SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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
[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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
Common Stock, $3 1/6 par value,
and Common Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Shares outstanding on February 28, 2001
- ------------------- ---------------------------------------
Preference Stock, without par value 250,000
Preferred Stock, without par value 97,500
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the shares of voting stock (common stock) held by
non-affiliates of the registrant at February 28, 2001 was: $618,598,200.
Indicate number of shares outstanding of each of registrant's classes of common
stock as of February 28, 2001: Common Stock, $3 1/6 par value,
and Common Share Purchase Rights 25,230,166
DOCUMENTS INCORPORATED BY REFERENCE
List documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated.
Portions of the Proxy Statement of Company, to be filed in connection with the
2001 Annual Meeting of Shareholders, are incorporated by reference in Part III.
Introductory Note
-----------------
This Form 10-K/A amends Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition - "Other Income (Expense)" and
Item 8. Financial Statements and Supplementary Data - Note 1, Note 2 and Note 4
to the Consolidated Financial Statements contained in the Annual Report on Form
10-K of Northwest Natural Gas Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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 in 1999 and
sold in the first quarter of 2000
Together these businesses are referred to herein as the "Company" (see
"Subsidiary Operations" below and Note 2 to the Consolidated Financial
Statements).
At Dec. 31, 1999, the Company's investment in Canor was reclassified
to current assets and reported as a discontinued segment. In the consolidated
statements of income for 1999 and 1998, Canor's operating revenues and expenses
are included in net income from discontinued segment.
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
years ended Dec. 31, 2000.
Highlights and Outlook
- ----------------------
Among its accomplishments in 2000, NW Natural:
o grew the customer base by more than 4 percent for the 12th year in a
row, adding 22,243 customers to its gas distribution system during the
year;
o completed another phase in the expansion of the Mist gas storage
system and placed it in service Dec. 1, 2000, on time and on budget;
o filed and settled a general rate case in Washington and secured fair
regulatory treatment in both Oregon and Washington for the Mist
storage project, new state cost allocations and gas cost changes;
o completed the replacement of the last remaining portion of its
100-year-old low-pressure gas distribution system;
o sold its Canadian energy exploration and production subsidiary at a
gain, redeploying $35 million in cash proceeds from the sale into the
Company's growing operations in its core market;
o increased productivity by 6 percent, reducing its ratio of expenses
per customer from $188.56 in 1999 to $176.31 in 2000; and
o began trading its common stock on the New York Stock Exchange.
Among its corporate strategies for 2001, NW Natural will focus on:
o supporting and strengthening its core gas distribution business;
o sustaining profitable customer growth while providing excellent
customer service;
o enhancing service and creating shareholder value through further gas
storage development; and
o improving efficiency by managing costs, investments and utilization of
assets.
2
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock in 2000 were $47.8
million, up from $42.8 million in 1999 and $24.7 million in 1998. Earnings for
2000 set a new record for the Company while earnings for 1999 were its third
highest on record. Earnings for 1998 were reduced by write-downs of subsidiary
assets and by warmer than normal weather.
Diluted earnings per share from consolidated operations were $1.88 a
share in 2000, compared to $1.70 a share in 1999 and $1.02 a share in 1998.
NW Natural earned $1.78 a diluted share from gas utility operations in
2000, compared to $1.66 in 1999 and $1.43 in 1998. Weather conditions in its
service territory in 2000 were 4 percent colder than in 1999 and 5 percent
colder than the 20-year average. Weather in 1999 was 6 percent colder than in
1998 and 2 percent colder than the 20-year average. Weather in 1998 was 5
percent warmer than the 20-year average.
Non-regulated operating results for 2000, excluding Canor, were
earnings of 1 cent a share compared to earnings of 3 cents a share from these
operations in 1999 and a loss of 42 cents a share in 1998 (see Note 2). The loss
in 1998 included write-downs of subsidiary assets equivalent to 43 cents a
share. The Company recognized a gain equivalent to 9 cents a share from the sale
of Canor during the first quarter of 2000. Results from Canor for the years
ended Dec. 31, 1999 and 1998 were equivalent to earnings of 1 cent a share (see
Note 2). Results in 1998 included write-downs of assets equivalent to 7 cents a
share and a gain equivalent to 15 cents a share from a transaction involving
Canor (see "Discontinued Segment," below).
2000 was the 45th consecutive year in which the Company's dividends
paid have increased. Dividends paid on common stock were $1.24 a share in 2000
compared to $1.225 a share in 1999 and $1.22 a share in 1998.
Results of Operations
- ---------------------
Regulatory Matters
------------------
NW Natural provides gas utility service in Oregon and Washington, with
Oregon representing approximately 92 percent of its revenues. Future earnings
and cash flows from utility operations will be determined largely by the pace of
continued growth in the residential and commercial markets and by NW Natural's
ability to remain price competitive in the large industrial market, to control
expenses, and to obtain reasonable and timely regulatory ratemaking treatment
for investments made in utility plant.
In October 2000, the Washington Utilities and Transportation
Commission (WUTC) authorized a general rate increase totaling $4.3 million per
year, or 12.1 percent. The first $3.0 million per year of the revenue increase,
relating to costs allocated to Washington under a new cost allocation study
approved by the WUTC and the Public Utility Commission of Oregon (OPUC), was
effective on Nov. 1, 2000. The remaining increase of $1.3 million per year will
be effective on Oct. 1, 2001. The WUTC authorized and based rates on a return on
common equity (ROE) of 10.8 percent.
In November 1999, the OPUC authorized a general rate increase of $0.2
million per year effective Dec. 1, 1999. Higher revenues from rate increases
averaging 1.3 percent for residential customers were partially offset by rate
decreases for certain commercial and large industrial customers. The OPUC
authorized and based rates on an ROE of 10.25 percent. On Dec. 1, 2000, NW
Natural reduced rates in Oregon by $3.0 million per year to implement the cost
allocation study that produced the equivalent rate increase in Washington.
3
NW Natural applies rate changes each year reflecting changes in its
purchased gas costs, the application of temporary rate adjustments to amortize
regulatory balancing accounts and the removal of temporary rate adjustments
effective the previous year. On Sept. 28, 2000, the OPUC approved, effective
Oct. 1, 2000, rate increases averaging 23 percent for NW Natural's Oregon sales
customers. On July 31, 2000, the WUTC approved, effective Aug. 1, 2000, rate
increases also averaging 23 percent for NW Natural's Washington sales customers.
These rate increases reflect sizable increases in the cost of natural gas
commodity purchased under contracts with gas producers (see "Comparison of Gas
Operations--Cost of Gas," below).
Also reflecting changes in NW Natural's purchased gas costs, the OPUC
approved rate increases averaging 9.1 percent effective Dec. 1, 1999, and
increases averaging 3.4 percent, 6.1 percent and 11.4 percent effective Dec. 1,
April 1 and Jan. 1, 1998, respectively. The WUTC approved rate increases
averaging 11.1 percent and 5.8 percent effective Dec. 1, 1999 and 1998,
respectively.
In an order issued in April 1999, the OPUC formalized a process that
tests for excessive earnings in connection with gas utilities' annual filings of
rate changes due to increases or decreases in gas costs. The OPUC confirmed NW
Natural's ability to pass through 100 percent of its prudently incurred gas
costs into rates. Under this order, NW Natural is authorized to retain all of
its earnings up to a threshold level equal to its authorized ROE plus 300 basis
points. One-third of any earnings above that level will be refunded to
customers. The excess earnings threshold is subject to adjustment up or down
each year depending on movements in interest rates.
Even with the commodity-related rate increases approved in Washington
and Oregon in recent years, NW Natural expects to maintain a price advantage
over competing fuels, including heating oil as well as electricity provided by
the investor-owned electric utilities in its service territory.
4
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenues for the three years ended Dec. 31:
Thousands
(Except customers and degree days) 2000 1999 1998
- ------------------------------------------------------------------------------------------
Gas Sales and Transportation Volumes - Therms (000's):
- ------------------------------------------------------
Residential and commercial sales 606,755 605,351 544,810
Unbilled volumes 8,691 (9,343) 8,645
---------- --------- ---------
Weather-sensitive volumes 615,446 52% 596,008 49% 553,455 49%
Industrial firm sales 76,559 6% 84,630 7% 87,275 8%
Industrial interruptible sales 56,632 5% 52,938 4% 51,521 4%
---------- --------- ---------
Total gas sales 748,637 733,576 692,251
Transportation deliveries 431,136 37% 480,570 40% 446,165 39%
---------- ---- --------- ---- --------- ----
Total volumes sold and delivered 1,179,773 100% 1,214,146 100% 1,138,416 100%
========== ==== ========= ==== ========= ====
Utility Operating Revenues - Dollars (000's):
- ---------------------------------------------
Residential and commercial sales $ 440,302 $ 382,377 $ 323,277
Unbilled revenues 12,661 (2,671) 8,314
---------- --------- ---------
Weather-sensitive revenues 452,963 85% 379,706 83% 331,591 82%
Industrial firm sales 37,378 7% 35,857 8% 34,303 8%
Industrial interruptible sales 23,483 5% 17,182 4% 15,337 4%
---------- --------- ---------
Total gas sales 513,824 432,745 381,231
Transportation revenues 21,491 4% 21,351 5% 19,958 5%
Other revenues (3,976) (1%) 1,194 - 2,617 1%
---------- ---- --------- ---- --------- ----
Total utility operating revenues $ 531,339 100% $ 455,290 100% $ 403,806 100%
========== ==== ========= ==== ========= ====
Cost of gas sold $ 273,978 $ 212,021 $ 173,242
========== ========= =========
Total number of customers
(end of period) 523,406 501,163 477,407
========== ========= =========
Actual degree days 4,418 4,256 4,011
========== ========= =========
20-year average degree days 4,197 4,193 4,234
========== ========= =========
5
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with 22,243
customers added since Dec. 31, 1999. This represents a growth rate of 4.4
percent, compared to 5 percent in 1999 and 4.2 percent in 1998. 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 and revenues derived from these customers.
Weather conditions were 5 percent colder than average in 2000, 2
percent colder than average in 1999 and 5 percent warmer than average in 1998.
Average weather conditions are calculated from the most recent 20 years of
temperature data measured by heating degree days. Weather in 2000 was 4 percent
colder than 1999 and 1999 was 6 percent colder than 1998.
The volumes of gas sold to residential and commercial customers were 3
percent higher in 2000 than in 1999 and 8 percent higher in 1999 than in 1998,
reflecting the continued customer growth and colder weather. Partially
offsetting the effects of the customer growth and colder weather on sales to
these customers in 2000, however, was a reduction from 1999 of about 7 percent
in residential and commercial customers' consumption per heating degree day,
probably due to the impact of gas commodity cost-related rate increases in
recent years (see "Regulatory Matters," above). Revenue from residential and
commercial customers was up 19 percent in 2000 due to increased volumes and the
rate increases effective in 1999 and 2000, and up 15 percent in 1999 due to
increased volumes and rate increases effective in 1998 and 1999.
