share from consolidated continuing operations in
the first quarter of 2001 were 99 cents a diluted share, compared to $1.12 in
last year's first quarter. In addition, the Company recorded a gain equivalent
to 10 cents a share from the sale of Canor in the first quarter of 2000.
NW Natural earned 96 cents a diluted share from gas utility operations
in the first quarter of 2001, compared to $1.11 in the same period in 2000.
Weather conditions in its service territory in the first quarter of 2001 were 3
percent colder than the 20-year average but 4.5 percent warmer than the first
quarter of 2000. Residential customers' consumptions per heating degree day were
about 7 percent lower during the first quarter of 2001 than in the first quarter
of 2000, while commercial customers' consumptions were about 5 percent lower.
The Company estimates that the combination of warmer weather and lower
consumptions per degree day reduced sales by about 22 million therms and margin
revenues (gross revenues minus cost of sales) by about $7.1 million, equivalent
to 17 cents a share.
Non-utility operating results for the first quarter of 2001, excluding
Canor, were earnings of 3 cents a share compared to earnings of 1 cent a share
from these operations in 2000. See "Non-utility Operations," below.
13
Dividends paid on common stock were 31 cents a share for each of the
three-month periods ended March 31, 2001 and 2000. In April 2001, the Company's
Board of Directors declared a quarterly dividend of 31 cents a share on the
common stock, payable May 15, 2001, to shareholders of record on April 30, 2001.
The current indicated annual dividend rate is $1.24 a 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:
Thousands
(Except customers and degree days) 2001 2000
- --------------------------------------------------------------------------------------------------------
Gas Sales and Transportation Volumes - Therms (000's):
- ------------------------------------------------------
Residential and commercial sales 258,873 268,088
Unbilled volumes (24,223) (19,359)
---------- ----------
Weather-sensitive volumes 234,650 61% 248,729 60%
Industrial firm sales 23,464 6% 24,066 6%
Industrial interruptible sales 13,798 4% 15,570 4%
---------- ----------
Total gas sales 271,912 288,365
Transportation deliveries 112,473 29% 127,831 30%
---------- ----- ---------- -----
Total volumes sold and delivered 384,385 100% 416,196 100%
========== ===== ========== =====
Utility Operating Revenues - Dollars (000's):
- ---------------------------------------------
Residential and commercial sales $ 198,232 $ 178,352
Unbilled revenues (5,690) (12,649)
---------- ----------
Weather-sensitive revenues 192,542 89% 165,703 89%
Industrial firm sales 13,658 6% 10,959 6%
Industrial interruptible sales 7,225 3% 5,833 3%
---------- ----------
Total gas sales 213,425 182,495
Transportation revenues 4,419 2% 5,985 3%
Other revenues (1,782) - (1,968) (1%)
---------- ----- ---------- -----
Total utility operating revenues $ 216,062 100% $ 186,512 100%
========== ===== ========== =====
Cost of gas sold $ 125,678 $ 93,509
========== ==========
Total number of customers (end of period) 528,008 507,756
========== ==========
Actual degree days 1,890 1,979
========== ==========
20-year average degree days 1,827 1,835
========== ==========
14
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with 20,252
customers added since March 31, 2000 for a growth rate of 4 percent. In the
three years ended Dec. 31, 2000, more than 65,000 customers were added to the
system, representing an average annual growth rate of 4.6 percent.
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 were 3 percent colder than average in
the first quarter of 2001 and 8 percent colder than average in the first quarter
of 2000.
Volumes of gas sold to residential and commercial customers decreased
14.1 million therms, or 6 percent, in the first quarter of 2001 compared to the
first quarter of 2000. Related revenues increased $26.8 million, or 16 percent,
primarily due to rate increases effective during 2000. (See Part II, Item 7,
"Results of Operations - Regulatory Matters," in the 2000 Form 10-K.) Customer
growth in the residential and commercial segments since March 31, 2000,
contributed an estimated 8 million therms in sales volumes and $2.9 million in
additional margin during the first quarter of 2001.