In order to match revenues with related purchased gas costs, NW
Natural records unbilled revenues for gas delivered but not yet billed to
customers through the end of the period. Amounts reported as unbilled revenues
reflect the increase or decrease in the balance of unbilled revenues over the
prior year end. Year-end balances are affected by weather conditions, rate
changes and customer billing dates from one period to the next.
Industrial Sales, Transportation and Other Revenues
---------------------------------------------------
Total volumes of gas delivered to industrial customers were 9 percent
lower in 2000 than in 1999 and 6 percent higher in 1999 than in 1998. During
1999, industrial transportation volumes included 33 million therms of deliveries
to an electric generating plant during a temporary shutdown of its primary gas
supply line. The combined margin from industrial sales and transportation
decreased 2 percent in 2000 from 1999 and increased slightly in 1999 from 1998.
The 2000 results include the positive effects on industrial margins of higher
oil prices in an industrial schedule in which rates vary with oil prices. The
slight increase in industrial margin in 1999 from 1998 reflected the effect of
low oil prices on rates under this schedule, and transfers of some industrial
customers to rate schedules or special contracts with lower margins.
Other revenues include amortizations from regulatory accounts and
miscellaneous fees charged to gas sales customers. Other revenues in 2000
amounted to a net reduction to utility operating revenues of $4.0 million,
compared to a net increase of $1.2 million in 1999. Factors contributing to the
reduction in 2000 were higher amortizations from regulatory accounts covering
conservation programs ($1.9 million), property taxes ($1.7 million) and Year
2000 costs ($1.1 million), and lower miscellaneous revenues ($1.0 million),
partially offset by higher revenues from customer late payment and reconnection
fees ($0.6 million).
In 1999, other revenues totaled $1.2 million, including fees assessed
to customers ($1.6 million), partially offset by other regulatory account
adjustments ($0.4 million). In 1998, other revenues included the deferral of
$2.0 million in revenue reductions required under a settlement approved by the
6
OPUC as part of the Jan. 1, 1998 rate changes, offset by $3.1 million from the
amortization of property tax savings and $1.4 million from amortizations of
other regulatory accounts.
Cost of Gas
-----------
NW Natural's cost per therm of gas sold was 27 percent higher in 2000
than in 1999, primarily due to higher prevailing prices in the natural gas
commodity market. Its cost of gas sold was 15 percent higher in 1999 than in
1998. The cost per therm 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 2000 through an active natural gas commodity hedge program
conducted under the terms of the Company's Derivatives Policy (see Note 1,
"Derivatives Policy"). NW Natural recorded net gains from commodity swap and
call option contracts of $56 million in 2000, compared to net gains of $4
million in 1999. 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 $3.0 million in 2000, compared to $1.7 million in 1999
and $4.6 million in 1998. 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 $6.1
million of higher gas costs in 2000 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 in 2000 was that the Company absorbed $2.0 million of its
higher gas costs, reducing earnings by about 5 cents a share.
Non-regulated Operations
------------------------
Non-regulated operating results in 2000 were earnings of 1 cent a
share, compared to earnings of 3 cents a share from these operations in 1999 and
a loss of 42 cents a share in 1998 (see Note 2).
Financial Corporation's operating results in 2000 were net income of
$0.1 million, compared to $0.5 million in 1999 and $0.1 million in 1998. The
decrease in income from 1999 to 2000 was primarily due to an adjustment to
deferred taxes in 2000. The increase in income from 1998 to 1999 was primarily
due to stronger operating results from Financial Corporation's investments in
limited partnerships in solar electric, wind-power electric and hydroelectric
generation projects in California.
Financial Corporation recorded asset impairment charges in 1998
totaling $16.6 million, equivalent to 43 cents a share. The charges resulted
from the application of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," to Financial Corporation's limited partnership
investments. The determinations of impairments for Financial Corporation's
assets resulted from estimates in 1998 of lower prices for future sales of
electricity from the partnerships' power projects.
The Company's investment in Financial Corporation at Dec. 31, 2000,
was $7.2 million, compared to $7.1 million at Dec. 31, 1999 and $6.6 million at
Dec. 31, 1998.
The Company realized income of $0.1 million in 2000 from non-utility
gas storage, involving the sale of 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.
7
Discontinued Segment
--------------------
On Jan. 26, 2000, the Company sold its interest in Canor at a gain of
$2.4 million, equivalent to 9 cents a diluted share (see Note 2). Net income
from Canor for 1999 and 1998 was $0.4 million in both years. Results for 1998
included asset write-downs totaling $2.8 million, equivalent to 7 cents a share,
and a $3.5 million gain, equivalent to 15 cents a share, from a merger involving
Canor. The gain from the merger was not subject to U.S. income tax in 1998, but
it was effectively taxed upon disposition of Canor in 2000.
The Company's investment in Canor of $29.2 million at Dec. 31, 1999,
was reported in current assets as an investment in discontinued segment.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $4.6 million, or
6 percent, higher in 2000 than in 1999. The increase was primarily due to
credits to a litigation reserve in 1999 totaling $4.9 million resulting from
favorable decisions by the Oregon Supreme Court and the Oregon Court of Appeals
in a case involving claims by a commercial customer (see Note 12), and to
increased payroll costs ($0.9 million) and accruals for environmental claims
($0.6 million) in 2000, partially offset by a lower bonus accrual ($1.3 million)
in 2000.
Operations and maintenance expenses in 1999 were $5.0 million, or 6
percent, lower than in 1998. The decrease was primarily due to the $4.9 million
credit to the litigation reserve (see above). Lower expenses in 1999 for
uncollectible accounts ($0.6 million), pensions ($0.4 million) and other
miscellaneous operating costs ($2.0 million) were approximately offset by higher
expenses for bonus accruals ($2.5 million) and early retirement and severance
charges ($0.9 million).
Taxes Other Than Income
-----------------------
Taxes other than income, which are comprised of property, franchise,
payroll and other taxes, increased $3.7 million, or 15 percent, in 2000.
Franchise taxes, which are based on gross revenues, increased $2.6 million, or
25 percent, reflecting higher revenues due to an increase in the Company's
customer base and rate increases effective in late 1999 and 2000. Property tax
expense was $0.6 million, or 7 percent, higher than in 1999 due to more plant in
service. Payroll tax expense was $0.3 million, or 9 percent, higher than in 1999
due to an increase in payroll expense.
Taxes other than income increased $2.7 million, or 12 percent, in
1999. Property tax expense was $0.9 million, or 10 percent, higher than in 1998
due to more plant in service. Franchise taxes increased $1.4 million, or 16
percent, reflecting higher revenues due to rate increases effective Dec. 1, 1998
and 1999.
8
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense was $3.6 million
lower in 2000 than in 1999. The reduction was due to charges to NW Natural's
depreciation expense in both years relating to regulatory treatment of a new
customer information system (CIS) completed in 1997. NW Natural wrote down its
CIS assets by $6.5 million in 1999 pursuant to the OPUC's order in its Oregon
general rate case concluded in November 1999, and by a further $0.4 million in
2000 pursuant to the WUTC's order in its Washington general rate case concluded
in October 2000. (See "Results of Operations - Regulatory Matters," above.)
Exclusive of these regulatory mandated charges, consolidated
depreciation, depletion and amortization expense increased $2.6 million, or 6
percent, in 2000 compared to 1999 and $0.5 million, or 1 percent, in 1999
compared to 1998. As a percentage of average plant and property, depreciation,
depletion and amortization expense was 3.5 percent for both 2000 and 1999.
Other Income (Expense)
- ----------------------
Other income was $3.9 million in 2000, $1.0 million lower than in
1999, primarily due to a reduction of interest income from $3.9 million to $3.1
million. Other income was $4.8 million in 1999, compared to Other expense of
$13.7 million in 1998, reflecting $16.6 million in asset write-downs recorded in
1998 related to Financial Corporation's limited partnership interests in solar
electric, wind-power electric and hydroelectric generation projects in
California (see "Non-regulated Operations," above). These asset write-downs
resulted primarily from the effect of projected lower prices for future sales of
electricity from these projects during the period of their expected remaining
lives ranging from 18 to 20 years.
As a result of the outlook for reduced cash flows due to lower energy
prices in California, the Company investigated a potential sale of its interests
in these projects and conducted an impairment analysis. The Company concluded
that the aggregate fair value of these assets was potentially much lower than
their book value, but that the market was limited and market prices were not
readily available. The Company then determined these projects were held for use
and did an impairment test on that basis.
Impairment tests were conducted using a model based on SFAS No. 121.
The assumptions used were determined to be reasonable based on historical data,
best available information and previous analyses performed. The Company's cash
flow projections focused primarily on future projected electricity prices. The
projections also included assumptions related to project operating and
maintenance costs, production availabilities, avoided power costs and discount
rates.
The impairment tests compared the undiscounted estimated future cash
flows from the assets to their book value. Because the undiscounted future cash
flows were less than the book value, the assets were deemed to be impaired,
requiring write-downs by the amount of the difference between the book value and
the discounted value of their estimated future cash flows. The SFAS No. 121
valuation model used, including key assumptions and present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved, represented the best estimate of fair value for these projects.
Interest Charges - Net
----------------------
Interest charges increased $3.5 million, or 12 percent, in 2000
compared to 1999, primarily due to an increase in long-term debt outstanding and
an adjustment relating to the favorable decisions by the Oregon Supreme Court
and the Oregon Court of Appeals in a case involving claims by a commercial
customer that reduced interest expense by $1.7 million in 1999 (see Note 12).
9
Interest charges decreased $1.5 million, or 5 percent, in 1999
compared to 1998, primarily due to reversals of interest charges recorded in
prior years following the favorable decisions by the Oregon Supreme Court and
the Oregon Court of Appeals in the case involving claims by a commercial
customer (see Note 12).
Allowance for Funds Used During Construction (AFUDC) represents the
cost of funds used during the construction of utility plant (see Note 1). In
2000, AFUDC reduced interest expense by $0.8 million compared to $1.2 million in
1999 and $1.4 million in 1998. The weighted average AFUDC rates were 6.0 percent
in 2000 and 1999 and 5.5 percent in 1998 (see "Financing Activities," below).
Income Taxes
------------
The effective corporate income tax rates for 2000, 1999 and 1998 were
35.9 percent, 35.4 percent and 35.1 percent, respectively.
Redeemable Preferred and Preference Stock Dividend Requirements
---------------------------------------------------------------
Redeemable preferred and preference stock dividend requirements for
2000 and 1999 were lower by $0.1 million, or 2 percent, in 2000 and 3 percent in
1999, due to sinking fund redemptions.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth, system improvements and the
development of underground gas storage. 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 gas
usage by NW Natural's residential and commercial customers influences the
Company's financing requirements. Short-term liquidity is satisfied primarily
through the sale of commercial paper, which is supported by commercial bank
lines of credit (see Note 6).
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 and
preference stock redemption requirements (see Notes 3 and 5).
Cash Flows
----------
Operating Activities
--------------------
Continuing operations provided net cash of $87.2 million in 2000
compared to $108.2 million in 1999. An increase in cash from operations before
working capital changes ($14.8 million) was offset by higher working capital
requirements ($35.8 million). The increase in cash from continuing operations
before working capital changes was primarily due to an increase in the balance
of deferred income taxes and investment tax credits compared to a decrease in
1999 ($9.7 million), a decrease in regulatory account net debit balances
compared to an increase in 1999 ($8.1 million) and higher net income from
continuing operations ($2.9 million), offset in part by lower depreciation,
depletion and amortization ($3.6 million) and a smaller decrease in deferred gas
costs receivable ($2.9 million). The increase in working capital requirements
was due to changes in net balances of other current assets and liabilities
($33.0 million) (see "Port of Portland Building," below), an increase in
accounts receivable compared to a decrease in 1999 ($18.2 million) and an
increase in accrued unbilled revenue compared to a decrease in 1999 ($16.8
million), offset in part by a larger increase in accounts payable ($25.6
million) and an increase in accrued interest and taxes compared to a decrease in
1999 ($6.9 million).
10
Cash provided by continuing operations in 1999 was $108.2 million
compared to $66.6 million in 1998. The 62 percent increase was due to increased
cash from operations ($6.8 million) and lower working capital requirements
($34.8 million). The increase in cash from continuing operations before working
capital changes compared to 1998 was primarily due to higher net income from
continuing operations ($18.0 million) and a greater reduction in deferred gas
costs receivable ($6.0 million), offset in part by non-cash investment losses in
1998 including the asset write-downs by Financial Corporation ($16.1 million).
The decrease in working capital requirements in 1999 was primarily due to an
increase in accounts payable compared to a decrease in 1998 ($19.6 million) and
reductions in accrued unbilled revenue and accounts receivable compared to
increases in 1998 ($13.1 million and $8.8 million, respectively). The decreases
in working capital requirements were partially offset by a larger increase in
inventories of gas, materials and supplies ($8.8 million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Note 12).
Port of Portland Building
-------------------------
A large portion of the change in cash from continuing operations in
2000, compared to 1999, was due to cash flows relating to NW Natural's
development contract for construction of a new headquarters building for the
Port of Portland. The Port made construction progress payments totaling $18.8
million in the second and third quarters of 1999. NW Natural recorded current
liabilities in the amounts of these payments, pending closing on the sale of the
building, with the effect of reducing working capital requirements in the first
nine months of 1999. The Port made its final payment of $1.2 million at closing
on the sale of the building in the third quarter of 2000. At that time NW
Natural reversed the balance of current liabilities relating to the building
($19.3 million), with the effect of increasing working capital requirements by
that amount in 2000.
Cash used in construction of the building was recorded in both periods
as an investment in non-utility property (see "Investing Activities," below). NW
Natural used a portion of the Port's progress payments to pay off the balance
outstanding under a bank line of credit arranged for construction of the
building ($12.3 million), contributing to a reduction in short-term debt in
1999.
Investing Activities
--------------------
Cash requirements for investing activities in 2000 totaled $30.9
million, down from $118.9 million in 1999. Cash requirements for utility
construction totaled $80.4 million, down $28.7 million from 1999. The decrease
in cash requirements for utility construction in 2000 resulted from lower
expenditures for completion of another phase of the Company's gas storage
expansion project ($24.8 million); lower construction overhead ($1.9 million);
and reduced expenditures for computer hardware and software ($1.6 million).
Cash requirements for NW Natural's capital program in 1999 totaled
$109.1 million, up $29.1 million from 1998. The increase in cash requirements
for utility construction in 1999 resulted from higher expenditures for gas
storage development ($23.9 million); higher expenditures for computer hardware
and software ($2.3 million), communications technology ($0.8 million) and large
system improvement projects ($1.3 million); and higher construction overhead
($2.0 million).
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
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.
11
Investments in non-utility property in 2000 included expenditures for
completion of the portion of the Company's gas storage expansion project
utilized for interstate storage ($4.9 million) and final payments of $2.6
million for the construction of the Port of Portland building. Total proceeds
from the sale of the building in 2000 ($20.0 million) were recognized as
proceeds from sale of assets. Investments in non-utility property in 1999 were
$10.7 million, including $9.7 million relating to the Port of Portland building.
There were no new capital investments in either of the Company's
subsidiaries during 1999. Non-utility capital expenditures totaled $19.8 million
in 1998, including Canor's investments of $13.5 million in Canadian exploration
and production properties. NW Natural's non-utility expenditures in 1998
totaling $6.3 million included expenditures relating to the Port of Portland
building ($6.0 million) and additions to existing facilities ($0.3 million).
The sale of Canor provided net cash of $34.8 million in 2000.
Financing Activities
--------------------
Cash used in financing activities in 2000 totaled $55 million,
compared to cash provided by financing activities in 1999 of $13 million.
Factors contributing to the $68 million difference were retirements of long-term
debt of $60 million in 2000 compared to $10 million in 1999, and a reduction in
short-term debt ($38 million) in 2000 compared to an increase in short-term debt
($13 million) in 1999, partially offset by an increase in long-term debt issued
($35 million) in 2000.
NW Natural sold $75 million of its Medium-Term Notes (MTNs) in 2000.
It sold $50 million of secured MTNs with a weighted average maturity of 28 years
and a weighted average coupon rate of 7.75% and used the proceeds to redeem all
$50 million of the callable 9-3/4% Series of First Mortgage Bonds due 2015. The
refunding will save the Company about $0.8 million per year (net) in future
interest expense. NW Natural used $10 million from the remaining $25 million of
proceeds from sales of secured MTNs in 2000 to refund maturing long-term debt,
and $15 million to meet capital requirements for the Company's ongoing
construction program or to reduce short-term debt.
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. As of Dec. 31,
2000, the Company had repurchased 108,700 shares of common stock at a total cost
of $2.4 million.
Cash provided by financing activities in 1999 totaled $13 million,
down from $32 million in 1998. The decrease was due to lower proceeds from sales
of common stock ($47 million), partially offset by higher net proceeds from the
issuance and retirement of long-term debt ($13 million) and an increase in
short-term debt ($15 million). Proceeds from the sales of $20 million of secured
MTNs were used in part to refund maturing long-term debt ($10 million).
Stock Listing
-------------
On July 27, 2000, the Company's Common Stock, $3-1/6 par value, and
the Common Share Purchase Rights appurtenant thereto, began trading on the New
York Stock Exchange, Inc. under the symbol "NWN". The stock previously traded on
the Nasdaq National Market with the symbol NWNG.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the years ended Dec. 31, 2000, 1999 and 1998, the Company's ratios
of earnings to fixed charges, computed using the Securities and Exchange
Commission method, were 3.14, 3.12 and 2.20, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges. Fixed charges
12
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
- ----------------------
Environmental Matters
---------------------
Since 1993, NW Natural has recorded expenses of $2.6 million for the
costs of a continuing investigation of property it owns in Linnton, Oregon, that
is the site of a former gas manufacturing plant that was closed in 1956 (the
Linnton site). In 2000, NW Natural recorded an additional accrued liability of
$1.4 million representing the estimated costs of further investigation and
interim remediation on this site. Correspondingly, the Company recorded a
receivable for its estimated recovery of these additional costs from insurance
or through future rates.
Also in 2000, NW Natural recorded expenses of $0.4 million relating to
an investigation of a site adjacent to the Linnton site that now is the location
of a manufacturing plant (the Wacker site), and $0.6 million relating to a
segment of the Willamette River (the Portland Harbor) that includes the area
adjacent to the Linnton site and the Wacker site. See Note 12.
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.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
1. Management's Responsibility for Financial Statements................. 15
2. Report of Independent Accountants.................................... 16
3. Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31,
2000, 1999 and 1998.................................................. 17
Consolidated Statements of Earnings Invested in the Business for the
Years Ended December 31, 2000, 1999 and 1998......................... 18
Consolidated Balance Sheets, December 31, 2000 and 1999.............. 19
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................................. 21
Consolidated Statements of Capitalization, December 31, 2000 and
1999................................................................. 22
Notes to Consolidated Financial Statements........................... 23
4. Quarterly Financial Information (unaudited).......................... 42
5. Supplementary Data:
Financial Statement Schedules for the Years Ended December 31, 2000,
1999 and 1998: Schedule II - Valuation and Qualifying Accounts and
Reserves............................................................. 43
Supplemental Schedules Omitted
All other schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included
elsewhere in the financial statements.
14
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
----------------------------------------------------
The financial statements in this report were prepared by management,
which is responsible for their objectivity and integrity. The statements have
been prepared in conformity with generally accepted accounting principles and,
where appropriate, reflect informed estimates based on judgments of management.
The responsibility of the Company's independent accountants is to render an
independent report on the financial statements.
The Company's system of internal accounting controls is designed to
provide reasonable assurance that assets are safeguarded and transactions are
executed in accordance with management's authorizations, that transactions are
recorded to permit the preparation of financial statements in conformity with
orders of regulatory authorities and generally accepted accounting principles
and that accountability for assets is maintained. The Company's system of
internal controls has provided such reasonable assurances during the periods
reported herein. The system includes written policies, procedures and
guidelines, an organization structure that segregates duties and an established
program for monitoring the system by internal auditors. In addition, the Company
has prepared and annually distributes to its employees a Code of Ethics covering
its policies for conducting business affairs in a lawful and ethical manner.
Ongoing review programs are carried out to ensure compliance with these
policies.
The Board of Directors, through its Audit Committee, oversees
management's financial reporting responsibilities. The Committee meets regularly
with management, the internal auditors, and representatives of the Company's
independent accountants. Both internal auditors and external accountants have
free and independent access to the Committee and the Board of Directors. No
member of the Committee is an employee of the Company. The Committee reports the
results of its activities to the full Board of Directors. Annually, the
Committee recommends the nomination of independent accountants to the Board of
Directors for shareholder approval.