NW Natural believes the recent reduction in its customers' gas
consumption patterns (see "Earnings and Dividends," above) is caused by the
Company's much higher cost of purchased gas, which NW Natural passed through to
customers as rate increases last fall, and to efforts throughout the region to
conserve energy. NW Natural is discussing with the Oregon Public Utility
Commission (OPUC) new regulatory initiatives that would stabilize margin
revenues in the face of variable consumption patterns, improve the Company's
energy efficiency programs and help customers manage their energy bills. The
Company's goal is to have a margin stabilization mechanism in place for the next
heating season which starts in October 2001, thereby mitigating further losses
during the current fiscal year.
In order to match revenues with related purchased gas costs, NW
Natural records "unbilled revenues" relating to gas delivered through the end of
the period but not yet billed to customers.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial firm, industrial interruptible,
and transportation customers were 17.7 million therms, or 11 percent, lower in
the first quarter of 2001 than in the same period of 2000. Margin from these
customers decreased from $13.3 million in the first quarter of 2000 to $11.7
million in the first quarter of 2001. The primary factors contributing to the
decrease in industrial margin were a $1.0 million decrease in margin from
customers on an industrial schedule in which rates vary with oil prices and a
$0.7 million decrease in margin from customers with special contracts, due to a
combination of some customers' transferring to rate schedules with lower margins
and other customers' use of oil rather than natural gas during the current
period.
Other revenues include amortizations from regulatory accounts and
miscellaneous fees charged to gas sales customers (see Part II, Item 8., Note 1,
"Notes to Consolidated Financial Statements," in the 2000 Form 10-K). Other
revenues increased $0.2 million during the first quarter of 2001 compared to the
first quarter of 2000. Factors contributing to the increase in the first three
months of 2001 were lower property tax amortizations ($1.2 million) and higher
revenues from customer late payment and reconnection fees ($0.7 million), offset
by higher amortizations from regulatory accounts covering conservation programs
($1.7 million).
15
Cost of Gas
-----------
The cost per therm of gas sold was 30 percent higher during the first
quarter of 2001 than in the first quarter of 2000, primarily due to higher
prevailing prices in the natural gas commodity market. The cost of gas sold
includes current gas purchases, gas drawn from storage inventory, gains or
losses from commodity hedges, demand cost equalization, regulatory deferrals and
company use.
NW Natural was able to offset some of the impact of the higher gas
prices during the first quarter of 2001 through an active natural gas commodity
hedge program conducted under the terms of the Company's Derivatives Policy (see
Item 1, Note 2., "Notes to Consolidated Financial Statements," above). NW
Natural recorded net gains from commodity swap and call option contracts of $74
million in the first quarter of 2001, compared to net losses of $0.9 million in
the first quarter of 2000. Gains (losses) from commodity hedges are recorded as
reductions (increases) to the cost of gas. The cost of gas sold also was reduced
by off-system gas sales of $0.6 million and $1.2 million for the first quarters
of 2001 and 2000, respectively. Under an agreement with the OPUC, revenues from
these sales are treated as a reduction of gas costs.
NW Natural has a Purchased Gas Adjustment (PGA) tariff under which its
net income from Oregon operations is affected only within defined limits by
changes in purchased gas costs. NW Natural absorbs 33 percent of the higher cost
of gas sold, or retains 33 percent of the lower cost, in either case as compared
to projections. The remaining 67 percent of the higher or lower gas costs are
recorded as deferred debits or credits (regulatory assets or liabilities) for
recovery from or refund to customers in future rates. NW Natural deferred $3.7
million of higher gas costs during the first quarter of 2001 and expects to
recover these amounts from customers during the next two years. The combined
impact of NW Natural's higher gas costs and its partially offsetting off-system
gas sales under the PGA sharing mechanism during the first quarter of 2001 was
that the Company absorbed $0.4 million of its higher gas costs, reducing
earnings by about 1 cent a share.
Non-utility Operations
-----------------------
At March 31, 2001 and 2000, the Company had one active subsidiary,
Financial Corporation, a wholly-owned subsidiary. One discontinued segment,
Canor, a majority-owned subsidiary, was sold in January 2000 (see "Discontinued
Segment," below).
Financial Corporation
---------------------
Financial Corporation's operating results for the three months ended
March 31, 2001, were net income of $0.1 million, compared to income of $0.2
million for the first quarter of 2000. Diluted earnings per share were
equivalent to 1 cent a share for each of the three-month periods ended March 31,
2001 and 2000. Financial Corporation's net assets at March 31, 2001 and 2000,
were $7.4 million.