/s/ Richard G. Reiten
----------------------------------
Richard G. Reiten
President and
Chief Executive Officer
/s/ Bruce R. DeBolt
----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
NW Natural
In our opinion, the consolidated financial statements listed in the accompanying
table of contents present fairly, in all material respects, the financial
position of Northwest Natural Gas Company (doing business as NW Natural) and its
subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying table of contents
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and this financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and this financial statement schedule
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
February 16, 2001
16
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Share Amounts)
Year Ended December 31 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------
Operating Revenues:
Gross operating revenues $ 532,110 $ 455,834 $ 404,390
Cost of sales 274,160 212,197 173,424
---------- ---------- ----------
Net operating revenues 257,950 243,637 230,966
Operating Expenses:
Operations and maintenance 77,817 73,209 78,226
Taxes other than income taxes 28,351 24,652 21,939
Depreciation, depletion and amortization 47,440 51,008 43,937
---------- ---------- ----------
Total operating expenses 153,608 148,869 144,102
---------- ---------- ----------
Income from Operations 104,342 94,768 86,864
Other Income (Expense) 3,860 4,816 (13,723)
Interest Charges - net 33,561 30,052 31,586
---------- ---------- ----------
Income Before Income Taxes 74,641 69,532 41,555
Income Taxes 26,829 24,591 14,604
---------- ---------- ----------
Net Income from Continuing Operations 47,812 44,941 26,951
Discontinued Segment:
Income from discontinued segment - net of tax - 355 350
Gain on sale of discontinued segment - net of tax 2,412 - -
---------- ---------- ----------
Net Income 50,224 45,296 27,301
Redeemable preferred and preference stock dividend requirements 2,456 2,515 2,577
---------- ---------- ----------
Earnings Applicable to Common Stock $ 47,768 $ 42,781 $ 24,724
========== ========== ==========
Average Common Shares Outstanding 25,183 24,976 24,233
Basic Earnings Per Share of Common Stock:
From continuing operations $ 1.80 $ 1.70 $ 1.01
From discontinued segment - 0.01 0.01
From gain on sale of discontinued segment 0.10 - -
---------- ---------- ----------
Total basic earnings per share $ 1.90 $ 1.71 $ 1.02
========== ========== ==========
Diluted Earnings Per Share of Common Stock:
From continuing operations $ 1.79 $ 1.69 $ 1.01
From discontinued segment - 0.01 0.01
From gain on sale of discontinued segment 0.09 - -
---------- ---------- ----------
Total diluted earnings per share $ 1.88 $ 1.70 $ 1.02
========== ========== ==========
Dividends Per Share of Common Stock $ 1.24 $ 1.225 $ 1.22
========== ========== ==========
------------------------------------
See Notes to Consolidated Financial Statements.
17
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS
(Thousands)
Year Ended December 31,
2000 1999 1998
--------------------- --------------------- ---------------------
Earnings Invested in the Business:
Balance at Beginning of Year $ 118,711 $ 106,513 $ 113,098
Net Income 50,224 $ 50,224 45,296 $ 45,296 27,301 $ 27,301
Cash Dividends Paid:
Redeemable preferred and preference stock (2,466) (2,525) (2,587)
Common stock (31,198) (30,569) (29,615)
Common Stock Repurchased (1,080) - -
Common Stock Expense (2) (4) (1,684)
---------- ---------- ----------
Balance at End of Year $ 134,189 $ 118,711 $ 106,513
========== ========== ==========
Accumulated Other Comprehensive Income (Loss):
Balance at Beginning of Year $ (3,181) $ (2,460) $ (2,235)
Other comprehensive income (loss) - net of tax:
Foreign currency translation adjustments
from discontinued segment - - (721) (721) (225) (225)
Recognition of foreign currency translation
adjustment included in gain on sale of
discontinued segment 3,181 3,181 - - - -
---------- --------- ---------- --------- ---------- ---------
Comprehensive Income $ 53,405 $ 44,575 $ 27,076
========= ========= =========
Balance at End of Year $ - $ (3,181) $ (2,460)
========== ========== ==========
------------------------------------
See Notes to Consolidated Financial Statements.
18
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 2000 1999
- -----------------------------------------------------------------------------------------
Assets:
Plant and Property:
Utility plant $ 1,406,970 $ 1,331,415
Less accumulated depreciation 478,138 436,386
------------ ------------
Utility plant - net 928,832 895,029
------------ ------------
Non-utility property 8,649 8,548
Less accumulated depreciation and depletion 3,451 7,654
------------ ------------
Non-utility property - net 5,198 894
------------ ------------
Total plant and property 934,030 895,923
------------ ------------
Investments and Other 14,526 16,557
Current Assets:
Cash and cash equivalents 11,283 10,013
Accounts receivable, less allowance for uncollectible
accounts of $1,867 in 2000 and $1,669 in 1999 60,753 43,349
Accrued unbilled revenue 45,619 31,550
Inventories of gas, materials and supplies 46,883 33,919
Investment in discontinued segment - 29,163
Property held for sale - 16,712
Prepayments and other current assets 22,834 18,349
------------ ------------
Total current assets 187,372 183,055
Regulatory Tax Assets 49,515 51,060
------------ ------------
Deferred Gas Costs Receivable 16,973 20,950
------------ ------------
Deferred Debits and Other 76,297 76,878
------------ ------------
Total Assets $ 1,278,713 $ 1,244,423
============ ============
-----------------------------------
See Notes to Consolidated Financial Statements.
19
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 2000 1999
- -----------------------------------------------------------------------------------------
Capitalization and Liabilities:
Capitalization (See Consolidated Statements of Capitalization):
Common stock $ 79,905 $ 79,458
Premium on common stock 238,215 234,608
Earnings invested in the business 134,189 118,711
Accumulated other comprehensive income (loss) - (3,181)
------------ ------------
Total common stock equity 452,309 429,596
Redeemable preference stock 25,000 25,000
Redeemable preferred stock 9,750 10,564
Long-term debt 400,790 396,379
------------ ------------
Total capitalization 887,849 861,539
------------ ------------
Current Liabilities:
Notes payable 56,263 94,149
Accounts payable 110,698 68,163
Long-term debt due within one year 20,000 10,000
Taxes accrued 8,066 4,101
Interest accrued 2,696 4,673
Other current and accrued liabilities 23,638 39,153
------------ ------------
Total current liabilities 221,361 220,239
Deferred Investment Tax Credits 9,538 10,393
------------ ------------
Deferred Income Taxes 141,656 136,150
------------ ------------
Regulatory Liabilities and Other 18,309 16,102
------------ ------------
Commitments and Contingencies (see Note 12) - -
------------ ------------
Total Capitalization and Liabilities $ 1,278,713 $ 1,244,423
============ ============
-----------------------------------
See Notes to Consolidated Financial Statements.
20
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Year Ended December 31 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income from continuing operations $ 47,812 $ 44,941 $ 26,951
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization 47,440 51,008 55,822
Gain on sale of assets (491) - (3,782)
Deferred income taxes and investment tax credits 4,651 (5,015) (344)
Equity in (earnings) losses of investments 221 (490) 15,572
Allowance for funds used during construction (789) (1,153) (1,426)
Deferred gas costs receivable 3,977 6,845 833
Regulatory accounts and other - net 4,333 (3,795) (8,109)
--------- --------- ---------
Cash from operations before working capital changes 107,154 92,341 85,517
Changes in operating assets and liabilities:
Accounts receivable - net (17,404) 792 (8,056)
Accrued unbilled revenue (14,069) 2,708 (10,347)
Inventories of gas, materials and supplies (12,964) (12,661) (3,873)
Accounts payable 42,535 16,910 (2,736)
Accrued interest and taxes 1,988 (4,916) 2,976
Other current assets and liabilities (20,000) 12,992 3,108
--------- --------- ---------
Cash Provided by Continuing Operating Activities 87,240 108,166 66,589
--------- --------- ---------
Cash Provided by Operations of Discontinued Segment - 46 2,633
--------- --------- ---------
Investing Activities:
Acquisition and construction of utility plant assets (80,444) (109,144) (80,022)
Investment in non-utility property (6,923) (10,713) (19,780)
Proceeds from sale of discontinued segment 34,756 - -
Proceeds from sale of assets 21,012 - -
Investments and other 610 956 (1,057)
--------- --------- ---------
Cash Used in Investing Activities (30,989) (118,901) (100,859)
Financing Activities:
Common stock issued 4,826 5,356 52,384
Common stock repurchased (2,441) - -
Redeemable preferred stock retired (814) (935) (930)
Long-term debt issued 75,000 40,000 52,000
Long-term debt retired (60,000) (10,000) (35,000)
Change in short-term debt (37,886) 12,717 (2,054)
Cash dividend payments:
Redeemable preferred and preference stock (2,466) (2,525) (2,587)
Common stock (31,198) (30,569) (29,615)
Foreign currency translation and capital stock expense (2) (725) (1,909)
--------- --------- ---------
Cash Provided by (Used in) Financing Activities (54,981) 13,319 32,289
Increase in Cash and Cash Equivalents 1,270 2,630 652
Cash and Cash Equivalents - Beginning of Year 10,013 7,383 6,731
--------- --------- ---------
Cash and Cash Equivalents - End of Year $ 11,283 $ 10,013 $ 7,383
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 35,592 $ 30,506 $ 32,323
Income Taxes $ 22,552 $ 27,302 $ 8,205
Supplemental Disclosure of Non-cash Financing Activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures $ 589 $ 359 $ 565
------------------------------------
See Notes to Consolidated Financial Statements
21
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands, Except Share Amounts)
December 31 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Common Stock Equity:
Common stock - par value $3-1/6 per share; authorized 60,000,000 shares:
outstanding - 2000, 25,233,424 shares; 1999, 25,091,938 shares $ 79,905 $ 79,458
Premium on common stock 238,215 234,608
Earnings invested in the business 134,189 118,711
Accumulated other comprehensive income (loss) - (3,181)
--------- ---------
Total common stock equity 452,309 51% 429,596 50%
--------- ---------
Redeemable Preference Stock, authorized 2,000,000 shares; $6.95 Series,
stated value $100 per share; outstanding - 2000, 250,000 shares;
1999, 250,000 shares 25,000 25,000
--------- ---------
Total redeemable preference stock 25,000 3% 25,000 3%
Redeemable Preferred Stock, authorized 1,500,000 shares; all outstanding series
have a stated value of $100 per share
$4.75 Series, outstanding - 1999, 643 shares - 64
$7.125 Series, outstanding - 2000, 97,500 shares; 1999, 105,000 shares 9,750 10,500
--------- ---------
Total redeemable preferred stock 9,750 1% 10,564 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
6.75% Series B due 2002 10,000 10,000
8.05% Series A due 2002 10,000 10,000
5.55% Series B due 2002 20,000 20,000
6.40% Series B due 2003 20,000 20,000
6.34% Series B due 2005 5,000 5,000
6.38% Series B due 2005 5,000 5,000
6.45% Series B due 2005 5,000 5,000
6.80% Series B due 2007 10,000 10,000
6.50% Series B due 2008 5,000 5,000
7.45% Series B due 2010 25,000 -
8.26% Series B due 2014 10,000 10,000
7.00% Series B due 2017 40,000 40,000
6.60% Series B due 2018 22,000 22,000
8.31% Series B due 2019 10,000 10,000
7.63% Series B due 2019 20,000 20,000
9.05% Series A due 2021 10,000 10,000
7.25% Series B due 2023 20,000 20,000
7.50% Series B due 2023 4,000 4,000
7.52% Series B due 2023 11,000 11,000
7.72% Series B due 2025 20,000 -
6.52% Series B due 2025 10,000 10,000
7.05% Series B due 2026 20,000 20,000
7.00% Series B due 2027 20,000 20,000
6.65% Series B due 2027 20,000 20,000
6.65% Series B due 2028 10,000 10,000
7.74% Series B due 2030 20,000 -
7.85% Series B due 2030 10,000 -
Unsecured:
8.47% Series A due 2001 10,000 10,000
Convertible Debentures
----------------------
7-1/4% Series due 2012 8,790 9,379
--------- ---------
420,790 406,379
Less long-term debt due within one year 20,000 10,000
--------- ---------
Total long-term debt 400,790 45% 396,379 46%
--------- ----- --------- -----
Total capitalization $ 887,849 100% $ 861,539 100%
========= ===== ========= =====
------------------------------------
See Notes to Consolidated Financial Statements.
22
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ------------------------------------------------
Organization and Principles of Consolidation
- --------------------------------------------
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 in 1999 and sold in the
first quarter of 2000
Together these businesses are referred to herein as the "Company."
Intercompany accounts and transactions have been eliminated.
Investments in corporate joint ventures and partnerships in which the
Company's ownership is 50 percent or less are accounted for by the equity
method or the cost method (see Note 9).
Certain amounts from prior years have been reclassified to conform with the
2000 presentation. These reclassifications had no impact on prior year
results of operations.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the consolidated financial
statements and accompanying notes. Changes in such estimates may affect
amounts reported in future periods.
Industry Regulation
- -------------------
The Company's principal business is the distribution of natural gas which
is regulated by the Oregon Public Utility Commission (OPUC) and the
Washington Utilities and Transportation Commission (WUTC). Accounting
records and practices conform to the requirements and uniform system of
accounts prescribed by these regulatory authorities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation."
Utility Plant
- -------------
Utility plant for NW Natural is stated at cost (see table in Note 9). When
a depreciable unit of property is retired, the cost is removed from both
utility plant and the accumulated provision for depreciation together with
the cost of removal, less any salvage. No gain or loss is recognized upon
normal retirement.
NW Natural's provision for depreciation of utility property, which is
computed under the straight-line, age-life method in accordance with
independent engineering studies and as approved by regulatory authorities,
approximated 3.5 percent of average depreciable plant in 2000, 4.0 percent
in 1999 and 3.9 percent in 1998. The rate of depreciation approximates the
economic life of the utility property.
23
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Certain additions to utility plant include an allowance for funds used
during construction (AFUDC), a non-cash item. AFUDC represents the cost of
funds borrowed during construction and is calculated using actual
commercial paper interest rates. If commercial paper borrowings are
insufficient to finance the total work in progress, then a composite rate
of interest on all debt, shown as a reduction to interest charges, and a
return on equity funds, shown as other income, is used to compute AFUDC.
While cash is not realized currently from AFUDC, it is realized in the
ratemaking process over the service life of the related property through
increased revenues resulting from higher rate base and higher depreciation
expense. NW Natural's weighted average AFUDC rates were 6.0 percent for
both 2000 and 1999 and 5.5 percent for 1998.
Regulatory Accounts
- -------------------
In applying SFAS No. 71, NW Natural has capitalized certain costs and
benefits as regulatory assets and liabilities pursuant to orders of the
state utility regulatory commissions, in general rate proceedings or
expense deferral proceedings, in order to provide for recovery of revenues
or expenses from, or refunds to, NW Natural's utility customers in future
periods. At Dec. 31, 2000 and 1999, regulatory tax assets were $49.5
million and $51.1 million, respectively, while other regulatory assets and
liabilities (net) were $26.5 million and $37.4 million, respectively.
If NW Natural should determine in the future that all or a portion of these
regulatory assets and liabilities no longer meet the criteria for continued
application of SFAS No. 71, then NW Natural would be required to write off
that portion which it could not recover or refund.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and highly liquid temporary investments with expected maturity
dates of three months or less.
Revenue Recognition
- -------------------
The Company's utility revenues are derived primarily from the sale and
transportation of natural gas. The Company recognizes utility revenue from
gas sales and transportation when the gas is delivered to customers.
Estimated revenues are accrued for gas deliveries not billed to customers
from meter reading dates to month end (unbilled revenue) and are reversed
the following month when actual billings occur.
Revenues from non-utility services, including gas storage services, are
recognized upon delivery of the service to customers.
Inventories
- -----------
NW Natural's inventories of gas in storage and materials and supplies are
stated at the lower of average cost or net realizable value.
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 Company's derivatives 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 Note 11).
24
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued 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
recognize all derivatives as either assets or liabilities and measure those
instruments at fair value. SFAS No. 133 requires that changes in the fair
value of a derivative be recognized currently in earnings, unless specific
hedge accounting criteria are met. 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. Some of the
Company's gas supply and transportation contracts are derivative
instruments as defined under SFAS No. 133. These standards will be
effective for the Company beginning Jan. 1, 2001. Adoption of these new
accounting standards, as of Jan. 1, 2001, is not expected to have a
material affect on net income or financial position. The Company's primary
derivatives hedging activities will be accounted for as cash flow hedges
under SFAS No. 133. Due to the nature of the Company's hedging strategy,
cash flow hedges are expected to be highly effective. Furthermore, because
the results of the Company's hedging program are included in the regulated
cost of gas, unrealized hedging gains or losses will be tracked in deferred
gas costs rather than other comprehensive income.
25
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Segment Reporting
- -----------------
The Company principally operates in a single line of utility business
consisting of distribution of natural gas. Other segments are primarily
investments in alternative energy projects in California, the discontinued
oil and gas exploration business, a Boeing 737-300 Aircraft which is leased
to Continental Airlines and non-utility gas storage.
The following table presents information about reportable segments for
2000, 1999 and 1998. Inter-segment transactions are insignificant.
Thousands Utility Other Total
-------------------------------------------------------------------------------
2000
----
Net operating revenues $ 257,361 $ 589 $ 257,950
Income from operations 103,902 440 104,342
Net income from continuing operations 47,519 293 47,812
Income from financial investments - 103 103
Income from non-utility storage - 102 102
Gain on sale of discontinued segment - 2,412 2,412
Assets 1,260,013 18,700 1,278,713
1999
----
Net operating revenues $ 243,269 $ 368 $ 243,637
Income from operations 94,744 24 94,768
Net income from continuing operations 44,323 618 44,941
Income (loss) from financial investments - (82) (82)
Net income from discontinued segment - 355 355
Assets 1,197,673 46,750 1,244,423
1998
----
Net operating revenues $ 230,564 $ 402 $ 230,966
Income (loss) from operations 86,981 (117) 86,864
Net income (loss) from continuing operations 37,530 (10,579) 26,951
Income (loss) from financial investments - (17,192) (17,192)
Net income from discontinued segment - 350 350
Assets 1,120,706 71,030 1,191,736
Income Taxes
- ------------
NW Natural uses the balance sheet method of accounting for deferred income
taxes. Deferred tax liabilities and assets reflect the expected future tax
consequences, based on enacted tax law, of temporary differences between
the tax basis of assets and liabilities and their financial reporting
amounts (see Note 8).
Consistent with rate and accounting instructions of regulatory authorities,
deferred income taxes are not currently collected for those temporary
income tax differences where the prescribed regulatory accounting methods
do not provide for current recovery in rates. NW Natural has recorded a
regulatory tax asset for amounts pending recovery from customers in future
rates. These amounts are primarily differences between the book and tax
basis of net utility plant in service. This asset balance was $49.5 million
and $51.1 million at Dec. 31, 2000 and 1999, respectively.
Investment tax credits on utility property additions and leveraged leases
which reduce income taxes payable are deferred for financial statement
purposes and are amortized over the life of the related property or lease.
Investment and energy tax credits generated by non-regulated subsidiaries
are amortized over a period of one to five years.
26
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Other Income (Expense)
- ----------------------
Other income (expense) consists of interest income; gain on sale of assets;
investment income (loss) of Financial Corporation, including write-downs
due to asset impairments in 1998; and other miscellaneous income from
merchandise sales, rents, an aircraft lease and other items.
Earnings Per Share
- ------------------
Basic earnings per share are computed based on the weighted average number
of common shares outstanding each year. Diluted earnings per share reflect
the potential effects of the conversion of any outstanding convertible
debentures and the exercise of outstanding stock options. Diluted earnings
are calculated as follows:
Thousands, except per share amounts 2000 1999 1998
------------------------------------------------------------------------------
Earnings applicable to common stock $ 47,768 $ 42,781 $ 24,724
Debenture interest less taxes 389 415 431
-------- -------- --------
Net income available for diluted common stock $ 48,157 $ 43,196 $ 25,155
======== ======== ========
Average common shares outstanding 25,183 24,976 24,233
Stock options 13 21 41
Convertible debentures 442 471 489
-------- -------- --------
Diluted average common shares outstanding 25,638 25,468 24,763
======== ======== ========
Diluted earnings per share of common stock $ 1.88 $ 1.70 $ 1.02
======== ======== ========
2. CONSOLIDATED SUBSIDIARY OPERATIONS AND DISCONTINUED SEGMENT:
- -----------------------------------------------------------------
At Dec. 31, 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.
NNG Financial Corporation
- -------------------------
Financial Corporation provided short-term financing for Canor and has
several financial investments, including investments as a limited partner
in solar electric generating systems, windpower electric generating
projects, a hydroelectric facility and low-income housing projects. It also
held interests in certain gas producing properties in the western United
States (see Note 9).
During the fourth quarter of 1998, Financial Corporation recorded asset
impairment charges resulting from the application of an impairment model
based on SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," to limited partnership
investments in solar electric, windpower electric and hydroelectric
projects in California. The pre-tax write-down of $16.6 million is included
in other income (expense) in the consolidated statements of income.
These asset write-downs resulted primarily from the effect of projected
lower prices for future sales of electricity from these projects during the
period of their expected remaining lives ranging from 18 to 20 years. As a
result of the outlook for reduced cash flows due to lower energy prices in
California, the Company investigated a potential sale of its interests in
these projects and conducted an impairment analysis. The Company concluded
that the aggregate fair value of these assets was potentially much lower
than their book value, but that the market was limited and market prices
were not readily available. The Company then concluded that it would not
currently sell its interests in the projects and determined that an
impairment test would provide a best estimate of fair value.
27
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Impairment tests were conducted using a model based on SFAS No. 121. The
assumptions used were determined to be reasonable based on historical data,
best available information and previous analyses performed. The Company's
cash flow projections focused primarily on future projected electricity
prices. However, the projections also included assumptions related to
project operating and maintenance costs, production availabilities, avoided
power costs and discount rates. The Company used a discount rate of 15
percent, a rate which was deemed to be commensurate with the risk that
would be involved in similar investments with like risks. Production
forecasts as well as projected operating, maintenance and other operating
expenses used in the cash flow analyses were consistent on a
project-by-project basis with historical data for the projects since their
inception and estimates provided by the projects' operators, and also
included a reasonable trend line for projected future costs.
The impairment tests compared the undiscounted estimated future cash flows
from the assets to their book value. Because the undiscounted future cash
flows were determined to be less than the book value, the assets were
determined to be impaired, requiring write-downs by the amount of the
difference between the book value and the discounted value of their
estimated future cash flows. The SFAS No. 121 valuation model used,
including key assumptions and present value of estimated expected future
cash flows using a discount rate commensurate with the risks involved,
represented the best estimate of fair value for these projects.
Canor Energy, Ltd.
- ------------------
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. The after-tax gain from the sale was $2.4 million, net of Canadian
tax on dividends ($0.6 million) and U.S. income tax ($2.8 million) and is
shown as gain on sale of discontinued segment.