Gas Storage Services
--------------------
The Company realized income of $0.7 million in the three months ended
March 31, 2001, from gas storage services to upstream customers using storage
capacity not required from time to time for service to utility customers. NW
Natural retains 80 percent of the revenues from the upstream storage services
and credits the remaining 20 percent to its utility customers. Earnings from
storage services were equivalent to 2 cents a diluted share for the three months
ended March 31, 2001. There were no revenues or earnings from storage services
in the first quarter of 2000.
16
Discontinued Segment
--------------------
During the first quarter of 2000, the Company sold its interest in
Canor at a gain of $2.5 million, equivalent to 10 cents a diluted share (see
Item 1, Note 8., "Notes to Consolidated Financial Statements," above and Part
II, Item 7., "Results of Operations - Discontinued Segment," in the 2000 Form
10-K).
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $2.0 million, or 11 percent,
higher in the first quarter of 2001 compared to the same period in 2000. Key
factors that contributed to the increase in expenses were higher accruals for
employees' health and life insurance benefit plans ($0.7 million) due to
increases in premiums for these benefit plans; higher accruals for uncollectible
accounts expense ($0.7 million) due to increased utility revenues and the impact
of higher customer gas bills; and higher payroll ($0.6 million) due to wage and
salary increases. Expenses in the first quarter of 2001 included a charge of
$0.1 million representing the change in value of an embedded derivative relating
to a contract for an equipment financing program (see Item 1, Note 4., "Notes to
Consolidated Financial Statements," above).
Taxes Other than Income Taxes
-----------------------------
Taxes other than income taxes increased $1.0 million, or 12 percent,
in the first quarter of 2001 compared to the first quarter of 2000. Franchise
tax expense increased $0.3 million due to higher utility operating revenues.
Payroll tax expense increased $0.3 million due to higher payroll. Property taxes
increased $0.2 million and regulatory fees increased $0.2 million.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation, depletion and amortization expense
increased $0.7 million, or 6 percent, compared to the first quarter of 2000.
This increase is primarily due to a 5 percent increase in utility plant in
service. As a percentage of average plant and property, depreciation, depletion
and amortization expense was approximately 1 percent for the three months ended
March 31, 2001 and 2000.
Other Income
------------
The Company's other income was approximately $0.1 million lower in the
first quarter of 2001 compared to the first quarter of 2000. The decrease was
primarily due to a decrease in income from Company-owned life insurance policies
($0.3 million), a decrease in earnings from Financial Corporation's investments,
a decrease in merchandise income ($0.1 million) and higher charitable donations
($0.1 million), offset by an increase in net rental income ($0.4 million).
Interest Charges - net
----------------------
The Company's net interest expense decreased $0.3 million, or 4
percent, in the first quarter of 2001 compared to the first quarter of 2000.
Interest expense on commercial paper was $0.3 million lower due to a lower
average balance of commercial paper outstanding during the period.
Income Taxes
------------
The effective corporate income tax rates from continuing operations
during the three months ended March 31, 2001 and 2000 were 37.0 percent and 36.7
percent, respectively.
17
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 2000 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 2000 Form 10-K).
Cash Flows
----------
Operating Activities
--------------------
Continuing operations provided net cash of $62.2 million in the three
months ended March 31, 2001, compared to $78.8 million in the first three months
of 2000. The $15.8 million, or 20 percent, decrease was due to decreased cash
from operations before working capital changes ($3.1 million) and higher working
capital requirements ($12.7 million). The decrease in cash from continuing
operations before working capital changes was due to lower income from
continuing operations ($3.3 million) and a smaller reduction in deferred gas
costs receivable ($3.0 million), partially offset by a larger reduction in the
net asset balance in regulatory accounts ($1.2 million), a net increase in
deferred income taxes and investment tax credits in the first quarter of 2001
compared to a net decrease in the first quarter of 2000 ($1.2 million), and an
increase in depreciation, depletion and amortization ($0.7 million). The
increase in working capital requirements was primarily due to a larger reduction
in accounts payable ($45.6 million), partially offset by a reduction in accounts
receivable in the first quarter of 2001 compared to an increase in the first
quarter of 2000 ($19.1 million), and a larger reduction in inventories of gas,
materials and supplies ($11.1 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 12, "Notes to Consolidated Financial Statements," in the
2000 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first quarter of
2001 totaled $17.1 million, down $0.2 million from the first quarter of 2000.