The consolidated financial statements of the Company have been restated to
reflect Canor as a discontinued segment. Accordingly, Canor's operating
revenues and expenses are included in net income from discontinued segment
for 1999 and 1998, and its cash flows are reported as cash provided by
discontinued segment for all periods presented. At Dec. 31, 1999, the
Company's investment in Canor was $29.2 million and is shown as investment
in discontinued segment (in current assets).
Canor began operations in 1990 as a wholly-owned indirect subsidiary. In
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. In January 2000, the Company acquired NI's interest in Canor and
then sold 100 percent of Canor's stock.
During 1998, Canor recorded asset write-downs of $4.2 million for its oil
and gas production properties. Approximately half of the write-downs were
due to impairment charges under SFAS No. 121 resulting from the impact of
low oil prices on Canor's oil properties in Canada. The additional
write-downs were due to determinations that some of Canor's oil and gas
wells were no longer productive due to water encroachment.
3. CAPITAL STOCK:
- -------------------
Common Stock
- ------------
At Dec. 31, 2000, NW Natural had reserved 222,229 shares of common stock
for issuance under the Employee Stock Purchase Plan, 153,577 shares under
its Dividend Reinvestment and Stock Purchase Plan, 781,347 shares under its
1985 Stock Option Plan (see Note 4), 502,056 shares for future conversions
of its 7-1/4% Convertible Debentures and 3,000,000 shares under the
Shareholder Rights Plan.
28
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Redeemable Preference Stock
- ---------------------------
The $6.95 Series of Preference Stock is not redeemable prior to Dec. 31,
2002, but is subject to mandatory redemption on that date.
Redeemable Preferred Stock
- --------------------------
The mandatory preferred stock redemption requirements aggregate $0.8
million in 2001, 2002, 2003, 2004 and 2005. These requirements are
non-cumulative. At any time NW Natural is in default on any of its
obligations to make the prescribed sinking fund payments, it may not pay
cash dividends on common stock or preference stock. Upon involuntary
liquidation, all series of redeemable preferred stock are entitled to their
stated value.
The remaining shares of the $4.75 Series of redeemable preferred stock were
redeemed on Sept. 1, 2000.
The redeemable preferred stock is callable at stipulated prices, plus
accrued dividends. At Dec. 31, 2000, shares of the $7.125 Series are
redeemable on or after May 1, 2001 at a price of $103.325 per share
decreasing each year thereafter to $100 per share on or after May 1, 2008.
Stock Repurchase Program
- ------------------------
In May 2000, the Company commenced a program to repurchase up to 2 million
shares, or up to $35 million in value, of its common stock through a
repurchase program to extend through May 2001. Purchases are made in the
open market or through privately negotiated transactions. As of Dec. 31,
2000, the Company had repurchased 108,700 shares of common stock at a total
cost of $2.4 million.
29
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table shows the changes in the number of shares of NW Natural's
capital stock and the premium on common stock for the years 2000, 1999 and 1998:
-------------Shares-------------- Premium-on
Redeemable Redeemable common
Common preference preferred stock
stock stock stock (thousands)
--------------------------------------------
Balance, Dec. 31, 1997 22,864,328 250,000 124,285 $ 182,998
Sales to the public 1,725,000 - - 40,789
Sales to employees 17,637 - - 366
Sales to stockholders 194,835 - - 4,644
Exercise of stock options - net 22,946 - - 377
Conversion of convertible
debentures to common 28,375 - - 475
Sinking fund purchases - - (9,300) 1
---------- ---------- --------- ----------
Balance, Dec. 31, 1998 24,853,121 250,000 114,985 229,650
Sales to employees 13,619 - - 295
Sales to stockholders 188,821 - - 4,028
Exercise of stock options - net 18,355 - - 334
Conversion of convertible
debentures to common 18,022 - - 301
Sinking fund purchases - - (9,342) -
---------- ---------- --------- ----------
Balance, Dec. 31, 1999 25,091,938 250,000 105,643 234,608
Sales to employees 14,696 - - 278
Sales to stockholders 199,920 - - 3,769
Exercise of stock options - net 5,990 - - 81
Conversion of convertible
debentures to common 29,580 - - 495
Stock repurchase (108,700) - - (1,016)
Sinking fund purchases - - (8,143) -
---------- ---------- --------- ----------
Balance, Dec. 31, 2000 25,233,424 250,000 97,500 $ 238,215
========== ========== ========= ==========
4. STOCK OPTION AND PURCHASE PLANS:
- -------------------------------------
NW Natural's 1985 Stock Option Plan (Plan) authorizes an aggregate of
1,200,000 shares of common stock for issuance as incentive or non-statutory
stock options. These options may be granted only to officers and key
employees designated by a committee of NW Natural's Board of Directors.
All options are granted at an option price not less than the market value
at the date of grant and may be exercised for a period not exceeding 10
years from the date of grant. Option holders may exchange shares they have
owned for at least one year, at the current market price, to purchase
shares at the option price.
Since the Plan's inception in 1985, options on 922,171 shares of common
stock have been granted at prices ranging from $11.75 to $27.875 per share,
and options on 79,296 shares have expired. NW Natural applies Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized
for either the Plan or the Employee Stock Purchase Plan. If compensation
cost for awards under NW Natural's two stock-based compensation plans had
30
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
been determined based on the fair value at the grant dates using the method
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
2000 1999 1998
---- ---- ----
Earnings applicable to common stock ($000):
-------------------------------------------
As reported $ 47,768 $ 42,781 $ 24,724
Pro forma 47,190 42,525 24,518
Basic earnings per share
------------------------
As reported $ 1.90 $ 1.71 $ 1.02
Pro forma 1.87 1.70 1.01
Diluted earnings per share
--------------------------
As reported $ 1.88 $ 1.70 $ 1.02
Pro forma 1.86 1.69 1.01
For purposes of determining the pro forma expense, the fair value of each
option is estimated on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions used for
grants in 2000 and 1998, respectively: a dividend yield of 5.2 and 4.7
percent; expected volatility of 31.4 and 27 percent; risk-free interest
rates of 5 and 5 percent; and expected lives of seven years. There were no
new grants during 1999.
Information regarding the Plan is summarized as follows:
Options
----------------------------
2000 1999 1998
---- ---- ----
Outstanding, beginning of year 290,212 320,032 227,733
$16.59 Options:
---------------
Exchanged by holder - - (2,608)
Exercised (88) - (2,264)
$24.00 Options:
---------------
Exchanged by holder (6,305) - -
Exercised (2,320) (7,500) (8,082)
Expired (1,500) - -
$20.17 Options:
---------------
Exchanged by holder (1,912) (1,465) -
Exercised (582) (5,755) (247)
$20.92 Options
--------------
Exchanged by holder - - (1,147)
Exercised (3,000) (5,100) (12,353)
Expired (3,000) - -
$27.875 Options
---------------
Granted - - 116,000
Expired (6,000) (10,000) (1,000)
$26.75 Options
--------------
Granted - - 4,000
$20.25 Options
--------------
Granted 145,500 - -
Expired (2,500) - -
$21.625 Options
---------------
Granted 2,500 - -
$22.875 Options
---------------
Granted 5,000 - -
-------- -------- --------
Outstanding, end of year 416,005 290,212 320,032
======== ======== ========
Available for grant, end of year 357,125 497,125 487,125
======== ======== ========
31
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The weighted average grant-date market value for options granted during
2000 was $20.36. For options outstanding at December 31, 2000, the range of
exercise prices was $20.17 to $27.875, and the weighted average remaining
contractual life was 6.9 years.
NW Natural's Employee Stock Purchase Plan, as amended in 2000, allows
employees to purchase common stock at 85 percent of the average bid and ask
market price on the subscription date which is set annually. Each eligible
employee may purchase up to 900 shares through payroll deduction over a six
to 12 month period.
5. LONG-TERM DEBT:
- --------------------
The issuance of first mortgage bonds, including secured medium-term notes,
under the Mortgage and Deed of Trust (Mortgage) is limited by property,
earnings and other provisions of the Mortgage. The Mortgage constitutes a
first mortgage lien on substantially all of NW Natural's utility property.
The 7-1/4 % Series of Convertible Debentures may be converted at any time
into 50-1/4 shares of common stock for each $1,000 face value ($19.90 per
share).
The maturities for the five years ending Dec. 31, 2005, on the long-term
debt outstanding at Dec. 31, 2000 amount to: $20 million in 2001, $40
million in 2002, $20 million in 2003, no maturity in 2004 and $15 million
in 2005.
6. NOTES PAYABLE AND 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 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 Dec. 31, 2000 or 1999.
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 the
Company's lines of credit. Financial Corporation's commercial paper is
supported by the guaranty of NW Natural. The amounts and average interest
rates of commercial paper outstanding were as follows at Dec. 31:
--------2000------ --------1999-----
Thousands Amount Rate Amount Rate
NW Natural $ 56,263 6.5% $ 94,149 5.8%
Financial Corporation - -
---------- ----------
Total $ 56,263 $ 94,149
========== ==========
32
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. PENSION AND OTHER POSTRETIREMENT BENEFITS:
- -----------------------------------------------
NW Natural has two qualified non-contributory defined benefit plans
covering all regular employees with more than one year of service, a
non-qualified supplemental pension plan for eligible executive officers and
other postretirement benefit plans for its employees. The following tables
provide a reconciliation of the changes in the plans' benefit obligations
and fair value of assets over the three-year period ended Dec. 31, 2000 and
a statement of the funded status as of Dec. 31, 2000, 1999 and 1998:
Pension Benefits Other Benefits
---------------------------------- ----------------------------------
Thousands 2000 1999 1998 2000 1999 1998
- --------- ---- ---- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at Jan. 1 $ 136,198 $ 142,619 $ 127,879 $ 11,902 $ 15,717 $ 12,332
Service cost 3,475 4,259 3,430 234 162 288
Interest cost 10,312 9,379 9,282 995 715 891
Expected benefits paid (8,035) (6,911) (6,762) (878) (766) (578)
Plan amendments 12 4,057 (2,948) - (1,583) -
Net actuarial (gain) loss 4,840 (17,205) 11,738 1,816 (2,343) 2,784
---------- ---------- ---------- ---------- ---------- ----------
Benefit obligation at Dec. 31 146,802 136,198 142,619 14,069 11,902 15,717
---------- ---------- ---------- ---------- ---------- ----------
Change in plan assets:
Fair value of plan assets at Jan. 1 193,427 175,554 158,118 - - -
Actual return on plan assets 4,351 24,104 23,532 - - -
Employer contributions 708 680 666 878 766 578
Benefits paid (8,035) (6,911) (6,762) (878) (766) (578)
---------- ---------- ---------- ---------- ---------- ----------
Fair value of plan assets at Dec. 31 190,451 193,427 175,554 - - -
---------- ---------- ---------- ---------- ---------- ----------
Funded status:
Funded status at Dec. 31 43,649 57,229 32,935 (14,069) (11,902) (15,717)
Unrecognized transition obligation 701 1,035 1,072 5,232 5,667 7,896
Unrecognized prior service cost 8,022 9,184 5,601 191 210 -
Unrecognized net actuarial (gain) loss (47,661) (67,656) (40,936) 1,061 (755) 1,553
---------- ---------- ---------- ---------- ---------- ----------
Net amount recognized $ 4,711 $ (208) $ (1,328) $ (7,585) $ (6,780) $ (6,268)
========== ========== ========== ========== ========== ==========
Amounts recognized in the
consolidated balance sheets:
Prepaid benefit cost $ 13,150 $ 7,712 $ 5,900 $ - $ - $ -
Accrued benefit liability (8,932) (8,578) (8,902) (7,585) (6,780) (6,268)
Intangible asset 493 658 1,674 - - -
---------- ---------- ---------- ---------- ---------- ----------
Net amount recognized $ 4,711 $ (208) $ (1,328) $ (7,585) $ (6,780) (6,268)
========== ========== ========== ========== ========== ==========
The Company's non-qualified supplemental pension plan was the only pension
plan with an accumulated benefit obligation in excess of plan assets. The
plan's accumulated benefit obligation was $10.4 million, $9.8 million and
$11.1 million at Dec. 31, 2000, 1999 and 1998, respectively. There were no
plan assets in the non-qualified plan due to the nature of the plan, but
the Company funds its obligation with trust-owned life insurance. The
amount of the life insurance coverage is designed to provide sufficient
returns to recover all costs of the plan. The Company's plans for
postretirement benefits other than pensions also have no plan assets. The
aggregate benefit obligation for those plans is $14.1 million, $11.9
million and $15.7 million at Dec. 31, 2000, 1999 and 1998, respectively.
The following tables provide the components of net periodic cost (benefit)
for the plans for the years ended Dec. 31, 2000, 1999 and 1998 and the
assumptions used in the measurement of these costs and the Company's
benefit obligations:
33
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------------------------ ------------------------------------
Thousands 2000 1999 1998 2000 1999 1998
- --------- ---- ---- ---- ---- ---- ----
Service cost $ 3,475 $ 4,259 $ 3,430 $ 234 $ 162 $ 288
Interest cost 10,312 9,379 9,282 995 715 890
Expected return on plan assets (16,056) (15,570) (13,926) - - -
Amortization of transition (asset)
obligation 334 37 (45) 436 436 564
Amortization of prior service cost 1,174 827 1,481 19 - -
Recognized actuarial (gain) loss (3,449) (781) (969) - (35) 2
Special termination benefits - 1,410 - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net periodic cost (benefit) $ (4,210) $ (439) $ (747) $ 1,684 $ 1,278 $ 1,744
========== ========== ========== ========== ========== ==========
Weighted average assumptions as
of Dec. 31:
Discount rate 7.50% 7.75% 6.75% 7.50% 7.75% 6.75%
Expected return on plan assets 9.00% 10.00% 10.00% n/a n/a n/a
Rate of compensation increase 4.25%-5.0% 4.25%-5.0% 4.50% n/a n/a n/a
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 9.0 percent during 2000. The rate was
assumed to decrease gradually each year to a rate of 4.5 percent for 2005
and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percent change in assumed
health care cost trend rates would have the following effects:
Thousands 1% Increase 1% Decrease
--------- ----------- -----------
Effect on the total service and interest
cost components of net periodic
postretirement health care benefit cost $50 ($48)
Effect on the health care component of the
accumulated postretirement benefit obligation $459 ($460)
NW Natural also has a qualified defined benefit contribution plan under
Internal Revenue Code Section 401(k) and a non-qualified deferred
compensation plan for eligible employees. These plans are designed to
enhance the retirement program of employees and to assist them in
strengthening their financial security by providing an incentive to save
and invest regularly. NW Natural's contributions to these plans were $1.3
million in 2000, $1.0 million in 1999 and $1.1 million in 1998.
34
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES:
- ------------------
A reconciliation between income taxes calculated at the statutory federal
tax rate and the tax provision reflected in the financial statements is as
follows:
Thousands 2000 1999 1998
- ---------------------------------------------------------------------------------------
Computed income taxes based on statutory federal income
tax rate of 35% $ 26,124 $ 24,336 $ 14,544
Increase (reduction) in taxes resulting from:
Difference between book and tax depreciation 222 222 310
Current state income tax, net of federal tax benefit 2,622 2,450 1,976
Federal income tax credits (357) (357) (574)
Amortization of investment tax credits (855) (855) (700)
Removal costs (480) (485) (424)
Reversal of amounts provided in prior years (25) (655) (361)
Gains on Company-owned life insurance (611) (703) (504)
Other - net 189 638 337
-------- -------- --------
Total provision for income taxes $ 26,829 $ 24,591 $ 14,604
======== ======== ========
35
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following:
Thousands 2000 1999 1998
- ---------------------------------------------------------------------------------------
Income taxes currently payable:
Federal $ 18,228 $ 20,518 $ 13,004
State 2,444 3,288 1,790
-------- -------- --------
Total 20,672 23,806 14,794
-------- -------- --------
Deferred taxes - net:
Federal 7,495 1,283 (876)
State (483) 357 1,386
-------- -------- --------
Total 7,012 1,640 510
-------- -------- --------
Investment and energy tax credits restored:
From utility operations (800) (800) (645)
From subsidiary operations (55) (55) (55)
-------- -------- --------
Total (855) (855) (700)
-------- -------- --------
Total provision for income taxes $ 26,829 $ 24,591 $ 14,604
======== ======== ========
Percentage of pretax income 35.9% 35.4% 35.1%
======== ======== ========
- ---------------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following:
Thousands 2000 1999 1998
- ---------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $123,559 $114,664 $112,495
Regulatory asset 14,349 15,894 21,388
-------- -------- --------
Total 137,908 130,558 133,883
-------- -------- --------
Deferred tax assets:
Regulatory liability (9,558) (10,784) (14,684)
Other deferred assets 5,810 5,192 8,257
-------- -------- --------
Total (3,748) (5,592) (6,427)
-------- -------- --------
Net accumulated deferred income tax liability $141,656 $136,150 $140,310
======== ======== ========
- ---------------------------------------------------------------------------------------
36
9. PROPERTY AND INVESTMENTS:
- ------------------------------
The following table sets forth the major classifications of NW Natural's
utility plant and accumulated provision for depreciation at Dec. 31:
2000 1999
---------------------- ---------------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
- ---------------------------------------------------------- ---------------------
Transmission and distribution $ 1,144,107 3.3% $ 1,086,891 3.3%
Storage 103,506 2.7% 98,750 2.6%
General 82,723 6.3% 80,509 4.7%
Intangible and other 46,344 5.5% 45,173 21.1%
----------- -----------
Utility plant in service 1,376,680 3.5% 1,311,323 4.0%
Gas stored long-term 11,301 11,301
Work in progress 18,989 8,791
----------- -----------
Total utility plant 1,406,970 1,331,415
Less accumulated depreciation 478,138 436,386
----------- -----------
Utility plant - net $ 928,832 $ 895,029
=========== ===========
The following table summarizes the Company's investments in non-utility
plant at Dec. 31:
Thousands 2000 1999
- --------------------------------------------------------------------------------
Storage $ 4,929 $ -
Dock, land and oil station 3,713 3,565
Other 7 4,983
----------- -----------
Total non-utility plant 8,649 8,548
Less accumulated depreciation 3,451 7,654
----------- -----------
Non-utility plant - net $ 5,198 $ 894
=========== ===========
- --------------------------------------------------------------------------------
Investments in Canadian oil and gas properties and the Port of Portland
building were included in current assets at Dec. 31, 1999. The Canadian oil
and gas properties were included in investment in a discontinued segment
(see Note 2) and the Port of Portland building was classified as property
held for sale. Both were sold in 2000. Also in 2000, Financial Corporation
sold domestic oil and gas properties that had been included among other
non-utility plant as of Dec. 31, 1999 ($4.9 million).
The following table summarizes the Company's investments in affiliated
entities accounted for under the equity and cost methods, and its
investment in an aircraft leveraged lease at Dec. 31:
Thousands 2000 1999
- --------------------------------------------------------------------------------
Electric generation $ 4,898 $ 5,165
Aircraft leveraged lease 7,479 7,925
Gas pipeline and other 1,776 2,919
Long-term notes receivable 373 548
----------- -----------
Total investments and other $ 14,526 $ 16,557
=========== ===========
- --------------------------------------------------------------------------------
Financial Corporation has ownership interests ranging from 4.0 to 5.3
percent in solar electric generation plants located near Barstow,
California. Power generated by these plants is sold to Southern California
Edison Company under long-term contracts.
37
Financial Corporation also has ownership interests ranging from 8.5 to 41
percent in U. S. Windpower Partners electric generation projects located
near Livermore and Palm Springs, California. The wind-generated power is
sold to Pacific Gas and Electric Company and Southern California Edison
Company under long-term contracts.
In 1987, the Company invested in a Boeing 737-300 aircraft which was leased
to Continental Airlines for 20 years under a leveraged lease agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- -----------------------------------------
The estimated fair values of NW Natural's financial instruments have been
determined using available market information and appropriate valuation
methodologies. The following is a list of financial instruments whose
carrying values are sensitive to market conditions:
December 31, 2000 December 31, 1999
----------------------- --------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
------------------------------------------------------ --------------------
Redeemable preference stock $ 25,000 $ 22,750 $ 25,000 $ 23,500
Redeemable preferred stock $ 9,750 $ 9,750 $ 10,564 $ 9,618
Long-term debt including amount
due within one year $420,790 $460,929 $406,379 $415,412
---------------------------------------------------------------------------
Fair value of the redeemable preference stock and the redeemable preferred
stock was estimated using quoted market prices. Interest rates that are
currently available to the Company for issuance of debt with similar terms
and remaining maturities were used to estimate fair value for debt issues.
The carrying amount of long-term notes receivable approximates fair value
at Dec. 31, 2000 and 1999.
11. USE OF FINANCIAL DERIVATIVES:
- ----------------------------------
In connection with its Canadian gas purchase commitments, NW Natural uses
foreign currency forward contracts to hedge against fluctuations in
currency values. The forward contracts have terms ranging up to 12 months.
Such contracts are purchased in an amount up to 100 percent of estimated
daily requirements for commodity gas purchased in Canadian currency from
gas suppliers in Canada. The notional amount of these contracts at Dec. 31,
2000 and 1999, totaled $34.1 million and $8.6 million, respectively, and,
if settled on those dates, NW Natural would have realized a gain of $0.4
million in 2000 and a gain of $0.2 million in 1999.