NW Natural's construction expenditures are estimated to total $75
million for 2001. Over the five-year period 2001 through 2005, these
expenditures are estimated at between $450 million and $500 million. The level
of capital expenditures over the next five years reflects projected high
18
customer growth plus a major system reinforcement project and the development of
additional underground gas storage facilities. An estimated 60 percent of the
required funds is expected to be internally generated over the five-year period,
with the remainder funded through a combination of long-term debt and equity
securities with short-term debt providing liquidity and bridge financing.
Investments in non-utility property during the first quarter of 2001
and 2000 were negligible. The discontinued segment provided net cash of $34.7
million in the first quarter of 2000, due to the sale of the Company's interest
in Canor.
Financing Activities
--------------------
Internally generated cash was used to reduce short-term debt by $33.8
million in the first quarter of 2001, compared to a reduction of $77.7 million
in the first quarter of 2000.
In May 2000, the Company commenced a program to repurchase up to 2
million shares, or up to $35 million in value, of NW Natural's common stock
through a repurchase program to extend through May 2001. The purchases are made
in the open market or through privately negotiated transactions. The Company
used $3.8 million for stock repurchases under the program in the first quarter
of 2001. As of March 31, 2001, the Company had repurchased 265,900 shares of
common stock at a total cost of $6.2 million.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper.
Both NW Natural and Financial Corporation issue commercial paper under agency
agreements with a commercial bank. The commercial paper is supported by bank
lines of credit (see "Lines of Credit," below). 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 2000 Form
10-K). NW Natural had $22.5 million of commercial paper notes outstanding at
March 31, 2001, compared to $16.5 million and $56.3 million at March 31 and Dec.
31, 2000, respectively. Financial Corporation had no commercial paper notes
outstanding at March 31, 2001.
Lines of Credit
---------------
NW Natural has available through Sept. 30, 2001, committed lines of
credit with four commercial banks totaling $120 million which are used as backup
lines for the commercial paper program. In addition, Financial Corporation has
available through Sept. 30, 2001, committed lines of credit with two commercial
banks totaling $20 million. Financial Corporation's lines are supported by the
guaranty of NW Natural.
Under the terms of these lines of credit, NW Natural and Financial
Corporation pay commitment fees but are not required to maintain compensating
bank balances. The interest rates on borrowings are based on current market
rates as negotiated. There were no outstanding balances on either the NW Natural
or Financial Corporation lines of credit as of March 31, 2001 or 2000.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended March 31, 2001, and Dec. 31, 2000, the
Company's ratios of earnings to fixed charges, computed using the Securities and
Exchange Commission method, were 2.95 and 3.14, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges, and fixed
charges consist of interest on all indebtedness, the amortization of debt
expense and discount or premium and the estimated interest portion of rentals
charged to income.
19
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 OPUC and the WUTC, with
respect to allowed rates of return, industry and rate structure, purchased gas
and investment recovery, acquisitions and dispositions of assets and facilities,
operation and construction of plant facilities, present or prospective wholesale
and retail competition, changes in tax laws and policies and changes in and
compliance with environmental and safety laws and policies; (ii) 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information provided in
Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk,"
in the 2000 Form 10-K.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Electric Generation Market
--------------------------
Besides its core market, another developing market for NW Natural is
the market for delivery of natural gas for use in the generation of electricity.
A number of generation projects are on a fast track in the Company's service
area in order to help meet the immediate demand for power in the western United
States. For example, NW Natural signed a letter of intent in April 2001 to
provide gas service to Clark Public Utility District (Clark PUD) in Vancouver,
Washington, for a year beginning July 1, 2001. Clark PUD will use the gas to
produce up to 50 megawatts of electricity. NW Natural estimates that its service
to this site could contribute 5 cents a share to earnings in 2001.
20
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
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the quarter ended
March 31, 2001.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: May 14, 2001 /s/ Stephen P. Feltz
---------------------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
21
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
March 31, 2001
Exhibit
Document Number
- -------- ------
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12