As part of an overall strategy to maintain an acceptable level of exposure
to the risk of gas price fluctuation, NW Natural has developed a targeted
mix of fixed-rate and cap-protected natural gas commodity contracts versus
variable rate contracts. To efficiently manage this mix, NW Natural
utilizes natural gas commodity swap and cap agreements to effectively
convert the gas purchase commitments into an acceptable fixed-rate and
capped rate mix. NW Natural uses natural gas commodity swap agreements to
convert certain long-term gas purchase contracts from floating prices to
fixed prices. Under the commodity swap agreements, NW Natural receives or
makes payments based on the differential between a specified price and the
actual price of natural gas as measured by price indices relating to the
market area where it purchases the gas. The swap agreements have terms
ranging up to 12 months. At Dec. 31, 2000 and 1999, the Company had swap
agreements with broker-dealers to cover notional quantities of 30.9 million
and 24.1 million MMBtu, respectively. Under the swap agreements in effect
at Dec. 31, 2000 and 1999, the Company paid fixed prices averaging $3.457
and $2.396 per MMBtu, respectively. In return, it received a price that
varied from month to month with market conditions. The notional amounts of
the swap agreements at Dec. 31, 2000 and 1999 were $106.7 million and $57.7
million, respectively, and, if settled on those dates, NW Natural would
38
have realized a gain of $122.6 million and a loss of $6.9 million,
respectively. At Dec. 31, 2000, the Company had cap agreements with
broker-dealers to cover notional quantities of 13.2 million MMBtu. Under
the cap agreements in effect at Dec. 31, 2000, the Company paid fixed
prices averaging $3.862 per MMBtu. The notional amounts of the cap
agreements at Dec. 31, 2000 were $51.1 million, and, if settled on those
dates, NW Natural would have realized a gain of $42.0 million. (See Note 1
for a summary of accounting for gains and losses.)
Canor, a discontinued segment, also managed its commodity price risk
through the use of gas and oil commodity swaps and collars. At Dec. 31,
1999, the notional amount of these contracts was $4.3 million and, if
settled, Canor would have realized a loss of $0.8 million.
12. COMMITMENTS AND CONTINGENCIES:
- -----------------------------------
Lease Commitments
-----------------
The Company leases land, buildings and equipment under agreements that
expire in various years through 2006. Rental expense under operating leases
was $4.9 million, $5.2 million and $6.0 million for the years ended Dec.
31, 2000, 1999 and 1998, respectively. The table below reflects the future
minimum lease payments due under non-cancelable leases at Dec. 31, 2000.
Such payments total $19.6 million for operating leases. The net present
value of payments on capital leases was $1.6 million after deducting
imputed interest of $0.1 million. These commitments principally relate to
the lease of the Company's office headquarters, underground gas storage
facilities, vehicles and computer systems.
Later
Millions 2001 2002 2003 2004 2005 years
---------------------------------------------------------------------------
Operating leases $ 4.3 $ 4.0 $ 2.7 $ 2.3 $ 2.3 $ 4.0
Capital leases $ 0.8 $ 0.8 $ 0.1 $ - $ - $ -
Minimum lease
payments $ 5.1 $ 4.8 $ 2.8 $ 2.3 $ 2.3 $ 4.0
Purchase Commitments
--------------------
NW Natural has signed agreements providing for the availability of firm pipeline
capacity under which it must make fixed monthly payments for contracted
capacity. The pricing component of the monthly payment is established, subject
to change, by U.S. or Canadian regulatory bodies. In addition, NW Natural has
entered into long-term agreements to release firm pipeline capacity. The
aggregate amounts of these agreements were as follows at Dec. 31, 2000:
Capacity Capacity
Purchase Release
Thousands Agreements Agreements
--------------------------------------------------------------------------
2001 $ 84,493 $ 3,840
2002 80,943 3,840
2003 75,919 3,840
2004 50,458 3,840
2005 48,153 3,840
2006 through 2023 313,144 18,537
-------- --------
Total 653,110 37,737
Less: Amount representing interest 174,530 9,322
-------- --------
Total at present value $478,580 $ 28,415
======== ========
NW Natural's total payments of fixed charges under capacity purchase
agreements in 2000, 1999 and 1998 were $81.5 million, $78.2 million and
$76.2 million, respectively. Included in the amounts for 2000, 1999 and
1998 were reductions for capacity release sales totaling $3.8 million, $3.8
million and $3.9 million, respectively. In addition, NW Natural is required
to pay per-unit charges based on the actual quantities shipped under the
agreements. In certain of NW Natural's take-or-pay purchase commitments,
annual deficiencies may be offset by prepayments subject to recovery over a
longer term if future purchases exceed the minimum annual requirements.
39
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
Linnton site has been under investigation by the Company in recent years
under program oversight by the Oregon Department of Environmental Quality
(ODEQ). Since 1993, NW Natural has recorded expenses of $2.6 million for
its costs of the voluntary investigation including consultants' fees, ODEQ
oversight reimbursement and legal fees. In 2000, NW Natural recorded an
additional accrued liability and corresponding receivable of $1.4 million
representing the estimated costs of further investigation and interim
remediation on this site. The Company expects that it will be able to
recover its costs of further investigation and any remediation for which it
may be responsible with respect to the Linnton site from insurance or
through future rates.
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 Wacker site). In October 2000, the ODEQ issued an order
requiring Wacker and NW Natural to determine the nature and extent of
releases of hazardous substances to Willamette River sediments from the
Wacker site. The Company recorded a liability of $0.4 million for the
estimated costs of the investigation and initial remediation on the Wacker
site.
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 and notified the Company that it is a potentially
responsible party. In 2000, NW Natural recorded an expense of $0.6 million
for its estimated share of the costs of remedial investigation of the
Portland Harbor. Although available information is insufficient to
determine either the total amount of liability for investigation and
remediation of the Portland Harbor or the Company's share of that
liability, this amount is an estimate of NW Natural's share of the lower
end of a range of probable liability.
NW Natural expects that its costs of investigation and any remediation for
which it may be responsible with respect to 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
----------
In July 1995, a jury in an Oregon state court returned a verdict against NW
Natural in the case of Northwest Natural Gas Company v. Chase Gardens, Inc.
(Lane County Circuit Court Case No. 16-91-01370). In 1996, after the Oregon
Court of Appeals affirmed the trial court decision, NW Natural recorded
charges to operating expense and interest expense equivalent to 15 cents
per share as a reserve against payment of the judgment, related costs and
post-judgment interest. In May 1999, the Oregon Supreme Court reversed the
Court of Appeals' decision, overturned the trial court verdict on the
larger of the two claims in the case and remanded the case to the Court of
Appeals for further proceedings on NW Natural's appeal of the judgment on
the smaller (contract) claims in the case. Reflecting the Supreme Court's
decision, NW Natural reduced the litigation reserve by a total of $3.9
million in the second quarter of 1999, reducing operating expense by $3.0
million and interest expense by $0.9 million. The Court of Appeals
subsequently issued an opinion in favor of NW Natural on the contract
claims. Based on that decision, NW Natural reversed the remaining reserve
balance of $2.7 million at Dec. 31, 1999, further reducing operating
expense for 1999 by $1.9 million and interest expense by $0.8 million. The
Oregon Supreme Court initially declined to review the Court of Appeals'
decision in favor of NW Natural 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.
The Company is party to certain other legal actions in which claimants seek
material amounts. Although it is impossible to predict the outcome with
certainty, based upon the opinions of legal counsel, management does not
40
expect disposition of these matters to have a materially adverse effect on
the Company's financial position, results of operations or cash flows.
41
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dollars Quarter ended
---------------------------------------------------------------------
(Thousands Except Per Share Amounts) March 31 June 30 Sept. 30 Dec. 31 Total
- -------------------------------------------------------------------------------------------------------
2000
Operating revenues 186,649 86,136 61,255 198,070 532,110
Net operating revenues 93,088 45,886 35,566 83,410 257,950
Net income (loss) from continuing operations 29,192 2,498 (4,868) 20,990 47,812
Gain (loss) on sale of discontinued segment 2,470 (35) (17) (6) 2,412
Net income (loss) 31,662 2,463 (4,885) 20,984 50,224
Basic earnings (loss) per share 1.24 0.07 (0.22) 0.81 1.90 *
Diluted earnings (loss) per share 1.22 0.07 (0.22) 0.80 1.88 *
1999
Operating revenues 167,873 94,252 55,737 137,972 455,834
Net operating revenues 85,905 55,241 33,605 68,886 243,637
Net income (loss) from continuing operations 24,184 10,529 (3,608) 13,836 44,941
Net income (loss) from discontinued segment (141) 255 48 193 355
Net income (loss) 24,043 10,784 (3,560) 14,029 45,296
Basic earnings (loss) per share 0.94 0.41 (0.17) 0.53 1.71 *
Diluted earnings (loss) per share 0.93 0.40 (0.17) 0.53 1.70 *
* Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of shares
outstanding has increased in each quarter shown, the sum of quarterly earnings
may not equal earnings per share for the year. Variations in earnings between
quarterly periods are due primarily to the seasonal nature of the Company's
business.
42
NORTHWEST NATURAL GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- -------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------
Additions Deductions
Balance at ------------------------ ---------- Balance
beginning Charged to Charged to at end
of costs other Net of
period and expenses accounts write-offs period
------ ------------ -------- ---------- ------
Thousands
- ---------
Years ended December 31:
2000
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $ 1,669 $ 2,344 $ - $ 2,146 $ 1,867
1999
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $ 1,547 $ 2,380 $ - $ 2,258 $ 1,669
1998
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $ 1,253 $ 3,005 $ - $ 2,711 $ 1,547
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
(23) Consent of PricewaterhouseCoopers LLP.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: August 10, 2001 By: /s/ Richard G. Reiten
-------------------------------
Richard G. Reiten, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
/s/ Richard G. Reiten Principal Executive Officer August 10, 2001
- ---------------------------------- and Director
Richard G. Reiten, Chairman
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer August 10, 2001
- ----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ Stephen P. Feltz Principal Accounting Officer August 10, 2001
- ----------------------------------
Stephen P. Feltz
Treasurer and Controller
/s/ Mary Arnstad Director )
- ---------------------------------- )
Mary Arnstad )
)
/s/ Thomas E. Dewey, Jr. Director )
- ---------------------------------- )
Thomas E. Dewey, Jr. )
)
/s/ Tod R. Hamachek Director )
- ---------------------------------- )
Tod R. Hamachek )
)
/s/ Richard B. Keller Director )
- ---------------------------------- )
Richard B. Keller )
)
/s/ Wayne D. Kuni Director )
- ---------------------------------- )
Wayne D. Kuni )
)
/s/ Randall C. Pape Director ) August 10, 2001
- ---------------------------------- )
Randall C. Pape )
)
/s/ Robert L. Ridgley Director )
- ---------------------------------- )
Robert L. Ridgley )
)
/s/ Dwight A. Sangrey Director )
- ---------------------------------- )
Dwight A. Sangrey )
)
/s/ Melody C. Teppola Director )
- ---------------------------------- )
Melody C. Teppola )
)
/s/ Russell F. Tromley Director )
- ---------------------------------- )
Russell F. Tromley )
)
/s/ Benjamin R. Whiteley Director )
- ---------------------------------- )
Benjamin R. Whiteley )
)
/s/ Richard L. Woolworth Director )
- ---------------------------------- )
Richard L. Woolworth )
45
NORTHWEST NATURAL GAS COMPANY
-----------------------------
EXHIBIT INDEX
-------------
To
Annual Report on Form 10-K
For Fiscal Year Ended
December 31, 2000
Exhibit
Document Number
-------- -------------
Consent of PricewaterhouseCoopers LLP (23)